
Dan Brecher
Counsel
212-286-0747 dbrecher@sh-law.comCounsel
212-286-0747 dbrecher@sh-law.comThe growth of virtual currency continues to be held back by the lack of uniform regulations. While regulators at the federal and state level are increasing their oversight over Bitcoin and Ether blockchain-based currencies, there are still very few clear rules for businesses to follow. Given the lack of clear standards, there are significant risks associated with taking and perfecting a security interest in assets that include virtual currency.
As detailed in a prior article, the Uniform Law Commission drafted a uniform model state law, known as the Uniform Regulation of Virtual-Currency Businesses Act (URVCBA), to address the patchwork of overlapping and varying virtual currency laws for businesses, users, and investors. The law was finalized late last year and is currently under consideration in several states, including Connecticut, Hawaii, and Nebraska.
The URVCBA aims to provide a statutory framework for the regulation of companies engaging in “virtual-currency business activity” and contains a three-tier regulatory scheme that determines whether an individual or company engaging in virtual currency business activity is (1) exempt from the law; (2) must register; or (3) must obtain a license. The URVCBA also contains numerous consumer protections.
While the URVCBA is a great start, it does not contain commercial law rules for covered transactions. To fill that void, the Uniform Law Commission is currently working on a companion model law. It addresses the commercial law rights of virtual-currency businesses that have control over their customers’ virtual currency and, in particular, providing to those businesses and customers duties and rights comparable to those enjoyed by customers of securities intermediaries under Article 8 of the Uniform Commercial Code (UCC).
Article 9 of the UCC generally governs security interests in both tangible and intangible assets. Because it does not fit neatly into any of the UCC’s existing definitions, the application of Article 9 to virtual currencies is ripe with legal uncertainties.
The Uniform Commercial Code Companion Act (Companion Act) aims to provide some guideposts for businesses and investors. One of its major goals is to provide a roadmap for Article 9 secured parties to the attachment and perfection of security interests in virtual currencies held by intermediaries in a manner comparable to traditional securities held in “securities accounts” subject to UCC Article 8.
“The use of provisions based on Article 8 is intended to provide certainty for using virtual currency as collateral under Article 9 of the Uniform Commercial Code: it allows secured parties taking virtual currency as collateral to proceed under the ‘control’ model for attachment and perfection of their security interests that Article 9 allows,” the Uniform Law Commission states in its draft law. “We also believe that this act will enhance the ‘negotiability’ of virtual currency when transferred or exchanged, as well as making clear that generally recognized commercial law rules are available to supplement the provisions of this act.”
For a licensee or registrant governed by the URVCBA to be subject to UCC Article 8’s rules, the licensee or registrant must assume “securities intermediary” status and maintain a “securities account” to which a “financial asset” is or may be credited. Under UCC Section 8-102, a “securities intermediary” is not confined to a person who is regulated under banking or securities, but includes “a person…that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity.”
Similarly, the definition of “securities account” is not confined to an account at a bank or broker or to an account maintained by a person regulated under banking or securities law. The term is defined in UCC Section 8-501(a) as “an account to which a financial asset is or may be credited in accordance with an agreement under which the person maintaining the account undertakes to treat the person for whom the account is maintained as entitled to exercise the rights that comprise the financial asset.”
Finally, the definition of “financial asset” is not confined to a security, but defined in UCC Section 8-102(a)(9)(iii) to include “any property that is held by a securities intermediary for another person in a securities account if the securities intermediary has expressly agreed with the other person that the property is to be treated as a financial asset under [Article 8].”
The Uniform Law Commission maintains that, taken together, the definitions indicate that a licensee or registrant, which maintains accounts for users to which virtual currency is or may be credited as a financial asset, could agree expressly with the users to be subject to the rules of UCC Article 8. Below are several key provisions of the model law:
As explained by the Uniform Law Commission, the provisions are based on Article 8, but are not intended to affect its provisions or their interpretation. However, third-party intermediaries maintaining “control” of virtual currencies for their customers, as well as customers of those providers, should be able to take advantage of judicial decisions affecting obligations under UCC Article 8.
The laws governing virtual currency are constantly evolving. Scarinci Hollenbeck’s Corporate Transactions & Business Group will continue to track the progress of the Uniform Regulation of Virtual-Currency Businesses Act and the Companion Act. Please stay tuned for updates.
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.
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