SDBA Op-Ed: ‘We Stand on the Facts: HB 1193’

The 98^th legislative session is nearly in the books, as only “veto day” remains, Monday, March 27. At the end of session, to our surprise, Governor Noem vetoed HB 1193, “An Act to Amend Provisions of the Uniform Commercial Code (UCC)”. A few persons have cast a cloud of falsehoods claiming this measure does not advance and include certain digital assets and instead sets the stage for a central bank digital currency (CBDC). That simply isn’t true.

The 2022 UCC Amendments were drafted for adoption nationwide, over a three-year period with significant input from cryptocurrency advocates. They provide the commercial law reforms that owners of cryptocurrency have desired, allowing them to do more with these assets to unlock value and create wealth. With these updates, the law gives transactions in digital assets legal certainty. This will allow the cryptocurrency industry an opportunity to thrive in South Dakota and across the United States.

Under current UCC, “money” is synonymous with cash. But cryptocurrency is categorized currently for UCC purposes as a “general intangible.” This causes two problems:

• Unlike money, cryptocurrency is not “negotiable,” which means a person who accepts cryptocurrency as payment or for security cannot be certain that the crypto is free from outside claims. If it is later determined that the crypto was stolen, the recipient is at legal risk.
• Secondly, the only way for a lender to perfect a security interest in a “general intangible” as collateral is to file a public financing statement under the name of the borrower. Many crypto owners do not want to be publicly identified in that way.

I seek to directly address the two points identified in the Governor’s veto message by responding with facts. Her veto letter states: “HB 1193 adopts a definition of ‘money’ to specifically exclude cryptocurrencies like Bitcoin, as well as other digital assets.” This is categorically FALSE. 

The long-established law for determining who has the legal right to money rely heavily on the concept of possession, and on the rules governing deposits at banks. New UCC Article 12, and new amendments to Article 9, seek to solve both problems for crypto by creating a new category called a “controllable electronic record” (CER). Categorizing crypto as “money” would address the first issue but also create new problems, because crypto can’t be possessed. Hence the new category of CER.

Second veto point: “By defining ‘money’ in this proposed way, HB 1193 opens the door to the risk that the federal government could more easily adopt a Central Bank Digital Currency (CBDC), which then may become the only viable digital currency. At this moment in time, such a government-backed electronic currency has not been created. It would be imprudent to create regulations government something that does not yet exist. More importantly, South Dakota should not open the door to potential future overreach by the federal government.” Again, FALSE.

While it is true that the U.S. has not created a Central Bank Digital Currency (CBDC), other nations have, presenting a different set of issues if we continue without updated definitions. As fiat currencies, CBDCs are designed to integrate with the existing banking system in the country that issued them. The UCC amendments treat CDBCs as a subcategory of money— “electronic money”—and subject them to many of the same rules applicable to traditional bank accounts.  Defining Central Bank Digital Currencies as “money” in the UCC does not favor them over non-fiat currencies such as Bitcoin. Simply put, as a government creation, CBDC is subject to a similar but different set of rules that reflect the existing financial system, while the rules for CER’s reflect the current practices of the decentralized finance (DEFI) system that has developed around Bitcoin and other cryptocurrencies. In all these cases, the 2022 Amendments allow for holders to use their value in commerce as they should be able to do.

The UCC is uniform state law and takes no position as to whether any country should adopt a CBDC. If it did, we would not have brought the bill and would be opposing it if someone else had. Nor does the UCC create CBDC. Under the US Constitution, only Congress can do so. The Commonwealth of the Bahamas and the Republic of the Marshall Islands have created digital currencies, and other countries are considering them. The UCC takes the world as it is and provides commercial law in which people can continue to have confidence. The UCC provides the necessary legal infrastructure for all business transactions for those conducting business in South Dakota or across state lines.

HB 1193 has been supported on record by many pro-business organizations in South Dakota, including the South Dakota Bankers Association, the Independent Community Bankers of South Dakota, South Dakota Blockchain Institute, South Dakota Retailers, South Dakota Chamber of Commerce and the South Dakota Trust Association, to name a few. The 2022 UCC amendments, taken as a whole, will significantly improve the legal landscape for cryptocurrency and provide greater freedom for individuals and businesses in South Dakota to use cryptocurrency in their transactions.  The Legislature should override the Governor’s veto.

—Respectfully submitted by Karl Adam, president, South Dakota Bankers Association