Updates to the UCC – New Article 12 and Article 9 Amendments–Controllable Electronic Records (CER’s)

The American Law Institute (ALI) and Uniform Law Commission (ULC) adopted amendments to the Uniform Commercial Code (UCC) in May 2022 and July 2022 respectively.  The highlight of these amendments was the addition of Article 12 governing transactions in digital assets known as “controllable electronic records” (CER’s).

A CER is a record of information in electronic form susceptible to control.   Several now common place things fall under this definition like Bitcoin and Ethereum as and NFT’s like Bored Ape Yacht Club.

Under Article 12, the fundamental question is one of control. Control is defined as:

1. the power to enjoy substantially all the benefits of the CER (which does not have to be exclusive),
2. the exclusive power to prevent others from enjoying substantially all the benefits of the CER, and
3. the exclusive power to transfer control or to cause another person to obtain control of the CER

The owner must also be able to identify themselves to a third party as the person in control. A person asserting control over a CER is entitled to a rebuttable presumption of exclusivity. If these conditions are not met, then a digital asset is not a CER within the meaning of Article 12.

Likely the most impactful part of the new Article 12 is the treatment of qualifying purchasers. If the purchaser is a qualifying purchaser, the purchaser takes free of any property claim to the CER. A qualifying purchaser is a purchaser that obtains control a CER for value, in good faith, and without notice of a property claim to the CER.

In English, if your NFT is stolen then the thief sells it to a purchaser who buys it without knowing it was stolen from you, they own your NFT.

If a CER is purchased, the purchaser acquires an interest in all the rights in the CER the transferor had or had the power to transfer.

Article 9 was also amended to harmonize with the new Article 12. Article 9 was amended to treat a CER as a “general intangible”, a controllable account as an “account”, and a controllable payment intangible as a “payment intangible.” Because these assets are included in pre-existing categories of collateral there is no need to change existing collateral descriptions in security agreements and financing statements.

Article 9 now anticipates perfection of security interests in CERs.  A security interest in a CER, controllable account or controllable payment intangible can be perfected by filing a financing statement or by control (as defined in Article 12).  A security interest in a CER, controllable account, or controllable payment intangible perfected by control has priority over a security interest perfected only by the filing a financing statement — even if control is obtained after the filing of the financing statement.

While these changes have been made, they must still be adopted in each in Massachusetts a bill adopting Article 12 is currently with the committee for Financial services. In New Hampshire a bill adopting Article 12 is in committee in the senate. Status updates for all 50 states can be found here: https://www.uniformlaws.org/committees/community-home?communitykey=1457c422-ddb7-40b0-8c76-39a1991651ac#LegBillTrackingAnchor