Pub. 9 2018 Issue 4

www.wvbankers.org 10 West Virginia Banker Bitcoin and Other Cryptocurrencies Becoming Relevant to Secured Lenders By Michael R. Proctor T he day when lenders will need to familiarize themselves with cryp- tocurrencies such as Bitcoin is fast approaching. Bloomberg reported on December 14, 2017 that while traditional banks “are largely on the sidelines,” several start-up companies are offering loans secured by the $300 billion cryptocurrency market. Nearly a year later, several alternative financing companies are operational, advertised as “trusted crypto-to-fiat lending plat- forms” and offering borrowers the op- portunity to “leverage your blockchain assets to secure cash loans.” Other companies are working on issuing debit cards linked to cryptocurrency. If lending was not competitive enough al- ready, traditional banks now face a new class of competitors for loans secured by virtual collateral. To be sure, cryptocurrency is a volatile asset. By design, cryptocurrency can be “spent” anywhere in the world very quickly, even though there is no physical coin or paper to represent its value. Tra- ditionally, cryptocurrency is not backed by anything concrete like a sovereign state or precious metal. Given its vola- tility and existence primarily in a virtual form, it is not likely to be the centerpiece of a loan portfolio for many banks any time soon. But, there is a risk that any type of collateral may depreciate, be sto- len or otherwise disposed of before the loan is paid. So, like patents and other intangible collateral, if cryptocurrency is available, lenders might as well require that it be included as security for a loan. Cryptocurrency would be encompassed in an “all asset” loan, provided it is properly documented. Although there are no reported decisions from any U.S. court under the Uniform Com- mercial Code to confirm the method of perfection of cryptocurrency, it likely is a “general intangible” under Article 9 of the UCC. While general intangibles are perfected by filing a financing statement, the nature of cryptocurrency might require more than a simple financing statement. One reason for this is because the state UCC filing office records do not appear on the virtual clearinghouse for cryptocurrency, or blockchain. But, because Article 8 of the UCC may also apply to cryptocurrency, some additional protection may be available if the cryptocurrency is designated a security through a control agreement that would limit its transfer.