Policymakers at the Federal Reserve have considered the adoption of a digital dollar over the last several years. Noem said in a veto letter to the South Dakota House of Representatives that the legislation “opens the door to the risk that the federal government could more easily adopt a CBDC, which then may become the only viable digital currency.”
“At this moment in time, such a government-backed electronic currency has not yet been created,” Noem told lawmakers. “More importantly, South Dakota should not open the door to a potential future overreach by the federal government.”
The bill would have defined money as a “medium of exchange that is currently authorized or adopted by a domestic or foreign government.” Lawmakers passed the measure 49-17 in the House of Representatives and 24-9 in the Senate, both of which are margins that would allow for the overturn of the veto in the two chambers.
Noem added that cryptocurrencies, which are decentralized digital assets that can be transferred between virtual wallets, would not be considered money under the legislation. She asserted that the bill therefore “needlessly” limited freedoms and placed citizens at a “business disadvantage” by discouraging development within the nascent sector.
Opponents of a potential central bank digital currency assert that such an initiative would render citizens vulnerable to government censorship and surveillance. Unlike Bitcoin, Ethereum, and other cryptocurrencies, digital assets managed by central banks are not decentralized and are tethered to their analog counterparts. Federal Reserve Chair Jerome Powell said two years ago that his “mind is open” to a digital dollar, noting that he was “legitimately undecided” on whether the “benefits outweigh the costs” of central bank digital currencies.
“We would want very broad support in society and in Congress,” he told lawmakers. “It’s a very, very important initiative, and I do think we should ideally get authorization.”
A central bank digital currency would preserve the international role of the dollar while mitigating pitfalls intrinsic to cryptocurrencies such as liquidity risk and credit risk, according to a paper from the Federal Reserve. The central bank recently conducted a simulation with Citi, Mastercard, BNY Mellon, and other companies to determine the “feasibility of payments between financial institutions” using tokenized assets.
Increased skepticism toward cryptocurrencies comes in the aftermath of FTX and other digital asset companies controlled by Sam Bankman-Fried filing for bankruptcy at the end of last year after customers learned that FTX had commingled funds with trading company Alameda Research. Bankman-Fried pleaded not guilty to multiple charges, which include conspiracy to commit wire fraud, conspiracy to commit securities fraud, and conspiracy to commit campaign finance violations.
Recent tumult in the cryptocurrency sector and the widely publicized criminal proceedings against Bankman-Fried have quickly eroded consumers’ trust in the novel assets: a survey conducted by CNBC and Momentive found that 60% of Americans see the risk of cryptocurrency investments as “high,” while only 10% say the assets carry little or no risk.