As digital assets continue to gain prominence in the global economy, the need for a clear legal framework to govern these assets has become increasingly important. To address this, the Uniform Commercial Code (UCC) is proposing amendments that introduce the concept of Controllable Electronic Records (CERs). This blog post will provide a comprehensive explanation of CERs, how they are defined, and how the legal language is specified in the proposed revisions to the UCC.
What is a Controllable Electronic Record (CER)?
A Controllable Electronic Record (CER) is a record stored in an electronic medium that can be subjected to “control” [2]. CERs encompass various digital assets, including virtual currency, tokenized shares of stock or other investment, non-fungible tokens (NFTs), and digital assets with embedded payment rights [6]. The proposed new Article 12 of the UCC aims to provide rules for transactions involving digital assets and specifically refers to these intangible assets as CERs [5].
Defining “Control” in the Context of CERs
In order for a person to have “control” of a CER, they must meet the following criteria [1]:
- The power to enjoy “substantially all the benefit” of the CER.
- The exclusive power to prevent others from enjoying “substantially all the benefit” of the CER.
Exclusions
It’s important to note that not all digital assets are considered CERs. By definition, a CER excludes digital assets that are not subject to “control” as well as those that are already subject to other commercial laws, such as the Electronic Signatures in Global and National Commerce Act (E-SIGN), the Uniform Electronic Transactions Act, or other articles of the UCC [4].
Legal Language in the Revised UCC
In the proposed amendments to the UCC, Section 12-102(1) defines a CER as a “record stored in an electronic medium that can be subjected to control” [8]. This definition specifically excludes many types of digital assets already subject to other commercial laws.
The new Article 12 aims to provide clarity regarding the transfer of property rights in CERs [9]. To have “control” of a CER, a person must possess “the power to enjoy ‘substantially all the benefit’ of the CER,” and this power does not have to be exclusive [10].
Examples of CERs
Some examples of digital assets that could be considered CERs under the proposed amendments include:
- Virtual currencies (e.g., Bitcoin, Ethereum): These cryptocurrencies can be stored electronically and are susceptible to control by the person holding the private key associated with the currency.
- Non-fungible tokens (NFTs): NFTs are unique digital assets that can represent various forms of digital art, collectibles, or virtual goods. Like virtual currencies, NFTs can be stored electronically and controlled by the person holding the private key associated with the token.
- Digital assets with embedded payment rights: These digital assets may include smart contracts or other electronically stored agreements that provide the holder with the right to receive payments.
- Tokenized Securities: These are digital assets or smart contracts which represent an underlying share of stock, a limited partnership unit, or other actual form of investment security ownership.
Conclusion
The proposed amendments to the Uniform Commercial Code aim to address the growing prominence of digital assets in the global economy by introducing the concept of Controllable Electronic Records (CERs). These amendments provide a legal framework for the control and transfer of digital assets, such as virtual currencies, non-fungible tokens, and digital assets with embedded payment rights.
By understanding the definition and legal language surrounding CERs, individuals and businesses can better navigate the evolving landscape of digital asset transactions and ensure compliance with the Uniform Commercial Code.
[1] “A “controllable electronic record” is a record in electronic form that is susceptible to “control.” For a person to have “control” of a CER, the person must have: the power to enjoy “substantially all the benefit” of the CER, the exclusive power to prevent others from enjoying “substantially all the benefit” of the CER, and” URL: https://www.americanbar.org/groups/business_law/publications/blt/2022/04/2022-amendments-ucc/
[2] “A “controllable electronic record” (CER) is a record stored in an electronic medium which can be subjected to “control” under 12-105 but does not include a controllable account, payment intangible, deposit account, electronic copy of a record evidencing chattel paper, electronic documents of title, electronic money, investment property or a …” URL: https://www.hmblaw.com/blog/the-uccs-proposed-article-12-controllable-electronic-records/
[3] “A “controllable electronic record” is a record in electronic form that is susceptible to “control.” For a person to have “control” of a CER, the person must have: the power to enjoy “substantially all the benefit” of the CER, the exclusive power to prevent others from enjoying “substantially all the benefit” of the CER, and” URL: https://businesslawtoday.org/2022/03/proposed-2022-amendments-uniform-commercial-code-digital-assets/
[4] “By definition, a CER excludes any digital assets that are not subject to “control” as well as those that are already subject to other commercial laws such as E-SIGN, the Uniform Electronic Transactions Act or other articles of the UCC.” URL: https://www.skadden.com/insights/publications/2022/10/amendments-to-uniform-commercial-code
[5] “Summary of Key Uniform Commercial Code (UCC) Amendments. Article 12: A proposed new Article 12 of the UCC provides rules for transactions involving certain new types of digital assets, including cryptocurrency and non-fungible tokens.Under the proposed new Article 12, these intangible assets are called “controllable electronic records,” or “CERs.”” URL: https://www.gtlaw.com/en/insights/2022/12/proposed-ucc-amendments-to-article-12-shed-new-light
[6] “Article 12 introduces the concept of the controllable electronic records (CER). A CER is defined as a record of information in electronic form that is susceptible to control. Examples include virtual currency, non-fungible tokens, and digital assets with embedded payment rights.” URL: https://www.wolterskluwer.com/en/expert-insights/uniform-commercial-code-ucc-amended-to-address-emerging-technologies
[7] “Controllable electronic record (CER): A record of information stored electronically that is susceptible to control and that a person has the power to use. Controllable account: An account that is evidenced by a CER, and the agreement of the account debtor (obligor) obligated on the account to pay the person who controls the CER.” URL: https://www.orrick.com/en/Insights/2022/10/The-Uniform-Commercial-Code-and-Digital-Assets-What-You-Need-to-Know
[8] “The new Section 12-102(1) defines a CER as a “record stored in an electronic medium that can be subjected to control” and specifically excludes many types of digital assets already …” URL: https://www.natlawreview.com/article/2022-uniform-commercial-code-amendments-address-emerging-digital-technologies
[9] “Amendments to Uniform Commercial Code Aim To Provide Clarity … The new article governs the transfer of property rights in a “controllable electronic record” (CER), which is defined as a record stored in an electronic medium that can be subjected to “control” (discussed below). By definition, a CER excludes any digital assets” URL: https://www.skadden.com/-/media/files/publications/2022/10/amendments_to_uniform_commercial_code_aim_to_provide_clarity_on_the_transfer_of_digital_assets.pdf
[10] “Article 12 covers only digital assets that are CERs. A CER is a record in electronic form that is susceptible to “control.” (e.g., bitcoin). D. Control. For a person to have “control” of a CER, the person must have. · “the power to enjoy “substantially all the benefit” of the CER (does not have to be exclusive);”.” URL: https://web.nebankers.org/handbook/results.aspx?ContentID=2169
