In this article, the author revisits cryptocurrency-based lending and how the 2022 UCC amendments provide welcome clarity to lending transactions involving digital assets.

Much has changed in the world of digital assets since bitcoin’s debut in 2008. Blockchain and cryptocurrencies are no longer obscure technologies relegated to the outskirts of our financial systems; many industry participants and customers have come to view cryptocurrencies as mainstream financial assets. Cryptocurrencies and other digital assets, and the blockchain technology on which they are based, have taken on increasingly central roles in our financial systems. As digital assets and cryptocurrencies have grown in popularity, parties to financial transactions have sought to incorporate these assets into their deals. One area of the market that saw significant growth is cryptocurrency-backed lending. Borrowers with cryptocurrency assets sought to leverage their relatively illiquid crypto-assets for liquidity or for additional crypto-assets, including by using cryptocurrency assets as collateral in a financing transaction. Of course, financing structures are typically tailored to the specific operating and liquidity needs of borrowers and the use of illiquid assets, similar to cryptocurrencies, is not new to these financing structures. While there is a market for the trading of cryptocurrencies, certain adverse tax consequences of selling cryptocurrencies have resulted in crypto-owners using a buy-and-hold strategy. Lending against these types of assets unlocks value to these companies while avoiding these potentially adverse tax consequences.

In response to the changing financial landscape and borrowers’ interest in cryptocurrency-backed lending, more and more financial institutions and direct lenders ventured into the world of cryptocurrency financing over the last couple of years. While the market experienced a “crypto winter” for much of 2022, the market also saw signs of a “crypto winter thaw.” If there is less volatility in the crypto industry in 2023, it is possible that the use of crypto and other digital assets as collateral in traditional financing arrangements continues to be part of the lending landscape as companies continue to include cryptocurrencies and other digital assets in their business strategies. As further discussed below, the proposed 2022 amendments to the Uniform Commercial Code (“UCC”) to address emerging technologies could aid in the continued financing of digital assets in the years ahead. 

Considerations When Providing Loans Secured By Cryptocurrency Lenders that accept cryptocurrency collateral must, in addition to the credit and market risks they evaluate for all transactions, consider certain risks specific to cryptocurrencies. Some considerations are similar to those involved in traditional lending arrangements, including lender due diligence to ensure the borrower’s ability to repay and that the borrower owns the collateral, constraints on the borrower’s ability to access or use the collateral, complying with the operative regulatory regime, and assetspecific tax considerations. Due diligence is particularly important in cryptocurrency-backed financing transactions as lenders will want to ensure the borrower’s ownership of the assets securing the loan and, if applicable, that appropriate information and other security protocols are in place.

As noted above and as we’ve seen in 2022, cryptocurrencies are subject to significant fluctuations in value, including on a daily basis. While this is a significant factor in deciding whether to lend against these assets, lending transactions can be structured in a variety of ways to limit a lender’s risk of loss due to such volatility, as discussed in more detail below

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