Getting a loan for a business can be daunting, but cryptocurrency-related businesses can have an especially hard time, which could be changing soon.
William Wenzel, the owner of Red Road Legal based in Denver, who is an expert in cryptocurrency, said one of the most exciting developments of 2022 was the work done on adding an amendment to the Uniform Commercial Code to incorporate digital assets into it. The UCC is a set of laws that are in all states, Wenzel said, which governs items such as the dealing of goods among parties, while leading to a certainty of terms. Article 9 of the UCC deals with collateralization for things like loans.
“The Uniform Commercial Code is this pillar on which the American lending institutions [are] built because any transaction that involves a loan necessarily implicates the UCC in Article 9 if there’s collateral involved,” Wenzel said.
Over the past few years, work has been done to update the code and a final draft has come forward that’s being submitted to state legislatures to adopt, which would modify a state’s UCC. The change includes language involving digital assets.
“I personally believe this is the most exciting development in cryptocurrency regulation or laws that we’re going to see in any predictable future,” Wenzel said.
Wenzel noted items like cryptocurrency have value — currently, one Bitcoin is worth nearly $23,000 — and with that value, it should be able to be lent against.
“Prior to this new UCC development, there was very little … about how cryptocurrency pledged as collateral could be collected on, in the event of a debtor’s default,” Wenzel continued. “Let’s just say there are these people and companies out there whose main asset is cryptocurrency and that’s just sort of the world that they’ve been living in for the last 10 or 11 years or so. They have these assets that they want to do something with. They should be able to take out loans against those assets, for things like building their businesses.”
Wenzel noted the UCC’s collateral provisions in the earlier versions don’t talk about digital assets. He added a bank didn’t want to make a loan if someone has major assets in cryptocurrency because even though the owner of the cryptocurrency believes those assets are real, the handling, disposal and liquidation of that collateral are open questions.
Wenzel said what happened is when the UCC didn’t give certainty to lenders regarding loaning money against cryptocurrency, banks wouldn’t offer loans at good prices, which led to cryptocurrency-based companies turning to one another for loans.
“They all become interconnected and these are not sophisticated lenders,” Wenzel added. “It’s a group of common-minded industry people who don’t have anywhere but internally to turn to get the money that they need to do important stuff like [research and development] and marketing and public listing.”
This whole scenario dials up systemic risk, Wenzel surmised, leading to a domino effect if there’s a failure within the group of businesses. With the changes to the UCC, a situation like this can be fixed because the banks have more certainty.
“Institutional lenders come in, make calculated loans to good debtors, and that necessarily drives the price and another lender will come in and offer a loan at a better rate,” Wenzel said.
The update from the UCC defines digital assets while being predictive of them going forward, Wenzel added. According to the update, the amendments to the UCC provide new rules to govern transactions involving the digital assets.
Wenzel said you can already collateralize stock under the UCC currently, but there’s no intrinsic reason why you can’t collateralize cryptocurrency.
“Crypto lending will never be the same,” Wenzel said. “It will be so much better in my view because you will have experienced lenders in there rather than just a bunch of industry players.”
Multiple states have introduced the UCC amendment already this year, according to the Uniform Law Commission website, including Colorado where it was introduced Jan. 27 by a Democrat and Republican. So far, 14 states have introduced the legislation.