Digital Assets - Part One of Two
Written By: Steven N. Kurtz, Partner, Levinson Arshonsky Kurtz & Komsky, LLP
Presently, we are on the cusp of some significant innovations which will impact your business. There are two major changes forthcoming. The first is Article 12 of the Uniform Commercial Code (“UCC”), which is entitled Controllable Electronic Records. The second is President Trump’s Executive Order dated January 23, 2025 entitled Strengthening American Leadership in Digital Financial Technology (the “Digital Finance Executive Order”).
Digital assets and cryptocurrency have long seemed like the Wild West. The origin of cryptocurrency was to facilitate and pay for criminal activity conducted on the dark web in a place known as the Silk Road. As cryptocurrency becomes more mainstream and legitimized, along comes Sam Bankman-Freed and the FTX debacle to stink up the industry. While there are always bad guys, good ideas and technology will always prevail.
One roadblock to legitimizing digital assets for use in business was the Securities Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 121. Among other things, this rule required traditional banks to record cryptocurrency on their balance sheets as liabilities. This balance sheet requirement precluded many banks from jumping into digital currencies, and those who were in the space likely passed along the extra costs. Mainstream business folks like to know that their funds are with a solid financial institution. While the technology and ability to transact business using cryptocurrency certainly exist, if the funds are not connected to a reputable financial institution, many businesses and individuals will shy away from cryptocurrency and its related technology, which are good business tools.
The Digital Asset Executive Order did away with SAB 121. This order will allow banks to offer custodial services for digital assets, expand crypto-backed financial products, and establish blockchain-based payment platforms without the accounting issues that existed before the repeal of SAB 121. The Digital Currency Executive Order also establishes a working group composed of various departments within the federal government, including the Attorney General, Treasury Department, Homeland Security, the SEC, and science advisors to the President. This working group is tasked with identifying regulations, guidance documents, orders, and other things that affect the digital currency sector. The working group is supposed to present a report to President Trump in six months. In addition, the working group is tasked with collaborating with industry experts and will hold public hearings. The Digital Asset Executive Order further provides that the process must be transparent.
This legitimacy and push to develop digital currencies will also push Article 12 along, as it will be the controlling state law on financing and securitizing assets that exist digitally. Although Article 12 will indeed cover cryptocurrencies, it will also govern other transactions that occur within the digital world. Article 12 is entitled Controllable Electronic Records (a “CER”). It sets up the legal framework to record, finance and secure transactions that were traditionally paper based. To qualify as a CER, the information must exist exclusively in electronic form, the holder must have exclusive control, and the system must allow for verification of control so that the parties know who has the right to enforce claims and know who is entitled to get paid and when.
Article 12 of the UCC is predicated upon the parties transacting business within a blockchain. While complicated and technical, a blockchain is a decentralized digital ledger that records transactions across multiple computers in a manner that ensures transparency, security, and immutability. The blockchain contains blocks of data that reference a transaction, and other transactions are linked together in a chain in chronological order. The blockchain is supposed to be secure and tamper-proof, and the transactions must be verified. Blockchains are used for digital currencies like Bitcoin but have wide commercial applications. Some examples of industries that can employ blockchains are supply chains and digital asset management. In other words, blockchains can digitally record transactions and facilitate business within a controlled electronic ecosystem.
Examples of CERS will be receivables stored in a blockchain set up to facilitate business transactions. Those in the transportation space are likely to see electronic bills of lading. The electronic bills of lading are a form of a CER that will be covered by Article 12. Implicit within the CERs are accounts that can be financed and account debtors who can be given notice. Part two of this Article will go into how one finances and perfects their security interest in CERs, but spoiler alert, it will involve control. But, operating in a CER, especially within a blockchain, will likely speed up and streamline the information to transact business. Information will be available faster, and provided that the CER has the right security protocols, it might cut out fraud. “Might” being the operative word here because fraudsters have always been and will always be within the commercial finance and factoring world, and it is likely that this future fraud will be the subject of a later article.
While the Financial Executive Order primarily deals with cryptocurrencies, digital commerce will quickly grow into areas where you traditionally finance. The new presidential administration campaigned on being friendly to the cryptocurrency industry. The Financial Asset Executive Order does that. It removed a major hurdle and encouraged traditional banks to go into this industry. While cryptocurrencies may be the driving force behind the Financial Asset Executive Order, those who intend to operate within Article 12 will benefit greatly. If traditional banks offer blockchain technology payment platforms, which is where the world is heading, businesses will flock there as well. This will provide opportunities for the factors and other commercial finance players in this space. Part two of this Article will dive into Article 12 and discuss the opportunities therein in greater detail.
About Steve Kurtz
Steve Kurtz is a seasoned attorney with expertise in commercial and bankruptcy litigation, as well as complex commercial finance transactions. He has led numerous high-stakes commercial cases and now divides his time equally between litigation and transactional work, serving a diverse clientele, including financial institutions and fintech lenders.
Beyond his legal practice, Mr. Kurtz has served as a Judge Pro-Tem in Los Angeles County and actively engages in pro bono work. He is also deeply involved in his community, serving as the President of the Calabasas Shul and leading an active lifestyle with his family.
He holds a B.S. in Psychology from San Diego State University and a J.D. from McGeorge School of Law. He is affiliated with several prestigious legal organizations and has been recognized as a "Super Lawyer" by Los Angeles Magazine for multiple years. Additionally, he is a published author and frequent speaker at finance and legal conferences.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.