The Lawfare Podcast: Deep Dive into Central Bank Digital Currencies and Money Laundering Risks

Episode: Lawfare Archive: Yaya Fanusie on 'Central Bank Digital Currencies: The Threat From Money Launderers and How to Stop Them'
Release Date: March 16, 2025
Transcript Date: December 15, 2020
Host: Alan Rosenstein
Guest: Yahya Fanusi

Introduction

In this archival episode of The Lawfare Podcast, host Alan Rosenstein engages in a comprehensive discussion with Yahya Fanusi, a former CIA analyst and expert on the national security implications of cryptocurrencies. The conversation centers around Central Bank Digital Currencies (CBDCs), exploring their definitions, advantages, potential misuse by illicit actors, and strategies to mitigate associated risks.

Defining Central Bank Digital Currencies (CBDCs)

Yahya Fanusi begins by elucidating what CBDCs are:

"A CBDC, as we call it, can vary, but basically it is a digitized form of a nation's currency... it would be, in essence, a digital banknote" (04:06).

Unlike traditional digital payments facilitated by banks or credit card providers, CBDCs represent a direct digital equivalent of physical cash, enabling instantaneous and direct transactions without the need for intermediary financial institutions.

CBDCs vs. Traditional Electronic Payments

Alan Rosenstein seeks to differentiate CBDCs from existing electronic payment systems:

"If I give you $5 in a banknote, I've just given you $5... a CBDC would basically eliminate the need for that settling in the background" (05:34).

Fanusi expands on this:

"CBDCs are currently being explored by a variety of central banks around the world... a CBDC would allow for more instantaneous payment digitally and sort of getting rid of the account-based system" (06:06).

The key takeaway is that CBDCs promise greater efficiency and speed, potentially revolutionizing how transactions are conducted by removing traditional settlement delays.

Advantages of CBDCs

Fanusi outlines several benefits driving the interest in CBDCs:

1. Efficiency and Cost Savings: CBDCs can streamline monetary transactions, reducing the costs associated with traditional banking processes.

2. Enhanced Monetary Policy Implementation: With better visibility into the flow of money, central banks can implement more effective monetary policies.

3. Financial Inclusion: CBDCs can extend financial services to underserved populations, especially in remote or rural areas lacking traditional banking infrastructure (07:57).

Timeline for CBDC Implementation

When pressed about the timeline for widespread CBDC adoption, Fanusi provides a nuanced perspective:

"The Bahamas has actually launched a form of digital currency... China is in the midst of a major effort to create a digital currency... in the next five plus years you're going to see different forms of CBDCs" (10:16).

While some nations like the Bahamas and China are at advanced stages, larger economies are still in exploratory phases, anticipating broader adoption within the next half-decade.

CBDCs vs. Bitcoin: Understanding the Differences

A significant portion of the discussion contrasts CBDCs with decentralized cryptocurrencies like Bitcoin.

Fanusi explains:

"Bitcoin is a decentralized system... it's not backed by any particular currency or asset... CBDCs are very different because they're managed and backed by central authorities" (12:40).

Key distinctions include:

• Centralization: CBDCs are controlled by central banks, whereas Bitcoin operates on a decentralized blockchain.
• Anonymity: Bitcoin offers pseudonymous transactions, while CBDCs are likely to require user identification.
• Programmability: Unlike Bitcoin, CBDCs can be programmed for specific uses or restrictions.

Programmable Money: The Next Frontier

Rosenstein introduces the concept of programmable money, prompting Fanusi to delve deeper:

"Programmability means that digital currency can be integrated with software to create new types of transactions... for example, allowing microtransactions or automated payments based on predefined rules" (16:37).

This feature could enable innovative financial applications, such as:

• Micropayments: Facilitating transactions in amounts smaller than a penny, ideal for digital content payments.
• Automated Payments: Linking payments to specific events or conditions, enhancing transactional flexibility.

Money Laundering and CBDCs: An Emerging Threat

Transitioning to the core concern, Fanusi defines money laundering and elaborates on traditional and CBDC-specific challenges:

"Money laundering is the act of getting illicit funds... criminals use various techniques to obfuscate the origin of illicit funds, such as through front companies or anonymous transactions" (24:38).

While CBDCs inherently reduce anonymity, making traditional cash-based laundering more challenging, Fanusi argues that criminals will adapt:

"Illicit actors are going to still want to use CBDCs because they have programmability, cross-border capabilities... they still offer advantages over cash" (28:50).

Techniques Criminals Might Use to Launder CBDCs

Fanusi identifies four primary methods through which criminals could exploit CBDCs:

1. Money Mules:

   "Money mules are individuals used by criminals to transfer illicit funds... In the CBDC context, this could involve multiple digital wallets managed by unsuspecting or complicit individuals" (31:58).

2. Winning Merchants:

   "Merchants involved in legitimate businesses could be coerced into acting as fronts, making it easier to blend illicit funds with legitimate transactions" (33:58).

3. Ease of Cross-Border Transactions:

   "CBDCs minimize friction in international transfers, making it simpler for large sums of money to move across borders without the logistical challenges of physical cash" (35:48).

4. Crypto Asset Exchanges Not Complying with AML Regulations:

   "The proliferation of crypto exchanges, especially those bypassing anti-money laundering (AML) protocols, provides avenues for converting illicit cryptocurrencies into CBDCs" (37:55).

Mitigating Money Laundering Risks

Addressing these threats, Fanusi suggests both tactical and strategic approaches:

1. Enhanced Transaction Monitoring:

   "Banks and financial institutions handling CBDCs must implement robust monitoring systems to detect suspicious activities similar to current AML practices" (41:17).

2. Public-Private Partnerships:

   "Collaborative efforts between government entities and the private sector are essential to establish standards and best practices for CBDC implementation" (41:17).

3. Regulatory Scrutiny for Fintech Providers:

   "Financial technology firms involved in CBDC infrastructure must adhere to stringent standards to prevent misuse" (41:17).

4. Strategic National Planning:

   "Governments, particularly those like the U.S., need to proactively assess potential CBDC developments and their implications for national security and financial integrity" (41:17).

Conclusion

The conversation underscores that while CBDCs offer significant advantages in efficiency, monetary policy, and financial inclusion, they also present novel challenges in the realm of illicit finance. Fanusi emphasizes the need for vigilant regulatory frameworks and collaborative strategies to harness the benefits of CBDCs while mitigating their misuse by malicious actors.

Notable Quotes

• Yahya Fanusi at 04:06:
  "A CBDC... is in essence, a digital banknote."

• Alan Rosenstein at 05:34:
  "If I give you $5 in a banknote, I've just given you $5... a CBDC would eliminate the need for settling in the background."

• Yahya Fanusi at 12:40:
  "Bitcoin is a decentralized system... it's managed by central authorities."

• Yahya Fanusi at 28:50:
  "CBDCs have programmability, cross-border capabilities... they still offer advantages over cash."

• Yahya Fanusi at 41:17:
  "There has to be a greater public-private partnership on how CBDCs should look and be run."

Timestamp Reference

For ease of navigation, below are the referenced timestamps corresponding to the quotes and sections discussed:

• 04:06 - Definition of CBDCs
• 05:34 - CBDCs vs. Traditional Electronic Payments
• 07:57 - Advantages of CBDCs
• 10:16 - Timeline for CBDC Implementation
• 12:40 - CBDCs vs. Bitcoin
• 16:37 - Programmable Money
• 24:38 - Introduction to Money Laundering
• 28:50 - Criminals' Interest in CBDCs
• 31:58 - Money Mules in CBDCs
• 33:58 - Winning Merchants
• 35:48 - Cross-Border Transactions
• 37:55 - Crypto Asset Exchanges and CBDCs
• 41:17 - Mitigating Money Laundering Risks

This summary aims to provide a comprehensive overview of the podcast episode, capturing the essential discussions and insights shared by Alan Rosenstein and Yahya Fanusi. For an in-depth understanding, listeners are encouraged to access the full episode through Lawfare's website.