Perfecting Bitcoin

Abstract

Bitcoin is still here. The price of Bitcoin rebounded — in 2017 setting a record high of $19,783.21 per Bitcoin in December before dropping to a price of ($8,690 per Bitcoin as of March 22, 2018). Moreover, legal and regulatory developments, like New York’s BitLicense and federal taxation of virtual currency as property, can be viewed as legitimizing its use. The normalization of virtual currency is evidenced by its increasingly mainstream applications. Virtual currency can be used as a faster and lower cost method of transferring funds domestically and internationally. A growing number of retailers now accept virtual currency as a method of payment. In addition, more and more investors are trying to capitalize on the price volatility of virtual currency by buying/selling it as a speculative investment. Recognizing the potential of this growing market of users, investment in virtual currency businesses and startups has also risen. Even traditional financial institutions and the New York Stock Exchange have invested — participating in a funding round for Coinbase that raised $75 million dollars. Putting aside the normative question of whether the normalization of virtual currency is desirable, an inescapable truth remains. Virtual currency is a present reality. It has the potential to disrupt a range of traditional industries and implicate a host of legal issues. But to date, the legal and regulatory treatment of virtual currency has been limited. Developments in virtual currency law have focused almost exclusively on virtual currency in the context of money transmission and the twin regulatory objectives of crime prevention and consumer protection.

Outside of this space, the discussion about and implementation of an appropriate legal framework is relatively undeveloped. Secured transactions are a prime example of a significant commercial practice that is currently being affected by virtual currency — specifically, the use of virtual currency as collateral. It is increasingly likely that debtors, both individuals and organizational, will hold virtual currency. Because of this, creditors must now deal with the realities of ensuring that they have attached, perfected and have priority over a debtor’s virtual currency. If creditors are unable to navigate this process, they risk losing out on the monetary value of the virtual currency upon a debtor default. Unfortunately, the Uniform Commercial Code was not drafted with virtual currency in mind and it has not been optimized in any way to expressly account for it. Therefore, those engaged in secured transactions are in the position of having to evaluate and interpret how the existing provisions of the Uniform Commercial Code might apply to virtual currency.

This Article expands the conversation by pushing beyond the confines of current developments in virtual currency law and regulation. In doing so, it considers broader commercial law implications of virtual currency. Specifically, this Article provides a solution for the present and future of virtual currency collateral under Article 9 of the Uniform Commercial Code. This Article sets forth a roadmap for dealing with the uncertainties of virtual currency collateral under Article 9 as it exists today. In addition, it advances a framework for optimizing Article 9 for virtual currency collateral by recognizing it as a distinct collateral type and creating special rules based on the concept of “control” which already applies to other collateral types. Since U.S. policymakers have already opted to accommodate (rather than ban) virtual currency, this Article seeks to ensure that the discussion does not overlook the commercial law implications of virtual currency. In doing so, this Article highlights the importance of and advances the development of a comprehensive and appropriately-scaled set of laws and regulations applicable to virtual currency in the United States.

Keywords: Uniform Commercial Code, Article 9, Secured Transactions, Bitcoin, Virtual Currency, Digital Currency, Cryptocurrency, Payments, Payment Systems, Financial Services, Banking, Lending, Collateral, Law and Technology, Bitcoin, Payments, Payment Systems, Filing Systems, Personal Property