Blockchain and the Future of Secured Transactions Law
3 Stanford Journal of Blockchain Law & Policy (2020)
42 Pages Posted: 27 Mar 2019 Last revised: 19 Mar 2020
Date Written: March 2, 2019
Blockchain-enabled smart contracts create self-executing transactions that automatically capture assets to satisfy obligations. They are a form of asset partitioning. Some scholars compare smart contracts to self-help, analogous to security interests. Others describe the asset-shielding function of smart contracts, analogous to entity law. State lawmakers have begun to address the legal status of blockchain and smart contracts, but their approaches treat the technology as a new platform for executing established deal types. They have not digested the difficulty of fitting blockchain-based smart contracts into existing legal frameworks given that these platforms conflate contract and property law functions, and mimic both security interests and entities. Lawmakers should address whether blockchain-based smart contracts constitute security interests under Uniform Commercial Code (UCC) Article 9, by virtue of how they function. Short of deeming all smart contracts to be security interests, lawmakers should consider whether UCC Article 9 should govern smart contracts that do not involve assignments that secure obligations in certain contexts. Blockchain-based smart contracts are a device or platform for transacting, not a deal type. But this device has a legal effect: it dedicates assets to specific transactional counterparties. As such, it is possible to interpret all blockchain-based smart contracts as meeting the statutory requirements for a security interest. At the same time, market actors could proceed as if no blockchain-based smart contract creates an Article 9 security interest given the strong form of partitioning such transactions effectuate, thereby side-stepping statutory rules surrounding notice, priorities, commercially reasonable disposition of collateral, and bankruptcy. Defining the relationship between blockchain-based smart contracts and secured transactions law would situate emerging market activity in relation to a major category of private-law rules that express longstanding policy choices. If lawmakers decline to articulate how blockchain-based transactions implicate contract, property, and entity laws, markets could expand despite inconsistent or incoherent legal status, undermining the capacity to enforce, in the future, rules designed to curtail problematic risks.
Keywords: blockchain, smart contracts, security interests, secured transactions, Uniform Commercial Code, Article 9, asset partitioning, entity law, private law, property, contract
Suggested Citation: Suggested Citation