South Dakota Governor vetoes pro-CBDC legislation

South Dakota Governor Kristi Noem Thursday vetoed a bill passed by the state legislature which would recognize central bank digital currency as money while excluding cryptocurrency from the definition.

A central bank digital currency (CBDC) is a digital currency issued and governed by a central bank. In the case of the United States, a CBDC would be a digital currency issued and controlled directly by the Federal Reserve. 

CBDC is like cash in that it is backed by the Fed and its value is manipulated by the Fed’s monetary policies. However, whereas cash transactions are anonymous, CBDC transactions are not, as confirmed by Federal Reserve Chairman Jerome Powell.  

While on paper, CBDC has the potential to maximize payment efficiency, it also has far-reaching implications about the government’s involvement in private citizens' transactions. During a lockdown, for example, a government may be able to see if a citizen broke the rules by trying to make a purchase and where the purchase attempt was made. The government could in some cases restrict use of digital funds altogether. 

This month, the South Dakota legislature voted 49-17 in the House of Representatives and 24-9 in the Senate to pass HB 1193, which defines “money” as a “medium of exchange that is currently authorized or adopted by a domestic or foreign government.”

But Kristi Noem vetoed the bill, positioning herself as the first state governor to oppose CBDC.

“[B]y defining ‘money’ in this way, HB 1193 opens the door to the risk that the federal government could more easily adopt a CBDC, which may then become the only viable digital currency,” Noem wrote in a letter to Speaker of the House Hugh Bartels.

“At this moment in time, such a government-backed electronic currency has not yet been created,” she continued. “More importantly, South Dakota should not open the door to a potential future overreach by the federal government.”

The governor also noted that the legislation’s definition of “money” excludes cryptocurrencies, which “would put South Dakota citizens at a business disadvantage.” Cryptocurrencies, which operate on blockchain technology, face friction from many lawmakers given that they are not under government control.

Last month, the US Treasury Department began assembling a team of senior officials from the Treasury Department, the Federal Reserve, the National Security Council and other government agencies to explore the creation of a CBDC. The step is in keeping with an Executive Order signed by Joe Biden in March 2022 which tasked his cabinet and various federal agencies with developing a framework for a CBDC and submitting related proposals.  

According to an analysis from the Cato Institute in July, 71% of public comments on a Federal Reserve discussion paper about CBDC were opposed to it with most citing financial privacy, financial oppression, and the risk of disintermediation as main concerns.

Nevertheless, the White House in September directed government agencies and the Federal Reserve Bank to explore the technology needed to implement a CBDC. In a fact sheet entitled, “First-Ever Comprehensive Framework for Responsible Development of Digital Assets,” the Biden administration stated that digital assets, such as decentralized cryptocurrency which is not under government control, “pose real risks". The regime, however, will step in to “protect consumers, investors, businesses, financial stability, national security and the environment” by regulating digital assets.  

The Biden administration even plans to launch a propaganda campaign against digital assets. 

“The Financial Literacy Education Commission (FLEC) will lead public-awareness efforts to help consumers understand the risks involved with digital assets, identify common fraudulent practices, and learn how to report misconduct,” read the fact sheet. 

The White House also tasked the Department of Commerce with “establishing a standing forum to convene federal agencies, industry, academics, and civil society” to regulate digital assets. 

“Together, these recommendations comprise the first, ‘whole-of-government approach’ to regulating the industry,” crowed CNBC. 

The White House made a point of listing the benefits of a CBDC, which include the government’s ability to control it. 

“A potential U.S. CBDC could also help preserve U.S. global financial leadership, and support the effectiveness of sanctions. But a CBDC could also have unintended consequences, including runs to CBDC in times of stress.” 

The fact sheet said that “further research and development on the technology that would support a U.S. CBDC is needed,” and directed the “leadership of the Federal Reserve, the National Economic Council, the National Security Council, the Office of Science and Technology Policy, and the Treasury Department” to “meet regularly” to discuss their progress on creating and implementing a CBDC. 

Senator Ted Cruz (R-TX) slammed the government's “framework” and move toward a CBDC.

“Biden just released his crypto reg ‘framework’ encouraging the Fed to keep developing a CBDC, which the Fed Chair admits would destroy cryptocurrencies,” tweeted Cruz. “A CBDC would allow the gov to spy on us. Congress needs to pass my bill that stops the Fed from developing a CBDC now!”