Bitcoin and the Uniform Commercial Code

Abstract

Much of the discussion of bitcoin in the popular press has concentrated on its status as a currency. Putting aside a vocal minority of radical libertarians and anarchists, however, many bitcoin enthusiasts are concentrating on how its underlying technology – the blockchain – can be put to use for wide variety of uses. For example, economists at the Fed and other central banks have suggested that they should encourage the evolution of bitcoin’s blockchain protocol which might allow financial transactions to clear much efficiently than under our current systems. As such, it also holds out the possibility of becoming that holy grail of commerce – a payment system that would eliminate or minimize the roles of third party intermediaries. In addition, the NASDAQ and a number of issuers are experimenting with using the blockchain to record the issuing and trading of investments securities.In this Article, I examine the implications for bitcoin under the Uniform Commercial Code (the “U.C.C.”). Specifically, I consider three issues. In Part 1, I discuss the characterization of bitcoin – which I am using generically to refer to any virtual or cryptocurrency – under Article 9. The bad news is that it does not, and cannot be made to fit into, the U.C.C.’s definition of “money”. If held directly by the owner, bitcoin constitutes a “general intangible”. Unfortunately, general intangibles are non-negotiable. This could greatly impinge on bitcoin’s liquidity and, therefore, its utility as a payment system.In Part 2, I show how this may be mitigated by the rules of Article 8 governing investment securities. If the owner of bitcoin were to choose to hold it indirectly through a financial intermediary, then she and the intermediary could elect to have it treated as a “financial asset” which is super-negotiable. Unfortunately, this comes at the cost of eliminating one of the primary attractions of cryptocurrency, namely the ability to engage in financial transactions directly without a third-party intermediary. However, Article 8, may already provide a legal regime for another contemplated use for the blockchain – namely as a readily searchable means of recording the ownership and transfer of property generally.In Part 3, I explain how cryptosecurities fall squarely within Article 8's definition of “uncertificated securities.” Ironically, therefore, the creation of bitcoin securities may finally breathe life to little used provisions that were invented almost 40 years ago in a failed attempt to solve a completely different problem.