University of Miami Law School Institutional Repository University of Miami Business Law Review 6-1-2016 Bitcoin and the Uniform Commercial Code Jeanne L. Schroeder Follow this and additional works at: http://repository.law.miami.edu/umblr Part of the Banking and Finance Law Commons, and the Commercial Law Commons Recommended Citation Jeanne L. Schroeder, Bitcoin and the Uniform Commercial Code, 24 U. Miami Bus. L. Rev. 1 (2016) Available at: http://repository.law.miami.edu/umblr/vol24/iss3/3 This Article is brought to you for free and open access by Institutional Repository. It has been accepted for inclusion in University of Miami Business Law Review by an authorized administrator of Institutional Repository. For more information, please contact [email protected]. Bitcoin and the Uniform Commercial Code Jeanne L. Schroeder* Much of the discussion of bitcoin in the popular press has concentrated on its status as a currency. Putting aside a vocal minority of radical libertarians and anarchists, however, many bitcoin enthusiasts are concentrating on how its underlying technology – the blockchain – can be put to use for wide variety of uses. For example, economists at the Fed and other central banks have suggested that they should encourage the evolution of bitcoin’s blockchain protocol which might allow financial transactions to clear much efficiently than under our current systems. As such, it also holds out the possibility of becoming that holy grail of commerce – a payment system that would eliminate or minimize the roles of third party intermediaries. In addition, the NASDAQ and a number of issuers are experimenting with using the blockchain to record the issuing and trading of investments securities. In this article I examine the implications for bitcoin under the Uniform Commercial Code (the “U.C.C.”). Specifically, I consider three issues. In Part 1, I discuss the characterization of bitcoin – which I am using generically to refer to any virtual or cryptocurrency – under Article 9. The bad news is that it does not, and cannot be made to fit into, the U.C.C.’s definition of “money”. If held directly by the owner, bitcoin constitutes a “general intangible”. Unfortunately, general intangibles are non-negotiable. This could greatly impinge on bitcoin’s liquidity and, therefore, its utility as a payment system. * Professor of Law, The Benjamin N. Cardozo School of Law, Yeshiva University, New York City. I’d like to thank David Gray Carlson and Aaron Wright for their comments. 1 2 UNIVERSITY OF MIAMI BUSINESS LAW REVIEW [Vol. 24:1 In Part 2, I show how this may be mitigated by the rules of Article 8 governing investment securities. If the owner of bitcoin were to choose to hold it indirectly through a financial intermediary, then she and the intermediary could elect to have it treated as a “financial asset” which is super-negotiable. Unfortunately, this comes at the cost of eliminating one of the primary attractions of cryptocurrency, namely the ability to engage in financial transactions directly without a third-party intermediary. However, Article 8, may already provide a legal regime for another contemplated use for the blockchain – namely as a readily searchable means of recording the ownership and transfer of property generally. In Part 3, I explain how cryptosecurities fall squarely within Article 8's definition of “uncertificated securities.” Ironically, therefore, the creation of bitcoin securities may finally breathe life to little used provisions that were invented almost 40 years ago in a failed attempt to solve a completely different problem. INTRODUCTION ......................................................................................... 3 PART 1: BITCOIN UNDER ARTICLE 9 ......................................................... 9 I. Introduction. ................................................................................... 9 A. Categorization. ........................................................................ 9 B. Bitcoin. .................................................................................. 10 II. Money. ......................................................................................... 14 A. Negotiation. ........................................................................... 14 B. Conveyancing. ....................................................................... 16 C. The U.C.C.’s Definition of Money. ...................................... 19 D. Deposit Accounts .................................................................. 21 III. Possession as Physical Custody. ............................................... 23 IV. Ostensible Ownership and “Control.” ...................................... 27 V. General Intangibles and the Law of Proceeds. ........................... 30 A. Proceeds. ............................................................................... 30 B. Implications. .......................................................................... 42 VI. Amending Article 9. ................................................................... 43 A. Security Interests. .................................................................. 43 B. Filing. .................................................................................... 46 PART 2: INDIRECT OWNERSHIP OF BITCOIN UNDER ARTICLE 8 ............. 47 I. Article 8’s History. ....................................................................... 48 A. The Paper Crunch. ................................................................ 48 B. The Failed Uncertificated Security. ...................................... 49 C. Immobilization. ..................................................................... 50 2015-2016] BITCOIN AND THE UNIFORM COMMERCIAL CODE 3 D. The Fall of the 1977 Revision. .............................................. 52 II. The Current Regime. ................................................................... 53 A. Securities Entitlements. ......................................................... 54 B. Conveyancing and Super-Negotiation. ................................. 55 C. Control. ................................................................................. 56 D. Financial Assets. ................................................................... 57 E. Other Property as Financial Assets. ....................................... 65 PART 3: CRYPTOSECURITIES AND ARTICLE 8. ........................................ 66 I. Introduction. ................................................................................. 66 II. Uncertificated Securities. ............................................................ 67 A. Back to the Future. ................................................................ 67 B. Characterization Under Article 8. ......................................... 69 C. Authorization Under Corporate Law. .................................... 70 D. Transfer and Delivery. .......................................................... 72 E. Stop Transfer Orders. ............................................................ 74 F. Negotiability. ......................................................................... 76 CONCLUSION. .......................................................................................... 78 INTRODUCTION Bitcoin has garnered tremendous attention in the 6 years since it was launched by its almost certainly pseudonymous creator Satoshi Nakamoto.2 In “his” manifesto, Nakamoto describes bitcoin as a virtual 2 Joshua Davis chronicled his unsuccessful attempt to track down the programmer, or, more likely, team of programmers, who posted under the Nakamoto name. Joshua Davis. The Crypto-Currency, Bitcoin and its mysterious inventor, THE NEW YORKER 62, Oct. 10, 2011. Although “Nakamoto” claims to be a Japanese man, his/their English makes some suspect that he is (or they are) British or Irish. Id. at 68. In the March 2014, the magazine Newsweek attempted to make a triumphant return to print publication with a cover story claiming to have identified the real Satoshi Nakamoto—a Japanese American engineer who is actually named Satoshi Nakamoto. Leah McGrath Goodman, The Face Behind Bitcoin, NEWSWEEK, March 6, 2014, available at http://www.newsweek.com/2014/03/14/face-behind-bitcoin-247957.html. This Nakamoto denied that he was the notorious Nakamoto and the supposed revelation was met with skepticism. See, e.g., Matthew Herper, Linguistic Analysis Says Newsweek Names the Wrong Man As Bitcoin’s Creator, FORBES (March 20, 2014) http://www. forbes.com/sites/matthewherper/2014/03/10/data-analysis-says-newsweek-named-the- wrong-man-as-bitcoins-creator; Joe Mullin, The colossal arrogance of Newsweek’s Bitcoin “scoop,” ARSTECHNICA (March 20, 2014) http://arstechnica.com/tech-policy/2014 /03/the-colossal-arrogance-of-newsweeks-bitcoin-scoop/. Other more plausible identifications of Nakamoto include Hungarian-born American, Nick Szabo (Nathaniel Popper, Decoding the Enigma of Satoshi Nakamoto 4 UNIVERSITY OF MIAMI BUSINESS LAW REVIEW [Vol. 24:1 currency that would avoid the inflationary and other real or imagined risks of “fiat currencies.”3 Some proponents hope it might undermine the control of the Federal Reserve Bank (“the Fed”) and other central banks.4 Much of the discussion in the popular press has concentrated on its status as a currency and such scandals as the collapse of Mt. Gox, at that time the biggest bitcoin exchange,5 the conviction of Ross Ulbricht for and the Birth of Bitcoin, N.Y. TIMES (May 15, 2015) http://www.nytimes.com/2015/05/1 7/business/decoding-the-enigma-of-satoshi-nakamoto-and-the-birth-of-bitcoin.html?_r=