Implications for Trade Finance of Proposed 2022 UCC Amendments

Potentially game-changing amendments have been proposed for the Uniform Commercial Code (UCC) which is law enacted by the US states (with state-by-state variations) to govern commercial transactions, including Articles 2 (Sales), 3 (Commercial Paper), 5 (Letters of Credit), 7 (Warehouse Receipts, Bills of Lading and Other Documents of Title), and 9 (Secured Transactions). The 2022 UCC amendments focus on digital assets and technologies but cover other important matters as well.

The amendments were promulgated by the Uniform Law Commission (ULC) and the American Law Institute (ALI) to the official version of the UCC. The ULC has published several position papers supporting enactment of the amendments and over 20 U.S. jurisdictions already are considering their enactment.

Some of the amendments are especially relevant for trade finance, including digital analogs for paper negotiable instruments (such as drafts, bills of exchange, and promissory notes), digital analogs for accounts receivable and payment intangibles, and digital letters of credit and independent guarantees. Other amendments that are not digital-related include clarifying how bank branches are treated as if they were separate legal entities for certain purposes even though they are not separate legal entities like a parent corporation and its subsidiaries. Amendments pertaining to Article 5 (Letters of Credit) include those contained in, and Official Comments to, Section 5-104 (Formal Requirements) and Section 5-116 (Choice of Law and Forum).

The amendments are needed because commercial laws governing the rights of persons involved in electronic transactions have not kept pace with technological and market developments. While the UCC’s underlying principles and policies remain sound, many are written as if they apply only to manually-signed paper undertakings and as if physical possession of goods and documents is the most (or only) reliable or relevant evidence of control of those assets. This creates uncertainty as to the legal rights conferred by digital assets and by electronic transfers of digital and non-digital assets.

Stay tuned for further updates if and when the proposed amendments advance through the enactment process.

The 2022 Amendments enable the use of emerging technologies, such as blockchain in commercial and financing transactions. UCC Article 12 recognizes controllable electronic records, which include a variety of digital assets, such as Bitcoin. UCC is well ahead of the global efforts to implement international standards to digitize trade finance, such as the Model Law on Electronic Transferable Records [MLETR]. It has already inspired a set of principles of digital assets developed by UNIDROIT. The implementation of these emerging standards to digitize commercial and financing transactions forms the backbone of new environments, such as platforms and exchanges that reduce the cost of transactions while enhancing their efficiency and certainty.

— Marek Dubovec, Director of Law Reform Programs, International Law Institute, and The American Law Institute delegate to the Study/Drafting Committee that produced the 2022 UCC Amendments