Virtual Currency in Texas

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Virtual Currency in Texas:  The world’s ninth largest economy will soon allow virtual currency to be used as collateral, and state-chartered banks to serve as virtual-currency custodians.  Effective September 1, 2021, new amendments to Article 9 of the Texas Uniform Commercial Code will allow creditors to perfect security interests in “virtual currency” which they accept as collateral. 

Background: Ordinarily, a creditor will file a “financing statement” (usually on a “UCC-1” form) with the Secretary of State and/or other appropriate authorities in order to “perfect” its security interest in collateral. The financing statement describes the collateral pledged to secure the loan, and is publicly available for searching. In that way, people who are considering buying the collateral described in the financing statement can see that it’s already pledged and know to steer clear of it. If a creditor fails to “perfect” its security in its collateral, it may not be able to enforce its lien against a good-faith purchaser for value who comes along later, unaware of the existence of the lien or any other reason to suspect a lien exists.   

Perfection-by-financing-statement works well for receivables, machinery, and other types of collateral which can readily be described in a filing.  But practicalities dictate that some types of collateral can only be secured by the creditor maintaining possession of the collateral, or “control” over it.  Virtual currency is one such type. 

Texas UCC amendments relating virtual currency:  New Texas amendments allow creditors to accept virtual currency as collateral (itself a major step forward in Texas commercial history), and to “perfect” liens against them so long as the creditors have and retain “control” of the virtual currency while the lien is outstanding.  Paraphrased, “control” means having and keeping the power to derive substantially all the benefit from the virtual currency, through a record attached to or logically associated with the virtual currency or with a system that enables someone to readily identify the person who has those powers.  (Interestingly, filing a financing statement listing virtual currency will no longer constitute “notice” to prospective purchasers of an “adverse claim” to it, namely the creditor’s claim of a lien on it.  Instead, “control” of the virtual currency will now be key.) 

You can read the text of the bill by clicking on the following link:

https://legiscan.com/TX/text/HB4474/id/2406936

Texas banking developments relating to virtual currency: Separately, the Texas Department of Banking has advised Texas state-chartered banks that they are authorized to serve as “custodians” of virtual currencies, either in a fiduciary (if they have trust powers) or a non-fiduciary way:

https://www.dob.texas.gov/sites/default/files/files/news/Industrynotices/in2021-03.pdf 

Closing thoughts: The Texas legislature should be commended for its efforts to modernize commercial law.  Calling virtual-currency “currency” for purposes of Article 9 doesn’t make it legal tender, of course. However, it does pave the way for blockchain transactions, and the attendant “FinTech” (financial technology) that is beginning to revolutionize the financial services industry.

Questions do remain, particularly with respect to how issues of enforcement of liens and foreclosures on virtual-currencies should be handled, as well as what the role of intermediaries (like banks) should be in this process.  Nevertheless, this is a significant step forward in easing the entry of virtual currency into a functional role in the world’s ninth largest economy.

In taking this step, Texas tips its ten-gallon hat to its sister state Wyoming, which recently became the first state to recognize virtual currency as appropriate for Article 9 treatment – even as Wyoming was the first state to develop and authorize the now-ubiquitous Limited Liability Company structure, back in 1977. 

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Hosch & Morris, PLLC is a boutique law firm dedicated to data privacy and protection, cybersecurity, the Internet and technology. Open the Future℠.