Changes to the Uniform Commercial Code (UCC) are not usually headline news, but recent changes around the UCC’s definition of money have been catching attention across the country. Concerns have erupted around the idea that states are quietly banning Bitcoin and paving the way for central bank digital currencies (CBDCs).

Although these concerns are important to be mindful of given what other countries have done, what’s actually been happening to the UCC is far more complicated and far more benign than it might appear at first glance.

What’s Happening

First, for those unfamiliar, the UCC is a set of laws maintained by the Uniform Law Commission and the American Law Institute that govern commercial transactions in the United States. The UCC is not federal law, but it was designed to be a way to harmonize state laws. The general idea is that this harmonization reduces uncertainty for businesses engaged in commerce across state lines while still preserving the autonomy of states.

After years of working on updating the UCC in response to new technologies, the Uniform Law Commission and the American Law Institute announced the “2022 Amendments”—essentially, a set of updates to the UCC that states are now considering. There are many updates being proposed, but the center of today’s issue is the proposal to redefine money for the purposes of the UCC. The amendment would essentially tack on additional language in the definition of money to exclude cryptocurrencies from being used as money within the scope of the UCC (the proposed addition is in italics):

“Money” means a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries. The term [money] does not include an electronic record that is a medium of exchange recorded and transferable in a system that existed and operated for the medium of exchange before the medium of exchange was authorized or adopted by the government.

This decision to update the definition was likely spurred by El Salvador and the Central African Republic adopting Bitcoin as legal tender. Because Bitcoin is legal tender in those countries, it should be considered money within the current version of the UCC since it is a “medium of exchange…authorized or adopted by a…foreign government.” Yet the new language would prevent that because Bitcoin existed “before” authorization and adoption.

However, there is a crucial distinction to be made here, for the UCC amendment is not prohibiting Bitcoin. Rather, it is excluding Bitcoin from being used as money within the scope of the UCC. This distinction is subtle, but it’s more than mere semantics.

Why Exclude Bitcoin?

The term “money” is defined in the UCC because it is used throughout the UCC in very specific ways. Brian M. McCall, Orpha and Maurice Chair in Law at the University of Oklahoma, identified these problems shortly after El Salvador initially adopted Bitcoin as legal tender. For example, McCall points out that if Bitcoin is money within the UCC, then it changes how someone would go through the necessary legal steps to secure an enforceable legal claim on Bitcoin as collateral for a loan. Likewise, it changes how jurisdiction is determined, as the location of the money in question is where the UCC assigns jurisdiction. Before Bitcoin became legal tender and thus money within the UCC, the jurisdiction would simply have been wherever the debtor in question was located.

McCall goes on to describe additional issues, but the general point is that treating Bitcoin as money for the purposes of the UCC opened up a can of worms that would have required substantial revision. Or, as McCall put it: “El Salvador has struck the Achilles’ heel of the Uniform Commercial Code to work a dramatic change in U.S. law.”

Excluded Here, But Not There

Faced with these problems, those working on the UCC had to consider two broad choices: (1) include Bitcoin in the definition of money and essentially rewrite the rest of the UCC around it or (2) exclude Bitcoin in the definition of money and handle it some other way. They chose the second option and defined Bitcoin as a controllable electronic record, or CER.

As explained by Carla Reyes, Assistant Professor of Law at the Southern Methodist University Dedman School of Law, the new category was created in an attempt to fix the issues Bitcoin faced both before and after its legal tender status in El Salvador and the Central African Republic. And in doing so, the new category would also provide a place in the UCC for other cryptocurrencies as well. As Reyes explains, a controllable electronic record is defined as a “record stored in an electronic medium” where a person or group can maintain direct ownership. So not only would this include Bitcoin, but it also has the potential to include many other cryptocurrencies as well.

Yaël Ossowski, visiting fellow at the Bitcoin Policy Institute, explained that this change is likely a net good for Bitcoin:

The bill in question—based on an update to the Uniform Commercial Code—not only expands definitions and protections for Bitcoin, but actually creates a legal mechanism for recognizing self-custody and for the protocol’s inclusion in traditional lending, insurance, and commercial transactions. In a sense, it’s an upgrade to existing commercial law that would allow Bitcoin to be used as collateral for all future financial contracts. It’s “not your keys, not your coins” in commercial law.

What About CBDCs?

As far as CBDCs are concerned, the proposed updates would not create, mint, or issue a CBDC. The Federal Reserve has certainly preserved a legal grey zone around this issue, but the UCC amendments are not the vehicle paving the way for a CBDC. However, that’s not to say they have nothing to do with CBDCs.

As Representative Warren Davidson (R‑OH) pointed out, the amendments would also create another category in the UCC: electronic money. According to Reyes, this addition was made due to countries (e.g., the Bahamas and Nigeria) adopting CBDCs and thus similar technical issues arising in the UCC. It’s certainly a fine line considering it would, by definition, make a CBDC easier to use for purposes of the UCC, but that is still not to say a CBDC is being created through the UCC. What would have been much more concerning is if the amendments proposed created a new category for CBDCs alone (making them easier to use in the UCC) and did nothing to address the existing UCC challenges to cryptocurrency.

Conclusion

Banning cryptocurrencies ahead of launching CBDCs has been a consistent trend across the world. Even in the United States, one need only take a cursory look at history to see how the U.S. government has used obscure laws to block currency competition. So Governors Kristy Noem (South Dakota) and Ron DeSantis (Florida) do deserve credit for recognizing the risks of CBDCs and being vigilant given how the current administration has gained a reputation for using backdoor measures to achieve its ends.

However, while the risks posed by CBDCs should not be understated, this change to the UCC does not appear to be the Trojan Horse that it appears to be at first glance. For now, those seeking to push back at CBDCs should focus on the federal level.