In veto of ‘central bank digital currency’ law, Gov. Kristi Noem joins conservative lawmakers
“There's nothing in [Noem's] veto statement that's true. It reflects all of the tinfoil hat lines that those strange rangers were spreading around,” one Republican lawmaker said.
PIERRE, S.D. — When Gov. Kristi Noem branded her veto on an update to the Uniform Commercial Code, it represented the conclusion of a prolonged effort by conservative lawmakers in South Dakota to highlight their concerns with a change that proponents backed as a necessary update to commercial law.
On March 10, hours after releasing her veto statement, Noem made an appearance on “Tucker Carlson Tonight,” where she criticized the update as a precursor to a “central bank digital currency” and positioned herself as a standard bearer for other state legislatures and governors that will be weighing the update to commercial code this year and next.
“We've got the same language coming to over 20 other states,” she said during the appearance. “I believe it’s to pave the way for the federal government to control our currency and thus control people. It should be alarming to everyone, and it's being sold as a UCC guidelines update.”
I VETOED a bill that changes the definition of money, and that opens the door for the federal government to adopt a Central Bank Digital Currency.— Kristi Noem (@KristiNoem) March 11, 2023
But more than 20 other states are facing the same legislation. Thank you @TuckerCarlson for helping us get the word out! pic.twitter.com/ggx47PiSAb
Noem’s concerns with House Bill 1193 — and the update itself — largely stem around changes in the definitions around “money" and a new category of “electronic money,” as well as rules around “controllable electronic records,” which attempt to bring the code up to speed with how transaction needs are changing with electronic currencies like Bitcoin.
“The amendments are really narrowly focused to avoid stifling innovation,” Rep. Mike Stevens, of Yankton, said on the House floor last month. “It preserves uniformity of state commercial law and clarifies rules for money in lots of our electronic transactions.”
But for weeks leading up to the governor’s veto, several conservative lawmakers including Rep. Scott Odenbach, of Spearfish, sounded the alarm on certain parts of the statute that, in their mind, appear to prioritize government-backed currencies over private ones.
“I have concerns that the intentions here, I think some would say, are maybe paving the way for some central bank currency,” Odenbach said during a Feb. 8 House Judiciary committee hearing. “This is serious business when you get into discussions about money and the ability of free people to determine the means of exchange for their transactions.”
Yet rather than a move defending economic freedom, more establishment Republicans heavily criticized Noem’s decision as an example of bending to the fringes of the party.
“There's nothing in that veto statement that's true. It reflects all of the tinfoil hat lines that those strange rangers were spreading around,” Senate President Pro Tempore Lee Schoenbeck, of Watertown, said. “It's just not true. In fact, it's the inverse of economic freedom. Because it interferes with the ability of South Dakota businesses to do business under the commercial code with other states.”
Schoenbeck, the top Republican in the Senate, lambasted Noem as “being afraid of these far-right media people.”
“They shake their fist at her and she runs,” he said.
Updates seek to keep pace with currency innovations, proponents argue
In short, the Uniform Commercial Code (UCC) is an ultra-complex set of laws “governing all commercial transactions in the United States,” created by the Uniform Law Commission, an organization made up of practicing lawyers, judges, legislators and legislative staff and law professors.
“It is not a federal law, but a uniformly adopted state law,” the organization’s website says about the UCC. “Uniformity of law is essential in this area for the interstate transaction of business.”
The updates scheduled for 2024 mainly seek to solve the ways that cryptocurrencies differ from “money” in the traditional sense, namely that they are intangible: they can’t be stored in a safe, for example.
“That definition [of money] doesn’t work with a theoretical electronic money,” Benjamin Orzeske, the chief counsel with the Uniform Law Commission, told lawmakers last month. “If electronic money ever exists at some point in the future it will be impossible to possess, but it will be possible to control. And so that's what the definition of control and the definition of electronic money is meant to anticipate.”
While at the moment any willing buyer and willing seller can use Bitcoin — or really any currency they so choose — to complete transactions, the problem comes when Bitcoin or any other “intangible” currency is used as collateral for a loan.
To keep things very simple, status as a "secure" creditor is important in the case of a loan default, as secure creditors who "perfect" their security interest in the collateral are paid off before unsecured ones.
As Carla Reyes, an assistant professor of law at Southern Methodist University, explained in a lengthy Twitter thread on the changes, the filing statements required to secure creditors that take on Bitcoin have the potential to undermine the privacy of currency holders.
The updates to the UCC attempt to fix this with a category called a “controllable electronic record,” which Reyes explains would improve both the capacity for creditors to accept cryptocurrencies and the ability for cryptocurrency to be transferred effectively through multiple transactions.
Yet what most concerns some conservatives in the South Dakota Legislature is the updated definition of money, which on its face appears to favor electronic records “authorized or adopted by the government.”
Reyes disputes that reading, explaining that Bitcoin and other cryptocurrencies would not be harmed if they were excluded from the definition of “money” since “controllable electronic records” are an entirely separate, yet still effective, category.
"The definition [of money] does cover CBDCs and excludes existing cryptocurrencies. That part is right," Reyes told Forum News Service. "But all the effects that people read into that are wrong; CBDCs getting extra benefits and cryptocurrencies not getting them is not what happens."
‘CBDCs’ on the horizon could harm privacy, lawmakers say
Still, this framework for the adoption of a “central bank digital currency,” or CBDC, a cryptocurrency regulated by the government, is seen by some as an extreme incursion in personal privacy, and one that could be politicized to punish certain uses of the money.
“The central bank will know when you donate to your church, pay your membership to the NRA or give to a political party,” Rep. Julie Auch, of Yankton, said during a Senate Commerce and Energy committee hearing on Feb. 28. “And these actions may determine the amount of access you have to your bank account.”
Several countries have developed digital currencies, such as the Sand Dollar in the Bahamas, although adoption has not been widespread.
On March 9, President Joe Biden signed an executive order “ensuring responsible development of digital assets.”
“My administration places the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC,” the executive order reads, adding that the development should align with “democratic values, including privacy protections.”
While the UCC updates do not in themselves create a federal CBDC, they would clarify how the currency can be controlled and transferred, just as it would answer those important questions for Bitcoin and other electronic currencies.
Though House Bill 1193 passed the House of Representatives with little fanfare on Feb. 13, more vocal opposition to the legislation was soon taken up by the South Dakota Freedom Caucus, a group of three conservative lawmakers in the state, which began sending emails warning of the bill’s potential passage and its effect of “laying the groundwork for [central bank digital currency].”
“We saw what this could do to personal financial freedom for individuals and their families, so we decided to get all hands on deck,” Rep. Aaron Aylward, of Harrisburg, said of the caucus’s decision to go all-in on fighting the update. “We saw activity from constituents to other legislators to the governor's office. It was a great thing to witness.”
For example, Auch played a crucial role in giving the governor a near guarantee that the veto would be sustained.
“I have a letter that I delivered to the governor on Monday signed by 30 of us [in the House],” Auch said. “So I have 30. I only need 24 [to sustain the veto in the House].”
When lawmakers reconvene on March 27 for “Veto Day,” where they will consider vetoes handed down in the two weeks following the session, overriding Noem’s decision would require a two-thirds majority in each chamber — 47 votes in the House and 24 in the Senate. Its first time around, the bill narrowly reached these thresholds.
“I think this is going to fall apart here pretty quick,” Auch said, referencing conversations she’s had with lawmakers in other states mulling these changes like Arizona and Oklahoma. “That's good. That's what we need. We need it to just all go away.”
Jason Harward is a Report for America corps reporter who writes about state politics in South Dakota. Contact him at 605-301-0496 or firstname.lastname@example.org.