Bitcoin and Cryptocurrency as Collateral – Not!
A loan applicant offers Bitcoin as collateral. You must perfect a security interest in the collateral. Is it a negotiable instrument like a blank endorsed check? Maybe it’s investment security, like IBM stock? Or a foreign currency, like a briefcase of Euros? How about a commodity, like “virtual” gold or pork bellies? Maybe it’s a general intangible, the “everything else” category of personal property? The answer to all of these is maybe, but maybe not. Anyone who claims to know the answer is kidding themselves. We find ZERO court decisions on cryptocurrency as collateral. Even once you know what it is, you have to worry about whether it is held by a crypto-bank or exchange.
Today’s Takeaway? If you must take cryptocurrency as collateral, we recommend an “all of the above” approach. File a UCC-1. Take complete control and possession. Transfer the collateral DIRECTLY into your name as lender, so you don’t have to worry about a dishonest middle man. If a third party has control, get a control agreement in which the third party holds the asset to perfect your security interest, and make sure it has both a license and LOTS of insurance. Don’t jump into cryptocurrency financing unarmed and we recommend against being an early adopter. Instead, we suggest that you wait until the courts or legislatures decide what you must do to be protected.
Jay L. Hack is available at firstname.lastname@example.org.