Study examines blockchain securities under U.S. commercial law

     Cryptographic bonds and blockchain record-keeping systems may be exempt from the U.S. Uniform Commercial Code (UCC) laws governing commercial transactions, according to a new study of Cardozo’s law.

     A 60-page research paper written by professor Jenny Schroeder and released this week outlines how bitcoin transactions will be regulated by laws governing the exchange of property, both financially and non-financially.

     This article once again highlights the legal issues that may arise in disputes over ownership of crypto assets, such as Bitcoin. The problem is that Bitcoin does not meet the definition of currency under the United States Uniform Commercial Code and challenges traditional regulatory concepts.

     The Uniform Commercial Code, first published in 1952, is a private law organization that seeks to harmonize state laws regarding commercial transactions. States may adopt the Uniform Commercial Code as written or approve or reject specific changes to it.

     The study echoes many of Perkin Coie’s conclusions and is perhaps the first to speculate on how the U.S. Uniform Commercial Code will apply to other uses of blockchain. For example, Schroeder cited decentralized application platform Ethereum and Overstock’s tØ platform, which are designed to support the use of tokens other than monetary payments.

     The study comments that such transactions could potentially be queued on the blockchain without requiring any changes to the UCC:

     “There is no reason why a government department, typically the U.S. Secretary of State, could not establish a blockchain record system under the UCC language. Likewise, numbering, maintaining records, indexing records, and communicating information through an electronic ledger system would not be possible.”

     Schroeder suggested such a system could be “more efficient and accurate” than those currently in use, while also providing the ability for individual states to collect filings through smart contracts.

     “We could continue to practice that filing fees must be paid to debtors in various states,” the article reads. “A ‘smart’ blockchain ledger could be programmed to allow the acquiring party to automatically transfer the fees to a location under the jurisdiction of the Secretary of State by moving the funds on the blockchain.”

Required corrections

     This finding stands in contrast to the study's conclusion that the UCC needs to be modified for Bitcoin to be used as a payment system.

    “Cryptocurrencies do not, and they cannot, fit the definition of ‘money’ in Title IX,” the report reads.

     Building on this statement, the authors note that Bitcoin is currently defined as a “generally intangible” asset. Perkins Coie notes that this means that, unlike cash, it is a legal asset that can continue to be valid after it is transferred.

     The authors say that no matter how many times a particular bitcoin changes owners, the owner's legal interest can continue.

  “Unlike nearly all other categories of personal property defined in Title IX, once a generally intangible becomes an impediment to a security interest, it can never be unsealed, even if there is a bona fide purchaser’s offer,” the report adds:

  “This could significantly impact Bitcoin’s liquidity and, therefore, its utility as a payment system.”

This survey believes that general intangible assets do not have the function of currency, like paper money.

Crypto Securities Coverage

  In contrast, the authors argue that the UCC as currently drafted could be easily adapted for the development of crypto-securities, or asset transactions on the blockchain.

   The technology has been developed in various forms, primarily in the U.S. Nasdaq stock market, with participation from online retail giant Overstock and “smart securities” startup Symbiont.

    Schroders said crypto securities would fall under the UCC’s definition of “uncertificated securities,” which is meant to cover securities that don’t have a backed-up share certificate.

  “The failed uncertificated securities regime of the 1994 reform of Article 8 may be given new life by allowing the issuance and trading of blockchain crypto-securities under a direct ownership regime,” the survey continued. “Ironically, the policy drafters who could not understand what they were getting at may have ended up predicting the future.”

     However, this article suggests that custody of crypto-securities may also be affected by specific UCC provisions, thereby changing the definitions they may provide.

  Hand to hand currency

     The investigation goes on to suggest that even if Bitcoin aspires to become a digital form of cash, the UCC contains language that would prevent them from doing so.

“The problem is that, although not intentional, the term is limited in context to tangible, or ‘hand-to-hand,’ money,” he said. “Bitcoin’s currency characterization has negative consequences because the security benefits can only be fulfilled in tangible custody.”

      According to the report, Bitcoin could have what the authors call the “hyper-negotiable” status of a physical currency, but such a change would require a change in the text.

Specifically, Schroders believes that the UCC needs to be updated, including the definition of cryptocurrency, the definition of cryptocurrency custody and the priority rules for securities interests and digital assets.

However, the authors suggest that this problem can be circumvented if the bitcoins are held by a third-party broker or bank, at which point they can qualify as “financial assets” as governed by super-negotiated rules.

  “Unfortunately, doing so would negate one of Bitcoin’s greatest appeals: the ability to transfer value directly without going through a third party,” the paper concludes.