Macdonald | Fernandez LLP


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Can Bitcoin be Used as Collateral to Secure a Loan?

Problems arise when a lender attempts to accept Bitcoin as collateral to secure a loan.  More problems arise when Bitcoin makes up a portion of the lender's collateral without the lender's knowledge.  It is best to address these issues in advance and avoid surprise.

Secured transactions are governed by Uniform Commercial Code Article 9, which does not clearly provide a way for a lender to perfect its security interest in Bitcoin as collateral.  Perfection by possession appears to be unavailable because Bitcoin is intangible and cannot be put into the hands of the lender without making a transfer.  Perhaps a form of control agreement will emerge similar to arrangements involving traditional bank accounts. For now, a Bitcoin wallet appears to be a method of transmitting Bitcoin and not a deposit account against which a lien can be perfected by control pursuant to Uniform Commercial Code Section 9-104.
Perhaps more importantly, Bitcoin is not a form of money under Uniform Commercial Code Section 1-201(24) because it has not been "authorized or adopted by a domestic or foreign government."  Moreover, the Internal Revenue Service considers Bitcoin to be property, not money, and therefore subject to capital gains taxes.
If Bitcoins are treated as general intangibles, the lender must perfect its lien by filing a UCC-1 Financing Statement.  However, without possession or control, it may be difficult to prevent a Bitcoin user to transfer assets after default.  Although all Bitcoin transactions are posted to a public ledger, the users are anonymous.  

A typical UCC-1 Financing Statement perfecting a blanket lien and covering "inventory, goods, equipment, accounts, and general intangibles" might be enough to cover Bitcoin, but it would be better to require the borrower to disclose all Bitcoin identification and wallets.  If possible, lenders should consider requiring borrowers to agree to turn over control of Bitcoin wallets upon default, to provide records of transactions or to share control during the loan term.  Query whether institutional lenders want to be in possession of their borrowers' passwords.  Lenders may also wish to simply require borrowers not to transact in Bitcoin or significant amounts of Bitcoin.
There may be problems for those who take payments in Bitcoin as well.  A transferee of money ordinarily takes free of a pre-existing lien pursuant to Uniform Commercial Code Section 9-332.  Moreover, goods sold in the ordinary course of business generally pass free of liens (including properly perfected liens known to the buyer) pursuant to Uniform Commercial Code Section 9-320(a).  By contrast, such protections to not apply to transfers of general intangibles, and a lien "continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the" lien pursuant to Uniform Commercial Code Section 9-315.  The lien remains through subsequent transfers pursuant to Uniform Commercial Code Section 9-325.
This is a tough problem to solve as buyers are likely unable to represent that their Bitcoin is free and clear of liens that may have attached in previous transactions.  Presumably, Bitcoin generated directly from "mining" will be free and clear of liens, and the miner can make representations as to the liens he or she has granted, but dealing only with miners would be a significant limitation.  An indemnity agreement may provide transferees with some comfort.  However, given Bitcoin users' preference for streamlined, anonymous transactions with little outside interference, such paperwork is unlikely to be attractive.

Also seen on Legal By the Bay, blog of the Bar Association of San Francisco.