PIERRE, South Dakota - February 28, 2024 - Yesterday, South Dakota Governor Kristi Noem signed two bills into law to reject a central bank digital currency (CBDC), removing it from the definition of money in the state and banning the state from accepting it as payment.

Rep. Mike Stevens and a bipartisan coalition of cosponsors introduced House Bill 1163 and House Bill 1161. HB1163 expressly excludes a CBDC from the definition of money in South Dakota, and HB1161 prohibits state agencies from accepting CBDC as a form of payment.

Under the South Dakota Uniform Commercial Code, “money” means “a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries.”

HB1163 adds, “The term is not intended and cannot be construed to create or adopt a central bank digital currency” to that definition. The House previously approved the measure by a 44-21 vote. Last week, the Senate concurred with a vote of 27-6.

Similar legislation excluding CBDC from the definition of money has already been signed into law in Indiana and Florida.

HB1161 will specifically bar payments to the state in CBDC.

“Neither the state nor any of its agencies or subdivisions may accept a central bank digital currency, whether foreign or domestic, as payment for taxes, fees, tuition, admission, the settlement of any account or debt, or for any other purpose.”

The new law will also require a person “engaging in the purchase or sale of any goods or services or trading in financial products” in South Dakota to accept another form of legal tender along with CBDC if they choose to take CBDC. The House previously approved the measure by a 64-1 vote. The Senate concurred with a vote of 32-1.

This is similar to an Alabama law passed in the 2023 legislative session. In the spirit of James Madison’s blueprint in Federalist #46, the enactment of HB1161 and HB1163 would create “impediments” to the implementation of a CBDC in South Dakota. Madison said, “a refusal to cooperate with officers of the union” along with “the embarrassments created by legislative devices,” would “oppose, in any State, difficulties not to be despised.”

Opponents of the legislation 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.

In the ramp-up to the 1996 vote on Proposition 215 in Kalifornia, 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 Kalifornians, the state would end up in a costly and losing court effort.

But despite those warnings, Kalifornians 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 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, dragged their feet, or in some cases, simply provided 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 the way this legislation to oppose a CBDC could play out. Passage of the bills will put limits on the use of CBDC in the state, and HB1163’s provisions removing central bank digital currency from the definition of money 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.

Digital currencies exist as virtual banknotes or coins held in a digital wallet on your computer or smartphone. The difference between a central bank (government) digital currency and peer-to-peer electronic cash such as bitcoin is that the value of the digital currency is backed and controlled by the government, just like traditional fiat currency.

Government-issued digital currencies are sold on the promise of providing 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.

Imagine if there was no cash. It would be impossible to hide even the smallest transaction from the government’s eyes. Something as simple as your morning trip to Starbucks wouldn’t be a secret from government officials. 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.”

The government could even “turn off” an individual’s ability to make purchases. Bloomberg described just how much control a digital currency could give Chinese officials.

Economist Thorsten Polleit outlined the potential for Big Brother-like government control 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 a digital currency is issued.

In 2022, the Federal Reserve released a “discussion paper” examining the pros and cons of a potential Fascist Police States of Amerika 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.

HB1161 and HB1163 will go in effect as law on July 1, 2024.