Controllable Electronic Records (CERs)

Understanding Controllable Electronic Records (CERs) and the Proposed Uniform Commercial Code Revisions

While they have been traditionally called "tokens", there's a new legal term that's a better definition - a "Controllable Electronic Record".

As digital assets continue to gain prominence in the global economy, the need for a clear legal framework to govern these assets has become increasingly important. To address this, the Uniform Commercial Code (UCC) is proposing amendments that introduce the concept of Controllable Electronic Records (CERs). This blog post will provide a comprehensive explanation of CERs, how they are defined, and how the legal language is specified in the proposed revisions to the UCC.

What is a Controllable Electronic Record (CER)?

A Controllable Electronic Record (CER) is a record stored in an electronic medium that can be subjected to "control" [2]. CERs encompass various digital assets, including virtual currency, tokenized shares of stock or other investment, non-fungible tokens (NFTs), and digital assets with embedded payment rights [6]. The proposed new Article 12 of the UCC aims to provide rules for transactions involving digital assets and specifically refers to these intangible assets as CERs [5].

Defining "Control" in the Context of CERs

In order for a person to have "control" of a CER, they must meet the following criteria [1]:

1. The power to enjoy "substantially all the benefit" of the CER.

2. The exclusive power to prevent others from enjoying "substantially all the benefit" of the CER.

Exclusions

It's important to note that not all digital assets are considered CERs. By definition, a CER excludes digital assets that are not subject to "control" as well as those that are already subject to other commercial laws, such as the Electronic Signatures in Global and National Commerce Act (E-SIGN), the Uniform Electronic Transactions Act, or other articles of the UCC [4].

Legal Language in the Revised UCC

In the proposed amendments to the UCC, Section 12-102(1) defines a CER as a "record stored in an electronic medium that can be subjected to control" [8]. This definition specifically excludes many types of digital assets already subject to other commercial laws.

The new Article 12 aims to provide clarity regarding the transfer of property rights in CERs [9]. To have "control" of a CER, a person must possess "the power to enjoy 'substantially all the benefit' of the CER," and this power does not have to be exclusive [10].

Examples of CERs

Some examples of digital assets that could be considered CERs under the proposed amendments include:

1. Virtual currencies (e.g., Bitcoin, Ethereum): These cryptocurrencies can be stored electronically and are susceptible to control by the person holding the private key associated with the currency.

2. Non-fungible tokens (NFTs): NFTs are unique digital assets that can represent various forms of digital art, collectibles, or virtual goods. Like virtual currencies, NFTs can be stored electronically and controlled by the person holding the private key associated with the token.

3. Digital assets with embedded payment rights: These digital assets may include smart contracts or other electronically stored agreements that provide the holder with the right to receive payments.

4. Tokenized Securities: These are digital assets or smart contracts which represent an underlying share of stock, a limited partnership unit, or other actual form of investment security ownership.

Conclusion

The proposed amendments to the Uniform Commercial Code aim to address the growing prominence of digital assets in the global economy by introducing the concept of Controllable Electronic Records (CERs). These amendments provide a legal framework for the control and transfer of digital assets, such as virtual currencies, non-fungible tokens, and digital assets with embedded payment rights.

By understanding the definition and legal language surrounding CERs, individuals and businesses can better navigate the evolving landscape of digital asset transactions and ensure compliance with the Uniform Commercial Code.