Action on 2022 amendments to the Uniform Commercial Code – South Dakota governor vetoes act

According to the Uniform Law Commission, the 2022 Amendments to the Uniform Commercial Code (UCC) have been introduced in approximately 21 states and adopted in the following states:

• North Dakota HB1082 (eff. August 1, 2023)
• New Mexico HB90 (eff. Jan. 1, 2024)
• Colorado SB23-090 (eff. August 7, 2023)
• Indiana SB468 (eff. July 1, 2023) and
• Washington SB5077 (on the governor's desk for signature, eff. January 1, 2024 once signed)

Variations on portions of the 2022 Amendments have been previously adopted in several states, including Idaho, Iowa, Nebraska, Indiana, Arkansas, New Hampshire, Texas, and Wyoming, although not all are effective yet.

On March 9, South Dakota Governor Kristi Noem vetoed House Bill 1193, which would have adopted the 2022 Amendments, including UCC Article 12, as part of the South Dakota UCC. We have previously discussed the potential impact of UCC Article 12. Governor Noem’s veto message stated that she objected to the legislation because the definition of “money” in the 2022 amendments does not include virtual currencies, such as Bitcoin, “and other digital assets,” unless they are “authorized or adopted” by a government. Governor Noem felt that the exclusion:

• Would make it more difficult to use privately issued or generated virtual currencies, placing South Dakota citizens “at a business disadvantage” and
• Would ease the adoption of a central bank digital currency (CBDC), which may then become “the only viable digital currency.”

The basis for the governor’s concerns is not entirely clear. Currently, the UCC defines “money” as “a medium of exchange currently authorized or adopted by a domestic or foreign government” (the Official Comments note that this definition only applies to the UCC, and not under other law). This definition of "money" would cover CBDCs, and would exclude privately issued or generated virtual currencies that have not been authorized or adopted by government authority – meaning that the 2022 Amendments do not change existing law with respect to the treatment of CBDC as "money." The 2022 Amendments do add a clarification – a virtual currency would only constitute “money” under the UCC if it was authorized or adopted by a government authority at the time the virtual currency is created – not it if is pre-existing. But as discussed below, under UCC Article 12 this limitation on the definition of “money” largely becomes a distinction without a meaningful difference.

Under current law, a security interest in "money" may only be perfected by possession – that means a person taking possession of "money" by delivery takes the "money" free of claims by a secured party with a prior perfected security interest in the "money." Since it is not clear whether a CBDC may be “possessed” as that term is used in the UCC, the 2022 Amendments expressly apply the concept of “control” and the “take free” rule to CBDCs. This both allows a CBDC to serve as collateral and protects transferees who take the virtual currency for value. Without these changes, the only practical way to take a perfected security interest in a CBDC under existing law would be if (i) it was held in a deposit account in a financial institution and the secured party had control of the account under UCC Article 9 and (ii) the secured party then used its control to prevent the CBDCs from being withdrawn or transferred out of the deposit account. So today, a transferee of a CBDC could arguably take a CBDC confident that the transferee’s interest is superior to prior claims.

The same is not true for non-CBDC virtual currencies under existing law. Under the current terms of the UCC, most virtual currencies that are not "money" constitute “general intangibles,” which means they are not freely transferable, but are instead subject to the claims of a prior properly perfected secured party – that is, a secured party that (i) holds a properly attached security interest in a debtor’s general intangibles and (ii) has filed a UCC-1 financing statement in the proper jurisdiction. A transferee of virtual currency that is not "money" takes subject to the prior claim, and cannot be confident that it has the sole, or even a superior, right to the virtual currency without performing a time-consuming and expensive UCC filing search on the transferor.

However, the 2022 Amendments change this result in UCC Article 12 by treating most virtual currencies as “controllable electronic records” and both (i) permitting secured parties to perfect their interest through “control,” whether or not the virtual currency is held in a deposit account, and (ii) permitting transferees to take their interest free and clear of prior claims – placing the virtual currency on the same footing as a CBDC. So, ironically, Governor Noem’s veto appears to actually impede, rather than advance, the practical utility of non-CBDC virtual currencies in South Dakota, by (i) limiting the rights of transferees receiving non-CBDC virtual currency and (ii) positioning the CBDC as the only freely transferable virtual currency.

For more information, please contact the authors.