Category: Pending and New Legislation

  • Sorry to Break It to You Geniuses: Under the GENIUS Act the Holders of Stablecoins Actually Have FIFTH Priority in an Issuer Bankruptcy

    Posted by

    Adam Levitin

    In order for stablecoins to operate like money, there cannot be any issuer credit risk. Otherwise coins will be discounted based on the financial strength of the issuer. That will cause transactional friction because buyers and sellers might not agree on the appropriate discount. It also means that different coins cannot possibly be good delivery for each other.

    The GENIUS Act tries to reduce issuer credit risk as much as possible. First, it requires payment stablecoins to be backed by reserves and creates a regulatory oversight system to create some confidence that the claimed reserves are in fact there. That’s basically replicating what the National Bank Act of 1864 did when it created national bank notes and a federal bank regulator to inspect the national banks that issued those notes.

    Second, the GENIUS Act has a provision regarding the insolvency of a payment stablecoin issuer. It aims to reduce credit risk by saying that the holders of payment stablecoins have first priority, coming ahead of all other claimants, for the issuer’s reserves. And second, it directs the bankruptcy court to pay out on the stablecoins as soon as possible, namely within 14 days of “the required hearing.” The idea here is to ensure that there is minimal liquidity disruption.

    Here’s the thing. The GENIUS Act fails miserably at both of these bankruptcy goals. Holders of payment stablecoins actually will rank fifth in a bankruptcy distribution, coming after (1) repo and margin lender claims, (2) the DIP lender, (3) the bankruptcy professionals via the DIP lender’s carve-out, and (4) set-off claims from depositaries and brokers. Those claims will gobble up a huge chunk of any reserves, so recoveries for payment stablecoin holders will be severely diminished.

    Moreover, because of the nature of the DIP lender and professionals’ claims, no distribution to the payment stablecoin holders will be possible until well into the case, if not the very end of it. That might mean waiting months or years for a distribution.

    Let me put it bluntly: a stablecoin issuer bankruptcy won’t be like an insured deposit claim against an FDIC insured bank, where you get 100¢ on the dollar back incredibly fast (perhaps next day). In a payment stablecoin issuer bankruptcy there will be a large haircut on the stablecoins and the payment won’t be any time soon.

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  • Forcing Bank Deposits to Subsidize Stablecoins: the GENIUS Act

    Posted by

    Adam Levitin

    The Senate is set to take up a vote on this Thursday on the GENIUS Act, the legislation to create a regulatory framework for stablecoins. Whatever else one might think about stablecoins or the GENIUS Act, its insolvency provisions are an absolute mess, both conceptually and in drafting. If the GENIUS Act becomes the law, we're in for a FUBAR situation when a stablecoin issuer ends up insolvent. Even more concerning, if a bank custodian for a stablecoin issuer's reserves ends up insolvent, the claims of the stablecoin investors will come ahead of the bank depositors. That's right. Crypto comes ahead of ma-and-pa. 

    The effect: stablecoins are being subsidized by bank deposits. Now that's GENIUS.

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  • Juliet Moringiello – One of the Greats

    Posted by

    Melissa Jacoby

    Juliet Moringiello was an amazing person. Her alchemy of brain and spirit and energy and heart and common sense made a positive difference for so many people, across disparate places and professions. She could teach you how to navigate a commercial law and to downhill ski.

    Testaments from Widener University Commonwealth Law School and professional organizations illustrate how Juliet served academic and legal communities with distinction. Examples include the Uniform Law Commission (including an instrumental role in the development of the 2022 amendments to the Uniform Commercial Code), American Law Institute projects, and as a scholar-in-residence for the American Bankruptcy Institute. Juliet did these things while also serving in critical leadership roles at Widener and offering engaged and committed classroom teaching, including first-year property law and an array of upper level classes and seminars. 

    Chris Odinet's memorial captures beautifully Juliet's commitment to helping others and building communities. As reflected in the mentoring award she recently received from the Commercial and Consumer Law Section of the Association of American Law Schools, Juliet did so much behind the scenes to lift up others and to help them improve their research and analysis. 

    Juliet was ideally positioned for mentoring because her own scholarship was creative and wide-ranging and yet reflected care and attention to detail. She offered important insights on municipal bankruptcy and related state law procedures. Whereas scholars and jurists long have referred to the "Butner principle" in the abstract, Juliet closely studied the case for which the principle is named, which turned out not to match how it was remembered. She explored poorly drafted statutory language that since 2005 has affected the treatment of car loans in Chapter 13 repayment plans for individuals and proposed an analytical framework accordingly. These are just a few of the examples of her writings in which a reader can find careful and sustained attention to the relationship between state and federal law. 

    With respect to state secured transactions law, Juliet comfortably traversed the border between real property and personal property. The problems dwelling from the tangible-intangible divide of personal property particularly attracted her attention. She explored puzzles that arise, for example, when one tries to apply fundamental concepts such as possession to remotely controlled activities.

    And those projects dovetailed with Juliet's longstanding interest in understanding emerging technologies, and her ability to demystify how foundational commercial law concepts can be squared with innovation – from software licensing agreements and electronic contracting, to cyberspace and domain names and Second Life, to non-fungible tokens. As popular subjects for scholarship, writings on hot tech topics risk ephemerality. Juliet's work is built to last. She made these issues accessible while demonstrating how they could and should be situated in broader legal frameworks.

    Of course, these professional interests were part of a rich multi-faceted life of family and friends, of appreciating the sights and nature in Pennsylvania, in Quebec, and anywhere and everywhere she traveled. When there wasn't enough snow for skiis, you might find her on a hike. Or on a bike. Or a paddleboard. 

    Juliet Moringiello offers inspiration to do impactful work, to help others, and to spend time on the the things you love. Deepest condolences to her family. 

  • Upcoming Public Events for Unjust Debts

    Posted by

    Melissa Jacoby

    P&PMore upcoming events open to the public – in person and virtual – for the new book Unjust Debts, including tonight in Washington DC. Join the conversation!

     

  • A Uniform Law Project of Note: Special Deposits Act

    Posted by

    Melissa Jacoby

    Last week, bolstered by a continuing legal education program offered by the American Law Institute, I started studying a new uniform law that will be recommended to your state legislature in the coming days and months. It is called the Special Deposits Act. As of today it has not yet been enacted by a state legislature. But trust me when I predict that you want to study it too – especially because the choice of law rules will work differently for this uniform law than for, say, the digital assets amendments to the Uniform Commercial Code. In other words, if one of the green states in the map below adopts the law, parties can contract for that state to govern the special deposit as well as to be the forum for disputes, even if there's no other relationship with that state.

     

    Special deposit act

     

     

     

     

     

     

     

     

     

    A special deposit is payable on the occurrence of a contingency and the identity of the party entitled to the funds is uncertain until the contingency happens. Right now, the law governing special deposits is nonuniform and the details can be uncertain, including the rights of creditors against those funds. One big impact of this uniform Special Deposits Act is this: in broadest terms, if a bank and depositor agree that a deposit account is a special deposit, and it meets the requirements for permissible purpose under the law, this law says that the funds in that account are not property of the depositor, including if the depositor files for bankruptcy, and cannot be reached by the depositors' creditors. (Fraudulent transfer law still applies and the drafters say there are other anti-fraud measures in place). The bankruptcy world may be interested in this law for an additional reason: possible use of special deposits in a bankruptcy case to pay professionals, or for large numbers of claimants, etc.

    I also find this law interesting because of its implications for loans secured by deposit accounts under Article 9 of the Uniform Commercial Code. Even if a bank has a security interest in all deposit accounts of a debtor held by a bank, and is automatically perfected by control, the bank's enforcement rights are far more limited against the special deposit than against a typical bank account. In general, the bank cannot exercise rights of setoff or recoupment against a special deposit.

    Again, as of today no state has enacted the Special Deposits Act. But given how the law is drafted, it will take just one state to adopt it, and for lawyers to encourage banks and depositors to opt in to that state's law, to have a much broader effect. Check out the materials here.

  • Catching Up on the Digital Asset Amendments to the Uniform Commercial Code

    Posted by

    Melissa Jacoby

    It has been a while since I last posted resources on amendments to the Uniform Commercial Code that would govern transactions in digital assets, including security interests. The take-up of these amendments, including a new Article 12, has not been as swift and sweeping as some might have hoped. To put it mildly, some in the cryptocurrency world have lobbied hard against enactment based on what seems to be a misinterpretation (to help set things straight, I recommend reading and listening to professors Juliet Moringiello and Carla Reyes). Currently, 11 states have enacted the amendments. Article 12

     

     

     

     

     

     

     

     

     

    Thorny choice of law issues flowing from non-uniform enactment inevitably will land in bankruptcy courthouses, as so many legal quandaries do. For example, choice of law will affect whether or not a lender has a perfected security interest in the debtor's interest in cryptocurrency, an issue that can arise in a wide variety of bankruptcies. Here is a collection of Uniform Law Commission resources in case you need them.

  • New Resource on Uniform Commercial Code Reform for Digital Assets including Crytocurrency

    Posted by

    Melissa Jacoby

    Earlier this fall I linked to a variety of resources, including webinars, on amendments to the Uniform Commercial Code to account for various types of digital assets. The scope includes but is not limited to commercial transactions involving cryptocurrency.

    To add to these resources, a version of the amendments that includes official comments is now available.  

    Because there will not be a uniform effective date, and some states have gotten an early start by implementing prior drafts of the amendments (see prior post), these could swiftly become relevant to transactions and disputes, including those that land in bankruptcy court. 

  • Getting Ready for Uniform Commercial Code Reform?

    Posted by

    Melissa Jacoby

    2022 amendmentsIAs digital assets and emerging technologies become common in commercial transactions, state commercial law must rise to the challenge – that's the driving force behind a new set of amendments to the Uniform Commercial Code, including Article 9 governing secured transactions in personal property – such as in virtual currencies and nonfungible tokens.

    No state has enacted the amendments yet,* but prior reforms to Article 9, at least, have been remarkably successful at achieving broad enactment. Consider, for example, the visual of the 2010 amendments to Article 9. Blue=enacted!

    2010 amendments

    How to track developments? Here are some publicly available resources courtesy of the Uniform Law Commission:

    First, here is where to find the actual amendments as finally approved by the Uniform Law Commission and the American Law Institute. 

    Second, here is a summary. Note the mention at the bottom of transition rules for lenders who followed existing law in perfecting security interests, etc. (by the way, there is not a prospective uniform effective date for these amendments). 

    Third, videos! Here's one highlighting the changes for digital assets. And here's another on other matters covered in the amendments. 

    Fourth, here's where proposed bills and enactment information will be tracked.

    *According to the digital assets video, some states adopted earlier versions of part or all of these amendments (New Hampshire, Iowa, Nebraska, Indiana, Arkansas, and Texas) but are expected to update those to conform with the final versions. Wyoming and Idaho went their own way on commercial transactions in digital assets.  

  • Harmony or Mismatch? A virtual event on mass torts and bankruptcy on February 28

    Posted by

    Melissa Jacoby

    Just wanted to make sure Credit Slips readers were aware of this virtual event at noon Eastern/3 Pacific on February 28. Bonus: a link to a masterful analysis of the topic by Professor Elizabeth Gibson that the Federal Judicial Center published in 2005. (click here for information and registration)

    Event

  • New Year, New Data in Your Credit Score

    Posted by

    Pamela Foohey

    During 2021, reports from the CFPB and consumer advocates spotlighted the role of credit scoring in people's financial growth or stagnation and decline. These reports emphasized racial and ethnic disparities in credit scores and in complaints about errors in credit reports. Congressmembers introduced three draft bills aimed at improving credit reporting. Given the problems with traditional credit reports and scores, along with barriers to access to credit and other opportunities faced by the credit invisible, the idea of alternative credit scoring was raised repeatedly last year — in reports, news stories, and in the draft bills. Seemingly in reaction, starting now, Experian is adding data about "buy now, pay later" loans to credit reports. Soon after Transunion announced that it was “well on [its] way” to including the same data.

    Sara Greene and I have a new paper about credit reporting and scores, "Credit Scoring Duality," that focuses on the benefits and potential problems of adding alternative data to credit scoring models. Adding more data to credit scores, at first, may seem appealing. More data = better, more accurate scores? However, the use of this alternative data will not necessarily make the credit invisible or people with low credit scores more attractive. Much of the additional data proposed suffer from the same demographic disparities as the data already incorporated into credit scores. That is, in general, the people supposedly helped by inclusion of alternative data are likely to perform below-average on these inputs. Beyond replicating already present disparities, Greene and I worry that pointing to alternative credit scoring as a solution will distract from larger, systemic issues that are shown by disparities in credit scores. For more details, see our draft paper.