Protecting Creditor Security Interests in Digital Currencies post-2022 UCC Amendments

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Digital currencies have become more commonplace over recent years. Some businesses are considering building infrastructure to allow their consumer base to pay with cryptocurrency. Cryptocurrency differs from Centralized Bank Digital Currency (CBDC) in their decentralized exchanges instead of centralized exchanges. With CBDCs, the federal bank is liable as opposed to private banks that offer digital currencies. CBDCs have not yet been adopted in the United States, but the rising interest and use of cryptocurrency may result in their widespread adoption in the near future. Creditors in commercial transactions should thus equip themselves with perfection methods for digital currencies in the context of the revised 2022 Uniform Commercial Code (UCC), as perfection gives priority to the secured party who perfected the security interest first in the case of conflicting security interests.

Digital currencies generally comes in two forms: (1) digital assets maintained and developed on decentralized blockchain technology as a medium of exchange and (2) stablecoin that is backed by the value of an underlying asset such as money. In either instance, the UCC does not classify digital currencies as “electronic money” under §§ 1-201(16A) & (24). “Money” under UCC § 1-201(24) is a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries. The term does not include an electronic record that is a medium of exchange recorded and transferable in a system that existed and operated for the medium of exchange before the medium of exchange was authorized or adopted by the government. Because digital currencies have not been authorized nor adopted by the United States government, digital currencies would not fall under “electronic money” but rather under “controllable electronic records” under the new § 12-105. The UCC defines “control” of controllable electronic records as (1) giving the person the power to avail itself of substantially all the benefit from the electronic record (2) exclusive power to prevent others from availing themselves to the benefit and transferring control and (3) enabling the person readily to identify itself in any way. Notably, control is analogous to possession under § 9-313 and therefore attachment of security interests.

Control is crucial to perfection under the 2022 UCC amendments as stated in Official Comment 1 in § 12-105. Security interest is attached when the secured party has control over the digital currencies pursuant to the debtor’s security agreement. After attachment has taken place allowing perfection of digital currencies, control would suffice to perfect the security interest in the digital currencies under § 9-326A. When a lender transfers control of the digital currencies to the secured party, the secured party has control of the digital currencies and would have attached and perfected the security interest in those digital currencies. Under the pre-2022 amendment, digital currencies would have been classified as a general intangible and therefore should have a financing statement filed to perfect the security interest in the digital currencies under Official Comment 2 in § 9-704. However, if the secured party gained control of the digital currencies before filing the financing statement under pre-2022 amendments, the secured party would have perfected their security interest in the digital currencies at the effective date of the security agreement as detailed in Official Comment 2 in § 9-704.

To ensure creditors are protected under both pre and post-2022 UCC amendments, filing a financing statement would guarantee priority (barring any filing mishaps that would result in non-perfection). The first-to-file rule under § 9-322(a) takes precedence over control, as suggested in Official Comment 2 in § 9-326A. Though, in the case that the digital currency is not filed in a financing statement, the 2022 amendment allows attachment and perfection through control, or analogously, possession. However, the debtor would have to transfer control to the secured party. Thus, to ensure that the security interest is perfected, filing remains the safest method of perfection for creditors. Furthermore, the first-to-file rule maintains stronger force than control, which allows for favorable subrogation terms where multiple parties have control over the digital currencies.

Suggested Citation: George Lee, Protecting Creditor Security Interests in Digital Currencies post-2022 UCC Amendments, Cornell J.L. & Pub. Pol’y, The Issue Spotter (April 10, 2024), https://live-journal-of-law-and-public-policy.pantheonsite.io/protecting-creditor-security-interests-in-digital-currencies-post-2022-ucc-amendments.

Hello! I’m a J.D. candidate at Cornell Law School and received my B.S. in Policy Analysis and Management from Cornell University. My legal and policy interests include media, entertainment, and technology. Outside of the Journal of Law and Public Policy, I am involved in the I.P. and Tech Student Organization and Big Red Ventures.