Digital Assets: Virtual Currencies, Security, and U.S. Foreign Policy

Monday, May 9, 2022
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U.S. Deputy Assistant to the President and Deputy National Security Advisor for Cyber and Emerging Technology, National Security Council

U.S. Deputy Assistant to the President and Deputy National Security Advisor for International Economics, National Security Council


Global Comanaging Partner, K2 Integrity; Advisor, Coinbase; Former U.S. Deputy Assistant to the President and Deputy National Security Advisor for Combating Terrorism (2005–2009); CFR Member

Panelists discuss digital assets, including virtual currencies and central bank digital currencies, and the implications for U.S. foreign policy and the global financial system.


ZARATE: Good afternoon, everybody. Hope everyone’s doing well. It’s great to be here in hybrid fashion, here in person here in Washington, D.C., with members joining us here in person as well as online. And as well, we have Anne Neuberger here with us in person and Daleep Singh joining us virtually.

My name is Juan Zarate. I am the global comanaging partner at K2 Integrity, longtime advisor for Coinbase, former deputy national security advisor for combatting terrorism, and a longtime CFR member. So I’m honored to be here today for our discussion.

Welcome to this meeting. The title is “Digital Assets: Virtual Currencies, Security, and U.S. Foreign Policy.” This is on the record today. We will have a discussion amongst ourselves for about thirty minutes and then open it up for questions, so I encourage you all to be thinking about your questions all along and organizing your thoughts.

But let’s start. Of course, we have Anne here. Anne is the deputy national security advisor and deputy assistant to the president for cybersecurity and emerging technology. She’s not busy at all. (Laughter.)

And Daleep Singh, who’s joining us virtually from a remote location. (Laughs.) Daleep, it’s great to see you. Thank you for joining us. Daleep, of course, is the deputy assistant to the president as well and deputy national security advisor for international economics.

Both of these officials are leading officials at the National Security Council and for the U.S. government on not just their areas of expertise, but of course in the areas of digital currency and digital payment platforms. So welcome, Anne. Welcome, Daleep.

NEUBERGER: It’s great to be here. Thank you.

SINGH: Thank you.

ZARATE: Let me start by providing a little bit of a preamble because I think it’s important to set the stage for the discussion, and then to talk to Anne and Daleep about their roles in this space and where the U.S. government and administration are heading.

We’ve certainly, I think, crossed the Rubicon in terms of legitimacy for digital currencies. We’ve seen regulators begin to grapple more openly, perhaps more aggressively with digital currencies, digital payments, the crypto economy and ecosystem. We know that over a hundred countries are either talking about or some have actually launched central bank digital currencies. And of course, the U.S. government has put out several reports, including the executive order most recently laying out the U.S. approach to digital currencies and digital assets.

So we are now in the field of legitimacy and the question of how best to leverage the technology, how to take advantage of it, the role of the United States, and certainly how to manage the risks. And that is, certainly, what Anne and Daleep spend a lot of time talking about.

So let’s start the discussion. Anne, start with you. Daleep, I want to come to you next. How do you think about the importance of digital assets and digital currency? And frankly, how does it sit in your portfolio? You have to deal with cybersecurity, artificial intelligence, robotics, quantum. So how does this fit into your portfolio and thinking about the ecosystem?

NEUBERGER: Absolutely. So, first, thank you again. It’s really terrific to be here.

And to the point that Juan was making, the partnership that Daleep and I have had really bridged the national security concerns, economic concerns, and that’s central to why we think about digital assets and cryptocurrency. On the one hand, we look at digital assets for the opportunity to truly bring down the costs of financial transactions such as remittances; to bring innovation into this space; to allow for, potentially, entirely new industries that we may not even think of today. On the other hand, we’re well aware of some of the risks, whether illicit use as we’ve observed with ransomware actors; as we’ve observed with countries like North Korea using the crypto ecosystem as a source of sanctions-evasion funds; whether it represents, potentially, a growth of alternative financial systems that Daleep will talk more about and the impact that may have on U.S. global leadership.

So you saw a consistent theme in the executive order which we actually carried through in last week’s national security memorandum on quantum as well, which is promote and protect—taking a very carefully balanced view to ensure that we’re seeing how do we ensure America maintains its leadership in technology and innovation in this area, which we know can transform the financial industry, but how do we ensure we do so in a way that’s thoughtful about the risks as well.

ZARATE: Daleep, how do you think about digital currencies and the crypto ecosystem?

SINGH: Yeah. So my thanks as well, Juan, for moderating this event. Good to be with you, Anne.

You know, the ecosystem has exploded in size and complexity. You mentioned some of this in your preamble. The market cap has fallen back a little bit, but in November of last year I think it hit over $3 trillion. That had roughly quadrupled from year end 2020, up from just under 15 billion (dollars) five years prior. I think we have more than five thousand tokens in circulation. The trading in NFTs went up 20,000 percent last year. And you said it, over a hundred countries are piloting or exploring the introduction of a central bank digital currency.

So, you know, this is all about how do we harness—how do we harness this financial innovation in the right way. Sometimes it works out well. The ATM is the classic example. Electric payments might be another. But we also know the horror stories that have globally systemic consequences: subprime mortgage security, CDO-squared, unregulated OTC swaps. So, you know, we’ve learned the hard way that governance really does matter, design matters, especially during this period of creative destruction when the applications of a new technology are still taking shape.

So, as Anne said, I mean, our view is there are benefits—potential benefits we can harness in digital technology: cheaper, faster, smarter financial services that reach more people. And we want to spread those benefits to as many people in our society as possible, but there is a long list of risks that worry us greatly: consumer protection, financial stability, tax avoidance, inequality, illicit finance, sanctions evasion, cybersecurity, energy consumption.

So, you know, let’s be honest, most digital assets—and really most innovations in general—are not designed at the outset to promote national interests. You know, it’s probably not what Satoshi Nakamoto had in mind, is to promote U.S. national interests. And so, just like any other form of technology, financial innovation is going to gain scale parabolically, and we needed the president’s executive order to set out a coherent and coordinated approach to articulate our strategic interests and then lay out lines of effort so we can reinforce our leadership role at the intersection of global technology and international finance.

ZARATE: Daleep, I’m going to come back to you and Anne to talk about the balance between the opportunities and the risks and how you each think of those, and, frankly, how you foster innovation while recognizing the need for regulation and the rest. But Daleep, that was a great sort of lead in to the executive order, and I think it’s important maybe to dissect that a bit.

President Biden signed the executive order on March 9th of this year. It followed a number of reports that the government had been putting out—the president’s working group on stablecoins, of course, had put out their report; last year in January we had the Federal Reserve putting out their report on the digital dollar—all of this sort of a rising crescendo of attention and import given to digital assets. Anne, can you give the members a sense of what’s in the executive order and what’s the driving principle behind it?

NEUBERGER: Absolutely. So there are really four key takeaways in the executive order.

The first part was, as we’ve talked about, there are so many considerations for policy in this space. How do we promote U.S. leadership in innovation, particularly when we look at a key competition with China as a country that is in the final stages of launching a central bank digital currency and a key country we think about with regard to potential interest in promoting a parallel financial system and the impact that has on U.S. global leadership? That’s one stake.

We certainly see the potential for broader humanitarian support. We see crypto, for example, funding Ukrainian refugees and related to that.

So one key part of the executive order was creating a broad framework to bring those different stakeholders together around the table as we design policy to ensure that those voices were heard. And we did so in a carefully measured way, frankly, as the sector continues to evolve in many ways to where we go.

So if we think about at the dawn of the internet had we considered Uber and what that would become, we clearly couldn’t, right? The pieces that evolved there—Uber, Waze—that came from a connected device, that came from data being shared, aggregated, and analytics—was not something we could have anticipated at the outset. That’s where we are in this ecosystem.

So what we’re looking to see is bringing those stakeholders around the table so we consider carefully our policy—promote, protect—and also how we think about second-order effects. That’s piece number one.

Second, it initiates research into whether the U.S. should launch a central bank digital currency and the considerations there for things as varied as privacy—since there is, as we know, a great deal of public information—to the alternative, to say how does that promote continued U.S. financial leadership. And what are the roles of alternative assets like stablecoins that are pegged to a U.S. dollar but are not issued by the U.S. government as we consider what is the right policy approach? So that’s piece number two.

Third, it promotes research into this space more broadly with regard to a plan to mitigate the risks. We know some of those risks. And indeed, to related—one of the risks, which is the movement of funds a la ransomware, the U.S.—the United States led the launch of an international counter-ransomware regime of which one pillar of that has been countering illicit finance, led by the U.K. and Singapore, to look at this area. And it highlighted to us how much capacity building in this space is needed because AML frameworks—and you have deep expertise in this, Juan—AML frameworks that we spent so much time building in the fiat currency world remain and need to be built in the cryptocurrency arena as well.

And then, finally, of course, it launches—you know, at the end of the day, government policy, there’s something to be said for processes and bureaucratic processes. So it launches a joint NEC/NSC-led process to devise policy in this space, to bring agencies together around the table, and to ensure that we’re pursuing these outcomes in accordance with the president’s direction to make progress and to maintain U.S. leadership but track the risks.

ZARATE: That’s a great description, Anne. Thank you.

Daleep, I want to come to you on a couple of the themes in the executive order related to financial stability, consumer protection, as well as sort of U.S. leadership. You both now alluded to it and it’s emblazoned in the sort of the intent of the executive order. How do you think about the management of those risks as well as the opportunities of American leadership in the global financial system?

SINGH: Yeah. There’s a lot there. Let me just first touch on the payment architecture, and then I’ll speak about consumer protection considerations on digital assets.

So you’re right, Juan. The EO makes it very clear, we think Americans are poorly served by the status quo as it relates to the current payment architecture. Five percent of American households are unbanked. Another 17 percent are underbanked, which means they still use nonbank payment services like check cashing or payday lenders—likely, at least due in part, to the fact that checks sometimes take up to two days to clear. And so a lot of low-income consumers in particular face a choice of paying exorbitant overdraft fees from their bank, or they have to turn to check cashing services or payday lenders, also with very high fees, to meet their obligations. So that’s a poor state of play.

And the status quo is even worse for cross-border payments. Transaction and conversion fees tend to average about 2 percent per cross-border transaction if you live in a G-7 country. And those fees can be up to 10 percent of the transaction if you live in a developing country. So that’s an enormous tax for those who send or receive remittances. And so the EO recognizes we’re overdue for cheaper and faster digital payment options that are available to our people. And it sets out work to identify the right protections for privacy and security as we identify new options, and then also the appropriate oversight for—to guard against money laundering, to make sure we have tax compliance, that we’re monitoring for sanctions evasion, and so forth.

Now, it relates to digital assets, let me—let me start with assets that are not backed by a fiat currency and therefor have no intrinsic value. Today is a demonstration of the fact that these tend to be highly volatile assets. And because their price is so volatile, they’re generally not used for transactions. And bitcoin is, I think, better thought of as a—as a digital stored value. OK, and so what the EO says is that consumers should be afforded disclosures on the risks with these investments—on market risks, operational risks, security risks. And consumers should have protections on their sensitive data and shield it against unlawful acts of surveillance.

Now, when it comes to stablecoins—Anne alluded to these—you know, we’re talking about digital assets that attempt to peg their value against one or several fiat currencies. OK, so in theory these assets may have a better chance of being used for transactions, but here we have a public interest in transparency and disclosure. Consumers ought to know whether and to what extent there’s a mismatch between the asset side of the balance sheet of stablecoin issuers and their liability side in terms of risk—market risk, liquidity risk, duration risk.

And financial regulators, plus the Financial Stability Oversight Council and our international counterparts, they absolutely have a duty to have a handle on one risk. What’s the resilience of stablecoin issue and balance sheets to shocks? What’s the complexity and connectedness of their liability structure? And ultimately, if one of these issuers fails, what are the implications to financial stability and to the broader macro economy? So that’s what the EO says, as it relates to the risks and the payment architecture and consumer protection considerations.

ZARATE: Thanks, Daleep. I’ll come back to you and also Anne on this question of American leadership and what this looks like in the future, because I think it’s a critical question.

Anne, going back to the risks that you’ve observed and are managing, like ransomware and North Korea, how much are the risks at this point driving and animating your time and efforts and the thinking in the U.S. government? We can all remember sort of the evolution of thought around digital currencies, where initially it was seen as a little bit of a niche technology. Kind of who is this Satoshi guy? Then it was a question of how are the bad guys going to use this, how are they using this? The Silk Road case was an exemplar at the time. Now we’ve crossed into this realm where it’s entered the financial markets and into this realm of legitimacy. How much are the risks that you have to attend to driving still the way that the U.S. government thinks about cryptocurrency?

NEUBERGER: It’s a really thoughtful question. So the way we’re looking at it is to say where are our levers to promote U.S. leadership and to control for the risks? So, for example, cryptocurrencies could be designed in a way that gives identity, that potentially gives revocability of illicit assets, or in a way that, you know, enhances anonymity. So to the extent that we could use potential standards approaches to say if a currency is launched we want it to have these attributes, that’s one way that from a strategic perspective we can account for the risks.

On the second hand, and I’ll point to really, as you know, the DPRK’s recent hack of a cryptocurrency gaming company, and the left of $620 million. Clearly, as we look at the DPRK, which continues to make advancements in its missile program, which continues to be a threat not only in the region but globally as well, any efforts that allow it to get at hard currency and to evade sanctions are going to be a priority for us. And we’ve used the recent theft to look at how do we both, as the U.S. government, bring our authorities, capabilities, and capacity together to pursue and seize funds? And how do we work with partners around the world? Where do we have authorities, capability, and capacity? And where do we have gaps?

And that’s been very eye-opening for us because we can use that to drive the approach. And frankly, that’s not just what government does. It’s also what the sector does itself. So for example, just about a couple of years ago we saw the sector work together to implement the travel rule, to ensure that between exchanges they’re sharing information to pursue illicit transactions. Excellent. That allows the sector to build those ties and help each other move at the speed of these transactions. From a government innovation perspective, you’ve seen we designated three exchanges.

We designated the first mixer this past Friday. That was significant because some might say, you know, mixers play the role of enhancing anonymity, of potentially being used to help launder funds. And that was so important to us then to say the U.S. government can pursue a mixer, can designate a mixer—which is not a central entity like one would think of an exchange. We can do so to highlight that when we need to pursue illicit transactions, we can do so. So I think both at the strategic level and at the operational/tactical level we’re suing cases that happened to help us see where we are, where we need to go for ourselves and our partnership with other countries around the world.

ZARATE: Yeah. Anne, do you think we’re mature enough from a regulatory enforcement standpoint? Or are we just in the beginning stages of developing the understanding, the capacity to deal with these risks?

NEUBERGER: I think we’re more in the beginning stages. I credit Treasury for the innovation—for example, the designations that I noted. But thinking about what may be new, thinking about how we better use standards—cryptographic standards, how we better use the existing regulatory models we have and adapt them for what’s needed in this space is very much needed. And that’s what we’re looking at.

ZARATE: Good. Daleep, let’s turn to the movement toward central bank digital currencies, and, of course, the question of whether or not the U.S. will issue a digital dollar. But let’s start first with this question of how you see central bank digital currencies amidst the stablecoin ecosystem, and whether or not CBDCs are a necessary part of the ecosystem or something that, you know, is more in the vein of what authoritarian regimes may want to do, in terms of the control of the ecosystem and control of digital currencies within their borders. How do you think about CBDCs? And how does that play into our policies around a potential U.S. digital dollar?

SINGH: Yeah, sure, Juan. So this is the big question we’re going to explore through September, when the report that we’ve commissioned through the EO will be released. And as the EO says, we’re going to weigh the benefits and the risks of issuing and CBDC relative to the alternatives, including stablecoins, to improve financial inclusion, safeguard financial stability, make the payment system less costly, more efficient, advance our national security interests, reinforce the centrality of the U.S. in the global financial system. So to do this analysis the right way we’ve got to consider all of the various design and deployment options.

Would a CBDC issued by the Fed be a retail CBDC? Would it be a wholesale CBDC? Where would the accounts reside? What would be the services offered with these accounts, and by whom? How would we protect the data and safeguard the operational risk and security of the CBDC? What would be the implications for credit creation in our economy both in peacetime and in stress—financial stress episodes? How might CBDCs expand our set of options for, and improve our execution, when we want to deploy stimulus during a downturn—or, even not during a downturn, if we want to use automatic stabilizers. How could we use CBDCs to do that?

So these are all the questions we’re going to take up. And until we, you know, kind of work through the modalities of what a U.S. CBDC could look like, and how those benefits and costs look relative to the alternatives, we’re going to—we’re going to—we’re going to withhold judgement on exactly what the policy decision is going to be.

ZARATE: Daleep, are you concerned at all about the challenge to the dollar itself? Or do you see these developments, as well as the stablecoins that are out there in the market at volume and scale that rely on the dollar, as reinforcing the role of the dollar? What’s your sense of the strength of the dollar in this evolving ecosystem?

SINGH: Yeah. So, Juan, I mean, to answer that question I think you’ve got to start with a view on why we have dollar primacy in the first place. And for me, it’s all about our fundamentals, if you like. You know, strong and independent economic institutions, like the Fed. An ingenious system of checks and balances oriented around the rule of law. And transparent regulation, effective corporate governance, deep and liquid capital markets, the ability to attract ideas, talent, and goodwill. And trust that we’re going to act as faithful stewards of the global financial system.

So it’s because of these attributes that the dollar has become analogous to the operating system of global finance. And that’s been reinforced by incredibly potent network effects. I mean, the value of joining the dollar-based system and the costs of being excluded from it have grown geometrically with its size and its reach, especially because there’s not an alternative network of comparable scale. Now, part of that—part of that circumstance is by default. The euro has faced existential challenges for much of its history. Japan has struggled to emerge from decades and stagnation. And China has chosen not to make the kind of reforms that would create trust in its currency, presumably because those reforms would require a loss of political control that the authorities are unwilling to accept.

So, look, none of this means we can take dollar primacy for granted, especially against the backdrop of new payment architectures, new technologies that could allow a rival currency to gain scale at much faster speeds than we’ve seen previously. So, you know, when it comes to CBDC, this is one of the—this is one of the potential competitors. And if you look at China, for example, it’s one of the first to issue a CBDC. It’s the first, you know, truly large, major economy to do so. But I would say, let’s look at it for what it is. The digital renminbi is the digital form of a currency with the same underlying risk attributes as the physical form of that currency. Both forms are backed by the same Chinese government without an independent central bank, with capital controls that can be tightened without warning—without an independent judiciary, without transparent regulation.

So, I mean, there’s a reason why international reserves held in renminbi are less than 3 percent, even though China’s share of the global economy is close to 20 percent. So I don’t view CBDC, per se, as a threat to dollar primacy. But what I do—I think we should monitor really carefully, and this is why the EO places high urgency on our own research and development efforts, is that CBDCs were to gain scale for cross-border transactions, number one, we would want to watch that really closely for the potential circumvention of sanctions.

But, number two, you know, standards could develop that get sticky. You know, standards for privacy, security, human rights—basically the model that China is pursuing with its own digital currency. If those standards were to become prevalent, you know, that would be very much against our national interest. So we’re moving as fast as we can to look at the—as I mentioned before—the modalities of how we might issue a digital currency and how that lines up relative to alternatives. And we want those standards that we ultimately identify as favorable to use to be the ones that continue to dominate in the global financial system.

ZARATE: Daleep, thank you for that.

Anne, let me ask you this: Given that you look at the landscape of threats, you look at the landscape of technologies, what is it that worries you most in this space? Is it the inability of the U.S. to sort of take a leadership role? Is it the challenge from China? Is it unfettered sort of evolution of the technology? Is it rogue actors taking advantage? What is it that sort of worries you most as you look at the landscape?

NEUBERGER: I would say one core thing on each of the promote and protect sides. Because in each of the emerging technologies space areas we look at there are such opportunities to bring down the costs of transactions, to allow greater access. And we want to ensure that that actually occurs and that we continue to enable the financial system to be a source of loans, to be a source of savings, to be a source of asset growth for Americans of all backgrounds—for individuals of all backgrounds around the world. So how do we ensure that we can promote that safely?

And then the safely piece is as we see—you know, we talked about the over $3 trillion of assets. As we see a rapid growth in this space, how do we ensure that we protect for the harms? And whether we look at, for example, standards for crypto exchanges so that, you know, private keys are protected, so there cannot be the rampant theft and cybersecurity hacks that we’ve seen growing and growing in this sector, is one piece. How do we ensure that there isn’t a way to rapidly move money, despite the transparency of the blockchain and the smaller liquidity within it today—which is one of the reasons that we haven’t been as concerned about sanctions evasion within—because of the publicity of the blockchain and the smaller—the smaller sizes. So there isn’t yet the large-scale liquidity.

But how do we build in now that ability to trace in an effective way the partnership? You know, our anti-money laundering rules were built up over decades. And they were built up between the sectors, so that the sector had a common way to share information rapidly, to get a common picture, to understand identity of entities. And how do we ensure we build that up? And then, both in the government-to-private sector role and the government-to-government role, how do we build capacity so that we ensure that we have that promotion, the ability to gain the benefits, but also account for the risks? So I think in each of those spaces we worry. And what’s most significant is that everything we’re doing within the executive order within our policy processes has one eye on each. Is if we don’t put them on the same scale, there’s a risk of doing and there’s a risk of not doing. And we need to do so in a careful, measured way.

ZARATE: One last question before we turn to the members for the Q&A session. Daleep, let me ask you this: You and Anne have both talked about American leadership. How are foreign counterparties as well as industry thinking about sort of the new executive order and the quest for American leadership in this space? Do they want it? Do they believe in it? What’s the—what’s your sense of the reaction to the proposition that the U.S. should be a leader in this space?

SINGH: I think they want us to have a seat at the table, you know? They want us to experiment with different design modalities of a CBDC. They want us to put our views forward on the standards and values that we think should be expressed in a potential central bank digital currency. And they want to start looking at ways that we can make a design that works for us interoperable with a design that works for them. There’s a tremendous amount of value to having the U.S. acting in a leadership role and staying at the forefront of big changes like this one in international financial and technologies as potent as digital technologies.

And, you know, we hear from industry all the time, we want clarity. We want to understand, you know, how are you thinking about this space? How can a—how can a privately issued cryptocurrency market coexist with the potential unveiling of a public option? Ultimately, you know, we want—we want competition and a race to the top. That’s going to be a good thing for our financial system, for our economy, and for our national leadership. So, you know, we have—we have issued the EO to accelerate the process of providing clarity and getting our seat at the table and coordinating with our partners abroad. They’re ready for it.

ZARATE: Thank you, Daleep. Thank you, Anne.

Let’s now open it up to the members. Ask that you raise your hand. We’ll bring you a microphone. If you identify yourself, keep it to one question. And remember, be on your best behavior, we’re on the record, OK? So we’ll try to alternate between the live membership here in D.C. and those attending virtually. So let’s start—Dante, in the back.

Q: Hi. Dante Disparte with Circle, an issuer of a privately issued digital currency or a stablecoin.

So my question is maybe more of a comment than a question. So the FAA doesn’t build jet engines and fly planes, but it does designate safe conduct in the skies. And there’s something deeply anti-Western in my mind about what the prospects of a central bank digital currency would pose. And I would just be curious is we could extract maybe some of the risks that the EO and the White House are considering as we look at, you know, what that ultimately looks like, if we’re coming for the movement of money against our own banking system. Thank you.

ZARATE: Anne or Daleep, you want to handle that question from Dante?

SINGH: I’m happy to start. You know, that—look, there are—there are serious considerations you’re raising. If we issue a central bank digital currency, as I alluded to, and Secretary Yellen has spoken to this as well, we really want to understand the implications for the credit creation process in the United States. We want to be sure that we have—we’d have a plan to safeguard the data that’s collected by a public authority. We want to know that during a stressful financial episode we can control the risk of a run from the commercial banking sector to a safer option. You know, there are all sorts of operational risks that you always have to be mindful of, particularly if you’re creating a new government bureaucracy from scratch. But, you know, look, if we were to introduce a central bank digital currency, you know, that’s nothing to be fearful of; that would be really our way of promoting, as I said, a race to the top with the kind of standards and values that have led to our centrality in the global financial system. That’s a good thing and I think it would support responsible innovation rather than suppressing it.

ZARATE: Good. We’re going to keep waiting for virtual questions so the next question can be live. Gentleman in the back there?

Q: Hi, I’m Ric Herrero with the Cuba Study Group.

My question has to do with providing P2P payment solutions in heavily sanctioned countries or countries under very severe sanctions programs like Cuba. Part of the policy of the United States is to allow, under current regulations, for providers of digital wallets and other fintech solutions such as Coinbase to provide services to civil society, entrepreneurs, and other independent actors within these sanctioned programs, but often overcompliance on the side of the private sector, because they don’t want to meddle in a market that is heavily sanctioned, leads to those services being inaccessible to the average person, to the kind of person that we want to help in these societies. So my question is, to what degree is the National Security Council—and as part of this whole review of the study after the EO—to what degree are you taking into consideration how we’re balancing both the interests of reducing the ability of bad actors, bad governments, to use cryptocurrencies, other digital assets to circumvent sanctions with the interest of providing those assets or access to those assets and to those services to the independent actors in those countries who favor the West, who are trying to increase their autonomy within those states? Thank you.


NEUBERGER: It’s a really thoughtful question and it speaks to the balance. You know, one of the most interesting aspects of digital assets is the potential accessibility it provides to the unbanked or for those who may have inadequate access to financial systems or those for whom it’s prohibitively expensive. So some of the figures we’ve seen is that potentially the cost of remittances, the 60 to 70 percent of the cost in traditional financial systems that’s clearly appealing as we think about workers working in one country who want to send back as much of their—as much of their earnings as they can to their families who may be struggling back home. Similarly, it may bring down transaction costs which allow, again, the benefits of the two parties with less taken at the interim. So those are some of the promise of digital assets and one of the reasons that we’re—to Juan’s repeated questions of why are you choosing this emerging technology to invest the time—of why we’re investing the time because it’s such a goal of the Biden-Harris administration to expand access, to use technology to expand access to individuals of all backgrounds as much as we possibly can.

On the risk side, to your point, the more that we have the ability to trace sanctions evasion, illicit transactions in particular currencies, or the opportunity for exchanges like Coinbase, to your point, to enforce those standards of new currencies growing, the more confidence we have that we can gain the benefits of that but also manage the risks.

To your point, that’s a very interesting exemplar of why anonymity-enhancing currencies are interesting, right, because much as the public blockchain gives visibility to see transactions, it may give it to an authoritarian regime to also identify transactions that may be seeking to bypass that regime because you have democratic advocates, et cetera. So I think that’s one use case to show why mixers and other parts of—(inaudible)—ecosystem we could play a really helpful role but balancing that with what we seek, which is tracing illicit transactions, is important. And that’s—you just captured perfectly the purpose of the various studies and reviews we’ve put in place so that—because we want to achieve both in a careful way.

SINGH: Now I’ll just add, I think it’s a great prompt because, you know, part of the appeal of a central bank digital currency could be it might give us a way to transfer value into a country without using the traditional banking rails, so it’s kind of the international analogy to how we might use it for very targeted stimulus domestically and so we can penetrate a country like Afghanistan where we don’t want to go through the Taliban but we want to get support for those who have the most dire and acute humanitarian needs. And to the extent that our central bank digital currency technology becomes prevalent, that reduces the risk of actors, you know, transacting in a decentralized way without any nexus to the U.S. financial system, because we’ll still have a hold through either bilateral or multilateral CBDC corridors, and so that—actually, I think you’ve laid out the opportunity.

ZARATE: Let’s go now to our virtual members. Next question, please.

OPERATOR: We will take our next question from Tara Hariharan.

Q: Thank you so much. I’m Tara Hariharan from NWI, a New York-based hedge fund.

Anne and Daleep, I’d like to push you again on Juan’s excellent questions earlier regarding risks to the dominance of the U.S. dollar in the near term from China, given that in the last week or so we have been hearing reports that China is considering preempting the threat of potential U.S. sanctions and avoiding having their dollar assets frozen like the case of Russia by diversifying their reserves away from the dollar and from dollar assets, and that would also necessarily include circumventing a digital dollar. So this is a slightly different situation than just China endeavoring to conduct transactions in other currencies, but in this case actively getting rid of their dollar assets. Thank you.

NEUBERGER: Daleep plays such a role in sanctions-related work so I want to give him the opportunity to lead on that, if he’s still connected.

ZARATE: Yeah, he may be frozen.

Daleep, are you there?

(Laughter.) Daleep, are you back with us?

Anne, do you want to take a crack at it?

NEUBERGER: While we get Daleep back to us.

So certainly, you know, as we look at the liquidity in the movement of cryptocurrency funds today, we don’t see that adequate liquidity to move the kinds of large-scale funds movements that would be needed to bypass—we lost Daleep—that would be needed to bypass the U.S. system. But one of the reasons that we are exploring a CBDC and we are thinking about how to ensure that we have—we maintain U.S. leadership in this space is because we want to ensure that for those who want the benefits and, frankly, want the backing of a sovereign currency that we have an alternative to offer. To the earlier question, that could be a CBDC, that could be a stable coin pegged to U.S. dollar with some assurances for that so individuals who are making those investments are using that are not subject to the volatility that we’ve seen in cryptocurrencies which make it not a good store for transactions, and that’s one of the reasons why in the study we’re exploring the spectrum of options to get to both managing for the risks you talked about as we look at nation-to-nation competition in this space.

ZARATE: I don’t think we have Daleep back, although we’ve got his frozen image with us here on stage. Good. Maybe when Daleep comes back we’ll revisit the question from a sanctions-evasion perspective.

Barbara, why don’t we go with you?

Q: Thanks, Juan. Barbara Matthews, BCMstrategy, Inc. My company measures public policy risk, quantitatively using patented technology. When we turned on the platform in 2019 we started measuring digital asset policy; it wasn’t called that at the time.

My question involves American leadership and cooperation. Over the course of the last three years I’ve seen, you know, the ECB, the Bank of England, BIS, you know, the monetary authority of Singapore, really doing amazing work on everything from operationalizing a third-party blockchain to (use of ?) CBDC monetary policy implication spillovers. As an American I’m delighted to know America’s voice will now be part of that debate at strength. As a former government official I appreciate the challenging interagency process the executive order has laid out and the challenging timelines. Without even taking into account working with our important partners, our other reserve currency global partners, I’m wondering if you could provide us some perspective on how you’re thinking about the international dimension, how—I’m confident the Fed is doing what the Fed does—of course, they’re independent, but you must be having some cross-border communication thinking about engaging. I would love—the executive order was thin on that; I’d love some feedback.

NEUBERGER: Absolutely. So when we look at the space there are standards that are being defined as we speak, whether they’re “know your customer” AML standards, whether they’re cybersecurity standards for exchanges and mixers, and one key goal of the EO was ensuring that the U.S. government was engaging with one voice and that we were bringing in a broad range of nontraditional stakeholders, right? So one might expect that Treasury and the Fed and the regulators play a role in this, but one might not have necessarily expected that you would have R&D entities in the U.S. government, intelligence community in the U.S. government who helps us understand how various components may be bypassed, technology elements of the U.S. government, the National Science Foundation, right, entities who can help ensure that as this is a new tech space we’re bringing that expertise to bear as well.

So that is—so the first part was organizing, so we can speak effectively; the second is, as you noted, we are engaging with any number of European, Asian partners on the standards and seeking to shape them in a way that allows for interoperability, that allows for security and, frankly, that allows for privacy protections, which some emphasize is one of the concerns we have as we look at the Chinese yuan, the degree of government insight and tracing of transactions that is also of concern as we look at that as an alternative model.

ZARATE: Daleep, can you hear us again?

SINGH: I’m able to hear you but it’s—I don’t know if it’s coming through on your side.

ZARATE: Daleep, we can hear you very well. The video’s a little bit static, but we can hear you. So if we could turn back to you on the question of what China’s doing to guard itself against dollar dominance or the use of U.S. sanctions and financial measures to isolate the Chinese economy, the question asked by our virtual questioner. If you could address that, that would be wonderful.


NEUBERGER: Oh, well.

ZARATE: All right. All right, the next virtual question, please.

SINGH: Juan, are you able to hear me?

ZARATE: All right, Daleep, we can hear you now. We can hear and feel your frustration, Daleep. (Laughter.)

SINGH: Juan, I can hear you. I think your question was on China’s efforts, if you’re able to hear me.
ZARATE: Yes, go ahead, Daleep, please.

Daleep, we cannot hear you, so we’re going to go to the next question. But stand by and if you can hear us and it connects properly, then we’ll come back to you.

Virtual question, please.

OPERATOR: We will take our next question from William Perlstein.

Q: Hi, it’s Bill Perlstein from FTI Consulting. I’ll first suggest that Daleep turn off his video and just use the audio. (Laughter.) Great technology advice.

SINGH: Thank you, Bill.

Q: I was previously with a G-SIFI bank and would like to ask Anne, the EO does recognize the unique role of the banking agencies and the other, you know, executive branch independent agencies. How do you envision being able to try to bring in what—you both are national security officials—the banking agencies along with the national security side, because their missions are really—while they’re related they’re really quite different.

NEUBERGER: That’s a really good question. So the way we’re approaching that is looking at what is the potential change this brings to the financial ecosystem, and as you saw in the EO, it launches a series of studies and reports, including building on the president’s working group study that came out, to say how do we account for the changes this brings, and what impact would it have on stability of the banking system, what impact would it have in terms of access in the banking system? And it does it on some pretty tight timelines, so that those reports interrelate to each other. So you hit on one key area which is, you know, a note that we need further study, particularly for—from a stability perspective and from an access perspective.

ZARATE: Yeah. And going back to the interagency point that Barbara was making, wrangling the regulators is often a difficult challenge in this environment.

NEUBERGER: It is, particularly given there’s a difference of view of is this a currency, is it an asset, looking at areas like NFTs, is this a “what is that,” which we want to leverage and have a technology-neutral approach to regulation but also account for what is definitely distinct and different here.

ZARATE: Yes. Let’s go to the young gentleman in the center.

Q: Hi, I’m Alex Zerden. I’m the founder of Capitol Peak Strategies; that’s a fintech and digital asset advisory, but I’m also former Treasury and NEC, so my question, I think, is informed from my time in government as well as now in the private sector.

So we’ve talked about the federal regulators, we’ve talked about international partners, but I was wondering kind of the scorecard on industry, so what are the lessons learned, what are some of the positive aspects of how industry has embraced the EO, helped inform the EO? But then, more importantly, kind of what are some of the areas for improvement where industry can engage better with government authorities? Thank you.

NEUBERGER: I love the question. So first, in the development of the executive order, we did listening sessions. We brought together different groups of members of industry to understand the perspective, frankly, to understand the technology, to see what the risks they were concerned about and what was the direction they think the technology will be going. What do we know today, what can we anticipate, and what do we most see the promise of? And that heavily informed the development of the EO in that space.

To your question of what industry can do: You know, as we look at the financial systems today, we see the partnership and the work between and across the industry that’s such a big part of the regulatory approach. Suspicious activity reports, information sharing, identity standards have been a big part of industry growing up. So as we look at it and we say where are the levers, we are thinking of what are the levers—how does the sector organize itself? When we think of, for example, from a cybersecurity perspective, there are information-sharing analysis committees, ISACs. There’s a financial services ISAC that is used to share information across banks, across money service businesses in a way that also protects for the risks, so there are particular different levels of standards when information is shared to say how sensitive it is, and given that these companies are also competitors, there’s built-in approaches to say if information leaks one can quickly identify what might be the source of the leak and they’re not part of further information sharing in the future, right? So self-incentivizing efforts to promote that. So as we look at this sector, you know, how do payment providers, how do some of the infrastructure companies share information amongst themselves to enable them to identify illicit transactions, trace illicit transactions, and note the most significant ones, recover funds if needed, revoke illicit transactions, which is not possible today, which brings risks to the system.

So one of the ideas, for example, I mentioned earlier is, you know, the power of exchanges to say, you know, much as we think about the power of the app store, we saw a marked cybersecurity improvement in applications when Google and Apple began enforcing standards; for any app that will be available in our store, we’ll have scrubbed for malware content, we’ll have scrubbed for what information is gathered without your insight, right, and that served as a central, private sector way to enforce and manage for the illicit use. So, you know, as we think about ideas in that way, can cryptocurrency exchanges say a currency that’s listing here, which we know is a key incentive because people want to move between currencies, must meet these particular standards for traceability, for anonymity enhancing with the ability to track illicit transactions. Those could be ways—you know, those two ideas I noted, the organizing function and the tracing function, are ways that the sector can work together to implement the protection goals that we all have in this space.

I welcome back my dear colleague Daleep. (Laughter.)

ZARATE: Daleep, you look wonderful. I hope you sound just as nice.

SINGH: Better?

ZARATE: There we go. There we go.

SINGH: Good.

ZARATE: Daleep, can we return to the question about China—China’s behavior, China’s attempt to defend itself against the use of U.S. financial measures, what that means to its position vis-à-vis the dollar? Can you comment on that, especially given all the work you’ve been doing on sanctions in the context of Russia?

SINGH: Sure. So, you know, I would observe that, as a general matter, we’re not seeing explicit efforts by Chinese companies or Chinese banks to evade our financial sanctions or to backfill our export controls. So that—you know, that’s been actually fairly consistent from the start of this invasion. Now, over the medium term, there’s no question that China’s development of its own payment architecture, the alternative it’s developed, it’s trying to develop to SWIFT, really going back to 2015, and the introduction of the ECNY and currency bridges with other countries—you know, the mCBDC Bridge with the UAE, Hong Kong, and Thailand. I think the medium-term objective is to reduce dependence on the dollar-based financial system in the event that it faced punitive sanctions, and so I think that’s an important motivation, although I would say the driving push for China to introduce its own CBDC is more domestic in nature. I see China as wanting to perfect the art of digital authoritarianism, and the only way to do that is to control the data. Mobile payment providers—private mobile payment providers have gained quite a bit of scale, well ahead of the United States, by the way, and so that’s why I think there was a crackdown that involved the introduction of the ECNY.

So that’s where we are. Look, I think we have to recognize the ECNY for what it is. It’s not going to have the standards for money laundering and terrorist financing that we might like. It’s not going to protect user privacy or offer transparency to anybody outside of China. China has a very poor track record of using technology for aims that have—that are very much at odds with the interests of foreign citizens, so we tell our tourists that are going over there, businesses, global financial institutions to take time and assess the risks of using the ECNY, especially if you’re being pressured into using it. The central bank, and by extension the State Council, they can see your payment activity, they know your identity, they can see who’s paying you and to whom you’re paying, making payments, with the exception of very small ECNY wallets, and so this is a competition that we’re in and it’s even more reason why it’s high time for us to research and develop our own alternative.

ZARATE: Another question here. Yes, sir.

Q: Hi, it’s Steve Bunnell. I’m the former general counsel of the Homeland Security Department, so I’ve got kind of a more traditional national security question, maybe more for Anne, which is, you talked about how the IC is being included in the EO consultations.

What do you see high-level as the implications for the IC of digital assets, just in terms of new opportunities for collection, new blind spots? Is it a net positive, short term, long term? What’s the impact on counterintelligence? I don’t know if you’d like to speak a little bit to those issues.

NEUBERGER: So given your background, you’re very familiar with kind of the arc of how the intelligence community works, and Juan can speak to this as well with repeated arcs during our counterterrorism mission. So essentially, you know, as we know—what I always think about is the power of the intelligence community is the power of its people, and tremendously smart, motivated people who will roll up their sleeves and study and pursue and study and pursue until they figure something out in order to ensure that a particular new technology we understand how it may be used for illicit purposes and we understand what we need to do to keep Americans, allies, and partners around the world safe. So I think in this space certainly we’re at the stage where there’s a complexity of the ecosystem and a rapid evolving change in the ecosystem. So the comment and the question made earlier about engagement with the private sector, to understand how that’s evolving, to understand the different players, to understand how, you know, entities may intentionally stand up in a given country because that country doesn’t participate in international AML frameworks, because that country may not be responsive to sanctions requests. And then working to develop the international partnerships and then working to develop the capabilities, if needed, to pursue and achieve and protect in that vein as well.

So I think in the current—where we are currently is working to develop but it will be—I anticipate, as this technology evolves, this will become a mission in the intelligence community to continue to evolve, much as we did in the counterterrorism space, right? In the beginning of the 9/11, post-9/11, we were focused on understanding Hawala networks, we then evolved to understanding other forms of moving money and continued to pursue how entities communicate, and that continued to evolve and the only constant was the commitments, you know, across—players across U.S. government to work together, to roll up their sleeves to maintain insight and, frankly, to continue their work with the private sector to understand a given technology (place ?).

ZARATE: Thank you. I think we have a virtual question. This may be our last one. Apologies, Melanie.

OPERATOR: We will take our next question from Lyric Hale.

Q: Yes, hello from Chicago. Thank you very much for this presentation.

My question really follows on I believe Dante’s question from Circle, which is, what is the proper role of government in the innovations of cryptocurrencies? And in a world where we have increased cyber warfare and consumers that are at increasing risk of their data being compromised, not just cryptocurrency but all of their data, their banking data, is there a role here for the government to play in consumer education and guidance, to say to everybody yes, we could be—the entire country’s banking system could be hacked, you should be backing up everything to an external hard drive, or help with passwords, for example, which are the scourge of everybody who gets on a laptop. Is there something that you could be doing not just at the high level of national security but to make sure that the infrastructure is secure for everyone, consumers and innovators? Thank you.

ZARATE: Maybe if each could address this and I think this will close us out. So, Anne, do you want to start?

NEUBERGER: Absolutely. I’ll start briefly.

So to your point about the security of the broader infrastructure and the security of individuals who are doing transactions in that infrastructure—and I think your point’s well taken; there’s a role for the sector and there’s a role for the government. On the government side, we’re often most effective when we, in consultation with the private sector, develop standards so that there’s a common threshold in place, right? One element of the crypto hacks we’ve seen have been crypto hacks that hack exchanges that have poorly implemented cybersecurity, steal the private keys and, with that, gain access to funds in a way that’s hard to recover. So one area we’re looking at is to say, what are the standards we need to put in place for protection of those core, you know, smart, most important parts of the assets within that system?

Similarly, to your point, some individuals say, you know, there’s a real reason for convenience of individuals to use exchanges. You know, one can just forget a password, as we’ve seen any number of cases, and then lose access to their assets, so there’s a reason people use exchanges. On the other hand, there’s some security risks there. So to your point, you know, publishing advice on how to stay safe online is a key thing that we’re doing.

I will note that over the last couple of weeks, as we’ve done the designations of exchanges, as we’ve done the designation of a mixer, we also released public guidance out of the U.S. government that gave advice for cryptocurrency exchanges and how to be more secure. But your point is well taken that we can do more in this space and we’ll take that as an action on this end to think through that thoughtfully.


SINGH: And I would just say, your question speaks to why we issued the EO. You know, left to itself, we simply don’t know if digital technology would evolve in a way that protects consumers, either in terms of the volatility of the asset itself or operational risks, which you alluded to, or cybersecurity issues. We don’t know if the scale of cryptocurrencies could rise to a point at which financial stability is threatened from destabilizing runs. We don’t know if tax avoidance would take place. We don’t know if illicit finance would occur and be intermediated through these mechanisms, if sanctions are being evaded, et cetera, et cetera. So if we lay out the guardrails, we’ll remove uncertainty for the innovators themselves, and the purpose of doing all of this is to push the applications to evolve in a way that harnesses the potential benefits of what is a genuine innovation and could provide real benefits to inclusion, efficiency, and global leadership, so that’s why we’re doing this.

ZARATE: Well, that does it for our discussion. I think we could have gone for a couple more hours, of course. I want to first of all thank all of you for joining in person and virtually. It’s great to see friends, actually. I haven’t seen some of you for a long time, so it’s great to see people in person. I want to thank the CFR staff and the NSC staff for their preparation and, most importantly, Anne and Daleep for their time and efforts and their contributions today. So thank you very much. (Applause.)

NEUBERGER: Truly a pleasure.

SINGH: Thank you, Juan.


This is an uncorrected transcript.


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