Cryptocurrency Issues for Lenders and Borrowers: How to Proceed In the Absence of Industry Clarity

States are beginning to recognize cryptocurrency as a form of collateral under their Uniform Commercial Codes. As a result, commercial lenders and borrowers are learning more about their legal rights in cryptocurrency. Of particular concern for borrowers and lenders alike is the enforceability of a security interest on cryptocurrency as collateral. Forty-seven U.S. states have not passed legislation on cryptocurrency as an asset category, whereas Texas, Rhode Island and Wyoming have passed cryptocurrency legislation. These three states call cryptocurrency, “Virtual Currency”. The collateral is defined in Texas, for example, as “digital representation of value that functions as a medium of exchange, unit of account, and/or store of value and is often secured using blockchain technology”. To perfect its lien in cryptocurrency, a secured lender can file a financing statement or execute a “control” agreement. That said, it is unclear whether filing a financing statement is sufficient to put prospective secured parties on notice of a then-existing lien. As such, until the industry gains clarity on this matter, lenders need to perfect via “control” to have any certainty in the viability of the priority of their security interest.

Even how a lender goes about “controlling” Virtual Currency, though – which is also a perfection method for asset types such as deposit accounts and investment property – is less than crystal clear at this point. For a user to access cryptocurrency, one needs what is called a private “key.” As such, some prospective lender in this space might require possession of that private key as a condition to funding. However, unless a borrower does not plan to access its cryptocurrency during the course of a loan, from a practical matter, it seems unlikely that a borrower would want to give up its private key. Some industry experts have discussed similar control mechanisms that secured lenders use for deposit account collateral or other receivables, such as deposit account control agreements or source code escrow agreements. Still, until those control mechanisms make their way through the court system, it is impossible to know with any degree of certainty how those methods would work and if they would achieve the requisite “control” under the new law.

For further guidance, please check this space regularly, subscribe to our blog or reach out to Michael Witt or Max Fargotstein.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

Proudly powered by WordPress