The Nebraska legislature has recently considered amendments to its Uniform Commercial Code (UCC) to create new rules for “controllable electronic records” (the Nebraska Amendment). The Nebraska Amendment follows an approach under development by the Uniform Law Commission/American Law Institute (ALI/ULC) Committee on the UCC and Emerging Technology (Committee). The ALI/ULC draft is still undergoing revisions and it is expected that Nebraska will further amend the Nebraska Amendment to adopt the final language put forth by the Committee. The Nebraska Amendment changes the rules that apply to transfers, security interests and repayment of cryptocurrencies, loans documented electronically (including electronic student loans, mortgage loans, and promissory notes), and certain other digital assets where Nebraska law applies. Similar legislation is being introduced in several other states. A few of the key changes in the Nebraska Amendment:
- Controllable Electronic Record: An electronic record is subject to the provisions of the Nebraska Amendment only if it is susceptible to “control.”
- Control: A person has “control” if the controllable electronic record or the system in which it is recorded, if any, gives the purchaser three powers: (i) the power, whether or not exclusive, to derive substantially all the benefit from the controllable electronic record, (ii) the exclusive power to prevent others from deriving substantially all the benefit from the controllable electronic record, and (iii) the exclusive power to transfer control of the controllable electronic record to another person or cause another person to obtain control of a controllable electronic record that derives from the controllable electronic record.
- Perfection and Negotiability: Perfection of security interests and negotiability are achieved by obtaining “control” consistent with the existing UCC. Security interests in controllable electronic records can also be perfected by filing a UCC financing statement.
- Take Free Rule: Similar to the take free rule in Article 8 of the existing UCC, a Qualified Purchaser of a controllable electronic record takes free of adverse claims to the controllable electronic record and to any account or payment intangible included in the controllable electronic record. Under the ALI/ULC draft, a Qualified Purchaser is someone who obtains control for value without notice of any adverse claim.
- Discharge: An account debtor may discharge obligations on an account or payment intangible included in a controllable electronic record by paying the person having control of the controllable electronic record or by paying a person who formerly had control of the controllable electronic record, unless such account debtor received notice from the person who formerly had control identifying the new person who has control and a reasonable method by which the account debtor is to make payments. This tracks the language in Article 9 of the existing UCC.
- Limited Scope: The scope intentionally excludes certain digital assets already dealt with elsewhere in the UCC. Specific exclusions are still being finalized but will likely include electronic chattel paper, electronic money, electronic documents, investment property, and transferable records under the Uniform Electronic Transactions Act and E-Sign.
In 2019, Wyoming was the first state to pass legislation amending the UCC for emerging technologies (the Wyoming Amendment). The Wyoming Amendment creates new rules for “digital assets” that include any “representation of economic, proprietary or access rights that is stored in a computer readable format, and includes digital consumer assets, digital securities and virtual currency.”1 The result of the Wyoming Amendment’s broad reach is in conflict with both Article 9 of the existing UCC and existing market practices in many instances. While no other states have adopted similar amendments as of now, other states may follow Wyoming’s lead. A few of the key changes in the Wyoming Amendment:
- Definition of Digital Assets: They are broadly defined to include most assets and payment rights in electronic form, likely encompassing not only cryptocurrency and digital securities but also electronic chattel paper, accounts in electronic form, payment intangibles in electronic form, and other items for which the market and the UCC have developed existing practices.
- Choice of Law and Perfection Rules: In conflict with existing choice of law rules in the UCC, perfection by control constitutes possession under Wyoming Amendment, and a digital asset is “located” in Wyoming under a number of circumstances. This implicates 9-301(2) of the existing UCC, which states that if collateral is located in a jurisdiction, the local law of that jurisdiction governs perfection. This allows for filing of a financing statement in Wyoming regardless of where the debtor is located (contrary to existing UCC), although the laws of other states may not recognize the effectiveness of this filing.
- Take Free Rule: A transferee of a digital asset perfected by a method other than control takes free of a security interest if the transferee gives value and does not have actual notice of an adverse claim, but only after two years. This overrides the existing take free rules and perfection rules in the UCC and applies to all digital assets.
The uniform version of the UCC is still the law in existence in most states. As such, currently there are three state commercial law regimes potentially applicable to digital assets (which, depending on the regime, could include any electronic asset), cryptocurrencies, and loans documented electronically. Those involved with these assets should be wary of which commercial law regime applies to them and should seek legal counsel to understand how the relevant laws affect their transactions.
1 Wyoming Statute 34-29-101.
