Are state digital currencies even possible?

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In July, the American state of Wyoming shared an open job position for the head of its Stable Token Commission. 

The executive will work alongside Wyoming’s governor, state auditor, state treasurer and four expert appointees to bring the state’s very own stablecoin to life.

While Wyoming was the first to pass a law on a state stablecoin, it isn’t the only state considering launching its own digital currency.

In April, a similar initiative was proposed in Texas, where lawmakers introduced bills for creating a state-based digital currency backed by gold.

However, the idea of state stablecoins raises many questions: How would they affect the monetary stability of fiat money and the power of the Federal Reserve? Could they be compatible with a central bank digital currency? Do people really want to return to a system with state banks printing their own monetary notes?

The Wyoming experiment

The Wyoming Stable Token Act was originally introduced in February 2022, in the midst of the crypto market crisis. The bill defines the Wyoming stable token as a virtual currency representative of and redeemable for one U.S. dollar held in trust by the state of Wyoming. Basically, the state would tokenize the federal currency on a 1:1 ratio with deposits. 

Explaining why state lawmakers took such an interest in the digital token project, Chris Rothfuss, the minority leader in the Wyoming State Senate, told Cointelegraph:

“Wyoming needs to be able to transact in a digital currency — to accept payments, to make payments, and to do so without risk. The Wyoming stable token is the solution to that challenge.”

A notable reservation in Section 2 of the Stable Token Act makes the state’s attorney general responsible for monitoring the startup phase of the token’s issuance. Should the attorney general believe it contradicts federal or state law, the project would be frozen. 

The bill also sets a deadline for the project: The commission’s director shall provide their report on the doability of the stable token no later than Nov. 1, 2023.

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Other than that, the document doesn’t specify much; instead, it establishes the Stable Token Commission with the authority to craft further details.

The legislation’s path wasn’t easy. In March 2022, Governor Mark Gordon vetoed the bill, saying he was “unconvinced” that the state’s Treasury was ready to implement the project safely.

Gordon criticized the lack of information and the cost of accounting services, blockchain development and other necessary expenses, and he was skeptical of the project’s purported benefits.

A year later, the governor applauded the effort made by legislators to enhance the document, but voiced new reservations:

“First and foremost, there was no overall plan (a ‘business plan’ for lack of a better term) or, if a plan exists, it did not appear to have been used to guide the legislators in crafting the legislation.” 

On March 22, 2023, the Stable Token Act was passed into law without Governor Gordon’s signature. Gordon recognized the state stable token’s potential to “nurture Wyoming’s reputation as a leader in the digital asset world” and deemed the improvements made by the bill’s authors enough to allow it to become law.

The era of multiple stablecoins?

Neither the U.S. Federal Reserve nor any crypto-focused legislators have reacted publicly to the Wyoming project, but it is hard to imagine any kind of affirmative response, given that the American dollar was established precisely to provide a countrywide monetary standard and bring the currency under the purview of the federal government.

So, in principle, any state token project could contradict the logic of central bank currency to a similar degree as private cryptocurrencies.

At the same time, the potential value of Wyoming’s stable token is rigorously tied to the same old American dollar, which makes it less of a separate currency and more of a state-issued financial asset, similar to the state-issued notes for specie of the 19th century.

A $40 note issued by the State Bank of Georgia in 1855. Source: Southern Style Currency

Rothfuss clarified, “We are not issuing a new currency. The Wyoming stable token is a digital representation of a U.S. dollar held in trust by the state of Wyoming on behalf of the tokenholder. We are not competing with the Federal Reserve — we are enabling a technology.”

Some observers still see a potential conflict between the states and the Fed. “Certainly, there will be a tussle between states and the federal government over the former attempting to issue their own stablecoins,” Brent Xu, CEO of Web3 bond-market platform Umee, told Cointelegraph.

But there could be a compromise in which the Federal Reserve allows states to issue stablecoins under a particular framework, he believes, noting the discussions concerning a national framework for stablecoins.

Zachary Townsend, CEO of Bitcoin-based life insurance provider Meanwhile, doesn’t see any potential problems with state stablecoins, as he believes that the very concept of a stablecoin is open to almost any entity, political or corporate, as the recent example with PayPal’s initiative has shown.

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He told Cointelegraph, “There are going to be tons of private stablecoins. If I just looked at my life and all the companies I have ‘accounts’ or ‘wallets’ or ‘balances’ with, those are going to transform to become stablecoins within a few years.”

This is something Peter Herzog, state policy lead at the Crypto Council for Innovation, can agree with. “There are a variety of models for stablecoins that involve different decisions around underlying collateral, governance and more,” he explained to Cointelegraph. For Herzog, it comes as no surprise that individual states with an active interest in crypto are continuing their experiments with new initiatives:

“Until we see a federal regulatory framework, it is likely that states continue to step in to create rules of the road to promote innovation and protect consumers.”