New York State Senator Brad Hoylman-Sigal deserves high praise for sponsoring a bill to enact key new Uniform Commercial Code (“UCC”) Article 12 to New York's UCC.  NY State Senate Bill 2023-S7244 (nysenate.gov) Article 12 provides rules governing transfers of "controllable electronic records," the legal name for one type of “digital asset.”  However, as Senator Hoylman recognized, Article 12 requires enactment of the new technology amendments to each Article of the UCC (the “2022 Amendments”) promulgated by the American Law Institute and the Uniform Law Commission.  Hopefully, the entirety of the 2022 Amendments will soon be enacted in New York, as recommended by the New York City Bar Association.  NYC Bar Report in support of 2022 UCC Amendments

Prompt New York enactment is now even more imperative, as we have fallen behind eleven States (including California and Delaware) that have enacted the 2022 Amendments and other nations (such as the United Kingdom) that have recognized digital records for supply chain management and finance.

It is crucial that New York adopt the 2022 Amendments promptly to maintain its prominent position as an international center of trade, finance and law.  The 2022 Amendments would provide many other benefits, but this article concentrates on the enormous benefits they would have for trade finance transactions and why New York should not be left behind.

Importance of New York Enactment

Digitizing trade management and finance will provide enormous efficiencies and cost-savings, would increase the capital available to finance trade, and, thereby, would reduce the costs and increase the volume of trade, to the benefit of trading partners and, ultimately, to consumers. 

But New York’s current UCC is inadequate to govern trade evidenced by digital assets.  New York law does not have clear and certain rules for transfers of electronic negotiable instruments and blockchain-evidenced chattel paper or sufficiently explicit rules for transfers of blockchain-evidenced documents of title.  Thus, parties desiring the benefits of digitized trade management and finance cannot reliably use New York law to govern, or New York courts to resolve, trade disputes. As more jurisdictions adopt laws recognizing digital assets, New York’s status as a legal and commercial center inevitably will erode.  

Enactment of the 2022 Amendments would change the situation to New York’s advantage.  It would enable transactions governed by New York law to realize the enormous cost savings and other benefits of digitization.  Enactment also would give New York a unique advantage over other jurisdictions, by preserving, for digital assets functioning as financial instruments, New York’s unique protections for negotiability found in NY UCC Sections 1-202(20) and 3-304(7).

Need for Legislation to Recognize New Digital Technology

The 2022 Amendments were drafted because the UCC did not adequately take into account the revolution during the past decade in the use of electronic records to accomplish and evidence commercial transactions. New technologies, like distributed ledgers, are now used to evidence transfers of control of electronic promissory notes, documents of title, chattel paper, and other novel transferable electronic records, including tokens evidencing rights to other tangible and intangible property, as well as cryptocurrencies and central bank digital currencies.

The UCC did not recognize electronic negotiable instruments and did not provide for the rights of persons in control of such new digital assets, and, therefore, those digital assets are not recognized at all (as in the case of electronic drafts and bills of exchange) or fall into the residual category of “general intangibles.”  General intangibles, absent the 2022 Amendments, often can be transferred effectively only by the cumbersome process of filing UCC financing statements, necessitating record searches in governmental offices to determine priority.

Benefits of Digital Assets and Electronic Records in Trade

There has been a significant world-wide push for legislative reform to recognize and incentivize use of electronic records and assets in international and interstate commerce for the sale, financing, and transport of goods.  The International Chamber of Commerce (“ICC”), particularly, has identified enormous benefits projected to flow from legal recognition of digital assets to conduct trade. 

According to an ICC report, digitization of trade records could increase the annual volume of international trade by trillions of dollars.   G7 ׀ Creating a Modern Digital Trade Ecosystem”, ICC Report issued October 2021, available at https://www.iccgermany.de/wp-content/uploads/2021/10/Creating-a-Modern-Digital-Trade-Ecosystem-G7.pdf.. The technology for that digitization exists, but it requires clear legal rules recognizing the rights of parties using digital trade records.

Currently 4 billion pages of paper are being processed at any given time in international trade transactions. This processing costs an average of $80,000, and imposes processing delays averaging a month, per transaction.  Digitization could slash costs by 80%, and reduce processing time to days. It would do this while also reducing risks of human error, fraud, and misrepresentation in transactions. Digitization would facilitate implementation of greater uniformity of trade standards.  It also would dramatically increase environmentally sustainable trade by reducing the huge quantity of paper documents that currently must be printed, physically delivered and stored.  Digitalisation could add $9 trillion to G7 trade by 2026 according to a 2021 ICC report.

The ability to subdivide a single large obligation into digital tokens evidencing fractional shares, which could be negotiated securely and instantaneously on distributed ledger platforms, would increase liquidity.  All these improvements would open the door to new capital sources for trade finance, further reducing financing costs and increasing access to trading opportunities, particularly for small and medium-sized enterprises.

Enactment of Digital Asset Legislation in Other Countries

The United Nations Commission on International Trade (“UNCITRAL”) proposed its Model Law of Electronic Transferable Records (“MLETR”) in 2017, and that has served as the basis for national legislation adopted in six countries, including Singapore and the United Arab Emirates.  The quarantine requirements of the Covid pandemic caused a tremendous disruption of trade and trade finance, increasing demand for electronic records and digital assets in trade.  This led to the ICC’s April 2020 call for emergency action recognizing electronic trade documents.  In response, the UK recently enacted the Electronic Trade Documents Act 2023 recognizing bills of exchange, promissory notes, bills of lading, insurance certificates and similar trade documents in electronic form.  France and Germany have similar initiatives.  https://www.gtreview.com/news/europe/analysis-tackling-functional-equivalence-to-make-mletr-work-in-germany/; https://www.gtreview.com/news/europe/proponents-of-french-digital-trade-documents-law-eye-eu-regulation/    Japan, India and China are studying adoption of MLETR. That same demand for recognition of electronic records in trade also produced the 2022 Amendments, already enacted in 11 US States and under consideration in 17 more.  New York cannot risk falling further behind other commercial centers.

Case Study: Use of Digital Assets in Supply Chain Finance and Management

The 2022 Amendments will expand the use of “supply chain finance” (“SCF”) and further reduce credit costs and enhance the ESG sustainability of the transactions.  In a typical SCF transaction, a buyer of goods with a high credit rating provides support for its suppliers, who are often small or medium-size enterprises without adequate credit ratings of their own.  The credit-worthy buyer does this by agreeing to pay invoices on their due date without the assertion of any setoffs or defenses, enabling the financer to extend credit against such invoices at a funding rate comparable to that of the buyer.

Many large corporate buyers are also eager to promote ESG programs (improving standards for environmental impact, employee protection, and corporate governance) within their supply chains. To accommodate these buyers, the SCF programs of several large international banks centered in New York contain incentives for suppliers to improve their ESG standards.  The UCC Amendments are neutral on the merits or contents of ESG, but the value of digitization as a tool in trade management and finance will make any SCF programs the parties design more effective at reducing trade expense and financing costs, and will provide environmental protection by reducing the enormous and unnecessary environmental burden of paper trade transactions and improve the ability to monitor compliance with applicable trade standards. As a legal officer of UNCITRAL has noted, “Once we shift towards digitalisation (sic), we will have easier compliance, better governance, and the possibility to account for ESG in the supply chain … This can boost international trade volumes, foster economic growth, and create new business opportunities worldwide.”  Status update: MLETR adoption in the G7 and emerging markets (tradefinanceglobal.com)

Conclusion: Why New York Should Enact the 2022 UCC Amendments

The strong protections of negotiability under New York commercial law make it a preferred jurisdiction for trade and other financial transactions, but the current deficiencies in the recognition of digital assets under New York law will impede the use of New York law and courts.  Enactment of the 2022 Amendments will mean that parties desiring to utilize digital assets for executing and financing trade transactions will no longer have any reason to consider selecting the law or venue of jurisdictions other than New York. This is necessary to preserve New York’s preeminence as a commercial, financial and legal center.

Authors, Alan Kolod and Eric Marcus, were members of the subcommittee of the New York City Bar Association committee that helped prepare the New York version of the 2022 UCC Amendments, which the City Bar recommended for enactment in New York. NYC Bar Report in support of 2022 UCC Amendments Alan Kolod is senior counsel at Moses Singer, and Eric Marcus is a retired partner of Arnold & Porter Kaye Scholer LLC.

Reprinted with permission from the December 7 issue of New York Law Journal. © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com.