Research Examines Blockchain Securities Under US Commercial Law

Cryptosecurities may not be subject to commercial transactions law under the US Uniform Commercial Code (UCC), according to new research.

AccessTimeIconAug 27, 2015 at 6:45 p.m. UTC
Updated Sep 11, 2021 at 11:50 a.m. UTC
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Cryptosecurities and blockchain recordkeeping systems may not be subject to commercial transactions law under the US Uniform Commercial Code (UCC), according to new research from Cardozo Law.

Penned by professor Jeanne Schroeder, the 60-page research paper, released this week, provides a wide-ranging overview of how bitcoin transactions, both financial and non-financial, would be governed by laws relating to the exchange of property across US states.

The paper is the latest to highlight potential legal issues that could arise in disputes over ownership of cryptographic assets, such as bitcoin, following research by law firm Perkins Coie in January. At issue is that bitcoin does not fit the UCC's definition of money and challenges conventional notions of custody.

The UCC, first published in 1952, was created by private legal institutions seeking to harmonize state laws regarding commercial transactions. States may adopt the UCC as written or approve or deny specific changes to its provisions.

While the paper echoes many of Perkin Coie's conclusions, it is perhaps one of the first to speculate on how the UCC would apply to alternative uses of blockchains. For example, Schroeder cites decentralized application platform Ethereum and Overstock's tØ as a platform designed to enable the use of tokens outside of currency and payments.

The paper remarks that such transactions could be filed on a blockchain without any amendments to the UCC, stating:

"There is no reason under the language of the UCC that a state’s filing office, usually the Secretary of State, could not establish a blockchain recording system [in which] recording on the blockchain would constitute filing with that office. Similarly, there is no reason why requirements for numbering, maintaining and indexing records and communicating information provided in records could not be met through an electronic ledger system."

Schroeder suggested such a system may prove "more efficient and accurate" than those in place, while still providing US states the ability to collect filing fees through smart contracts.

"We could continue the practice whereby a filing fee must be paid to the state of the debtor’s location," the paper reads. "A 'smart' blockchain ledger could be programmed to allow secured parties to automatically transfer filing fees to the Secretary of State of the jurisdiction of the debtor’s location by transferring funds on the blockchain itself."

Amendment needed

The finding stands in contrast to the paper's less favorable conclusion that the UCC would need to be amended for bitcoin to be used as a payment system.

"Cryptocurrency do not, nor can they be made to, fit within Article 9's definition of 'money'," the report reads, echoing previous findings.

Building on this remark, the author indicated bitcoin is currently defined as a "general intangible" asset under the UCC. As pointed out by Perkins Coie, this means that, unlike cash, legal claims on the asset can continue to be valid even after it is transferred.

The legal interest, the author said, can continue regardless of how many times a specific bitcoin changes owners.

"Unlike virtually every other category of personal property recognized by Article 9, once a general intangible becomes encumbered by a security interest, it can never become unencumbered even by transfer to a bonafide purchaser for value," the report reads, adding:

"This could greatly impinge on bitcoin’s liquidity and, therefore, its utility as a payment system."

The paper argues general intangible assets are ill-equipped to function as money, as in the exchange of paper currencies, claims on the assets are relinquished at the time of exchange.

Cryptosecurities covered

In contrast, the author argues the UCC as currently drafted can easily accommodate the development of cryptosecurities, or assets traded on a blockchain.

The technology is currently being pioneered in various forms by major US stock market Nasdaq, online retail giant Overstock and 'smart securities' startup Symbiont.

Schroeder indicated cryptosecurities would fall under the UCC's definition of "uncertificated securities", which were meant to cover securities represented not as physical stock certifications, but on the books of a specific corporation.

"Article 8's failed uncertificated security regime, which was reformed in 1994, may be given a new life because it permit the issuance and trading of blockchain cryptosecurities in the direct ownership regime," the paper continues. "It is ironic that the drafters who could not understand their own present, may have ended up predicting the future."

However, the paper suggests the custody of a cryptosecurity could also affect the specific UCC provisions under which it is covered, thereby altering definitions they could be afforded.

Hand-to-hand currency

The paper goes on to imply that, even though bitcoin aspires to be a digital form of cash, the UCC contains wording that currently excludes it from acting as such.

"The problem is that, although inartfully drafted, in context it is clear that the term is limited to physical, or 'hand-to-hand', currency," it reads. "Characterizing bitcoin as money would have a perverse effect because security interests in money can only be perfected by physical custody."

Bitcoin could be given what the author terms the "super-negotiation" status of physical currencies, but such a change would require alterations to the text, according to the report.

Specifically, Schroeder contends that the UCC would need to be updated to include a definition of cryptocurrency, a definition of custody of cryptocurrencies and priority rules with regards to securities interests with the digital assets, among other changes.

Still, the author suggests this problem could be circumvented if bitcoins were held by third-party brokers or banks, at which point they could qualify as "financial assets", which are covered by super-negotiation rules.

"Unfortunately, to do so would defeat one of the greatest attractions of bitcoin – the ability to transfer value directly between parties without the use, and expense, of third-party intermediaries," the paper concludes.

Money conceptualization via Shutterstock


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