The Uniform Commercial Code (UCC) is a set of rules developed by the Uniform Law Commission (ULC) to govern commercial transactions and has been adopted in nearly identical form by every United States jurisdiction. From 2019-2022, a committee appointed by the American Law Institute and the ULC considered and formulated amendments to the UCC to address emerging technological developments. This bill incorporates the changes from the 2022 amendments to address market concerns about the lack of definitive commercial law rules for transactions involving digital assets, especially relating to negotiability for virtual (non-fiat) currencies, certain electronic payment rights, secured lending against virtual (non-fiat) currencies, and security interests in electronic (fiat) money. This bill also addresses other technological developments affecting electronic chattel paper, negotiable instruments, payment systems, electronic documents of title, and sales and leases of goods. This bill also clarifies the scope of Articles 2 and 2A when transactions combine the sale or lease of goods with other matters. However, this bill only addresses state commercial law rules and does not address the federal or state regulation or taxation of digital assets or money transmitter or anti-money laundering laws.
DIGITAL ASSETS
With regard to digital assets, this bill provides the following:
(1) That for a controllable electronic record ("CER"), which includes certain virtual (non-fiat) currencies, non-fungible tokens, and digital assets in which specified payment rights are embedded, to be in effect negotiable, a "take-free" rule similar to the UCC rule for securities applies;
(2) That for a security interest in a CER to be perfected by "control" or by filing a financing statement, and for a security interest perfected by "control" to have priority over a security interest in the CER perfected, a financing statement must be filed; and
(3) Clarification on how to treat security interests in electronic (fiat) money.
This bill defines "controllable electronic record" as a record of information in electronic form that is susceptible to "control." For a person to have "control" of a CER, the person must have the power to enjoy "substantially all the benefit" of the CER; the exclusive power to prevent others from enjoying "substantially all the benefit" of the CER; and the exclusive power to transfer control or to cause another person to obtain control of the CER. Additionally, the person must be able readily to identify itself to a third party as the person having these powers. Identification can be made other than by name, such as by use of a cryptographic key or account number. The exclusivity requirement is satisfied in most instances even if there is a sharing of these powers through a multi-signature ("multi- sig") or similar arrangement or if changes occur automatically as part of the protocol built into the system in which the CER is recorded.
For purposes of determining whether a person has control of a CER, there is a rebuttable presumption that the person's power to prevent others from enjoying "substantially all the benefit" of the CER and to transfer control of the CER is exclusive. Such powers must be found to be exclusive unless evidence to the contrary is provided.
If an electronic record is not susceptible of control, it is not a CER and is outside the scope of Article 12, as well as the provisions of Article 9 that apply to CERs. In addition, the definition of a CER excludes certain digital assets that might otherwise fall within the definition. These assets are excluded because commercial law rules already exist for these assets, such as electronic chattel paper, electronic documents, investment property, transferable records under the federal E-SIGN law or the Uniform Electronic Transactions Act, deposit accounts, and electronic money. However, this bill does not disturb transacting parties' current practices of using transferable records under E-SIGN and UETA. Nor does this bill affect transacting parties' ability to "opt-in" to Article 8 by arranging for a digital asset to be held by a securities intermediary as a financial asset credited to a securities account. Electronic money is treated separately under this bill, as described below.
RIGHTS OF A TRANSFEREE OF A CER
Article 12 governs certain transfers of CERs. If a CER is purchased, meaning to encompass only voluntary transactions, including obtaining a security interest in the CER, the purchaser acquires an interest in all rights in the CER that the transferor had, or had the power to transfer. In addition, if the purchaser is a "qualifying purchaser," then the purchaser benefits from the "take-free" rule, which means the purchaser acquires its interest in the CER free from competing property claims to the CER. A "qualifying purchaser" means a purchaser that obtains control of a CER for value, in good faith, and without notice of a property claim to the CER. As with negotiable instruments and investment property, the filing of a financing statement in and of itself is not notice of a property claim to the CER.
TETHERING AND CERTAIN PAYMENT RIGHTS
With one exception, law other than Article 12 determines what rights are evidenced by the CER, and whether a "take-free" rule applies to those other rights upon a transfer of the CER. This bill does not address the effect of copyright law as it relates to someone in control of a non-fungible token "tethered" to intellectual property. Other law determines the effect of that "tethering." Similarly, if a CER purports to evidence an interest in real estate, whether the "take-free" rule applies to the interest in the real estate upon a transfer of control of the CER must be determined under other law, presumably the applicable real estate law.
An important exception to this deference to other law applies when an "account" or "payment intangible" is evidenced by a CER, creating a "controllable account" or "controllable payment intangible" if the person obligated on the account or payment intangible has agreed to pay the person in control of the CER. If control of a CER that evidences a controllable account or controllable payment intangible is transferred, then the controllable account or controllable payment intangible travels with the CER, and the transferee (if a qualifying purchaser) benefits from the same "take-free" rule that applies to the CER.
SECURED LENDING
Under this bill, the provisions applicable to purchasers of CERs are coordinated with corresponding additional and existing provisions of Article 9 to govern security interests in CERs. Under this bill, there are no changes to existing collateral descriptions in security agreements or existing collateral indications on financing statements. For purposes of Article 9, a CER is a "general intangible," a controllable account is an "account," and a controllable payment intangible is a "payment intangible." The normal rules for attachment continue to apply to security interests in CERs, and a security interest in a CER, a controllable account, or a controllable payment intangible may still be perfected by the filing of a financing statement.
Under this bill, a security interest in a CER, a controllable account, or a controllable payment intangible also may be perfected by the secured party obtaining "control" of the CER. A security interest in a CER, a controllable account, or a controllable payment intangible perfected by "control" has priority over a security interest in the CER, controllable account, or controllable payment intangible perfected only by filing or by another method other than control. However, this bill provides for a period during which parties to a transaction will retain their priorities existing on July 1, 2023.
ACCOUNT DEBTOR DISCHARGE
This bill provides that the obligor on an account or payment intangible ("an account debtor") receives a discharge by paying the person formerly in control until the account debtor receives a notification signed, which may be done in a writing or electronically, by the debtor or its secured party indicating that the secured party has a security interest in the controllable account or controllable payment intangible and a payment instruction ("deflection notification") to pay the secured party as the person now in control. Following receipt of the deflection notification, the account debtor is discharged only by paying the secured party and is not discharged by paying the debtor.
This bill provides that the account debtor may ask for reasonable proof that the secured party is the person in control before paying the secured party. However, unlike under current Article 9, for a controllable account or controllable payment intangible the method of providing that reasonable proof must have been agreed to by the account debtor, presumably as part of the CER when it was created. Absent there being an agreed method of providing reasonable proof, the deflection notification is not effective, and the account debtor is able to obtain a discharge by continuing to pay the debtor.
CHOICE OF LAW
This bill includes substantially identical choice-of-law rules for the Article 12 take-free rules for transferees of CERs and the Article 9 rules for perfection by control and priority of a security interest in a CER, controllable account, or controllable payment intangible perfected by control. This bill generally follows the choice-of-law approach taken in Articles 8 and 9 for financial assets credited to a securities account at a securities intermediary. The state or nation whose law applies to take-free rules in connection with transfers of CERs and the perfection, effect of perfection or non-perfection, and priority of a security interest in a CER perfected by control is determined by the law where the CER is considered by this bill to be the CER's jurisdiction. For a CER that expressly provides its jurisdiction, perfection, other than by the filing of a financing statement, and priority are governed by the law of that jurisdiction. Otherwise, the CER’s jurisdiction is the jurisdiction whose law governs the system in which the CER is recorded. If no express provision is made in the CER or the system, the CER is located in the District of Columbia. In the case of perfection of a security interest by the filing of a financing statement, the normal debtor location rules apply for perfection but not priority.
ELECTRONIC MONEY
The UCC presently defines "money" as sufficient to include a virtual (fiat) currency authorized or adopted by a government, whether token-based or deposit account-based. This bill excludes from "money" an electronic record that existed and operated as a medium of exchange before it was authorized or adopted as a medium of exchange. However, such a medium of exchange evidenced by an electronic record so excluded from the definition of money could still qualify as a CER under this bill.
Under Article 9, a security interest in money can be perfected only by possession, which means actual physical possession. However, intangible money is not susceptible to possession. However, if electronic money is not credited to a deposit account, a security interest in the electronic money may be perfected only by control. This bill provides that, if intangible money is credited to a deposit account, then the intangible money is not "money" for purposes of Article 9 and the normal deposit account perfection rules apply. This bill amends present law so that a transferee of money, whether tangible or electronic, can take free of a security interest in the money. In other circumstances, any "take-free" rule is determined by the law governing the electronic money.
CHATTEL PAPER
This bill makes the following changes to the treatment of chattel paper in the UCC:
(1) The definition of "chattel paper" is modified to refer to a right to payment evidenced by the relevant records rather than to the records themselves. This modification aligns the definition of chattel paper with the treatment of a right to payment consisting of a controllable account or controllable payment intangible evidenced by a CER, which distinguishes between the payment right and the CER itself;
(2) The definition of "chattel paper" is further modified so that a right to payment from a hybrid lease transaction, which is a single transaction consisting of a lease of goods and the provision of other property or services, is treated as chattel paper if the acquisition of the right to the use and possession of the goods is the predominant purpose of the transaction;
(3) The definition of "control" of chattel paper in electronic form is expanded to align with the definition of control for a CER. As a result, instead of a single authoritative copy of the chattel paper records being required to fit within the existing safe harbor for control of chattel paper in electronic form, a distinction is made between authoritative copies and non-authoritative copies. Control is achieved when a person has control of all authoritative copies. In order not to disturb transactions completed under the existing definition of control for electronic chattel paper, the safe harbor in the existing definition is grandfathered under this bill;
(4) This bill generally eliminates the distinction between chattel paper in tangible form and chattel paper in electronic form and the defined terms "electronic chattel paper" and "tangible chattel paper" have been removed. A security interest in chattel paper is perfected, and non-temporal "superpriority" is achieved, by possession and control of the chattel paper. Possession is applicable to the extent that the authoritative copies of the chattel paper are tangible; control is applicable to the extent that the authoritative copies of the chattel paper are electronic; and
(5) The choice-of-law rule for the perfection of a security interest by possession of chattel paper evidenced wholly by a tangible record, the effect of perfection and non-perfection of a security interest in the chattel paper, and the priority of a security interest in the chattel paper are determined by the law of the jurisdiction in which the tangible record evidencing the chattel paper is located. Both perfection (other than by filing) and priority for chattel paper that does not consist wholly of chattel paper in tangible form is governed by the law of the jurisdiction where the chattel paper is considered to be located. If chattel paper in electronic form expressly provides its jurisdiction, perfection and priority are governed by the law of that jurisdiction. Otherwise, the governing law is that whose law governs the system in which the chattel paper or electronic record thereof is recorded. If no governing law is stated in the system, perfection and priority is governed by the law of the debtor's location. For all chattel paper, the normal debtor location rules apply to perfection by the filing of a financing statement.
NEGOTIABLE INSTRUMENTS
This bill makes the following changes to Article 3 addressing negotiable instruments:
(1) Makes clear that a choice-of-law or choice-of-forum clause contained in the instrument does not affect the negotiability of the instrument;
(2) Provides that, if agreed by the payee, an item may be issued by a maker or drawer by transmission of an image of the item and information describing the item if the image and information permits the depository bank to process the item as an electronic check under Federal Reserve Board Regulation CC; and
(3) Provides that a check destroyed following a remote deposit of the instrument does not discharge the obligation evidenced by the instrument.
However, this bill does not provide for an electronic negotiable instrument under Article 3.
PAYMENT SYSTEMS
This bill clarifies what constitutes a security procedure for a funds transfer under Article 4A. Symbols, sounds, and biometrics may constitute a security procedure. However, merely verifying an email address, IP address, or telephone phone number is not a security procedure.
SALES AND LEASES OF GOODS
This bill provides that, in the case of a hybrid transaction in which the sale or lease of goods aspect predominates, Article 2 or 2A applies. If the goods aspects predominate, a court may, in appropriate circumstances, apply other law to the aspects of the transaction which do not relate to the sale or lease of goods. When the goods aspects do not predominate, then the provisions of Article 2 or 2A that relate primarily to the goods aspects of the transaction, and not to the transaction as a whole, apply to those aspects.
OTHER CHANGES
This bill makes the following additional changes:
(1) Changes a number of "writing" requirements in the UCC to "record" requirements where the effect is to facilitate electronic commerce. However, this bill does not change the current requirements for an "instrument" in Articles 3 and 9 to be in a writing. There are corresponding changes to the definition of "signed", as described below;
(2) Expands the definition of "signed" in Article 1 to apply not only to a signature in a writing, as in the existing definition, but also to an electronic signature. This definition applies throughout the UCC where an electronic record is permitted;
(3) Adds a new sentence to the definition of "person" in Article 1 to provide that a protected series of a series organization is a person under the UCC. The protected series is a person separate from the series organization or from another protected series of the series organization;
(4) Clarifies that, if a letter of credit issued by a bank states its governing law, a branch of a bank is still considered as a separate bank for purposes of Article 5;
(5) Expands the definition of "control" in Article 7 to be similar to the definition of control for electronic chattel paper. However, as with the chattel paper definition of "control," the existing "safe harbor" for control of an electronic document of title is grandfathered under this bill;
(6) Replaces the word "authenticate" in Article 9 with the word "sign" and makes correlative changes because the new definition of "sign" in Article 1, as described above, eliminates the need for the term "authenticate" in Article 9;
(7) Clarifies in Article 9 that, under existing law, an "assignor" is a person who grants a security interest to secure an obligation or a seller of accounts, chattel paper, payment intangibles, or promissory notes; and an "assignee" is a person in whose favor a security interest is granted to secure an obligation or a buyer of accounts, chattel paper, payment intangibles, or promissory notes;
(8) Clarifies in Article 9 that a security interest in a commercial tort claim as proceeds of original collateral properly described in a security agreement may attach to the commercial tort claim or its proceeds even if the commercial tort claim was not described in the security agreement; and
(9) Clarifies in Article 9 that a security interest may attach under an after-acquired property clause to proceeds of a commercial tort claim even if the security agreement does not describe or encumber the commercial tort claim.
TRANSITIONAL PROVISIONS
This bill includes transitional provisions, which contain a uniform "adjustment date" of July 1, 2025, to give tr