Florida’s passage of its law prohibiting the use of central bank digital currencies redefined the definition of money under the Uniform Commercial Code to exclude both US and foreign central bank currencies. Interestingly, the new Florida ban would seem to include Bitcoin, too, since it has been adopted as legal tender by El Salvador and the Central African Republic. Whether the Florida law is even constitutional is a critical question; and whether it is or isn’t, it appears difficult to enforce and less far-reaching than it has been billed to be.
How Florida will police the new law is not clear. The implementation risks center on what it would take to enforce the prohibition. What steps might the state have to take to enforce the potential prohibition on the use of any currency issued by a central bank? How could the State of Florida stop people from using a CBDC to make payments?
Section 1-201, General Definitions of the Uniform Commercial Code, is not particularly helpful. Definition (24) states that “‘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.” Note it does not define bank demand deposits, debt or credit card transactions, or other privately issued assets, like Paypal or Venmo, as “money” that we customarily use to execute transactions. Moreover, an individual or company is not required to accept currency or coin in making a transaction or settling a debt (see: https://www.federalreserve.gov/faqs/currency_12772.htm). Rather, under the UCC, bank deposits are considered to be a debt of the bank to the depositor, who is considered a creditor; and individuals are free to exchange whatever assets they wish as long as the receiving party is agreeable.
When we look into the legal definition of money, there are additional sources of confusion concerning the difference between “legal tender” and “lawful money.” Until 1933, only Treasury notes and gold and silver coins were defined as “legal tender,” but Congress expanded that list in 1933 to include Federal Reserve notes. However, “legal tender” is not necessarily the same as “lawful money.” The Federal Reserve Act states that Federal Reserve notes “shall be obligations of the United States and shall be receivable by all national and member banks and Federal Reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.” But the act does not define the term lawful money. However, the courts have interpreted lawful money to mean legal tender. That interpretation brings us back to the fact that lawful money means Treasury notes and coins and Federal Reserve notes. This narrow definition excludes most of the assets that economists and the Fed consider to be money, like bank deposits, and excludes most of the main technological methods that we employ, like credit and debit cards, bank checks, etc., to enter into everyday transactions.
As was noted in the first commentary on this issue (see https://www.cumber.com/market-commentary/central-bank-digital-currency), there are some practical issues in the ability of individuals and companies to get access to a CBDC and some significant enforcement issues that a state like Florida faces in enforcing its exclusion of CBDC from the Florida UCC. First, it isn’t clear what the true impact of the redefinition of money actually would be and what transactions would potentially be impacted. Presumably, the state would not accept CBDCs in payment of taxes and other payments to the state. But it isn’t clear if the intent is to prohibit citizens from having CBDCs and using them in day-to-day transactions. To enforce a general prohibition on use, the state must know who has CBDC accounts and how they are being used. Are the accounts for both in-state and out-of-state transactions (hence raising interstate commerce issues)? Are the accounts only for investment purposes so that CBDCs might be considered securities, or for actual transactions? Then there is the question of access to information on who has such accounts. While an account must be established with the Federal Reserve, an asset must be transferred to the Fed in exchange for a digital dollar, and the user must have access to an app or similar mechanism to make payments, Nellie Liang, Under Secretary for Domestic Finance at the US Treasury Department, suggests that “As a digital form of a country’s currency, a CBDC would likely have three core features. First, it would be legal tender. Second, it would be convertible one-for-one into other forms of central bank money—reserve balances or cash. Third, it would clear and settle nearly instantly." (See: Nellie Liang, “Remarks by Under Secretary for Domestic Finance Nellie Liang During Workshop on ‘Next Steps to the Future of Money and Payments,’” https://home.treasury.gov/news/press-releases/jy1314.) Given the lack of Fed facilities, she further notes that for a retail CDBC to be accessible to the public, “the Fed has stated that a potential U.S. CBDC, if one were created, would best serve the United States by being ‘intermediated,’ meaning that the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments. In terms of technology, a retail CBDC might involve a different architecture compared to a CBDC that is intended solely for wholesale use.” This would mean that to enforce laws against the potential use by the general public, the state would have to search the accounts originated through commercial banks and related financial institutions. Ironically, an enforcement of the ban will require investigative activities involving many of the same violations of personal privacy that were part of the rationale for establishing the ban in the first place.
From a non-lawyer’s perspective, a review of the actual reach of Florida’s supposed ban on CBDCs suggests that the ban is largely hype. The law does not prevent citizens from having CBDCs. Nor does it prevent their use in day-to-day business transactions. The redefinition of money in Florida’s UCC acts only to strip CBDCs of their status as “legal tender” and affects the status of CBDCs in the collection of certain debt claims when in dispute, and that change is arguably not constitutional. So, at this point it seems that Florida’s ban on CBDCs is more political hype than it is meaningful, enforceable, or apt to withstand scrutiny in the courts.
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