The 2022 amendments to the Uniform Commercial Code (UCC) brought substantial changes to various aspects of commercial transactions, with significant implications for secured transactions that involve “digital assets,” an essential part of business financing. These amendments not only introduced new rules around digital assets but also revised how businesses can use these assets as collateral in secured transactions.
Minnesota enacted the UCC 2022 Amendments in Spring of 2024. For companies in Minnesota, understanding these changes will help protect and leverage interests in digital assets when used to secure financings. Let’s explore how the 2022 UCC amendments reshape secured transactions, especially in relation to digital assets and other key areas of business finance.
Secured Transactions Before the 2022 Amendments
In a secured transaction, a borrower offers assets as collateral to secure a loan. Under the UCC, the lender’s rights to the collateral are protected through a process called perfection, which gives the lender legal priority over other creditors who might try to claim the same assets.
Before the 2022 UCC amendments, businesses typically used traditional assets like inventory, equipment, or receivables as collateral. Digital assets, like cryptocurrencies or NFTs, didn’t have a clear legal framework, making it risky for lenders to accept them as collateral. Additionally, disputes over ownership or rights to these digital assets were difficult to resolve, often relying on state contract law or other general provisions of the UCC.
The 2022 UCC amendments, particularly with the introduction of Article 12, changed the game by providing clearer rules for secured transactions involving digital assets.
New Categories of Collateral: CERs, Controllable Accounts, and Payment Intangibles
One of the standout changes in the 2022 UCC amendments is the introduction of the concept of Controllable Electronic Records (CERs). These are essentially digital assets, like cryptocurrencies or NFTs, that can be uniquely identified and controlled by their owner.
For secured transactions, this change is particularly important because the UCC now formally recognizes CERs, along with two related categories: controllable accounts and controllable payment intangibles, as legitimate types of collateral. This means businesses can now pledge certain digital assets as security for loans, with clear rules for how these assets can be perfected and prioritized under the law.
Here’s a breakdown of how these new categories work in secured transactions:
- Controllable Electronic Records (CERs): Digital assets like cryptocurrencies and NFTs that are considered CERs can now be used as collateral for loans. This means businesses that own valuable digital assets can use them to get financing.
- Controllable Accounts and Controllable Payment Intangibles: These refer to rights to receive money tied to a CER. For example, if a digital asset (like an NFT) comes with a right to receive payment, that right can also be used as collateral for loans, giving businesses more options to secure financing.
These new categories provide a structured approach for lenders and borrowers to handle digital assets in secured transactions, which wasn’t clearly possible before.
Perfection and Priority Rules for CERs and Digital Assets
Under the 2022 UCC amendments, the process of perfection (the legal steps to establish a security interest in collateral) has been expanded to include control over digital assets. This means that businesses can perfect their security interests in CERs, controllable accounts, and controllable payment intangibles either by:
- Filing a financing statement in the state of formation (as is typical for other types of collateral), or
- Taking control of the digital asset, which gives them legal priority over other creditors who may have a claim on the same asset.
This new option, perfection by control, is crucial because digital assets are inherently different from physical assets or traditional intangibles. By taking control of a CER, the lender essentially gains the power to enjoy all the benefits of the digital asset, block others from using it, and transfer ownership as needed. This level of security gives lenders greater confidence in using digital assets as collateral.
Impact on Lenders and Borrowers
For lenders, the 2022 UCC amendments significantly reduce the risk associated with accepting digital assets as collateral. Now, lenders can perfect their security interest in these assets and have clear rules for enforcing their rights if a borrower defaults.
For borrowers, the ability to use digital assets in secured transactions opens up new financing opportunities. Businesses that hold significant digital assets, such as cryptocurrencies, NFTs, or other digital records, can now leverage these assets to secure loans that might have been unavailable under the old rules. This is particularly relevant for businesses operating in industries with a heavy reliance on technology and digital currencies.
Revised Treatment of Chattel Paper and Hybrid Transactions
Another important update with the 2022 UCC Amendments is how the UCC now handles chattel paper — records showing both a financial obligation and a security interest in goods (like leases or sales contracts).
The 2022 UCC amendments acknowledge that today’s transactions often involve both physical and digital records. The new rules do away with the old differences between paper and digital forms, making it easier to use both in secured transactions. Now, chattel paper is treated as a combination of both types of records, reflecting how businesses typically operate.
Additionally, hybrid transactions, which involve both the leasing of goods and providing services, are now formally recognized. If the main purpose of the deal is to lease goods, it’s considered chattel paper, making it simpler for businesses to structure and secure these transactions.
Changes to the Definition of “Money” and Digital Currencies
One interesting update in the 2022 UCC amendments is the revised definition of money. The UCC now limits the definition of money to include only mediums of exchange that have been officially adopted by a government (i.e., traditional currencies). Cryptocurrencies like Bitcoin, which are not government-backed, are not considered “money” under the UCC.
However, certain types of digital currency can still be used in secured transactions, but they will be treated as general intangibles or CERs, depending on their characteristics. This clarification is important for businesses that want to use cryptocurrencies as collateral but need to understand how they’ll be classified under the new rules.
What Stays the Same?
While the amendments introduce many changes, it’s important to note that not all secured transaction rules are different. Many of the existing practices for handling traditional assets in secured transactions remain the same. For instance:
- If an asset doesn’t qualify as a CER or a controllable account, it will still be treated under the general rules for intangibles or other assets.
- The process for perfecting security interests in non-digital assets (like inventory or equipment) remains unchanged.
Key Takeaways for Minnesota Businesses
The 2022 UCC amendments are a significant update to the UCC that reflects the modern realities of digital assets and secured transactions. Here’s what Minnesota businesses need to know:
- Digital assets can now be used as collateral: If you or your business holds cryptocurrencies or NFTs, you can now use them to secure loans or enhance collateral.
- Perfection by control: Lenders can perfect security interests in digital assets by taking control, giving them added protection in transactions.
- Opportunities for tech-focused businesses: If your business operates in the digital space, these amendments open up new ways to leverage your assets for financing.
Need Help Navigating the 2022 UCC Amendments?
If you’re unsure how these changes impact your business’s secured transactions or digital assets, contact Kim Lowe at Avisen Legal for guidance. Kim can help you understand your options and ensure compliance with the new UCC rules.
Kim Lowe is one of Minnesota’s Uniform Law Commissioners. She worked with members from the Business Law Section of the Minnesota State Bar Association and law makers in Minnesota to enact the 2022 UCC Amendments in Minnesota. These changes to the law took effect in Minnesota in August of 2024.
