While the Federal Reserve and the Congress dither in respect of cryptocurrencies, a rash of experimentation is under way in what Justice Louis Brandeis of the Supreme Court once called the “laboratories of democracy” — namely the states and cities of America.

From Miami to New York, from Connecticut to Colorado, the coming years could well see a headlong rush by American states to embrace the possibilities of new forms of money for the oldest functions of government — taxing and spending. 

Even as America leans into cryptocurrency as never before, it has become an increasingly central consideration in foreign policy as well. Full-scale economic sanctions that have ensued related to President Putin’s attack on Ukraine, the Sun has already reported, might force Russia toward increased reliance on the blockchain.  

The country’s largest cryptocurrency conference, ETHDenver, concluded on a rousing note when Governor Polis of Colorado announced the Centennial State as being “crypto-forward.” In a subsequent Facebook post, Mr. Polis wrote that his state aimed to be “a center of crypto and blockchain innovation” and to that end would be the very first to “accept cryptocurrency for taxes and fees.”  

Mr. Polis’s enthusiasm is mirrored by a burgeoning chorus of state officials who have decided to hitch their burse to money’s next evolution. 

Wyoming is entertaining legislation to accept cryptocurrency for land and use taxes, and proudly does not tax cryptocurrency at all. Most daringly, a proposal in Arizona would go so far as to make Bitcoin “legal tender” for all transactions in that state.          

Even as advocates hail a fresh era of efficiency and liberty, the attraction to blockchain-based products raises profound questions of federalism, the vision of the Founders, and the nature of money. From Boulder to the Berkshires, the future of money has arrived. 

The Constitution’s far-sighted drafters might not have predicted such exotic financial products as Dogecoin and Non-Fungible Tokens, but they did worry that states would be tempted to innovate away from a central financial system. Article 1, Section 10 prohibits states from coining money and making “any Thing but gold and silver Coin a Tender in Payment of Debts.”

Additionally, Section 8 of Article 1 assigns solely to the federal government the power to  “coin Money” and “regulate the Value thereof.” The Supreme Court eventually expanded this exclusive power  to encompass generating print money as well. In a somewhat eccentric loophole, private entities like banks evaded this ban and can issue their own currency, even as states cannot do so.

A law professor, Seth Oranburg, tells the Sun that while this allows individuals to “mint” cryptocurrency, states would be prohibited from doing so. This harkens back to the 19th century practice of wildcat banks issuing their own bills of credit. 

Less certain would be the status of hybrid innovations like MiamiCoin, which aims to fund “new public spaces, improvements to infrastructure, hosting city events, recruiting startups, and more” by empowering citizens to mine crypto. In this scenario, the state does not “issue” the currency, even as it facilitates its circulation and use.      

Separately, a determination would have to be made whether the process used to generate cryptocurrency is in fact analogous to “coining.” Analogies between the analog and digital would be ones that courts will eventually be forced to draw.           

While at first blush these prohibitions read as comprehensive, in reality states have exercised broad discretion in their financial arrangements. They can’t make their own currency, but they can accept payment in whatever form they please — Maryland offers a $5 tax credit for every recycled bushel of oyster shells. 

This authority was codified in an 1868 Supreme Court decision, Lane County v. Oregon, which held that the states possess a primordial mandate to tax as they see fit. When it comes to their own citizens, “their power of taxation remained and remains entire.”

The ability of the states to tax as they see fit is “original in the states and never as yet surrendered,” which means that if a state decides that it wants to collect taxes only in gold and silver, “it is not easy to see upon what principle the national legislature can interfere with the exercise, to that end, of this power.”

If you haven’t paid in bullion lately, it is because of an 1871 Supreme Court decision written in the wake of a war that had divided the country and currency. 

In Knox v. Lee, a 5-4 court ruled that federally issued American greenbacks, disbursed when payments in gold and silver were suspended during the Civil War, were valid as legal tender. U.S. dollars thus join gold and silver as currency deemed legal tender by the American government.

Even if these forms of currency receive special imprimatur, the architecture of American federalism allows a wide berth for states to tango with crypto. While Colorado’s taxation scheme would actually convert back into dollars payment in cryptocurrency, an attorney and scholar, Edwin Vieira, tells the Sun that precaution wouldn’t be necessary — it can be crypto all the way down. 

The Arizona law is different not only in degree but in kind, another law professor, Eric Alston, tells the Sun. By amending the state constitution to list bitcoin as legal tender, which means it must be accepted for any transaction as the equivalent of greenbacks or gold, the Grand Canyon State sails straight into the teeth of the Constitution’s prohibition on states innovating currency. 

As the Framers wrote: “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts.”

State Senator Mary Rogers, who is spearheading the effort to make Bitcoin legal tender, tells the Sun that she sees it as “freedom money”  and “truly YOUR money” that can “never be seized by anyone.”   

Another trend gaining steam on both the state and more local levels is the issuing of crypto tokens that can be used in government transactions. Colorado issued its version in 2019, and both Miami and New York City have followed suit.  

Mr. Alston explains that this is largely a case of new wine in old barrels, comparing them to the age-old practice of states and localities raising funds via bonds and other financial instruments. There is likewise a venerable if obscure legacy of local governments issuing scrip, or a kind of local currency that can only be used in specific ways.. 

The Berkshires region utilizes Berkshares, “a local currency that can be exchanged at participating businesses in the region to keep money in local circulation.” 

Part of the urgency states are feeling toward building “crypto-infrastructure” is the looming shadow of federal regulation. Mr. Oranburg tells the Sun that “there will be a crash” of cryptocurrency, and that when “grandma loses her savings,” regulation will follow not long after.

Recent weeks have seen increased jitters over the stability of cryptocurrency, and the war in Ukraine has further dented their value. It remains to be seen whether cryptocurrency heralds a new era in state finance, or if in fact statehouses are skating on increasingly thin constitutional and fiscal ice.