The Definition of Money
The Ties Between Contracts, Legal Tenders, and Cryptocurrency
A lot can happen in 15 years. Over the past decade-and-a-half, there have been signs that the public’s understanding of “money” has perhaps begun to shift. Cryptocurrencies rapidly have gained popularity not only as a (volatile) investment tool but also as a legitimate means of exchange. The first real-world cryptocurrency transaction occurred on May 22, 2010, when Florida resident, Laszllo Hanyecz, used Bitcoin to purchase two Papa John’s pizzas. Just four years later, Overstock.com announced that it would become the first major online retailer to accept cryptocurrency as a form of payment worldwide. By 2022, a Visa survey found that nearly a fifth of U.S. small businesses were saying that they already did or expected they soon would accept cryptocurrencies as a form of payment. Two countries, El Salvador and the Central African Republic, have gone so far as to formally recognize Bitcoin as a form of legal tender.
As it turns out, these developments also had ramifications close to home. South Dakota’s Uniform Commercial Code, which governs commercial transactions in the state, defines “money” as “a medium of exchange currently authorized or adopted by a domestic or foreign government.” Earlier this year, the state legislature passed a bill that would have modified the Code’s definition of “money” to effectively exclude cryptocurrencies. The proposed change would not have prevented a willing partner from accepting cryptocurrency as payment in a transaction. But the proposed change, together with other amendments, would have updated the framework for using cryptocurrencies as collateral in lending or in other commercial transactions, differentiating these digital assets from cash or traditional foreign currencies.
In March, Governor Noem vetoed the bill. She cited, among other reasons, principles of economic freedom and her concern that excluding cryptocurrencies from the Code’s definition of “money” would leave South Dakotan businesses at a competitive disadvantage. By contrast, neighbor North Dakota recently approved an identical change to its version of the Code.
These developments might lead contracting parties to wonder: If a contract provides for payment of a defined sum of money, can one party to the contract force the other to accept payment in the form of cryptocurrency, rather than dollars?
The short answer is no—at least for the foreseeable future. Contracts between private parties are subject to the government’s constitutional powers to designate and regulate currency. That means that, unless the contract says otherwise, an agreement to pay a sum of money can be fulfilled in the form of any currency that is the “legal tender” of the place where the payment is made but not in alternative currencies. The term “legal tender” refers to the type of currency that the government requires a creditor to accept as sufficient to satisfy a debt or meet an existing financial obligation. By statute, dollars are legal tender in the United States. But cryptocurrencies are not.
Right now, there is no indication that the U.S. government plans to follow the lead of El Salvador and the Central African Republic in declaring Bitcoin (or some other cryptocurrency) legal tender. No bill to that effect has been introduced in Congress, with congressmen and women instead expressing skepticism or outright concern about the moves in these countries. And the Internal Revenue Service, for example, continues to treat cryptocurrency as property, rather than a currency, for federal tax purposes. True, in some states, state representatives have introduced bills that would purport to take a different approach.
In Arizona, for example, Senator Wendy Rogers has introduced a bill that would make Bitcoin legal tender in that state. But, even if these state bills stood a realistic shot at passage, their provisions would raise serious constitutional concerns: While the federal government has broad authority to designate what constitutes legal tender, the Constitution sets firm limits on states doing the same. In short, barring a dramatic shift in the attitudes in Congress, there is no imminent threat that any government entity would force businesses into accepting alternatives to traditional fiat currency.
Even so, parties entering long-term contracts should be mindful of the rapid change observed in the past 15 years. In that time, decentralized cryptocurrency has progressed from a half-baked idea to a legitimate means of exchange. It is not uncommon for the term of a commercial lease to last at least that long. With that much in mind, a person set to enter into a long-term contract or lease may be wise to include language regarding the forms of payment the party finds acceptable. A person who is reluctant to accept cryptocurrency as payment might consider including a clause specifying the currency in which payments should be made. Meanwhile, those happy to accept nontraditional forms of currency should include clauses specifying as much. The same goes for people willing to accept some, more established forms of cryptocurrency but not others.
If you have questions about the ties between contracts, legal tender, and cryptocurrency, members of Woods Fuller’s Business and Corporate Transactions group are eager to offer their assistance.
