Report in Support of Enacting New York Version of ‘Emerging Technology Amendments’ to the Uniform Commercial Code

The New York City Bar Association (“City Bar”) Task Force on Digital Technologies[1] (“Task Force”) endorses enactment in the State of New York of the attached New York version (“Amendments” or “New York Amendments”) of the Amendments to the Official Text of the Uniform Commercial Code (2022) (the “Emerging Technologies Amendments”).

Enactment of the Amendments is necessary to preserve New York’s preeminence as a leading commercial jurisdiction by adapting New York’s Uniform Commercial Code (“UCC”) to recent and potential future developments in technology and related new methods of doing business.

What the Amendments Accomplish

The Amendments are designed to modernize, rationalize and clarify New York’s UCC so that it effectively governs important transactions in digital assets,[2] while applying to certain digital assets the unique characteristics of New York law that facilitate the negotiability of written instruments and, thereby, enhance transactional certainty.  The Amendments also further the purpose of New York’s Electronic Signature and Records Act (“ESRA”)[3] – now almost a quarter-century old – to make commercial law more media-neutral in order to facilitate electronic commerce,[4] i.e., use of technology to accomplish transactions traditionally based on delivery of signed paper documents.

Most importantly, the Amendments utilize the concept of a “controllable electronic record” to provide legal recognition for, and thereby facilitate the creation of, a broad range of new forms of intangible property or digital assets (rather than limiting digital assets to specifically enumerated types of property)[5] and to define the rights of purchasers of such digital assets in order to enhance their commercial utility.  Second, a controllable electronic record is defined broadly, so that it is technology-neutral and not limited to any particular existing technology utilized to establish “control”.[6] Third, the Amendments specifically recognize as digital assets controllable accounts and controllable payment intangibles.  These are accounts and payment intangibles which, by their terms, the obligor has agreed are payable only to the person in control of a specified controllable electronic record.

These changes tailor the rules of the UCC to make them more appropriately and usefully applicable to cryptocurrencies, crypto-tokens, electronic money, electronic promissory notes and bills of exchange, and any existing or future forms of payment obligations evidenced by a controllable electronic record payable to the person in control, which are maintained on distributed ledger platforms, or any future technology platforms, satisfying the criteria for a controllable electronic record.

The Emerging Technologies Amendments to the Official Text of the UCC

Digital assets began to evolve several decades ago, and the UCC has periodically been amended to accommodate their existence.[7] Since the last comprehensive revisions to the Uniform Law Commission’s Official Text of the Uniform Commercial Code (“UCC”), promulgated in 2010 and substantially adopted by the New York Legislature in 2014, electronic commerce has continued to expand and evolve and become ever more important to the U.S. and world economy.  Furthermore, during the past decade, emerging technologies have led to the creation of an entirely new class of digital assets, which exist on distributed ledger or blockchain platforms and can be used to accomplish an increasing number and variety of transactions.  These digital assets dramatically transform commerce, but their legal effect is subject to significant uncertainties requiring a clear modern legal structure if they are to achieve their full potential.

As described in Section IV, below, the Emerging Technologies Amendments are designed to update the UCC, which is in effect in all 50 States and the District of Columbia, to increase commercial activity (and make it more efficient and secure) by more fully recognizing the use of electronic records in lieu of paper documents, and, even more significantly, by providing clear rules governing transactions in digital assets.

The Emerging Technologies Amendments are not intended to change the well-established and proven policies and principles of commercial law embodied in the UCC, but rather to revise the UCC to better apply these tried-and-true principles to commerce involving electronic records and, particularly, to commerce in digital assets.

Flexibility of the Emerging Technologies Amendments 

The Emerging Technologies Amendments are limited to issues of commercial law and do not address every issue raised by the development or use of electronic records or digital assets.  The primary purpose of the Emerging Technologies Amendments is to clarify the rights of market participants who acquire digital assets, in order to incentivize and encourage innovation and increased commercial activity using new technologies.  They do this, in particular, by (i) making clear how the existing principles of the UCC apply to transactions in digital assets and traditional transactions utilizing electronic records and (ii) applying the fundamental concepts of negotiability to transfers of certain digital assets.

The Amendments focus on the rights acquired by transferees of interests in digital assets.  They are not intended to, and do not, address regulatory or public interest issues outside the scope of the UCC.  Thus, they do not concern the technology by which such assets are created, and, in fact, are intended to be neutral on that subject.  (See footnotes 18, 25, 26 and 27, and accompanying text, below).  Such non-UCC issues, which are not the subject of the Amendments, are the subject of other federal and state laws, including environmental, securities, commodities, banking, and investor and consumer protection laws.  The Amendments leave such public interest issues to the appropriate regulatory laws and regulators.

Benefits to New York of Enactment of the Amendments

As described in Section V, New York commercial and financial law has unique respect for freedom of contract and strong protections for the negotiability of commercial instruments.  This has long made New York the preferred U.S. jurisdiction for paper-based commercial and financial transactions; this is currently not yet the case for transactions involving digital assets.  If New York were to enact the New York Amendments, New York would retain its commercial primacy.  New York is currently the only  state which has not  enacted the Uniform Law Commission’s proposed Uniform Electronic Transactions Act or UETA, with its concept of transferable electronic records.[8]

Enactment of the New York Amendments  will eliminate existing impediments (described, below, in Sections IV(B) and (C) and V(A)) to the choice of New York law and jurisdiction to govern transactions in, and to resolve disputes concerning, digital assets.  More than that, enactment of the Amendments would make choice of New York law and jurisdiction affirmatively attractive for purchasers of digital assets.  This will further New York’s long-standing goals (i) of encouraging choice of New York law and jurisdiction to govern commercial contracts[9] and (ii) of making the advantages of electronic commerce available to the greatest extent in New York.[10]

The Amendments, crafted specifically for New York, are intended to preserve and apply existing New York-specific principles, particularly those (described below, in Section V.B) protecting the rights of good faith purchasers of negotiable instruments and documents, to transactions involving digital assets which are the electronic equivalent of such instruments and documents.

By updating New York’s UCC to cover all digital assets that are controllable electronic records, prompt enactment of the Amendments would encourage parties to choose New York law and courts to govern commerce in digital assets, particularly those which function as electronic money or electronic notes, drafts, bills of exchange, or other electronic media.  Encouragement of New York-based digital commerce would be expected to increase business revenues, professional service fees and incomes in New York, and, as a result, New York tax revenues, and possibly future tax revenues on digital transactions.  New York’s failure to enact the Amendments (combined with their enactment in other States) could be expected to reduce governmental revenues that might be derived from digital transactions, including UCC filing fees, court filing fees and entity incorporation fees.

Enactment of the Amendments would not impose any additional expense on New York governmental operations.

The Emerging Technologies Amendments Have Been Carefully Vetted

The study, drafting and vetting process that produced the Emerging Technologies Amendments was organized by the Uniform Law Commission (“ULC”) and the American Law Institute (“ALI”), the sponsors of the Official Text of the UCC, which is the foundation for commercial and financial law throughout the U.S. The Amendments are a tailored version of the Emerging Technologies Amendments designed specifically for New York’s UCC, which differs in some respects from the current Official Text of the UCC.

Using the Emerging Technologies Amendments as the basis for updating New York’s law governing digital assets is the most prudent course of action.  It will preserve overall consistency with the commercial law of the other States which have or are expected to adopt the Emerging Technologies Amendments.  It is preferable to attempting to draft from scratch a new commercial or financial law limited to digital assets.  Most importantly, it recognizes that the commercial law governing electronic transactions and digital assets does not require entirely new legal doctrines, policies or principles, but rather the extension and application of existing legal concepts used for paper-based transactions to transactions executed in electronic media or involving digital assets.  No better alternative to the principles embodied in the UCC exists.

Summary of This Report 

Section II is the City Bar’s recommendation that the Amendments be enacted.

Section III describes the three-year drafting and vetting process that produced the Emerging Technologies Amendments.  Six lawyers of the New York bar were leaders of this process, and innumerable other New Yorkers participated.

Section IV summarizes the significant improvements the Emerging Technologies Amendments make to the official text of the UCC.

Section V summarizes the dramatic improvements that enactment of the Amendments, based on the Emerging Technologies Amendments, would make available for New York commercial activity.

Appendix B provides a detailed description of the changes to each Article of the New York UCC (each of which is referred to herein as an “Article”) proposed by the Amendments, including, particularly, new Article 12 – Controllable Electronic Records, and the extensive amendments to Article 9 – Secured Transactions, as well as the transition rules for the effectiveness of the Amendments.

Appendix C contains the draft of the proposed amendments to New York’s UCC, tailored specifically to New York’s unique version of the UCC, enactment of which this Report endorses.

Finally, Appendix D describes the function and effect of the Comments to the Emerging Technologies Amendments and the New York Amendments and contains three New York comments to Article 12 of the Amendments, describing modifications of the Emerging Technologies Amendments to deal with issues unique to New York’s UCC.