Why Ron DeSantis and others are wrong about the UCC’s role in crypto and CBDC

The UCC has served as the backbone of American commerce since the 1950s. Adopted by all 50 states and the District of Columbia, the UCC provides buyers, sellers, lenders, and borrowers with predictable and efficient rules for their transactions and ensures a harmonized legal framework for interstate commerce. For decades, updates to the UCC were uncontroversial. States adopted revisions proposed by the Uniform Law Commission and the American Law Institute without much fanfare. But now, spurred on by various political interest groups, state bills to enact the latest updates to the UCC have met with vocal opposition.

These changes are the result of a four-year revision project. They seek to modernize the UCC, to account for the impact of new technologies on commercial transactions over the past decade, including digital assets, cryptocurrencies and NFTs. Blocking these changes risks stifling innovation and the use of digital assets both at the state level and in interstate commerce.

Unfortunately, a significant portion of the objections to the UCC amendments stem from a fundamental misunderstanding of commercial law.

The primary criticism raised by opponents of the proposed changes is that they allegedly change the UCC’s existing definition of “money” to pave the way for the issuance of central bank digital currencies, or CBDCs, while leaving out cryptocurrencies such as Bitcoin. DeSantis, Noem and their allies see CBDCs as a threat to personal liberties and strongly oppose the US Federal Reserve’s current exploratory efforts in this domain. On the global stage, CBDCs have attracted interest, with a few countries adopting them, including Nigeria, the Marshall Islands and the Bahamas. However, no G-20 economy has made the leap so far.

In reality, the UCC amendments bear little resemblance to the opponents’ representation. The core element of the definition of “money” remains unchanged, encompassing “a medium of exchange currently authorized or adopted by a domestic or foreign government” in both paper and electronic form. The amendments aim only to clarify the limited scope of certain UCC sections as they apply to CBDCs already issued by some countries and those that other foreign nations may introduce in the future. Ensuring consistency across all 50 states and the District of Columbia is important and pragmatic.

It is true that the proposed amendments do not classify cryptocurrencies as “money” within the UCC definition. However, this is a deliberate choice, as the authors decided to create a new, purposefully designed category for them, known as “verifiable electronic records.”

This decision was made for two main reasons. First, the existing UCC assumes that “money” is a tangible asset that can be owned and held primarily in bank accounts. Because Bitcoin is intangible, it cannot be physically owned for UCC purposes. And while it is possible to hold Bitcoin and other cryptocurrencies in centralized accounts, users of these digital assets highly value their decentralized nature and often prefer self-storage to reliance on banks and other financial intermediaries.

Second, although many market participants may not realize it, the current UCC rules are ill-suited to transactions involving digital assets such as cryptocurrencies and NFTs. The existing rules were not designed for intangible assets that are traded quickly across pseudonymous, distributed networks such as blockchains. Individuals purchasing these assets face significant uncertainty in determining whether they have acquired clear legal ownership. The current system also makes it impractical or useless to use digital assets as collateral for secured loans.

The “verifiable electronic records” category effectively addresses these concerns.

But opponents of the proposed UCC changes see a far more sinister motive at play. They see these changes as a Trojan horse that lays the groundwork for the issuance of a US CBDC. Some critics even suggest that the contentious UCC revisions were coordinated with an executive order from the Biden administration exploring the potential benefits of a US CBDC. However, this is demonstrably false. Discussions on the proposed amendments’ “money” and “electronic money” sections began as early as 2021. The material was available on the Uniform Law Commission’s website and open for public comment.

Critics raise valid concerns about CBDCs. Issues such as unwarranted monitoring of financial transactions, reduced privacy, exposure to cyber-attacks and technical failures, destabilization of regional banking, and unexpected complications for conventional monetary policy transmission require thorough investigation. However, linking these claims to the UCC is erroneous and reveals a lack of knowledge of commercial law. The proposed amendments do not address the creation of a national digital currency, nor could they, as the Constitution gives this power to Congress, not the states.

Bills to adopt the UCC amendments have been introduced in 24 states, and more are expected to follow. Legislators who choose to adopt these new rules will provide legal certainty for market participants dealing with digital assets, including cryptocurrencies, and establish the necessary framework for their effective use in commercial transactions. Conversely, states that refuse to adopt these changes risk preventing the use of digital assets within their borders and hindering interstate commerce flowing toward their state.

As the world of commerce evolves, it is important that our laws keep pace with technological advances. The proposed UCC amendments represent a crucial step in securing the future of digital assets and should not be delayed or derailed by misinformed opposition.

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