Considerations for Secured Credit Transactions Involving Digital Assets
New UCC rules reshape secured lending for digital assets.
Date:
July 21, 2025
Category:
Intellectual Property



Our last two articles have explored some of the key issues under the Uniform Commercial Code (UCC) for secured creditors to consider when taking a security interest in cash collateral and deposit accounts. This article explores the application of the UCC to digital assets (i.e., cryptocurrencies and stablecoins), an ever-broadening asset class that has been experiencing broader adoption in the United States in the midst of pro-crypto regulatory reforms.
The Need for Clarity Prior to the 2022 UCC Amendments
In July 2022, the American Law Institute Emerging Technology Committee (ALI) and Uniform Law Commission (ULC) finalized a proposal to amend the UCC to address security interests in personal property consisting of digital assets, such as crypto. The draft amendments to the UCC created a new Article 12 covering a new type of collateral, “controllable electronic records” (CERS) and amended Article 9 to establish how security interests in CERs should attach and be perfected.
To many in the market, myself included, these amendments helped address a shortcoming that otherwise existed under the UCC. The last major amendments to UCC Article 9 took place in 2010 and addressed, among other things, the legal treatment of another major technological advancement – electronic document signing – and its downstream effect on how security interests in electronic chattel paper are perfected. Although Satoshi Nakamoto had published the Bitcoin white paper during the drafting period for the 2010 Amendments, digital assets would likely have been an afterthought at the time, if even considered at all, by the ALI and ULC. Therefore, digital assets were not included in the 2010 Amendments.
The period that followed the 2010, though, witnessed the remarkable growth of digital assets, which became challenging to make fit to the existing constructs of UCC Article 9. A residual collateral type, “general intangibles,” existed (and continues to exist) under UCC 9-102, which covers collateral that does not fit into other collateral types provided for under Article 9. This catch-all collateral type appeared to be the only one that could encapsulate digital assets. However, perfecting a security interest in general intangibles – unlike other collateral types under UCC 9-102, which provide for multiple methods of perfection – requires filing a financing statement under UCC 9-310. Additionally, unlike license rights in general intangibles (which under UCC 9-321 can be taken by good faith licensees free and clear of preexisting security interests), no “take free” rule applies to general intangibles themselves.
This meant that a security interest perfected by filing a financing statement would continue to attach to a digital asset, no matter how many times it was transferred (or “negotiated” for UCC 3-201 purposes) and regardless of whether the transferee was aware of the security interest’s existence. Such an outcome was plainly at odds with the technological and operational efficiencies made possible by blockchain technology, which became the task of the ALI and ULC to address in the 2022 Amendments.
The Effect of the 2022 Amendments and Considerations for Secured Creditors
Under the 2022 Amendments, UCC 12-102 defines a “controllable electronic record” (CER) as a “record” – meaning, under UCC 1-201(b)(31), information that is stored in a medium and is retrievable in perceivable form – that is subject to control under UCC 12-105. This definition may seem somewhat circular, but it has some justification. The CER definition does not include controllable accounts, controllable payment intangibles, deposit accounts, electronic copies of record evidencing chattel paper, electronic documents of title, electronic money, investment property or transferable records. What is left out from the definition of a CER leaves undisturbed prior amendments that helped harmonize the UCC with the Electronic Signatures in Global and National Commerce Act, the Uniform Electronic Transactions Act and other laws that were responsive to prior technological changes.
“Control” over a CER under UCC 12-105 exists for a person if “if the electronic record, a record attached to or logically associated with the electronic record, or a system in which the electronic record is recorded”:
enables the person “to avail itself of substantially all the benefit from the electronic record”, the exclusive power to prevent others from doing the same, and the exclusive power to transfer control or enable another person to obtain control of the CER; or
“enables the person readily to identify itself in any way, including by name, identifying number, cryptographic key, office, or account number, as having [such] powers[.]”
Perfection of a security interest in a CER can still take place by filing a financing statement under the 2022 Amendments to UCC 9-312. However, UCC 12-104 creates strong incentives for secured creditors to perfect a security interest in a CER through control instead of filing.
First, UCC 12-104(e) establishes a “take free” rule similar to the rights afforded to “holders in due course” of negotiable instruments (e.g., promissory notes or draw instruments, such as checks) under Article 3 of the of the UCC and “protected purchasers” of securities under Article 8 of the UCC: “[a] qualifying purchaser acquires its rights in the controllable electronic record free of a claim of a property right in the controllable electronic record.” A “qualifying purchaser” is defined under UCC 12-102(a)(2) as the purchaser of a CER “or an interest in a controllable electronic record that obtains control of the controllable electronic record for value, in good faith, and without notice of a claim of a property right in the controllable electronic record.”
UCC 12-104(d) establishes a “shelter principle” under which “[a] purchaser of a controllable electronic record acquires all rights in the controllable electronic record that the transferor had or had power to transfer, except that a purchaser of a limited interest in a controllable electronic record acquires rights only to the extent of the interest purchased.” The concept of a shelter principle establishes a similar outcome to similar principles in Article 3, in which the transferee of a negotiable instrument succeeds to the rights of a holder in due course transferor even if the transferee was not itself a holder in due course. In effect, the shelter principle offers protection to the transferee of a CER against adverse third party claims, including those of a secured creditor, that might otherwise limit its rights in the CER.
Second, UCC 12-104(h) underscores that “[f]iling of a financing statement under Article 9 is not notice of a claim of a property right in a controllable electronic record.” This provision largely negates any benefits of a secured creditor in filing a financing statement against CER collateral, because even though the financing statement is effective in perfecting a security interest in the CER, it fails to establish rights against a downstream transferee of the CER. If the debtor held valid title to the CER and transferred the CER to another party, the transferee would take the CER free and clear of the secured creditor’s prior security interest. The transferee’s nontemporal priority over the secured creditor would render the secured party essentially helpless when asserting a claim over the CER in which it had perfected its security interest by filing.
By comparison, establishing a security interest in the CER through control – which by definition means the exclusive power to transfer control – gives a secured creditor substantially better rights over its collateral. As a practical matter, the CER could not be transferred by the debtor without the secured creditor relinquishing control. And as a legal matter, however theoretical technologically today, a transferee of the CER would not be able to take advantage of any nontemporal priority rights over the secured party, either.
Considering the Implications of Downstream Controllable Electronic Records Transfers
The foregoing discussion should not ignore the significant benefits the 2022 Amendments create in promoting the transferability of CERs. Setting aside the issues that arise in secured credit transactions, Article 12 brings welcome clarity to the secondary market for digital assets. Where prior to the 2022 Amendments, the transferee of a digital asset would take its rights subject to a security interest that had been perfected by filing a financing statement (which one can assume most transferees would not think to search for), the 2022 Amendments now provide a framework for frictionless exchanges of digital assets that constitute CERs. At the time of this writing, 29 states – including California, Florida and Illinois, and not counting New York, where the bill has passed the State Senate and awaits the governor’s signature – and the District of Columbia have adopted the 2022 Amendments to the UCC. The ongoing adoption of these updates to the UCC will only continue to bring greater clarity, and efficiency, to the market.
A final nuance to note is that the 2022 Amendments apply specifically to CERs, but not to any associated rights tied to CERs. As blockchain technology continues to change the way that traditional markets transact, secured credit practitioners and participants in other markets twitnessing the tokenization of real world assets, should take care to remember that Article 12 governs only the CERs themselves. The myriad underlying property rights and transactional elements that underlie these tokens remain subject to many of the same legal issues regarding custody, rights clearance, licensing and more. Participants in the exciting, rapidly evolving landscape of tokenized assets are well advised to maintain vigilance and not compromise on their due diligence of the underlying assets that are being brought onchain. Or, as we say in crypto, DYOR.
Our last two articles have explored some of the key issues under the Uniform Commercial Code (UCC) for secured creditors to consider when taking a security interest in cash collateral and deposit accounts. This article explores the application of the UCC to digital assets (i.e., cryptocurrencies and stablecoins), an ever-broadening asset class that has been experiencing broader adoption in the United States in the midst of pro-crypto regulatory reforms.
The Need for Clarity Prior to the 2022 UCC Amendments
In July 2022, the American Law Institute Emerging Technology Committee (ALI) and Uniform Law Commission (ULC) finalized a proposal to amend the UCC to address security interests in personal property consisting of digital assets, such as crypto. The draft amendments to the UCC created a new Article 12 covering a new type of collateral, “controllable electronic records” (CERS) and amended Article 9 to establish how security interests in CERs should attach and be perfected.
To many in the market, myself included, these amendments helped address a shortcoming that otherwise existed under the UCC. The last major amendments to UCC Article 9 took place in 2010 and addressed, among other things, the legal treatment of another major technological advancement – electronic document signing – and its downstream effect on how security interests in electronic chattel paper are perfected. Although Satoshi Nakamoto had published the Bitcoin white paper during the drafting period for the 2010 Amendments, digital assets would likely have been an afterthought at the time, if even considered at all, by the ALI and ULC. Therefore, digital assets were not included in the 2010 Amendments.
The period that followed the 2010, though, witnessed the remarkable growth of digital assets, which became challenging to make fit to the existing constructs of UCC Article 9. A residual collateral type, “general intangibles,” existed (and continues to exist) under UCC 9-102, which covers collateral that does not fit into other collateral types provided for under Article 9. This catch-all collateral type appeared to be the only one that could encapsulate digital assets. However, perfecting a security interest in general intangibles – unlike other collateral types under UCC 9-102, which provide for multiple methods of perfection – requires filing a financing statement under UCC 9-310. Additionally, unlike license rights in general intangibles (which under UCC 9-321 can be taken by good faith licensees free and clear of preexisting security interests), no “take free” rule applies to general intangibles themselves.
This meant that a security interest perfected by filing a financing statement would continue to attach to a digital asset, no matter how many times it was transferred (or “negotiated” for UCC 3-201 purposes) and regardless of whether the transferee was aware of the security interest’s existence. Such an outcome was plainly at odds with the technological and operational efficiencies made possible by blockchain technology, which became the task of the ALI and ULC to address in the 2022 Amendments.
The Effect of the 2022 Amendments and Considerations for Secured Creditors
Under the 2022 Amendments, UCC 12-102 defines a “controllable electronic record” (CER) as a “record” – meaning, under UCC 1-201(b)(31), information that is stored in a medium and is retrievable in perceivable form – that is subject to control under UCC 12-105. This definition may seem somewhat circular, but it has some justification. The CER definition does not include controllable accounts, controllable payment intangibles, deposit accounts, electronic copies of record evidencing chattel paper, electronic documents of title, electronic money, investment property or transferable records. What is left out from the definition of a CER leaves undisturbed prior amendments that helped harmonize the UCC with the Electronic Signatures in Global and National Commerce Act, the Uniform Electronic Transactions Act and other laws that were responsive to prior technological changes.
“Control” over a CER under UCC 12-105 exists for a person if “if the electronic record, a record attached to or logically associated with the electronic record, or a system in which the electronic record is recorded”:
enables the person “to avail itself of substantially all the benefit from the electronic record”, the exclusive power to prevent others from doing the same, and the exclusive power to transfer control or enable another person to obtain control of the CER; or
“enables the person readily to identify itself in any way, including by name, identifying number, cryptographic key, office, or account number, as having [such] powers[.]”
Perfection of a security interest in a CER can still take place by filing a financing statement under the 2022 Amendments to UCC 9-312. However, UCC 12-104 creates strong incentives for secured creditors to perfect a security interest in a CER through control instead of filing.
First, UCC 12-104(e) establishes a “take free” rule similar to the rights afforded to “holders in due course” of negotiable instruments (e.g., promissory notes or draw instruments, such as checks) under Article 3 of the of the UCC and “protected purchasers” of securities under Article 8 of the UCC: “[a] qualifying purchaser acquires its rights in the controllable electronic record free of a claim of a property right in the controllable electronic record.” A “qualifying purchaser” is defined under UCC 12-102(a)(2) as the purchaser of a CER “or an interest in a controllable electronic record that obtains control of the controllable electronic record for value, in good faith, and without notice of a claim of a property right in the controllable electronic record.”
UCC 12-104(d) establishes a “shelter principle” under which “[a] purchaser of a controllable electronic record acquires all rights in the controllable electronic record that the transferor had or had power to transfer, except that a purchaser of a limited interest in a controllable electronic record acquires rights only to the extent of the interest purchased.” The concept of a shelter principle establishes a similar outcome to similar principles in Article 3, in which the transferee of a negotiable instrument succeeds to the rights of a holder in due course transferor even if the transferee was not itself a holder in due course. In effect, the shelter principle offers protection to the transferee of a CER against adverse third party claims, including those of a secured creditor, that might otherwise limit its rights in the CER.
Second, UCC 12-104(h) underscores that “[f]iling of a financing statement under Article 9 is not notice of a claim of a property right in a controllable electronic record.” This provision largely negates any benefits of a secured creditor in filing a financing statement against CER collateral, because even though the financing statement is effective in perfecting a security interest in the CER, it fails to establish rights against a downstream transferee of the CER. If the debtor held valid title to the CER and transferred the CER to another party, the transferee would take the CER free and clear of the secured creditor’s prior security interest. The transferee’s nontemporal priority over the secured creditor would render the secured party essentially helpless when asserting a claim over the CER in which it had perfected its security interest by filing.
By comparison, establishing a security interest in the CER through control – which by definition means the exclusive power to transfer control – gives a secured creditor substantially better rights over its collateral. As a practical matter, the CER could not be transferred by the debtor without the secured creditor relinquishing control. And as a legal matter, however theoretical technologically today, a transferee of the CER would not be able to take advantage of any nontemporal priority rights over the secured party, either.
Considering the Implications of Downstream Controllable Electronic Records Transfers
The foregoing discussion should not ignore the significant benefits the 2022 Amendments create in promoting the transferability of CERs. Setting aside the issues that arise in secured credit transactions, Article 12 brings welcome clarity to the secondary market for digital assets. Where prior to the 2022 Amendments, the transferee of a digital asset would take its rights subject to a security interest that had been perfected by filing a financing statement (which one can assume most transferees would not think to search for), the 2022 Amendments now provide a framework for frictionless exchanges of digital assets that constitute CERs. At the time of this writing, 29 states – including California, Florida and Illinois, and not counting New York, where the bill has passed the State Senate and awaits the governor’s signature – and the District of Columbia have adopted the 2022 Amendments to the UCC. The ongoing adoption of these updates to the UCC will only continue to bring greater clarity, and efficiency, to the market.
A final nuance to note is that the 2022 Amendments apply specifically to CERs, but not to any associated rights tied to CERs. As blockchain technology continues to change the way that traditional markets transact, secured credit practitioners and participants in other markets twitnessing the tokenization of real world assets, should take care to remember that Article 12 governs only the CERs themselves. The myriad underlying property rights and transactional elements that underlie these tokens remain subject to many of the same legal issues regarding custody, rights clearance, licensing and more. Participants in the exciting, rapidly evolving landscape of tokenized assets are well advised to maintain vigilance and not compromise on their due diligence of the underlying assets that are being brought onchain. Or, as we say in crypto, DYOR.
Conclusion
The 2022 UCC Amendments mark an essential step forward in bringing legal infrastructure up to speed with technological innovation. For secured creditors, the message is clear: control is king. While perfection by filing remains possible, it’s increasingly a second-best strategy when dealing with digital assets. As more jurisdictions adopt Article 12, practitioners must stay informed and vigilant. Because in this fast-moving digital asset landscape, clarity is power, and due diligence still reigns supreme. Or, as the crypto crowd says: DYOR.

Tom Meister
Partner
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