Digital Collateral: Unlocking Financing Potential with UCC Article 12

Written by: Jocelyne A. Macelloni, Partner, Barakat + Bossa PLLC & Pavla Vitkova, Attorney, Barakat + Bossa PLLC

Uniform Commercial Code (“UCC”) Article 9 provides for robust and uniform legal regulation of secured transactions, and as the readers of this Article know, it provides the rights and protections you all rely on each day. In today’s fast changing world, new types of assets pop up quicker than the legal world can react. That does not mean that the Uniform Law Commission, who drafts these uniform laws, does not try to keep up or anticipate the changes. Their latest attempt at catching up the law with the digital world is UCC Article 12. (1)

UCC Article 9 and the Need for Change

To understand Article 12, one needs to first understand Article 9. Article 9 is a set of laws that regulates security interests. (2) A typical secured transaction under Article 9 goes something like this: a person or company borrows money from a lender, and as security for the repayment of their monetary obligation, they give the lender, or factor, a security interest in one or more of their assets: for example, a car, an appliance, or inventory. UCC Article 9 provides a scheme for taking and enforcing a security interest in various types of personal property. (3) 

UCC Article 9 provides rules for entering into security agreements and securing the creditor’s interest in the asset. If a debtor defaults, Article 9 sets forth the rights and remedies of all parties involved, including permitting a secured creditor to take possession of the asset that has been provided as security under Article 9. (4) If there are more creditors secured by the same asset, there are also priority rules in Article 9 to resolve the dispute between creditors. (5) Given that Article 9 has been adopted by every state, if a debtor is from one state and the creditor is from another, the resolution of disputes is simplified by Article 9. (6)

The Leveraging of Digital Assets

The existence and condition of the assets covered by Article 9 are usually easily verifiable in that their existence can be proven by a photograph, receipt, or other document. Similarly, the assets can be easily valued as of the date of entering into the Security Agreement and, thereby, appropriate financing can be provided based upon the value of the asset. 

What if a would-be debtor has only digital assets? Imagine a die-hard survivalist who does not “trust the banks” and only invests in bitcoin. In other words, assets that cannot be seen in a photograph, held in your hand, or confirmed with a simple piece of paper, but rather existing only in a digital world. Can such a person still obtain financing secured by their digital assets?

The short answer is yes – it was always an option. However, there was sparse legal regulation and guidance for obtaining and enforcing a security interest in these situations. This is where UCC Article 12 comes in.

UCC Article 12: Tailoring Regulations for Digital Assets

The new Article 12 does not change the concepts set forth in Article 9. In fact, Article 9 is still the basis for securing loans in general. Article 12 expands Article 9 – and indeed, some amendments to Article 9 were needed to incorporate the new concepts found in Article 12. 

The new important phrase from Article 12 is “controllable electronic records” or “CERs”. (7) Under Section 12-102(a)(1) of the UCC, they are defined as “records stored in an electronic medium that can be subjected to control.” (8) “Control” is the basic concept behind Article 12. If an asset is not controllable, it is not covered by Article 12. (9)

Control Matters: The Key Concept in Article 12

The idea of “control” allows for negotiability of CERs. This is because in a digital world, CERs are often pseudonymous, meaning one can never truly know the identity of the prior owner or the chain of title. (10) This makes them dangerous to trade with. But Article 12 tried to change this by introducing the concept of control. Control has a few elements. First, it must give the person (a) the power to avail itself of substantially all of the CER’s benefits; and (b) “exclusive power” (i) to prevent others from doing so and (ii) to transfer control to another person. (11) Second, the CER must “enable[] the person readily to identify itself in any way, including by name, identifying number, cryptographic key, office, or account number, as having [those] powers.” (12)

Why is control so important in UCC Article 12? Because control means perfection. (13) Also, control basically means “super-priority” in that anyone with control automatically has priority over a creditor that does not have control but filed a UCC-1 financing statement. (14) 

Qualifying Purchasers: Ensuring Negotiability of CERs

Another important concept of Article 12 is “qualifying purchaser” defined under § 12-102(a)(2) as a person who takes an interest (either ownership or security) in a CER “for value, in good faith, and without notice of a claim of a property right in the controllable electronic record.” (15)

Section 12-104(d) of the UCC states that a qualifying purchaser acquires its rights in the controllable electronic record free of a claim of a property right in the controllable electronic record. (16) This is what makes CERs “negotiable” – the legal certainty that purchasers now have. (17) The concept of qualifying purchaser is similar to the “holder in due course” concept found in UCC Article 3. (18)

Updates to Article 9: Integrating Article 12 Innovations

To briefly summarize the updates to Article 9 arising from the introduction of Article 12, general intangibles under UCC § 9-102 now include CERs. As to perfection of a CER under UCC § 9-312, it can be achieved either by filing a UCC-1 statement, or by taking control. As we said above, anyone with control has priority over any other security interest. (19)

Adoption of UCC Article 12 and the Impact on Your Factoring Transactions

CERs typically encompass cryptocurrencies like Bitcoin or Ethereum, non-fungible tokens (NFTs), and various crypto tokens. (20) These CERs operate on blockchain technology. (21) Control of a CER is established through access, which is typically granted by possessing the necessary cryptographic key. (22) Practically, this means that if someone has exclusive knowledge of the cryptographic key or “seed phrase” to access a digital wallet and transfer the CERs within it, they effectively control the contents of that wallet under UCC Article 12. (23)

To leverage digital assets in factoring arrangements, it is imperative to inquire whether your customer holds any digital currencies or other digital assets, as these assets can be used to secure the obligations owed to you under the factoring agreement. However, you will also need to ensure that your factoring agreement contains an obligation for the factoring customer to provide you with control of the digital asset, such as by providing you with the cryptographic (access) key to the digital wallet. Once the key is provided, you have perfected your interest in the digital asset, like how you perfect your interest in accounts by filing a UCC-1 financing statement. And no worries, you can do both. For assistance in incorporating this change to your factoring agreement, consult an attorney familiar with the recent addition of UCC Article 12.

Conclusion: UCC Article 12 - A Milestone in Digital Asset Regulation

In conclusion, the introduction of UCC Article 12 marks a significant step forward in adapting legal frameworks to the evolving landscape of digital assets. This legislation addresses the unique challenges posed by CERs, such as cryptocurrencies stored in digital wallets. By emphasizing the concept of “control,” Article 12 establishes a clear framework for securing loans against digital assets, ensuring that creditors with control have super-priority. The inclusion of “qualifying purchasers” further enhances the negotiability of CERs, providing legal certainty for those acquiring interests in CERs. Overall, Article 12 expands upon the foundation laid by Article 9, demonstrating a proactive approach by the Uniform Law Commission to regulate and facilitate transactions involving digital assets in an increasingly digitalized world.


About the Authors:

Jocelyne A. Macelloni is a partner and director of education at Barakat + Bossa PLLC, located in Miami. Board-certified by the Florida Bar in business litigation, Macelloni has spent more than a decade representing businesses and business owners in courts and arbitrations around the U.S., including in cross-border transactions and disputes that involve enforcing factoring companies’ and secured creditors’ rights. Macelloni can be reached at jmacelloni@b2b.legal.

Pavla Vitkova is an attorney at Barakat + Bossa PLLC, located in Miami. Vitkova commenced her legal career in the Czech Republic, where she earned her first law degree. Subsequently, she transitioned to the U.S. She graduated summa cum laude from Nova Southeastern University and now specializes in business litigation. Vitkova can be reached at pvitkova@b2b.legal

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.

(1) As of the publishing of this Article, UCC Article 12 has been enacted in twenty-four states and the District of Columbia: Alabama, California, Colorado, Delaware, District of Columbia, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Minnesota, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Virginia, and Washington. Additionally, UCC Article 12 has been introduced in five states: Massachusetts, Missouri, New York, Tennessee, and West Virginia. See Uniform Law Commission Bill Tracker, UCC Article 12, found at: https://www.uniformlaws.org/committees/community-home?communitykey=1457c422-ddb7-40b0-8c76-39a1991651ac.
(2)  See generally UCC Art. 9, available at Uniform Law Commission Website. https://www.uniformlaws.org/acts/ucc.
(3) See id.
(4) UCC §§ 9-601-624.
(5) UCC §§ 9-301-342.
(6) See Uniform Law Commission Bill Tracker, UCC Article 9, Secured Transactions, found at: https://www.uniformlaws.org/committees/community-home?CommunityKey=6317f73b-badb-47b2-8a5a-58ee62032ba1.
(7) UCC § 12-102(a)(1).
(8) Id.
(9) Uniform Commercial Code Amendments (2022) With Prefatory Note and Comments, p. 231.
(10) Id. at 230.
(11) UCC § 12-105(a)(1).
(12) UCC § 12-105(a)(2).
(13) Remember, perfection is regulated under Article 9. See UCC § 9-301 - § 9-342. See also UCC § 9-312 and UCC § 9-314.
(14) UCC § 9-326A.
(15) UCC § 12-102(a)(2). See also Uniform Commercial Code Amendments (2022) With Prefatory Note and Comments, p. 232.
(16) UCC § 12-104(d).
(17) Uniform Commercial Code Amendments (2022) With Prefatory Note and Comments, p. 232-33.
(18) Id. a 232.
(19) UCC § 9-326A.
(20) Crypto, Part III: Securing Interest in Digital Assets – The Proposed UCC Article 12, American Bar Association, available at https://www.americanbar.org/groups/litigation/resources/newsletters/corporate-counsel/crypto-part-3-securing-interests-digital-assets-the-proposed-ucc-article-12/
(21) Id.
(22) Id. See also UCC § 12-105(a).
(23) Id.


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