Several States Take Steps To Block A Central Bank Digital Currency

Authored by Mike Maharrey via Money Metals,

Several states have taken action over the last two years in an effort to block the implementation of a central bank digital currency (CBDC) in the United States.

Indiana was the first state to pass legislation relating to central bank digital currency. Enacted in 2023, the law explicitly excludes a CBDC from the definition of money under the state’s Uniform Commercial Code (UCC). The law amends the definition of money to specify, “The term does not include a central bank digital currency that is currently adopted, or that may be adopted, by the United States government, a foreign government, a foreign reserve, or a foreign sanctioned central bank.”

A similar law was enacted in Florida last year, and this year South Dakota, Tennessee, and Utah followed suit. A Nebraska bill repealing the capital gains tax on gold and silver also changed the definition of money in the state tax code to exclude CBDC.

This year, Indiana took a second step to hinder the implementation of a CBDC with the enactment of a measure prohibiting state agencies from accepting payments made with a central bank digital currency for any service, tax, license, permit, fee, information, or other amount due the governmental body. It also bars government agencies from requiring payments to be made with a central bank digital currency.

Additionally, under the law, state government bodies are prohibited from advocating for or supporting the testing, adoption, or implementation of a central bank digital currency by the United States government.

Alabama, North Dakota, and Georgia have passed similar laws. 

Impact

It remains unclear how changing the definition of money in the UCC and other steps taken at the state level would play out in practice against a CBDC if the federal government attempts to implement one.

The UCC is a set of uniformly adopted state laws governing commercial transactions in the U.S. According to the Uniform Law Commission, “Because the UCC has been universally adopted, businesses can enter into contracts with confidence that the terms will be enforced in the same way by the courts of every American jurisdiction. The resulting certainty of business relationships allows businesses to grow and the American economy to thrive. For this reason, the UCC has been called ‘the backbone of American commerce.’”

Passage of this legislation would, as noted by one opponent of the legislation, put a CBDC “into the bucket of ‘general intangibles” – rather than money, and wouldn’t ban its use completely.

But it could still potentially gum up the works and make it difficult for the government to fully implement a CBDC.

Opponents of the strategy and supporters of CBDC generally take the position that states can’t do anything to stop a CBDC, since – according to their view – under the supremacy clause “any federal law on this point will automatically override state law.”

We’ve heard this song and dance on other issues before. That’s what they said when California legalized medical marijuana in 1996. It didn’t quite turn out that way.

In the ramp-up to the 1996 vote on Proposition 215, voters were repeatedly told that legalization of marijuana, even for limited medical purposes, was a fruitless effort, since, under the supremacy clause, any such state law would be automatically overridden by the Controlled Substances Act of 1970 (CSA). At best, opponents told Californians, the state would end up in a costly, and losing court effort.

But despite those warnings, Californians voted yes, setting in motion the massive state-level movement we see today, where a growing majority of states have legalized what the federal government prohibits. Ultimately, the federal government will likely have to back down, even if just to save face, because it has become impossible to fully enforce its federal prohibition over this massive state and individual resistance.

A similar scenario played out in response to the REAL ID Act of 2005. The national ID system still isn’t fully up and running more than 17 years after the “final deadline” for full implementation.

Why not?

Because a significant number of states decided not to participate, drug their feet, or in some cases, simply provide residents with a choice to opt-out. Federal officials have confirmed that state-level roadblocks to implementation are the primary reason for the continuing delays.

“Roadblock” is likely how this and other state-based strategies to oppose a CBDC will play out. This is part of James Madison’s four-step blueprint for how states can stop federal programs.

But, as can be seen so far with issues like marijuana and the REAL ID Act, whether a federal program is implemented or not ultimately gets down to the number of roadblocks put up by states, and more importantly, the willingness of the people to participate, or not.

What Is CBDC?

Generally speaking, digital currencies are virtual banknotes or coins held in a digital wallet on a computer or smartphone. The difference between a central bank (government-imposed) digital currency and peer-to-peer electronic currencies such as Bitcoin and Ethereum is the value of CBDC is backed and controlled by the government, just like traditional fiat currency.

Governments sell the idea of CBDC by promising to provide a safe, convenient, and more secure alternative to physical cash. We’re also told it will help stop dangerous criminals who like the intractability of cash. But there is a darker side – the promise of control.

At the root of the move toward government digital currency is “the war on cash.” The elimination of cash creates the potential for the government to track and even control consumer spending.

Imagine that all cash disappeared this morning and all that was left was a government-controlled digital currency. You would be forced into doing all business electronically with this government money. It would be impossible to hide even the smallest transaction from the government’s eyes. Something as simple as your morning trip to Dunkin would be known by government functionaries. As Bloomberg put it in an article published when China launched a digital yuan pilot program in 2020, digital currency “offers China’s authorities a degree of control never possible with physical money.”

Governments could even “turn off” your ability to make purchases. Bloomberg described the level of control a digital currency could give Chinese officials.

The PBOC (People’s Bank of China) has also indicated that it could put limits on the sizes of some transactions, or even require an appointment to make large ones. Some observers wonder whether payments could be linked to the emerging social-credit system, wherein citizens with exemplary behavior are ‘whitelisted’ for privileges, while those with criminal and other infractions find themselves left out. ‘China’s goal is not to make payments more convenient but to replace cash, so it can keep closer tabs on people than it already does,’ argues Aaron Brown, a crypto investor who writes for Bloomberg Opinion.

Economist Thorsten Polleit explained the level of Big Brother-like government control possible with the advent of a digital euro in an article published by the Mises Wire.

As he put it, “The path to becoming a surveillance state regime will accelerate considerably” if and when governments begin issuing CBDC.

In 2022, the Federal Reserve released a “discussion paper” examining the pros and cons of a potential U.S. central bank digital dollar. According to the central bank’s website, there has been no decision on implementing a digital currency, but this pilot program reveals the idea is further along than most people realized.

The Tenth Amendment Center contributed to this report.