Wyomingbucks: A Test Case

by Jacob Metzger, Blog Editor, University of Cincinnati Law Review Vol. 92

I. Introduction¹

The United States is struggling to clearly regulate and enforce blockchain regulations.² Many states have developed different regulatory approaches to this new technology.³ New York instituted impactful regulation on cryptocurrencies to protect the environment at the expense of economic growth.⁴ In contrast, Wyoming utilizes regulation to enable economic growth.⁵ In Wyoming, a series of laws have also been passed to permit the government to issue a cryptocurrency that can be redeemed for US dollars.⁶ These dollar-backed cryptocurrencies are also known as stablecoins.⁷ Some could determine that this specific law could cut against a constitutional clause utilized to unite our country after the revolutionary war. However, while the long-term legality of state-issued stablecoin remains uncertain, they are unlikely to offend the constitution.⁸

Part II of this article details the recent history and the novel regulation regarding cryptocurrencies and stablecoins. Further, Part II also discusses the provision of the constitution and raises the question that government-issued stablecoins could offend Article 1, Section 10 of the Constitution which prohibits states from coining money. Part III argues that a stablecoin issued by Wyoming has long-standing constitutional roots, since it is tied to the value of American fiat currency and follows the cadence of other government backed financial instruments.

II. Background

Cryptocurrency is a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.⁹ In the last fifteen years, the use of cryptocurrencies has exploded.¹⁰ The benefits to cryptocurrencies are vast. Cryptocurrencies support the near-instantaneous transfer of large amounts of money across political borders at a very low cost.¹¹ Further, some cryptocurrencies have elements that can make the parties to a transaction anonymous to one another.¹² However, cryptocurrencies carry significant financial risk.¹³ The largest cryptocurrency by market share, Bitcoin, exemplifies the riskiness of cryptocurrencies.¹⁴ From a consumer standpoint, Bitcoin is largely regarded as unstable due to the extreme price fluctuations.¹⁵ Recently, the price of bitcoin exceeded $60,000 and then dwindled to half of that price point.¹⁶ It is common for Bitcoin prices to fluctuate thousands of dollars a month.¹⁷

Seeing bitcoin’s price volatility, some institutions recognized the need for stablecoins as a more stable financial instrument.¹⁸ There are four major types of stable coins: (1) fiat-backed stablecoins, (2) commodity-backed stablecoins, (3) crypto-backed stablecoins, and (4) algorithmic stablecoins.¹⁹ Fiat-backed stablecoins are backed up by a fiat currency, like the US Dollar.²⁰ Two examples of fiat-backed stablecoins include Tether (USDT) and USD Coin (USDC).²¹ One stablecoin can maintain its value of one dollar because it can be redeemed by the issuing institution for the equivalent US currency.²²

Commodity-backed stablecoins are cryptocurrencies that are backed by commodities like gold, real estate, or metals.²³ Examples of this stablecoin include Paxos Gold or Tether Gold.²⁴ The stability in this coin comes from a facilitating party holding a commodity as collateral.²⁵ Crypto-backed stablecoins are backed by cryptocurrencies.²⁶ In issuing a crypto-backed stablecoin, the institution maintains collateral in a certain amount of cryptocurrency.²⁷

Unlike other stablecoins, algorithmic stablecoins do not use collateral to achieve price stability.²⁸ Algorithmic stablecoins maintain price stability by controlling the amount of the coin in circulation.²⁹ If the market price exceeds the target price of the stablecoin, an algorithm will issue more coins to increase the supply in the market and reduce the price.³⁰ If the market price is below the target price of the stablecoin, an algorithm will restrict the supply of coins in circulation.³¹ These supply and demand principles are the reason that governments cannot print more money to pay off debts and maintain the currency’s value, doing so would destroy the value of the currency.³²

Some investors perceive algorithmic stablecoins as more risky than other types of stablecoins, due to the lack of collateral associated with them. Essentially algorithmic stablecoins are self-stabilizing cryptocurrencies; thus, the value is based on belief of the currency.³³ Due to the risk, some legislators are attempting to enact reforms to prohibit them.³⁴

Recently, the Wyoming government enacted a law that permits the issuance of a government issued stablecoin.³⁵ The stablecoin would be a digital representation of a single U.S. dollar; thus, it would be a fiat-backed stablecoin.³⁶ The governor, who has the power to issue the coin, has been extremely cautious to issue the coin.³⁷ The governor’s hesitance is due to the complex legal, constitutional, and regulatory schema that exists around monetary policy in the United States.³⁸

In particular, the governor is likely afraid of violating Article 1 Section 10 of the Constitution which expressly prohibits states from issuing their own currencies.³⁹ Specifically, the constitution states “No State shall … coin Money.”⁴⁰ The inclusion of this explicit provision indicates the framers of the constitution intended for a single national monetary system.⁴¹ This is likely due to the inefficiency that would arise if the states were permitted to coin their own money. Other countries mint their own currency and those often fluctuate, meaning that a state’s economy could be weaker and would require specialized government assistance in remedying a recession or inflation concerns.⁴² In addition, similar to attempting to make a purchase in Canada with the United States Dollar, a person making a purchase in Indiana with an Ohio currency would have to convert their Indiana cash to make a purchase.⁴³ Thus, Article I, Section 10 of the Constitution prohibits governments from creating currencies, thus creating legal ambiguity as to state issued stablecoins.⁴⁴

III. Discussion

It is likely that Wyoming’s stablecoin would be constitutional pursuant to Article 1 Section 10 of the Constitution; however, if the stablecoin were commodity-backed, crypto-backed, or algorithmic, it would be unconstitutional. It is important to note that while Article 1 Section 10 is quite simple in the verbiage positioning the federal government as the coiner of money, it is silent as to the definition of money.⁴⁵ Thus, what is “money” is a complicated legal question and analogous cases to similar types of government actions will guide whether Wyoming’s Government-Issued Stablecoins are in-fact coined money; thus, unconstitutional.

Wyoming’s Government-Issued Stablecoin

Wyoming’s Government-Issued Stablecoin would likely be deemed constitutional pursuant to Article 1 Section 10 of the Constitution because it falls in line with other types of monetary structures that local and state governments have been making for years.⁴⁶ For instance, municipal bonds are low risk investments issued by state and local governments to fund projects like public construction.⁴⁷ In essence, for a municipal bond, a consumer provides American fiat currency to a state or local government, and this American fiat currency is for an assurance that the state or local government will provide later output.⁴⁸ This type of bond was first recorded in 1812, when New York City issued them to build a canal.⁴⁹ This type of investment is similar to a stablecoin. A consumer provides fiat currency to a state or local government for a stablecoin, which is an assurance that the local or state government will provide an output later, even if there is no substantial payout with a stablecoin.⁵⁰ Further, government-issued fiat backed stablecoins are based on and are immediately redeemable for United States currency; thus, making them a representation of United States currency, not a competitor with it.⁵¹ In addition, there have been instances of state-issued notes established in the 19^th century that were redeemable for U.S. currency, those, constitutionally, fall in line with the government issued stablecoins.⁵²

Practically, absent the federal government opining and acting against Wyoming’s stablecoin, it is unlikely that a successful constitutional challenge can be brought to a court by a private party.⁵³ For a constitutional challenge to be brought, standing is required.⁵⁴ Standing is a constitutional requirement for a plaintiff to sue.⁵⁵ Without standing, a lawsuit cannot proceed.⁵⁶ Three main requirements exist for standing; however, the relevant requirement for the constitutionality of government-issued stablecoins is the requirement for an injury-in fact.⁵⁷ To establish injury in fact, a plaintiff must show they suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent, not conjectural or hypothetical.⁵⁸ With government-issued stablecoins, it is difficult to imagine any private party has a legally protected interest that is not hypothetical, especially because users of the stablecoin can redeem their coins at any time.⁵⁹ Therefore, getting into the courtroom to raise a challenge against Wyoming’s law would be limited to parties, like the federal government, who might be harmed.

While unlikely that a current court would recognize Wyoming’s government-issued stablecoin as unconstitutional, it is possible that the federal government could enact laws to change the legal landscape and classify fiat backed stablecoins issued by the government as “coined money.” Considering the assortment of legislation that has not become law since FTX, these laws are unlikely to come to fruition and Wyoming will be able to issue the stablecoin.⁶⁰

IV. Conclusion

Wyoming’s government-issued stablecoins provide a novel opportunity for Wyoming to position itself as a pioneer of cryptocurrency. The initiative will likely survive constitutional scrutiny because it is unlikely the government-issued stablecoins are “coined money”; however, if the federal government issues a law classifying stablecoins as “coined money” then that will triumph and Wyoming will be barred from issuing the cryptocurrency.

Jacob T. Metzger

Jacob Metzger is a 3L at the University of Cincinnati College of Law. Jacob received his bachelor's degree in Paralegal Studies at the University of Toledo with a focus in business and communications. Jacob is the editor-in-chief of the University of Cincinnati College of Law Intellectual Property and Computer Law Journal. He joined Law Review to write about consumer protection, intellectual property, advertising law, technology law, and topical topics.

References

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I am extremely grateful for the help and assistance of Doctor Michael Jones and Professor Susan Stephan for giving all students the opportunity to learn about blockchain technology. I am fortunate to have had the opportunity to learn from two such distinguished scholars who not only impart knowledge but also nurture intellectual curiosity.
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II. Background

III. Discussion

Wyoming’s Government-Issued Stablecoin

IV. Conclusion

Author

References

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