Digital Assets: New Types of UCC Collateral Jacqueline Pueppke, Nicholas Buda and Justin Sheldon Baird Holm, LLP Bitcoin? A crypto currency represented by a cartoon dog, known as dogecoin? A non-fungible token (NFT) featuring a LeBron James dunk against the Houston Rockets in 2021 selling for over $387,000?1 What are these assets, and what happens if a borrower wants your bank to accept them as collateral for a loan? Cryptocurrency and NFTs are well-recognized types of electronically created assets, known as digital assets. The driving force behind digital assets is the idea that “centralized” governance creates security risks because a single entity — for example, a bank — administers and controls the so-called ledger (paper or electronic database) for the assets held by the entity. In contrast, digital assets are “decentralized” and created through a peer-to-peer network of computers, commonly known as a distributed ledger, that tracks and records electronic transfers to validate who owns or has the power to buy, sell or otherwise transfer the digital asset. Blockchain is a well-known example of a distributed ledger system stored across a number of digital networks.2 The IRS defines a digital asset as “any digital representation of value which is recorded on a cryptographically secured digital ledger or any similar technology.”3 Of particular importance is the concept that there is no physical asset; rather, there is only an electronic “record” that serves as evidence of the asset. Uniform Commercial Code (UCC) Article 12,4 which was adopted by the Nebraska legislature in 2021 and became effective on July 1, 2022 (Article 12), establishes the rules for perfecting security interest in so-called controllable electronic records (or CERs, for short), which are electronic records evidencing ownership of a digital asset created with underlying technology that allows the record to be subject to control by a third party. Under Article 12, control of a CER exists if: (A) the CER or the underlying technology system in which it is recorded (i.e., blockchain or other distributed ledger), gives the secured party: (i) the power to derive substantially all the benefit from the controllable electronic record, (ii) the exclusive power to prevent others from deriving substantially all the benefit from the controllable electronic record, (iii) the exclusive power to transfer control of the controllable electronic record to another person or cause another person to obtain control of a controllable electronic record that derives from the controllable electronic record, and (B) “the controllable electronic record, a record attached to or logically associated with the controllable electronic record, or the system in which the controllable electronic record is recorded, if any, enables the person to readily identify itself as having the powers” specified above.5 If the Article 12 definition of what constitutes control of a CER seems vague and abstract to you, you are not alone. The technology that forms the basis of creating and validating digital assets is constantly emerging; therefore, the statute is intentionally drafted “technology neutral” language that would work to establish control over CERs created with existing distributed ledger technology as well as over CERs created with future technology. COUNSELOR’S CORNER 22 Nebraska Banker
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