ARTICLE
The Orkney Slew and Central Bank Digital Currencies
by Gary B. Gorton and Jeffery Y. Zhang
This Article on central bank digital currencies is motivated by a parable, The Orkney Slew, which is set in an archipelago. Based on the parable, we point out a significant economic market failure that exists in the cross-border payments realm. The analysis then focuses on real-world examples and the national security concerns, including for Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) and the continued efficacy of U.S. sanctions, associated with the rapidly evolving digital payments landscape.
Many central banks around the world are now cooperatively experimenting with cross-border interoperability of digital currencies. These efforts are driven by the idea of building a global network—an infrastructure—to improve global supply chains and large value cross-border payments, as well as to mitigate national security concerns. While we do not believe that such an infrastructure is necessary at this moment, we do argue that cross-border experimentation is necessary.
SPEECHES
It’s Not Just the Economics: Why U.S. Leadership on CBDCs Is a National Security Imperative
by Daleep Singh
Remarks delivered at the Harvard National Security Journal’s Symposium on Digital Currencies and National Security on October 14, 2022.
The U.S. Dollar and Central Bank Digital Currencies
by Christopher J. Waller
Remarks delivered at the Harvard National Security Journal’s Symposium on Digital Currencies and National Security on October 14, 2022.
COMMENTARY
by Howell Jackson, Antionette Schoar, and Timothy Massad
ARTICLES
An Apparent Trilemma for Cross-Border Central Bank Digital Currencies
by Giulia Fanti
Today, most central banks worldwide are exploring some form of central-bank digital currency (CBDC), a digital form of central bank money accessible to the public. There has been particular interest in cross-border CBDCs (also commonly called multi-CBDCs), which can be used to transfer assets from a CBDC ledger in one jurisdiction (typically one country) to another.
Important open questions surround how to design multi-CBDCs. For example, how should the system be architected? How should data flow? How should transactions be processed and settled? How should the system be governed?
In general, these questions remain open. Part of the challenge is that multi-CBDCs must satisfy many desired properties, which can sometimes interfere with one another. In this Article, I discuss the tensions between three desired properties for cross-border CBDCs: security, privacy, and performance. I present a trilemma, which states that existing designs for multiCBDCs do not achieve all three desired properties. I then illustrate how existing common designs for multi-CBDCs fail to achieve all three properties. However, I also argue that the limitations of current implementations are not fundamental. I believe that with proper cooperation and collaboration between stakeholders, these technical challenges can and will be circumvented, enabling secure, private, and performant cross-border CBDC transactions.
In the remainder of the Article, I will assume that a cross-border CBDC would be built upon distributed ledger technology (DLT). A paper published by the Bank of International Settlements defines DLT as “the protocols and supporting infrastructure that allow computers in different locations to propose and validate transactions and update records in a synchronised way across a network.” DLT is a natural design choice for multi-CBDCs, in which there is no central trusted party. Indeed, DLT has been the technology of choice in many early pilot multi-CBDC programs, allowing independent domestic CBDC ledgers to be interlinked without requiring all CBDCs to interface on the same platform.
To my knowledge, every multi-CBDC pilot study to date has adopted an enterprise DLT solution. These enterprise DLT solutions are commercial software products that allow one or more organizations to maintain a DLT amongst themselves. For example, R3 has built a DLT platform called Corda, which has been used in several CBDC pilot studies.5 While these enterprise solutions are practical in many respects, they do not currently cover the full space of technical designs or properties one might envision in a multi-CBDC. Throughout the remainder of this Article, I will present concrete examples of how pilot projects have used enterprise DLT offerings, and how these products’ design choices and constraints affect the resulting multi-CBDC’s system properties.
Cryptocurrencies and National Security: The Case of Money Laundering and Terrorism Financing
by Shlomit Wagman
Cryptocurrencies can be a haven for criminals, terrorists, and sanction evaders. The early, romantic ideology underlying blockchain technology envisioned a decentralized currency without geographical boundaries, governmental supervision, central bank control, or any identification required. Cryptocurrency was meant to be a fast, cheap, and reliable way of transferring value among strangers.
In 2014, the Financial Action Task Force (FATF), an international organization dedicated to combating money laundering and the financing of terrorism, identified the risks associated with cryptocurrency. By 2018, it developed an overall strategy to manage these risks and countermeasures designed by the FATF were enacted into binding global standards that all jurisdictions must adopt. Since then, the FATF has been leading coordinated implementation efforts around the world. The FATF’s response was the first global, coordinated regulatory response to cryptocurrency risks. Dozens of countries have already adopted the FATF’s cryptocurrency-related measures. It is imperative that the remaining countries follow suit, and that the FATF holds them accountable if they fail to do so.
This Article reviews the anti-money laundering and counter-financing of terrorism (AML/CFT) framework and its application to cryptocurrencies. Then, it presents case studies demonstrating the important contributions that the AML/CFT toolkit has made to countries’ security. The case studies include the seizing of cryptocurrency used by terrorists for fundraising, revealing the identity of attackers in a ransomware cyberattack, and arresting terrorists who were paid through cryptocurrency and tracked before completing their planned attack. The Article concludes with recommendations for further actions that the global community, individual countries, and the private sector should take to better tackle AML/CFT risks, including unaddressed cryptocurrency-related challenges posed by decentralized systems.
Symbiotic Security and Free Speech
by Michael J. Glennon
The marketplace of ideas exists today within a public square occupied mainly by social media platforms. Sheltered by the state action doctrine, which prohibits speech abridgment only by the government, and the government speech doctrine, which insulates the government’s speech from constitutional constraints, the platforms and the government’s security apparatus have joined together symbiotically to employ new tools of soft censorship, suppressing the free exchange of unwanted information and opinions on a variety of topics. These include vital issues of public health and electoral politics. Shielding the marketplace of ideas from this cartel requires retracting the reach of those doctrines to protect more fully the speech freedom of all participants within it, not merely the platforms’ and government’s speech that now floods the marketplace. The free speech interests of social media users cannot count for naught, nor can the general public’s free speech interest in hearing the speech of others. The machinery of democracy depends upon keeping open these crucial channels of political communication; when those channels are blocked, it is the duty of the courts to re-open them, a task the courts can undertake by invigorating principles already present within existing case law.