Sound Regulations for Security Interests in Cryptocurrency

This article discusses recent developments in decentralized finance, or DeFi, and proposes a regulatory framework for taking cryptocurrency as collateral in secured transactions properly adapted to this new financial reality. By all numbers, cryptocurrency is increasingly present in the economy across the globe, and by all indicators, its prevalence will continue to grow in the future. Many actors for various reasons are looking to use their cryptocurrency in contracting secured loans. While the DeFi market has started to provide such lending services through P2P and P2C protocols with smart contracts, states have generally avoided to legislate these financial activities in any way. Meanwhile, legal doctrine on the subject has focused on reiterating the same issues already identified, mainly the difficulty of categorization, the need for perfection by control and the need for negotiability. Critically assessing the unique legislative approach adopted by the state of Wyoming, this article further discusses the limits of smart contracts with regards to taking into consideration third party interests, such as those of the state and other creditors. This article concludes by proposing sound regulations addressing these issues for taking security interests in cryptocurrency. These sound regulations include adding a proper definition of cryptocurrency, allowing perfection by registration or control, setting the requirements for control and adding a “supernegotiability” rule, and could be enacted everywhere in the world. In doing so, this article stresses the urgency for states to legislate on digital assets incrementally, as they rapidly evolve and take an ever-greater place in the economy, for the common good requires adapting to changing markets and constant reapplication of our inherited legal wisdom to current asset developments