Pub. 6 2016 Issue 2

W I TH LEGITIMATE USE OF VIRTUAL CURRENCIES IN- CREASING RAPIDLY, CREDITORS MAY FIND THEM- selves taking and seeking to perfect security interests in assets that include virtual currencies. There are hundreds of virtual currencies and cryptocurren- cies in existence at the present time, with Bitcoin as the largest and most frequently mentioned. Article 9 of the UCC governs security interests in per- sonal property, tangible and intangible. The application of Article 9 to virtual currencies, and issues related to the perfection and control of these animals, are discussed below. What is a virtual currency? Initially, a distinction must be drawn between virtual currency and real currency. The Financial Crimes En- forcement Network (“FinCEN”), in its Guidance FIN-2013-G-0001 issued March 18, 2013, defines “real” cur- rency as “coin and paper money of the United States or any other country that is designated as legal tender, circulates and is customarily used and accepted as a medium of exchange in the country of issuance.” By contrast, virtual curren- cies are electronic representations of value that may not have an equivalent value in a real government-backed currency. While virtual currencies can function like real currencies in cer- tain transactions, and certain virtual currencies can be exchanged into real currencies, a virtual currency itself does not have legal tender status. Users of virtual currency in com- merce include owners that use virtual currency for payment; merchants that accept virtual currency; intermediaries that exchange virtual currency on be- half of merchants; exchange agents that exchange virtual currency into real cur- rency; and electronic wallet and other non-deposit account providers who hold virtual currency for any of the above us- ers. A virtual currency may be managed in a centralized fashion by a single ad- ministrator or in a decentralized fashion where there is no central administrator and the verification of transactions is performed by participants. UCC security interests in virtual currency. A creditor taking a security interest in virtual currency must perfect its security interest under applicable state law. Unlike real currency, virtual currency is typically held in electronic wallets or other non-deposit accounts domiciled outside of traditional fi- nancial institutions. These electronic wallets and other nondeposit accounts are not “deposit accounts” as that term is defined in Article 9 of the UCC, because the providers thereof are not banks. Therefore, virtual currencies should be treated as general intangibles under Article 9 of the UCC. General intangibles. Under UCC 9-102(a)(42), a “general intangible” is defined to include “any personal property, including things in action, other than accounts, chattel paper, com- mercial tort claims, deposit accounts, documents, goods, instruments, invest- ment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.” To perfect a security interest in a general intangible, a creditor must file a UCC-1 financing statement in the proper filing office, and the financ- By RYAN M. BEHRMAN, STINSON LEONARD STREET LLP How Do You Perfect and Enforce a Security Interest in Virtual Currencies? 14 www.azbankers.org VIRTUAL w Continued on page 26