How to Create a Floating Lien on Digital Assets

The floating lien is one of the cornerstones of American commercial finance. In secured transactions, it is widely used to encumber a debtor’s inventory, accounts receivable, and other asset pools. At the time of its enactment, one of the critical aims of Article 9 of the Uniform Commercial Code (UCC) was precisely to simplify and explicitly allow the creation of floating security interests. The UCC was recently amended in 2022 to address emerging technologies such as distributed ledger technology (DLT) networks and digital assets. The 2022 UCC Amendments introduced the category of controllable electronic records (CERs), which encompasses cryptocurrencies, stablecoins, and non-fungible tokens (NFTs). NFTs are digital assets that are uniquely identifiable. They have gained widespread adoption in various business endeavors. Their most prominent business use case is tokenization, a process in which NFTs are used as digital representations for valuable tangible or intangible assets, such as vintage cars, paintings, or digital artworks, to facilitate their commercialization. The 2022 UCC Amendments establish a comprehensive framework for commercial transactions involving CERs, including their use as collateral in asset-based lending. Notably, they clarify and simplify the rules to create floating liens over crypto inventory, such as the NFTs created in tokenizations. This regime is built upon the newly created notion of ‘control’ and benefits from special ‘take free’ and priority rules.