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Florida Gov. Ron DeSantis recently proposed legislation to prohibit the use of a central bank digital currency in his state.
Cheney Orr/Getty Images
About the authors: Carla L. Reyes is an assistant professor of law at SMU Dedman School of Law . Prior to teaching, Reyes’ law practice focused on blockchain and cryptocurrency at Perkins Coie LLP. Andrea Tosato is an associate professor in commercial law at the School of Law of the University of Nottingham and a visiting associate professor at the University of Pennsylvania Carey Law School.
A quiet corner of commercial law has been thrust into the political spotlight. Florida Gov. Ron DeSantis and South Dakota Gov. Kristi Noem have recently intervened in routine updates to the Uniform Commercial Code, expressing concerns over federal overreach, perceived threats to individual economic liberties, and the potential emergence of a U.S. central bank digital currency. This development is worrisome. The UCC, while unfamiliar to many Americans, serves a vital function within our economic framework.
The UCC has served as the backbone of U.S. commerce since the 1950s. Adopted by all 50 states and the District of Columbia, the UCC provides buyers, sellers, lenders, and borrowers with predictable and efficient rules for their transactions and ensures a harmonized legal framework for interstate commerce. For decades, updates to the UCC were uncontroversial. States adopted revisions proposed by the Uniform Law Commission and the American Law Institute without much fanfare. But now, spurred by various political interest groups, state bills to adopt the most recent updates to the UCC have encountered vocal opposition.
These amendments are the result of a four-year revision project. They seek to modernize the UCC, to account for the impact of new technologies on commercial transactions over the past decade, including digital assets, cryptocurrencies, and NFTs. Blocking these changes risks stifling innovation and the adoption of digital assets both at the state level and in interstate commerce.
Regrettably, a significant portion of the objections to the UCC amendments stems from a fundamental misunderstanding of commercial law.
The primary criticism raised by opponents of the proposed amendments is that they supposedly change the UCC’s existing definition of “money” to pave the way for the issuance of central bank digital currencies, or CBDCs, while leaving out cryptocurrencies like Bitcoin. DeSantis, Noem, and their allies view CBDCs as a threat to personal freedoms and strongly oppose the U.S. Federal Reserve’s current exploratory efforts in this domain. On the global stage, CBDCs have piqued interest, with a few countries adopting them, including Nigeria, the Marshall Islands, and the Bahamas. However, no G-20 economy has made the leap thus far.
In reality, the UCC amendments hardly resemble their opponents’ portrayal. The core element of the definition of “money” remains unchanged, encompassing “a medium of exchange currently authorized or adopted by a domestic or foreign government” in both paper and electronic forms. The amendments merely aim to clarify the limited scope of certain UCC sections as they apply to CBDCs already issued by some countries and those that other foreign nations might introduce in the future. Ensuring consistency across all 50 states and the District of Columbia is essential and pragmatic.
It is true that the proposed amendments do not classify cryptocurrencies as “money” within the UCC definition. However, this is an intentional choice, as the drafters decided to create a new, purposefully-designed category for them, known as “controllable electronic records.”
This decision was made for two primary reasons. First, the existing UCC presumes that “money” is a tangible asset that can be possessed and held primarily in bank accounts. Because Bitcoin is intangible, it cannot be physically possessed for UCC purposes. And although it is possible to hold Bitcoin and other cryptocurrencies in centralized accounts, users of these digital assets highly value their decentralized nature and often prefer self-custody over reliance on banks and other financial intermediaries.
Second, though many market participants may not realize it, the current UCC rules are ill-suited to transactions involving digital assets like cryptocurrencies and NFTs. The existing rules were not designed for intangible assets traded rapidly across pseudonymous, distributed networks such as blockchains. Individuals purchasing these assets face considerable uncertainty in determining whether they have acquired clear legal ownership. The current system also makes it impractical or unworkable to use digital assets as collateral for secured loans.
The “controllable electronic records” category effectively addresses these concerns.
But opponents of the proposed UCC amendments see a far more sinister motive at play. They view these changes as a Trojan horse that lays the foundation for the issuance of a U.S. CBDC. Some critics even suggest that the contentious UCC revisions were coordinated with a Biden administration executive order exploring the potential benefits of a U.S. CBDC. However, this is demonstrably false. Discussions of the proposed amendments’ sections on “money” and “electronic money” began as early as 2021. Materials were available on the Uniform Law Commission’s website and open for public comment.
Critics raise valid concerns about CBDCs. Issues such as unwarranted surveillance of financial transactions, diminished privacy, exposure to cyberattacks and technical failures, destabilization of regional banking, and unanticipated complications for conventional monetary policy transmission warrant thorough examination. However, connecting these apprehensions to the UCC is misguided and reveals a lack of familiarity with commercial law. The proposed amendments do not take a stance on creating a national digital currency, nor could they, as the Constitution grants that power to Congress, not the states.
Bills to adopt the UCC amendments have been introduced in 24 states, with more expected to follow suit. Legislators who choose to adopt these new rules will provide legal certainty for market participants dealing with digital assets, including cryptocurrencies, and establish the necessary framework for their effective use in commercial transactions. Conversely, states that refuse to adopt these amendments risk hindering the utilization of digital assets within their borders and obstructing interstate commerce flowing towards their state.
As the world of commerce evolves, it is vital that our laws keep pace with technological advancements. The proposed UCC amendments represent a crucial step in securing the future of digital assets and should not be delayed or derailed by misinformed opposition.
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