MONTGOMERY, Ala. (June 20, 2023) – Last week, Alabama Governor Kay Ivey signed a bill into law that takes a small step toward pushing back against any potential future central bank digital currency (CBDC).
Sen. Dan Roberts sponsored Senate Bill 330 (SB330). The new law prohibits government agencies in Alabama from accepting a CBDC as payment, and from participating in any testing of a CBDC by the Federal Reserve.
The bill defines a CBDC as, “A digital currency, a digital medium of exchange, or a digital monetary unit of account issued by the United States Federal Reserve System or a federal agency which is made directly available to a consumer by such entities.”
The Senate passed SB330 by a 32-0 vote. The House approved the measure by a 103-0 vote. With Gov Ivey’s signature on July 16, the law will go into effect Sept. 1.
IN PRACTICE
In the spirit of James Madison’s blueprint in Federalist #46, the enactment of SB330 creates “impediments” to the implementation of a CBDC in Alabama. 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.”
Other states have also taken steps to block the use of CBDCs. Florida and Indiana both recently enacted laws that ban the use of a central bank digital currency (CBDC) as money in the state.
How such legislation will play out in practice against a CBDC, should the federal government attempt to implement one, is unknown.
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 California, 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 situation has played out in response to the REAL ID Act of 2005, already 17 years late on full implementation because a significant number of states have decided not to participate, or in some cases, just provide residents with a choice to opt out. There, 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, and it’s 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 the willingness of the people to participate, or not.
CENTRAL BANK DIGITAL CURRENCIES (CBDC)
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.
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 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.
The PBOC 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 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 US 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.
