Generic selectors
Exact matches only
Search in title
Search in content
Post Type Selectors

What Can UCC Article 12 Do For Crypto?

The Uniform Commercial Code is a set of laws that standardize commercial business transactions in the United States. Over the years, the bill has been amended to accommodate new markets and trends – and now, clauses on crypto are about to be added.

The American Uniform Commercial Code (UCC) allows interstate commerce between states. The bill ensures that businesses from different states can enter into contracts in a safe, standardized manner and can promote business and economic growth. Although not a federal law, UCC is a uniformly adopted state law that provides confidence for both businesses and customers to make secure transactions.

What’s UCC Article 12?

The UCC makes rules for common commercial transactions, such as secured lending, defaults, and gap fillers more streamlined. It simplifies commercial law, and encourages parties to boost the economy by entering into agreements for business to go under these mandatory rules set  by the UCC. 

As the UCC and its amendments are adopted by all 50 states in the United States, this standardisation makes transactions easier to understand but also protects consumers and businesses from potential dangers.

The latest amendment which has been in the works for three years, UCC Article 12, upon given effect, will address matters regarding digital assets. It will also adapt existing commercial transaction law to digital assets.

Am I at risk of a lawsuit if I buy a token from someone who received it from a hacker? 

How do I know if there’s a lien or claim on my bitcoin? 

What rights do I have if I loaned out my ether and the borrower has defaulted on the loan or even filed for bankruptcy protection?

The addition aims to address such questions.

Why UCC Article 12?

Prior to UCC Article 12, lawmakers have aimed to solve various problems that are becoming more common in the crypto industry. 

However, Andrew Hinkes, a partner and co-chair of the Digital Assets, Blockchain Technology, and Cryptocurrencies practice at law firm K&L Gates, says that there is a gaping hole that does address important issues in private law.

Hinkes, an advisor to the Digital Assets Working Group, who is responsible for drafting UCC 12, highlights that there are many questions to crypto law that aren’t clearly defined –including the title to digital assets, and the extent of legal rights received with the transfer of a digital asset. 

The drafting of UCC 12 also addresses recent developments in crypto law where digital assets  are to be defined as securities – where it aims to establish, for crypto, a framework to perfect security interests, and the priority for security interests against digital assets.

So, what else can UCC Article 12 do for me?

UCC Article 12 governs the transfer of property rights in certain digital assets that have been or may be created by emerging technology. 

These ‘certain digital assets’, called Controllable Electronic Records (CERs), are a new category of asset dubbed by the drafters of Article 12. As of the moment, existing law only relies on the physical possession of assets – which means that digital assets like tokens, NFTs, and stablecoins are intangible and cannot be possessed, under law.

In naming digital assets under law, the CER uses “control” to show the quality of crypto that holders of an asset can enjoy all inherent benefits of the asset, and the ability to transfer the asset to third parties.

CERs – covering most common cryptocurrencies, tokens, stablecoins, and NFTs – are defined  by the UCC as  assets that any given person can enjoy substantially all their benefits, while at the same time excluding all others from interfering with their enjoyment.

These following updates on the UCC clarifies matters on commercial crypto transactions – and is aimed to be the first step in establishing a common set of rules without the negotiation of arbitrary complex agreements as users and parties make transactions.

When enacted, UCC Article 12 can:

Clarify when a person receiving a transaction (transferee) is “subject” to prior claims to any digital asset, or when they may “take free” of claims.

Currently, there’s no clauses in US law that defines whether a digital asset can be associated with a regulatory or legal claim, or whether the claim for the asset still exists once transferred to another person.

Under Article 12, a transferee is assumed that they are receiving the asset in good faith, and CERs will be treated like existing negotiable instruments such as checks or promissory notes.

Clarify terms, and prioritise perfected security interest in digital asset collateral.

Many loans out there are intentionally unsecured, where lenders do not have the right to proceed against collateral in case of a default. Sometimes, a borrower may grant a lender a legally enforceable security interest, with collateral being in the form of a digital asset.

Including the term CER will make laws clearer on the process of the perfection of a security. A perfected security interest is any secure interest in an asset that cannot be claimed by another party. 

This will be done by clarifying that perfection can be done by either filing or by control of the actual CER. Interests by those who perfect by control are given “super-priority” in collecting the interest, over those who have plainly filed their financing statements earlier.

When Article 12 is enacted, it will standardise the rules on security interests, and would not be arbitrarily different to each location of a debtor.

Adding more certainty to the industry

According to Hinkes, advisor to the Digital Assets Working Group, Article 12 just provides more foundation for clarity on collateralized lending, and the legal meaning of transactions of digital assets.

The UCC Article 12 amendment addresses a bigger picture – but does not address substantive laws that may affect crypto. This means that you’d have to look elsewhere for the establishment of laws on sanctions, anti-money laundering, tax, intellectual property, commodity regulation, securities, and the rights of digital exchange customers.

Meanwhile, other regulatory forces are honing their blades to strike at substantive laws –  with much news and government focus on defining crypto as a security in countries including the US, UK, EU, and South Africa.

While not yet enacted, Article 12 can potentially change how a lot of businesses do transactions, and will pave a way for further laws to be implemented to protect crypto users from illicit activities, transactions, and malpractice.

Share Post: