December 5, 2024
The following article is part four of our series on the 2022 Amendments to the UCC. You can find the previous articles here. Our last article explored the amendments to the main definition of “money” in Article 1 of the UCC. We promised to look at the amended money-related definitions in Article 9 in another article. Well, here we go.
UCC Article 9 (Secured Transactions) did not have its own definition of “money” before the 2022 Amendments. Now the 2022 Amendments have added a definition, which is basically the same as the Article 1 definition (i.e., “a medium of exchange that is currently authorized or adopted by a domestic or foreign government”), except that the Article 9 definition excludes from the definition of money (i) a deposit account and (ii) money in electronic form that cannot be subjected to control under Section 9-105A.[1] The reason for excluding deposit accounts is because of the changes to the definition of “money” in Article 1 and because the UCC already provides for how a deposit account can be secured. The reason for excluding money in electronic form that cannot be subject to control from the Article 9 definition is that such money is not something that can be secured like other money—it would be a general intangible under Article 9.[2]
But recent developments in the market potentially complicate what is deemed to be a “deposit account.” Major banks (such as JPMorgan, read more here and here] and Citibank) have implemented permissioned blockchain solutions permitting their customers to transact with funds on deposit via tokenized coins. While bank regulators might regard bank deposits as a kind of money,[3] what about the UCC? Are deposit tokens “money” under the new Article 9 definition?
The answer turns on whether or not such deposit tokens are “deposit accounts,” and would therefore be excluded from Article 9 “money.” And, as with so much in the 2022 Amendments, the law looks to the technology for answers.
For example, let’s say that Bank A creates a “Bank A Coin” token for deposited funds. Further, let’s say that the permissioned blockchain system where Bank A Coin resides functions, not only as a payment rail, but also as Bank A’s deposit account ledger itself. On those facts, Bank A Coin would seem to be a deposit account, analogous to a deposit on a traditional off-chain ledger. But what if Bank A Coin was just a tokenized representation of a deposit held in a traditional ledger off-chain, a kind of shadow token. Would Bank A Coin be a deposit account in that case? Less clear.
Even if Bank A Coin is not a deposit account, though, does it pass muster under the other tests for Article 9 “money” that are inherited from Article 1? In particular, would the Bank A Coin be currently “authorized” or “adopted” by a government as a medium of exchange? Even if Bank A obtained approval for the Bank A Coin solution from its prudential banking regulator, for UCC purposes, without some kind of new regulation from the Department of Treasury blessing such approval as being tantamount to governmental authorization or adoption of the Bank A Coin, the Bank A Coin would not be deemed money under the UCC. And that means that, unless things change, from an Article 9 perspective the Bank A Coin would potentially be subject to the provisions of Article 12 (see below).
The second exclusion in the Article 9 definition deals with “control”. We are familiar with possessory control of tangible money (e.g., put bills and coins under your mattress) and Section 9-104 control of deposit accounts (DACAs, anyone?). But the 2022 Amendments to Article 9 add a new set of principles for taking control of “electronic money.” (The 2022 Amendments define “electronic money” as, naturally, “money in electronic form”[4]).
These control principles for electronic money are set out in new Section 9-105A, and track the rules created under Article 12 for control of “controllable electronic records” (“CERs”). Such control principles reference three powers: they require the electronic money (or a logically related record or system) to give the controlling party (i) the power to avail itself of substantially all the benefit of the electronic money, (ii) the exclusive power to prevent others from availing themselves of substantially all the benefit of the electronic money, and (iii) the exclusive power to transfer control of the electronic money to another person.[5] (You can find some of our deeper dives into the concepts of control and the nuts and bolts of Article 12 here and here.
If these rules for control strike you as kind of open-ended, that is exactly their intent. The 2022 Amendments seek to be technology-neutral, and once again demand those interpreting the law to look to the tech.
In other words, when money that is not excluded from Article 9’s definition is subjected to control pursuant to Section 9-105A, lawyers will have to look under the hood of technological control mechanisms—how crypto wallets work, how tokens are programmed, how blockchain protocols are governed, and so on—to figure out if tokens like Bank A Coin are capable of being “controlled”, and thus can be considered “money” under Article 9.
Why bother with all this?” After all, Bitcoin is not considered “money” for UCC purposes, and stablecoins like UST or USDC are not considered money either (they’re probably best classified as CERs). The reason all of this matters is because UCC characterizations of assets are not optional— every asset must be defined as one thing or another. And it is important to understand whether the cryptocurrency token you are dealing with is or is not “money” under Article 9 because the answer can have serious knock-on ramifications.
For example, even though one token might look identical to another technologically, how the tokens are characterized under Article 9 makes a difference in how to perfect a security interest by control over that token. “Control” for electronic money is different from “control” for deposit accounts, which in turn is different from “control” for uncertificated securities, for electronic chattel paper, for transferable records, for CERs, and so on. In sum, you need to take the time to understand which rule book applies.
One additional sticky wicket regarding “money” in Article 9 exists—the question of “monetary obligations.” That sneaky phrase shows up in some places in the UCC and not in others. Importantly, “accounts” and “payment intangibles” are defined under Article 9 as monetary obligations. Crucially, however, the “money” that may constitute part of such “monetary obligations” is the Article 1 definition of “money” (not the Article 9 definition “money”).[6] Meaning that “monetary obligations” does not exclude deposit accounts or non-controllable electronic forms of money.
Here’s how that works—imagine a receivable that is denominated, not in dollars, but in Bank A Coin. That receivable could be a monetary obligation and therefore an “account” or “payment intangible,” even if Bank A Coin were deemed a “deposit account” and therefore in and of itself not “money” under Article 9.[7]
On the other hand, if the receivable were payable in Bitcoin or USDC (i.e., CERs), then that receivable could not constitute a “monetary obligation,” because Bitcoin and USDC are not money under Article 1. And, for purposes of Article 9, those receivables would not be “accounts” or “payment intangibles.” They would be something else.
Finally, by following the differences in the definitions of “money” in the UCC and considering whether something can be a “monetary obligation,” you can go even further into the weeds. For example, “instruments,” like negotiable instruments, must evidence the right to a “monetary obligation,”[8] but the UCC definition of “letter of credit” only requires payment or delivery of “an item of value”—not necessarily money.[9]
The landscape of digital asset transactions is evolving rapidly. Questions of which types of such tokens or cryptocurrencies would be considered “money” under the 2022 Amendments (and which are not) are important questions and can be quite complex. And, it is important to get the answers right so as to apply the appropriate rules for transacting with them. As more different types of “money” get invented for use on-chain, the more urgent it becomes to find answers to these questions.
The Notorious B.I.G. may not be your go-to authority for UCC analysis. But in this case, you’ve got to admit that he’s on to something:
I don't know what they want from me
It's like the more money we come across
The more problems we see...[10]
[1] UCC (Amended) §9-102(a)(54A).
[2] UCC (Amended) §9-102(a), official comment 12A.
[3] See Money and Payments: The U.S. Dollar in the Age of Digital Transformation, Board of Governors of the Federal Reserve (Jan 2022), Appendix B. https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf
[4] UCC (Amended) §9-102(a)(31A).
[5] UCC (Amended) §9-105A(a)(1)(A), (B). For the parallel control rules for CERs, see UCC (Amended) §12-105(a)(1)(A), (B).
[6] UCC (Amended) §9-102, official comment 12A.
[7] Those receivables could even be “controllable accounts” or “controllable payment intangibles” under Article 12—which in many ways could be considered even better than plain accounts or payment intangibles. See our discussion of controllable accounts and controllable payment intangibles here https://natlawreview.com/article/new-ucc-article-12-matters-to-more-just-cryptocurrency.
[8] UCC (Amended) §9-102(a)(47).
[9] UCC (Amended) §5-102(a)(10).
[10] Bernard Edwards, Christopher Wallace, J Phillips, Mason Betha, Nile Gregory Rodgers, Sean Combs, Steve Jordan, “Mo Money Mo Problems,” lyrics © Sony/ATV Music Publishing LLC, Warner Chappell Music, Inc - link here.
On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction in Texas Top Cop Shop, Inc., et al, v. Garland, enjoining the federal government from enforcing the Corporate Transparency Act (“CTA”), its implementing regulations, and its reporting deadlines, and finding that Congress exceeded its authority in enacting the law.[1]
As a result of the decision, reporting companies are not required to comply with the CTA at this time, as the court ordered that “reporting companies need not comply with the CTA’s January 1, 2025, [beneficial ownership information] reporting deadline pending further order of the Court.”[2]
The constitutionality of the CTA has been challenged in other districts as well. The issue is already on appeal in a separate case in the 11th Circuit, where a federal district court in Alabama also found the CTA unconstitutional.[3] However, in two federal district courts in Virginia and Oregon, courts denied preliminary injunctions after finding that the CTA likely is constitutional.[4]
FinCEN is likely to seek an interlocutory appeal of the injunction and may seek its stay. The incoming Trump Administration has not yet commented, but the first Trump administration supported the CTA legislation.
The timing of any reversal is unclear. Any decision on the merits may take months or longer, and the matter may ultimately be heard by the Supreme Court.
FinCEN has not yet issued a public statement regarding the injunction. If the injunction is reversed or its implementation narrowed or stayed, we expect that new reporting deadlines will be established.
We will continue to monitor developments related to the CTA.
[1] Texas Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478, 2024 WL 4953814 (E.D. Tex. Dec. 3, 2024).
[2] Id. at *37.
[3] Notice of Appeal, Nat'l Small Bus. United v. Yellen, No. 5:22-CV-1448-LCB (N.D. Ala. Mar. 11, 2024), ECF No. 54.
[4] Notice of Appeal, Cmty. Associations Inst. v. Yellen, No. 1:24-CV-1597 (MSN/LRV) (E.D. Va. Nov. 4, 2024); ECF No. 41; Notice of Appeal, Firestone v. Yellen, No. 3:24-CV-1034-SI (D. Or. Nov. 18, 2024), ECF No. 19.
While many Federal agencies, including the prudential bank regulators, have decided to hold back moving forward with initiatives until after the inauguration in January, the Consumer Financial Protection Bureau ("CFPB") has been on a tear to get as many rules, interpretations and enforcement actions through their pipelines before the inauguration. Since the election, the CFPB has issued, or been part of issuing, all of the following:
- On December 4, the CFPB, along with the Federal Reserve, the Federal Deposit Insurance Corporation, the Financial Crimes Enforcement Network, the Office of the Comptroller of the Currency, and that National Credit Union Administration, issued an Interagency Statement on Elder Financial Exploitation. Explaining that the statement “does not replace previous guidance on this subject issued by any of the agencies, does not interpret or establish a compliance standard, and does not impose new regulatory requirements or establish new supervisory expectations”, the agencies nevertheless issued the statement to “raise awareness and provide strategies to supervised institutions for combating elder financial exploitation.” Elder financial exploitation is defined in the statement as “the illegal use of an older adult’s funds or other resources for the benefit of an unauthorized recipient.” Accordingly, supervised institutions are told to enhance (or create) their risk-based policies, transaction monitoring practices, employee training and complaint processes to better “identify, measure, control and mitigate” this kind of exploitation, while also ensuring that none of these steps result in “in age discrimination that is impermissible under the Equal Credit Opportunity Act ("ECOA").” Some of the most effective measures to help with this kind of exploitation are identified as including: 1) transaction holds and disbursement delays; 2) using trusted contacts that employees can contact to doublecheck on transactions; 3) filing SARs when there is suspected elder financial exploitation; and 4) reporting identified exploitation to local law enforcement agencies and to the U.S. Department of Justice’s National Elder Fraud Hotline.
- On December 3, the CFPB proposed a new rule to stop data brokers from selling sensitive personal data, in a bid to “protect Americans from crime and illegal foreign surveillance.” Asserting that adversaries like the Chinese government “don’t need to hack anything” because “data brokers – the outfits that collect and sell detailed information about our personal and financial lives – are making this data available to anyone willing to pay”, Rohit Chopra, in his prepared remarks, describes the proposed rule as a means of cracking down “on a range of misuses of our data.” In effect, the proposed rule will extend the protections of the Fair Credit Reporting Act ("FCRA") to data brokers. The FCRA is the world’s oldest federal privacy statute and has withstood the test of time since it first was passed in 1970. This is the rule that governs the use of credit reports and credit bureaus and provides significant rights to individuals to control their sensitive personal information. The statute is quite complex and we will publish a more in-depth explanation of how the proposed rule accomplishes extending the terms used by the FCRA to data brokers, but effectively, the CFPB proposes to treat data brokers as consumer reporting agencies, adjust the definition of consumer report, restrict marketing uses of consumer reports, and updates how “clear consent” must be provided by consumers for their data to be shared. The CFPB provided a useful Fact Sheet that provides high-level detail on the proposed rule. Comments must be received on or before March 3, 2025.
- On December 2, the CFPB finalized its thresholds under Regulation Z for the dollar amounts that trigger protections and Regulation Z coverage. Specifically, the threshold for minimum interest charges is unchanged at $1.00; high-cost mortgage loans subject to HOEPA protections have an adjusted total dollar amount of $26,968 and the corresponding fee amount will be $1,348; the qualified mortgage spreads in the annual percentage rate and the average prime offer rate will be 2.25 more when the first-lien transaction has a loan amount of greater than or equal to $134,841, 3.5 or more for first-liens with an amount greater than or equal to $80.905 and less than $134,841, and 6.5 or more for a first-lien with a loan amount less than $80, 905; and finally, “for all categories of QMs, the thresholds for total points and fees in 2025 will be 3 percent of the total loan amount for a loan greater than or equal to $134,841; $4,045 for a loan amount greater than or equal to $80,905 but less than $134,841; 5 percent of the total loan amount for a loan greater than or equal to $26,968 but less than $80,905; $1,348 for a loan amount greater than or equal to $16,855 but less than $26,968; and 8 percent of the total loan amount for a loan amount less than $16,855.”
- On November 21, the CFPB published a final rule regarding the definition of “Larger Participants” in the market for general-use digital consumer payment applications. As written, the final rule sweeps tech companies that offer digital wallet technology solutions into the definition of a “Larger Participant” which has the effect of subjecting such companies to CFPB supervision and automatically makes such companies “covered persons” for purposes of the Consumer Financial Protection Act ("CFPA"). That means that any jurisdictional argument these companies may have had regarding whether they technically met the definition of “covered person” under the CFPA have been swept away. The definition of such “Larger Participants” is broad enough to affect a number of other companies, as well, of course. But, the upshot is that most of those other companies have already accepted that they are “covered persons” or that they provide services to “covered persons” and are directly subject to the CFPA. For those companies, this rulemaking means that they are now also subject to supervision by the CFPB, which will be a change that could still be quite difficult for them. Interestingly, the effective date for the rule will be thirty days after it has been published in the Federal Register (and, it has not yet been published there, as of December 5). But, presuming that the final rule IS published prior to December 2, any “any nonbank covered person that qualifies as a larger participant would remain a larger participant until two years from the first day of the tax year in which the person last met the larger-participant test.” In other words, even if immediately after the inauguration, the new CFPB Director takes action to nullify the rule, any company that was identified as a Larger Participant would continue to be one until at least 2027.
- On November 29, the CFPB revised the date of applicability of its advisory opinion (published October 1) regarding medical debt collection from December 3 to January 2. In that opinion, the CFPB identified a variety of “illegal practices” they have observed medical debt collectors engaging in, including double billing, exceeding legal limits in interest rates charged for the overdue debts, falsified or fake charges, continuing collections activity even when the medical bills have not been substantiated, and mispresenting a consumer’s right to contest medical bills.
- Also on November 29, the CFPB announced the maximum allowable charge for a consumer report requested by a consumer from a credit bureau to be $15.50 in 2025, which is the same as it was in 2024, based upon the Consumer Price Index.
- A third announcement on November 29, the CFPB updated its internal procedures to reflect organizational changes, characterizing the updates as being “ministerial” in nature, although the last change described seems to have more than ministerial implications. All of the changes reflect the shift from references internally to the overall “Office of Enforcement” to it being called the “Enforcement Division” and updating the use of the phrase “Assistant Director” to be “Supervision Director” which allows the Bureau Director (e.g., Rohit Chopra) to also be the Supervision Director.
- On November 15, the CFPB issued its annual report on student loans focused on the 2023-2024 school year. In the related press release, the CFPB recounts that, “to assist struggling borrowers, the Department of Education implemented reforms resulting in billions of dollars in loan cancellation for almost 5 million borrowers and restored eligibility for 3 million formerly defaulted borrowers.” But, the report identifies a variety of “servicing failures and legal challenges” that have “hampered the implementation of critical loan relief efforts” by: 1) causing borrowers to pay inflated amounts that jeopardize their financial well-being; 2) causing borrowers who chose to enroll in the Saving on a Valuable Education ("SAVE") plan to be in financial limbo while litigation plays out; and 3) causing borrowers to get stuck in “customer service doom loops” as they are shuffled between servicers, wait months for responses, and receive inaccurate information, with an average of eight months of time passing before their servicers resolve their issues.
- On November 13, the CFPB issued its “pilot study” regarding small business lending markets, entitled “Matched-Pair Testing in Small Business Lending Markets.” As Director Rohit Chopra remarked in the related press release, “the results of our secret shopping are consistent with the longstanding concerns that small business loan borrowers experience different treatment based on their race.” The study was designed to examine “whether [b]lack testers received less favorable treatment than their white counterparts in four domains: (1) level of encouragement/discouragement to apply for financing; (2) information provided to the tester about available credit products and potential steering toward product types; (3) overall quality of treatment or customer service; and (4) business and credit information requested of the tester.” The results of the study found that there was statistically significant evidence of worse treatment with respect to #1 and #2.
- On November 12, as we reported in the last Cabinet, the CFPB issued a report regarding state data privacy laws and perceived weaknesses in the main federal privacy protection law, the Gramm-Leach-Bliley Act.
- Since the election, the CFPB has also announced settlements in four cases, addressing overdraft fees, inactivity blocks and fees on prepaid funds made available to incarcerated individuals, student loan fees charged by servicers, and fees charged by credit repair companies.
The UK’s Financial Conduct Authority ("FCA") and Prudential Regulation Authority ("PRA") have issued a joint consultation aimed at making dual-regulated firms’ remuneration regimes more effective, simple and proportionate while still ensuring accountability for risk taking. As a reminder, dual-regulated firms include banks, building societies and larger investment firms, whereby the PRA is the prudential regulator and the FCA is the conduct regulator.
CP 16/24 (FCA CP 24/23) (the "CP") propose to amend rules on: variable remuneration; the identification of ‘material risk takers’ ("MRTs") subject to the remuneration rules; MRT proportionality thresholds; and the link between remuneration and individual accountability. In addition, the FCA would amend its rulebook so that in the case of dual-regulated firms it largely cross-refers to the PRA’s remuneration rules.
- Identifying MRTs
MRTs are currently identified through minimum qualitative role based tests and quantitative remuneration based tests. The CP proposes creating a single qualitative threshold and giving firms more discretion through allowing them to exclude individuals solely identified via the quantitative threshold from MRT categorisation without regulatory pre-approval.
- Enhancing proportionality for MRTs
Currently, higher paid MRTs in firms classified as larger and more significant are subject to stricter deferral and clawback requirements than other firms, including a four to seven year deferral period (as opposed to a four year deferral requirement). In order to reduce complexity, the CP proposes raising the threshold below which firms my disapply remuneration rules such as deferral and payment in instruments as well as adjusting the clawback period.
- Remuneration and individual accountability
The senior managers and certification regime ("SMCR") addresses the accountability and responsibility of senior managers to both their employers and regulators. Similarly, the remuneration regime seeks to align financial incentives of MRTs and the long term interests of their firms and the general public. The CP proposes to link the accountability and remuneration regimes by introducing a rule and expectations for firms to consider adjusting remuneration up the management chain in the event of ‘adverse outcomes,’ as well as introducing a rule and expectations to the effect that senior management are accountable for their performance against PRA supervisory priorities.
- Deferral and retention periods
While deferral periods for variable remuneration are intended to align individual interests with long-term performance, current requirements for at least a seven year deferral for PRA senior managers (leading to a spread of deferral periods across the board of between three and seven years) has proved complex and potentially ineffective (the PRA has determined that longer deferral periods may have resulted in firms increasing fixed pay to compensate). The CP is therefore proposing a simplified two-tier deferral period of between three and five years, depending on seniority.
Next steps
The consultation period closes on 13 March 2025, and the PRA reminds firms that it expects them to continue to comply with the European Banking Authority’s 2015 guidelines on sound remuneration policies.
In October, the English Court of Appeal (the “Court”) in its landmark case Hopcraft, Wrench & Johnson [2024] EWCA Civ 1282, ruled it was unlawful for car dealers to receive commission from motor finance providers, unless such payment had been appropriately disclosed and consented to by the consumer.
In light of the judgment, lenders FirstRand Bank and Close Brothers (the “Proposed Appellants”) have sought permission to appeal the decision in this case. The application for appeal submitted by the Proposed Appellants flags a number of additional legal points, which include the impact of backward-looking liabilities to pay consumers as well as forward-looking adjustments to business models. The Financial Conduct Authority (“FCA”), which regulates consumer credit business (including motor finance), has raised concerns that these legal issues may have a wider implication for other financial services markets it regulates. Additionally, the appeal highlights the thousands of pending County Court proceedings and complaints before the Financial Ombudsman Service, all of which concern motor finance commissions as well.
Given the impact of the judgment and the proposed appeal, the FCA wrote to the Register of the Supreme Court on 2 December supporting the proposed appeal and requesting that if the application is granted, the Supreme Court expedites its determination to “assist in security legal certainty for the market”. In its letter, the FCA also highlighted that accounting standards generally require firms to recognise provisions for contingent liabilities for possible obligations. Since the judgment was published, the motor finance market has been left in a state of uncertainty with the market increasing its forecasts to provision for the potential compensation which motor finance firms could face, as well as the impact on any future business. Industry heads have requested the government’s support by intervening and working with the industry and regulators ahead of this potential Supreme Court ruling.
In its judgment, the Court ruled that acting as credit broker, the car dealership owed: (i) a “disinterested duty” (i.e., a duty to provide information and advice on an impartial or disinterested basis); and (ii) an “ad hoc fiduciary duty” (i.e., requiring them to act with loyalty and avoid conflicts of interest), to their customers.
There are obvious concerns about the wider implications of this ruling, given that the finding of a fiduciary duty being owed by credit brokers goes beyond the current understanding of the duties owed to consumers. This decision also potentially impacts all intermediary/broker-lead business where commission is paid, including in business to business markets for both regulated and unregulated products (including that required by the current rules in the Consumer Credit Sourcebook contained in the FCA Handbook).
On November 21, 2024, International Organization of Securities Commissions published a consultation report to provide guidance on acceptable pre-hedging practices and soliciting feedback from market participants. IOSCO recognized that currently very few jurisdictions provide any guidance on pre-hedging practices while the number of enforcement cases is increasing.
The purpose of the Report is to identify potential issues for market participants and to facilitate regulatory alignment. The Report defines what pre-hedging is, describes the circumstances when this practice is acceptable, identifies risks attendant to pre-hedging, and provides a set of recommendations to which dealers, brokers and their clients and counterparties should adhere. The Report also solicits comments from market participants on these Recommendations (the comments must be submitted to IOSCO by February 21, 2025). Ultimately, it is expected that member regulators will enact the proposed Recommendations in their respective local jurisdictions.
Read the full Client & Friends Memo here.