The 2022 amendments to the Uniform Commercial Code (UCC) introduced some important changes to the UCC, especially for businesses dealing with digital assets. One of the most significant updates is the addition of Article 12, which clarifies the legal treatment of digital assets like cryptocurrencies and non-fungible tokens (NFTs) in commercial transactions.
If you’ve been hearing terms like “Controllable Electronic Records” (CERs) and wondering what it means for your business, you’re in the right place. Let’s break down Article 12, its impact on digital assets, and what it all means for Minnesota businesses.
Background of the 2022 UCC Amendments
The Uniform Law Commission (ULC) is the organization responsible for the Uniform Commercial Code, a body of uniform laws related to commerce and business that have been promulgated in every state in America since first proposed in the middle of the 20th century. The ULC, together with lawyers from the American Law Institute (ALI) monitor changes in business and technology and periodically update the UCC so that it reflects what is happening in business.
The 2022 UCC Amendments were approved by the ULC in 2022 after a multi-year drafting period where experts in law and technology worked through the legal issues created by changes in technology. In the Spring of 2024, Minnesota adopted the 2022 UCC Amendments, they became effective in August of 2024, and apply now.
What Is Article 12?
Article 12 is a new section of the UCC that creates a legal framework specifically for Controllable Electronic Records (CERs), which is a fancy way of saying digital assets that can be owned and controlled, like Bitcoin or NFTs. Before Article 12, digital assets were often classified as “general intangibles,” a broad legal category that wasn’t always a good fit for the way these assets are used today. This caused confusion over who really “owned” a digital asset or how rights to these assets could be transferred.
With Article 12, the UCC creates clear rules for how digital assets are treated in commercial transactions, making it easier to define ownership, transfer rights, and protect these assets under the law.
What Are Controllable Electronic Records (CERs)?
At the heart of Article 12 is the concept of Controllable Electronic Records (CERs). A CER is essentially a digital asset that can be controlled by its owner. This control is defined by the ability to:
- Use the asset (e.g., sell or trade it),
- Prevent others from using it, and
- Transfer it to another person.
For a digital asset to qualify as a CER, the owner must be identifiable (either by name, cryptographic key, or other digital identifier) and must have exclusive control over it.
What Does This Mean for Digital Assets?
Before Article 12, digital assets were often treated inconsistently in the legal world. For example, if someone wanted to claim ownership of cryptocurrency or an NFT, it was unclear under the UCC how that ownership could be legally enforced. These assets were often lumped in with other types of property, leading to disputes over who really had the right to use or transfer them.
Article 12 changes that. It establishes specific rules for:
- Ownership: Clearly defining what it means to own a digital asset.
- Transfer of Rights: Clarifying how digital assets can be transferred from one owner to another, while protecting the rights of both parties.
- Negotiability: Allowing digital assets to be transferred in a way that “cuts off” competing claims, meaning if you buy a CER, you won’t have to worry about someone else suddenly claiming they have rights to it.
How Does Article 12 Impact Minnesota Businesses?
For Minnesota businesses, this is great news, especially if you’re dealing with digital assets. Whether you’re buying, selling, or using digital assets in your transactions, Article 12 gives you a clear legal foundation to do so with confidence.
Here’s how it can impact you:
- Certainty in Transactions: When you buy or sell a digital asset under the rules of Article 12, you can be more certain that your ownership of the asset is protected and that the transaction is legally sound. This reduces the risk of disputes over who actually owns a particular cryptocurrency or NFT.
- Digital Assets as Collateral: Article 12 also plays a big role in secured transactions, where businesses use assets as collateral for loans. Before, it was tricky to use digital assets as collateral because of the legal grey area surrounding them. Now, businesses and business owners can use CERs as collateral, with clear guidelines on how to protect and transfer these assets.
- Flexibility with Perfection: Under Article 12, digital assets can be perfected either by filing a financing statement or by establishing control over the asset. This provides businesses with more flexibility in managing their security interests, especially when using CERs in financing transactions.
What Digital Assets Are Covered?
Not all digital assets fall under Article 12. To be covered, a digital asset must be classified as a Controllable Electronic Record. Examples of digital assets that can qualify as CERs include:
- Cryptocurrencies like Bitcoin and other virtual (non-fiat) currencies,
- Non-fungible tokens (NFTs), and
- Other digital assets with embedded payment rights (for example, digital assets that represent a right to receive a payment).
If a digital asset doesn’t meet the definition of a CER, it may still be classified as a “general intangible” and be governed by other parts of the UCC, such as Article 9.
Why Does This Matter?
The changes introduced by Article 12 matter because they provide legal certainty in a rapidly evolving digital world. With the rise of cryptocurrencies and NFTs, businesses and individuals are increasingly engaging in transactions involving digital assets. However, without clear rules, these transactions were often risky and unpredictable.
Article 12 gives businesses:
- Protection: Knowing that their rights in digital assets are legally enforceable.
- Clarity: Clear definitions of ownership, control, and transfer rights.
- Confidence: The ability to engage in digital transactions without worrying about the legal complexities that previously surrounded digital assets.
When Do These Changes Take Effect in Minnesota?
In Minnesota, the 2022 UCC amendments, including Article 12, took effect on August 1, 2024. However, there’s a one-year transition period that extends until August 1, 2025. During this time, businesses can continue to operate under the old rules for existing transactions, but any new transactions must comply with the amended UCC. After August 1, 2025, all transactions must align with the new rules.
How Do These Changes Affect Existing Contracts?
The amendments can impact existing secured transactions, but the UCC includes transitional provisions. Security interests that were perfected under the old UCC before August 1, 2024, remain valid during the transition period. However, businesses must update their security agreements and other documents to comply with the new rules by August 1, 2025, to ensure continued enforceability.
Do Minnesota Businesses Need to Update Their Legal Documents?
Yes, it’s essential for businesses to review and update their legal documents, particularly security agreements. The introduction of CERs and changes to how digital assets are handled means businesses should make sure their agreements cover CERs, controllable accounts, and controllable payment intangibles.
Additionally, businesses should ensure that their procedures for perfecting security interests (either by filing or by control) are aligned with the new rules.
What Happens If a Business Doesn’t Comply by the August 1, 2025 Deadline?
If a business doesn’t update its secured transactions to meet the new UCC requirements by August 1, 2025, it risks losing its priority over collateral in secured transactions. This means that previously perfected security interests could become unperfected, making it harder to enforce claims on collateral or protect against competing claims.
How Article 12 of the UCC Protects Your Digital Assets
The introduction of Article 12 to the UCC provides critical legal protection for businesses using digital assets like cryptocurrencies and NFTs. By establishing clear rules for ownership, transfer, and secured transactions, Article 12 ensures that businesses can engage in digital transactions with confidence. Understanding how these new regulations affect your business is key to navigating the evolving digital landscape.
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.
