Commercial Transactions Committee Works on Emerging Technologies, including Blockchain, Supply Chain and Electronic Documents

It is beyond obvious that computers have radically changed commercial practices.  Something more than the traditional paper instruments is needed in a world where asparagus loaded being loaded on a plane at LAX will be on a dinner plate in Tokyo the next evening. This need is filled by documents produced on and exchanged by computer.  Some of these changes employing computers go beyond the production and exchange of documents and instruments and constitute electronic assets with or representing value, such as virtual currency.  Finally, even the underlying protocol of these electronic assets, such as blockchain, promise to serve as alternative methods of exchanging interests, assets, or valuable information significantly decreasing transactional costs. 

However, current commercial law has not kept pace with these changes.  This is not simply because drafting or revision has not been timely.  Instead, much of the new computer based technology simply does not fit the concepts or is not able to satisfy requirements of current commercial law.  For example, the centuries old requirements of negotiation, physical delivery of the negotiable instrument and endorsement, are both difficult or impossible with computers.  As stated by the Uniform Law Commission (the “ULC”), the author of the Uniform Commercial Code (the “UCC”), adopted in every state, “[t]he concepts of negotiation as we have known it in American law, cannot apply in electronic media”^[1]

Now, both California and a joint project between the ULC and the American Law Institute (the “ALI”) are exploring revisions to commercial and other law to address these emerging technologies and encourage their further development.  The implications of these efforts will extend to an extremely wide range of businesses from agriculture to banking, financial products, and consumer services. The CLA Business Law Section’s Commercial Transactions Committee (the “CTC”) is monitoring and participating in both these projects and will be commenting and reporting on them as they unfold. 

Pursuant to its AB 2658, the California legislature set up a Blockchain Working Group and charged it with “[e]valuating blockchain uses, risks, benefits, legal implications, and best practices; [d]efining …blockchain; and [r]ecommending amendments to … statutes that may be impacted by blockchain.”^[2]   The CTC monitored the various meetings of this Blockchain Working Group and its subcommittees and communicated with its members and with legislators during and about this process and the content of the final report.  The Blockchain Working Group’s task was completed in July, and that final report can be found at https://www.govops.ca.gov/wp-content/uploads/sites/11/2020/07/BWG-Final-Report-2020-July1.pdf.  Of interest to BLS members and its committees are the sections devoted to supply chain, to property, and to finance and payments as well as those discussing privacy concerns. 

Of even greater scope and complexity are the efforts of the ULC and ALI’s Joint Committee re Revision of the UCC to Address Emerging Technologies (the “Joint Committee”).  This Joint Committee comprises six to seven subcommittees and focuses on definitional concepts and existing concepts that can be modified or replaced to apply to emerging technologies.  For example, current law only addresses the transfer or negotiation of two types of electronic documents, transfer of electronic chattel paper (section 9-105) and negotiation of documents of title, warehouse receipts and bills of lading (section 7-106).  There are no rules governing electronic negotiable instruments, such as promissory notes, electronic bills of exchange, or electronic non-negotiable instruments (except non-negotiable documents of title). 

Over the past couple of decades the UCC has relied on the concept of control to govern the rights of secured parties and purchasers to perfect security interests or obtain a non-temporal priority interests in five types of assets– deposit accounts, letter of credit rights, investment property, electronic chattel paper, and electronic documents of title.^[3]  However, the definition and method of obtaining control differs with the asset and, except for the latter two, control does not govern the transfer or negotiation of the asset in electronic form. 

Presently, a good portion of the Joint Committee’s efforts are devoted to a definition of electronic asset consistent across numerous forms and development of a definition of control and rules equally applicable across these electronic assets.  This is complicated by the desire not to lose the functionality of systems presently operating and satisfying the requirements of current law (negotiation of electronic documents of title and transfer of electronic chattel paper).

Finally, in addition to addressing electronic documents and assets, the ULC/ ALI Joint Committee is working on rules regarding the non-custodial peer to peer transfer of virtual currency and revisions to the payment systems sections of Article 4A.

The CTC was admitted to the Joint Committee and various subcommittees as an Observer.  It has monitored and participated in the various meetings and communicated with members concerning particular issues.  It has also circulated agenda and reports to other committees that it believes would be interested in the content.

This work is expected to continue through 2022.  In the meantime, however, if you would like to discuss any of the subjects above, have clients or contacts interested therein, or would like to serve on the CTC and become involved, you are encouraged to contact Walter Oetzell below.

Walter K. Oetzell | Walter K. Oetzell APC

Co-Chair CLA Commercial Transactions Committee
wkoetzell@oetzelllaw.com

[1] ULC Summary re Revised Article 7

[2] https://www.govops.ca.gov/blockchain/

[3] See section 9-314, 9-327, 9-328, and 9-329