What is the UCC?

The Uniform Commercial Code (UCC) is a comprehensive set of laws governing all commercial transactions in the United States. It is not a matter of federal law, but rather a set of universally adopted state statutes. The uniformity of state adoption of the UCC directly facilitates interstate commerce by reducing legal and regulatory hurdles applicable to conducting business across multiple states. As a result of the UCC, businesses (and bankers financing them) can generally assume that similar legal structures will support their operations throughout the country, facilitating the growth and prosperity of the American economy.

The UCC is not a radical new concept. South Dakota has adopted the UCC as generally recommended by the Uniform Law Commission. The Uniform Law Commission is a non-profit entity formed by lawyers, judges, legislators, and law professors charged with providing non-partisan, well-conceived and well-drafted legislation to bring clarity and stability to critical areas of state statutory law. Since its inception as a consolidated code in 1940, the UCC has been periodically tweaked to address issues raised by case precedent or perceived gaps in coverage. The proposed amendments being considered by the South Dakota legislature in 2023 are a continuation of this process.

The UCC and Cryptocurrency

The amendments address a gap in the current law presented by digital assets, including cryptocurrencies. The revisions would allow banks to extend loans secured by cryptocurrency. They fix certain limitations under the current law in a fashion accommodating to both banks seeking to make loans and customers seeking to receive them. Under current law, there is no clear way for a lender to perfect a security interest in digital assets. In order to address this gap, the UCC adopts a new definition of “controllable electronic record” or “CER” for UCC purposes only. A security interest in a CER is perfected by a lender taking “control” of the CER. The UCC drafters chose to exclude CERs from the definition of “money” under the code since money is generally defined to refer to currency in its physical form.

As we all know, digital assets are, by definition, not capable of being reduced to physical form. Under the UCC, a security interest in money can only be perfected by taking possession of the currency. Obviously, cryptocurrencies do not have a physical form capable of possession, so it made no sense to add cryptocurrency to the UCC’s definition of money. The definition of “money” in the UCC has no impact on the definition of “money” for other legal purposes, such as the Bank Secrecy Act, Internal Revenue Code, money transmitter laws, or otherwise.

To correct a few misconceptions, note the following:

  • The law is agnostic as to the types of digital assets that would be covered as a CER, but the definition would certainly include existing cryptocurrencies (Bitcoin, Ethereum, etc.) and fix a hole in the current statutory construct. The UCC amendments do not, in any way, condone, recommend, or favor a central bank digital currency.
  • Under the United States Constitution, only the federal government has the power to “coin money”, so states could not issue a central bank digital currency even if they wanted to do so.
  • The UCC amendments do not, in any way, expand the powers of state or federal government to supervise the financial activities of South Dakota citizens. Quite simply, there is nothing in the statute granting the government any oversight powers.
  • The law has nothing whatsoever to do with the freedom of South Dakota residents to purchase and use or invest in digital assets, including cryptocurrency, as they deem appropriate. The UCC simply provides a framework to address this new asset from a commercial law perspective. Anyone suggesting that the revisions to the UCC hinder cryptocurrency simply doesn’t understand cryptocurrency or the current status of the law. The UCC revisions would actually help proponents of cryptocurrency by increasing the utility of the asset, making it available as collateral for traditional financing. The amendments promote both the privacy and negotiability of digital assets.

Broad South Dakota Support for the UCC

The UCC amendments have drawn broad support from South Dakota bankers, retailers, chambers of commerce, and the legal community. Unfortunately, a misinformation campaign has been commenced by a few national pundits who seem to fundamentally misunderstand the UCC in general and the proposed amendments. It would be better for state lawmakers to focus on the opinions of local business people, bankers, and lawyers when forming opinions on the UCC amendments. South Dakota has a well-earned reputation of adopting laws favorable to commerce, including banking, trusts, and related industries. If we allow uninformed national pundits to dictate South Dakota policy, we will be in danger of sullying our reputation on the national stage and jeopardizing our ability to continue to attract business to our state.


Sign up for eNews

Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.