Thread by @Prof_CarlaReyes

The 2022 UCC Amendments help promote stability & predictability in commercial transactions related to a variety of cryptocurrencies (whether intrinsic, non-intrinsic, NFT, or otherwise). A thread clarifying some of the critiques by @theblaze's Daniel Horowitz & @1MarkMoss 1/n

https://twitter.com/Peacockg/status/1632851503848251392

@theblaze @1MarkMoss First, it is worth noting that the UCC is maintained as a joint project of the Uniform Law Commission and the American Law Institute. I am neither a ULC commissioner, nor a member of the ALI. I am a #law #prof @SMULawSchool & have been a #blockchain lawyer since 2011-ish 2/n

@theblaze @1MarkMoss @SMULawSchool I was, however, an observer on the 2022 UCC Amendments project over the long-haul of the project, and it was a long-haul - years in a process that was open to the public for participation...I am not sure changes to the UCC have ever been accused of being "sudden" before 3/n

@theblaze @1MarkMoss @SMULawSchool It is also worth noting perhaps, that I am NOT a fan of #CBDCs. Indeed, I have expressed my concerns about #privacy related to #CBDCs in a variety of contexts on the record. That being said, I do not share any concern about the UCC "taking away an escape hatch" 4/n

When the 2022 Amendment project began, no state had yet adopted #bitcoin as legal tender. As a result (and as I am discussing in #secured #transactions with my students on Wednesday) #bitcoin was a general intangible. 5/n

When a lender takes general intangibles as collateral for a secured loan, the only way to perfect the #security #interest is to perfect by filing a financing statement in the relevant filing office. 6/n

This gave rise to two problems in the industry for those that lent against bitcoin as collateral: (1) native crypto-lenders were often concerned about filing a financing statement for fear of reducing the privacy interests of their debtors...7/n

The privacy concern was that third-parties could ascertain a debtor owned cryptocurrency (including, say, #bitcoin) and perhaps had borrowed against it and debtors wanted more privacy than that. As a result, some lenders began taking "control" of the bitcoin collateral 8/n

by for example, taking the bitcoin (or other crypto) into a wallet the lender controlled. While this was good for gaining access to the collateral if the debtor defaulted, under existing #law, that lender, without filing, was actually an unperfected secured creditor 9/n

This of course, would be a problem if the debtor defaulted to another secured creditor that had perfected and thus obtained priority, or in the event that the debtor became insolvent and filed for bankruptcy. 10/n

The second problem for #bitcoin was that general intangibles imposed a severe limitation on the negotiability of bitcoin. An onward transferee of bitcoin could never be sure w/o searching the filing system whether the bitcoin they received was encumbered or not. 11/n

the problem of non-negotiability of general intangibles was identified VERY early on, see: coindesk.com/markets/2015/0… and papers.ssrn.com/sol3/papers.cf… 12/n

Many initially think the answer to general intangible problem is to make bitcoin #money under the #UCC - because #money gets some special rules that makes it super-negotiable; a recipient of encumbered money from a debtor takes it free of a scty intst granted by the debtor 13/n

The problem with that is that #money in the UCC can only be perfected by #possession. And possession in the UCC is a physical, tactile, tangible concept. You have to be able to hold it in your hands. So, if you make bitcoin money, you make it impossible to perfect 14/n.

The 2022 Amendments seek to resolve these issues in nuanced ways. First, the amendments create a new category of asset for UCC purposes (NOTE: FOR UCC PURPOSES ONLY!) 15/n

That category of assets is called a #controllable #electronic #record or #CER. A CER is an electronic record that is capable of being subject to control. Now, here is the cool part, if you are a #commercial #law geek: 16/n

The 2022 amendments are technology agnostic, so they defer to the technical system to determine what constitutes control as a technical matter so long the person who can be said to have control via the tech has (1) the power to enjoy substantially all the benefit of the CER 17/n

(2) the exclusive power to prevent others from enjoying "substantially all the benefit" of the CER and (3) the exclusive power to transfer control of the CER. Notably, exclusivity is not lost if it is shared by agreement (or by tech - like through multi-sig arrangement) 18/n

The definition of "control" - these three powers that the person with control has - serves two purposes - (1) it serves a definitional purpose - not all electronic records are CERs - just those capable of being subject to the defined term control, and 19/n

(2) lenders who take crypto, including bitcoin as collateral, may now perfect by #control. Indeed, the amendments make #control the preferred method of perfection for CERs over filing (with a grandfather clause to let people switch over) 20/n

This, of course, is EXACTLY what existing industry players had already been doing - just without the legal benefits they would have wanted under the prior provisions of the #UCC. Now, the law caught up with what bitcoin-native secured lenders thought was best all along 21/n

Additionally, the 2022 #UCC Amendments provide that if a purchaser of a #CER (such as, say #bitcoin) is a qualifying purchaser the purchaser will benefit from the take-free rule - the purchaser gets an unencumbered CER. 22/n

Far from favoring #CBDCs, the #UCC 2022 Amendments actually seek to facilitate the #negotiability of #CERs such as #bitcoin. Without such rules as the take-free rules, #bitcoin and other #CERs would indeed be at a disadvantage to #electronic money in terms of negotiability 23/n

Instead, the #UCC 2022 Amendments preserve the negotiability of bitcoin and other CERs in a way that should better enable individuals to freely transact in bitcoin without worry that they are taking the bitcoin subject to a secret lien. This is VERY IMPORTANT 24/n

Now, at some point during the project (because, again, it was actually a very measured, deliberative and open project, not a bunch of suddenly proposed changes), El Salvador adopted bitcoin as its legal tender. 25/n

Arguably (and I say, arguably because there is some argument under historic practice and case law that suggests the contrary), El Salvador's move made bitcoin money under the existing UCC rules. Of course, this was a problem because no lender could actually perfect ...- 26/n

A security interest in intangible #money - recall money must be perfected by possession and possession is a concept for tangible stuff you can hold in your hands (or stuff under your mattress or in a safe, etc) 27/n

This is all of course why @CaitlinLong_ and others in Wyoming led the way with changes to that state's UCC to begin with - to help account for all of these problems. but, I digress (but only to congratulate you all for your foresight! so, it is ok, right!?!) 28/n

Also, some countries had already developed #CBDCs like the Sand Dollar. The Sand Dollar, as a virtual fiat currency authorized by the Bahamian government was already covered as money under the existing UCC definition, but still had no way to perfect it...because possession. 29/n

Further, because it is a form of fiat #money, #CBDCs often integrate with the existing banking system, and the existing UCC rules have rules for how to perfect in things like a deposit account (namely by control, defined in a different way) 30/n

Notably, this is even true for El Salvador, whose #chivo wallet is a custodial wallet with ultimate control over the wallet held by a bank with deep ties to the El Salvador government (but again, I digress...my family in E.S. just was not a fan of the implementation) 31/n

To deal with this fact unique to #CBDCs while actually attempting to honor the #decentralized nature of cryptocurrencies and blockchain protocols like that found in #bitcoin, the 2022 Amendments created the concept of #electronic money and limited its application to ... 32/n

exclude a medium of exchange in an electronic record (like bitcoin) that existed and operated as a medium of exchange before it was authorized or adopted as a medium of exchange by a government. Notably, this was not to preference #CBDCs, but to deal with unique issues ... 33/n

Namely, if #elctronic money is credited to a deposit account (which in #UCC speak means a bank account - and could include an account at a central bank), then the normal deposit account perfection rules will apply to the #electronic money there. If it is not ...34/n

credited to a deposit account, then a security interest in electronic money could be perfected by control. But note why you would not want the default method of perfection for #bitcoin to be the default method of perfection for #electronic money ... 35/n

It would need to be credited to a deposit account...perfection by requiring recentralization of #bitcoin holdings does not seem super awesome! Rather, it is much better to allow for #control over a #CER to be a method of perfection for #bitcoin, especially since 36/n

That is what native-bitcoin secured lenders were doing before the project every started!! The separation between #electronic money and #CERs, far from favor #CBDCs somehow, actually respects existing commercial practice & the decentralized nature of #bitcoin & other #crypto 37/n

Further, the take-free rule for #electronic money is linked to an amendment to the existing take free rules for money that a transferee of both money and electronic money could take free of the security interest. 38/n

What I do hear in the worries raised about the UCC definition of money covering (even if in a technology neutral fashion) what amounts to #CBDCs is a concern that other laws might copy the definition for other purposes. 39/n

it is SUPER important to keep in mind that the UCC is private law - it is not regulatory in nature, and the definition of money in the UCC has no direct impact on the definition of money for other legal purposes such as in the Internal Revenue Code, the Bank Secrecy Act, 40/n

Money transmitter laws, or otherwise. The definition of #money in the #UCC serves a narrow commercial law purpose: to provide predictability in commercial transactions. 41/n

Ok, I think that is all I've got. But if I have missed something, I invite others to add (here is looking at you @Andrea_Tosato @propelforward @ChrisOdinet @CaitlinLong_ ). Also happy to answer any questions about any of it! 42/42