Phasing Out Cryptocurrencies in Favor of CBDCs to Tackle Financial Crimes?
Critics of the cryptocurrency industry have noticed cryptocurrency’s use in financial crimes.[1] Critics have long argued that cryptocurrencies like Bitcoin are nothing but a “libertarian fantasy”[2] that is unstable,[3] essentially valueless,[4] and environmentally hazardous.[5] They believe that it is the government’s duty to “guarantee safe, usable, and stable money”[6] and instead advocate central bank digital currencies (“CBDC”) as a solution that fulfills this principle. The Bank of International Settlements (“BIS”) agrees with their contention[7] and further contends that with adequate international cooperation, mutual recognition, and some degree of harmonization, CBDCs of different nations could effectively improve cross-border payments and limit the risks of currency substitution.[8]
It is worthy to note that CBDC is not merely a complete theoretical construct but an increasingly materializing reality in many parts of the globe. China has taken an early lead in this field; as of October 2021, over 140 million people have reportedly spent more than $9.5 billion using e-CNY—the Chinese CBDC.[9] The People’s Bank of China is arguably ahead of the game that could potentially disrupt the current international monetary system predicated on the U.S. dollar.[10] As a response to this, the European Central Bank,[11] the Bank of England,[12] and the Bank of Japan[13] have likewise embarked on the process of developing their own CBDCs. The U.S. Federal Reserve is also expected to review possible digital dollar issuance soon.[14] But still, almost all CBDC projects are “moving at a sluggish pace” and are a long way from becoming a reality except for China.[15]
But it is unclear whether illegalizing cryptocurrency to facilitate an environment for CBDC adoption is going to work. The Chinese cryptocurrency ban has shown that the industry is remarkably resilient, and Cryptocurrency miners and traders will simply move elsewhere or go underground. Chinese market players of all types—from small cryptocurrency peer-to-peer lending startups to giant e-commerce companies and digital financial firms like Alibaba, Yillion Group, and Hande Group—had already relocated their crypto-based operations overseas months before Beijing’s strongest crackdown in late 2021.[16] The global Bitcoin mining activity, measured in computing power used for mining, also fully recovered from its abrupt crackdown-induced drop in only a few months as Chinese mining operations moved to hubs like the United States or new domestic underground mining sites located on small farms across the country.[17]
Whether CBDC adoption itself could adequately address the current money laundering problem is also unclear. CBDCs’ higher traceability and other technical aspects may certainly help governments combat some financial crimes compared to physical cash, but they are still likely to “nevertheless be tempting target for bad actors, both state and non-state, who will adapt their methods accordingly.”[18] Some predict that CBDCs may “enable more intricate money laundering schemes,”[19] by adding unique technical features such as wallet programmability and microtransactions to fiat money. This concern has already been partially vindicated by at least two CBDC-based money laundering schemes that were uncovered during its e-CNY pilot phase.[20]
Governments have many things to sort out before they can adopt CBDCs on a wide scale adding more to this lack of clarity about CBDC’s anti-money laundering efficacy. Even the CBDC advocates accept that there are too many uncertainties and controversies associated with CBDC, including CBDC’s ambiguous relationship with existing fiat currency, impact on private banks, and the question of privacy and surveillance.[21] All these issues are “way above the paygrade of every central banker”[22] and will most likely slow down the already sluggish progress with CBDC adoption outside of China.
Spencer Park is a staff member of Fordham International Law Journal Volume XLV.
This is a student blog post and in no way represents the views of the Fordham International Law Journal.
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[1] See Martin Wolf, The Time to Embrace Central Bank Digital Currencies is Now, Fin. Times (July 20, 2021), https://www.ft.com/content/7a93fb0a-ae95-44fc-a3d2-1398ef0ce1af; see also Robert A. Manning, Bye-bye, Bitcoin: It’s Time to Ban Cryptocurrencies, Hill (July 25, 2021), https://thehill.com/opinion/cybersecurity/564696-bye-bye-bitcoin-time-to-ban-crypto-currencies?rl=1.
[2] See Wolf, supra note 1.
[3] See Manning, supra note 1 (“[T]he risks and chaos of a wild world of unstable private money is a libertarian fantasy. According to a recent Federal Reserve paper, there are already some 8,000 cryptocurrencies. It’s a new mom-and-pop cottage industry.”).
[4] See id. (contending that unlike dollars, euros, and yen that are backed by nation’s respective treasuries, any value assigned to cryptocurrency is “based solely on convincing others it has value.”).
[5] See id.; Another source suggests that Bitcoin mining operations used as much energy as Denmark, or enough to power more than three million U.S. households in 2017, thereby rending it environmentally unsustainable and wasteful. See Chris Mooney & Steven Mufson, Why the Bitcoin Craze is Using Up So Much Energy, Wash. Post (Dec. 19, 2017), https://www.washingtonpost.com/news/energy-environment/wp/2017/12/19/why-the-bitcoin-craze-is-using-up-so-much-energy/.
[6] See Manning, supra note 3.
[7] Bank of Int’l Settlements, BIS Annual Economic Report 2021 67 (June 29, 2021).
[8] See id. at 85–90.
[9] See Mark Potter, $9.5 Billion Spent Using Chinese Central Bank’s Digital Currency—Official, Reuters (Nov. 3, 2021), https://www.reuters.com/technology/95-billion-spent-using-chinese-central-banks-digital-currency-official-2021-11-03/.
[10] See Manning, supra note 3 (stating that China’s CBDC sets renminbi in the direction of rivaling the dollar as international reserve currency in the distant future).
[11] European Central Bank Press Release, Eurosystem Launches Digital Euro Project (July 14, 2021), https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210714~d99198ea23.en.html.
[12] See Bank of Eng., Statement on Central Bank Digital Currency Next Steps (Nov. 9, 2021), https://www.bankofengland.co.uk/news/2021/november/statement-on-central-bank-digital-currency-next-steps.
[13] See Namrata Shukla, Japan’s CBDC Plans to ‘Speed Up’ in Light of Other Countries ‘Moving Ahead’ with Theirs, AMBCrypto (Dec. 1, 2021), https://ambcrypto.com/japan-ramping-up-political-pressure-as-chinas-digital-yuan-inches-closer-to-launch/.
[14] See Andrew Ackerman, Fed Prepares to Launch Review of Possible Central Bank Digital Currency, Wall St. J. (Oct. 4, 2021), https://www.wsj.com/articles/fed-prepares-to-launch-review-of-possible-central-bank-digital-currency-11633339800.
[15] See Ryan Browne, Central Bank Digital Currencies are a Long Way from Becoming Reality—Unless You’re in China, CNBC (Nov. 12, 2021), https://www.cnbc.com/2021/11/12/central-bank-digital-currencies-are-moving-slowly-but-not-in-china.html.
[16] See Ralph Jennings, How China’s Ban on Cryptocurrency Will Ripple Overseas, Voice of Am. (Oct. 2, 2021), https://www.voanews.com/a/how-china-s-ban-on-cryptocurrency-will-ripple-overseas-/6254329.html.
[17] See MacKenzie Sigalos, Bitcoin Mining Has Completely Recovered from Chinese Ban, CNBC (Dec. 10, 2021), https://www.cnbc.com/2021/12/10/bitcoin-network-hashrate-hits-all-time-high-after-china-crypto-ban.html.
[18] See Yaya J. Fanusie, Central Bank Digital Currencies: The Threat from Money Launderers and How to Stop Them, Lawfare Blog (Dec. 14, 2020), https://www.lawfareblog.com/central-bank-digital-currencies-threat-money-launderers-and-how-stop-them.
[19] See id.
[20] See China Catches Fraudsters Using Central Bank Digital Currency for Money Laundering, Ledger Insights (Nov. 15, 2021), https://www.ledgerinsights.com/china-catches-fraudsters-central-bank-digital-currency-cbdc-for-money-laundering/.
[21] See Manning, supra note 3.
[22] See Browne, supra note 15 (quoting Garrick Hileman, head of research of Blockchain.com and visiting fellow at the London School of Economics).