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The Personal Property Security Act, R.S.O. 1990 (“PPSA) in Ontario should once again consider following its counter part south of the border. In the United States, the Uniform Commercial Code (“UCC”) is a model law code, which regulates various commercial areas including taking security in chattels and other non-real property assets. Each individual state generally adopts the UCC as-is.

In 2022, the Uniform Law Commission released its final copy of their proposed amendments to the UCC. These amendments included Article 12. This Article covers Controllable Electronic Records (“CER”) and the transfer of property rights in certain intangible digital assets. This includes electronic records that utilize distributed ledger technology such as crypto currency and Nonfungible Tokens (“NFT”).

Under the proposed §12-102 (a) (1) CER is a record stored in an electronic medium that can be subject to control under §12-105. The term excludes any controllable account, a controllable payment intangible, a deposit account, an electronic copy of a record evidencing chattel paper, an electronic document of title, electronic money, investment property or transferable record.

§12-105 of the UCC provides three additional criteria for classification. A person has control of a CER if it gives the person: (i) the power to avail itself of substantially all the benefit from the electronic record; (ii) exclusive power to prevent other from availing themselves substantially all the benefit from the electronic record; and (iii) transferable control.

The methods of securing a traditional record under Article 9 (which governs secured transactions) continue to apply. Article 12 has merely allowed CERs to be secured under Article 9 of the UCC, giving CERs legitimacy on a legislative level. The descriptions under Article 12 are intentionally vague so that the CER treatment can be applied as broadly or narrowly as required.

It is worth pointing out that in a priority dispute, perfection by control will outrank perfection by filing. This will be an important point of consideration for lenders trying to preserve their rights.

These amendments represent an important shift in the commercial law practice area because it demonstrates the importance of adapting law to the changing landscape. There have been discussions in law journals throughout the country about smart contracts and artificial intelligence being used to streamline and update an Article 9 transaction. This response by the Uniform Law Commission to amend the UCC demonstrates the need for the law to stay current with technology and to be pro-active rather than reactive to changes that are quite frankly inevitable. This ensures predictability and certainty in practice.

As of the current date, these amendments have been proposed in 22 States including California. Adoption from states such as California signals that the legal market is ready to actively utilize this new area of law. Ontario would be wise to consider updating its own laws to accommodate this market shift. Given that there are considerable cross boarder dealings between Canada and the US, business continuity should be a strong motivation for updating our PPSA.

Co-author: Adam Nangini

This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.

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