In 2019, the shift in the legal landscape of transactions involving digital assets prompted the American Law Institute (ALI) and Uniform Law Commission (ULC) to start developing amendments to the Uniform Commercial Code (UCC). Digital assets have seen tremendous growth over the past decade, signaling a need for reconsideration of existing legal frameworks to accommodate these novel types of ownership.
The existing provisions set out in the Uniform Commercial Code do not customarily address digital assets as collateral. With the advent and explosion of digital currencies like Bitcoin, Ethereum, and various others, there is a need to have them legally recognized as potential collateral.
Such recognition can establish clear protection and recovery courses for investors in the event of default, bankruptcy, or a variety of other situations. Importantly, given that such digital commodities are highly volatile and could be subject to regulatory changes, crafting terms for digital collateral in loans may involve a fair bit of complexity.
New classifications may also need to be considered, covering not only cryptocurrencies but potentially any digital assets characterized by a value in trade. What exactly constitutes a ‘digital asset’ is still up for debate given the rapid pace of technological advancement.
While these amendments are in the works, legal professionals dealing with such transactions should consider a proactive approach. This approach might include initiating internal discussions and conducting robust risk assessment to develop interim strategies in anticipation of an updated UCC.
To read more about the ALI and ULC’s work on these amendments, visit the original article here.