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1. South Korea's Critical Moment in Digital Currency Policymaking: Between Regulating Cryptocurrencies and Launching a Central Bank Digital Currency (CBDC)

Author:
June Park
Publication Date:
03-2022
Content Type:
Working Paper
Institution:
Korea Economic Institute of America (KEI)
Abstract:
Why is South Korea pilot-testing its Central Bank Digital Currency (CBDC), and what made it shift from non-issuance to consideration? This paper investigates the Bank of Korea (BOK)’s CBDC-related developments amid the geopolitical contest between the U.S. and China. It examines the Moon Jae-in administration’s defiance of decentralized finance (DeFi) and the BOK’s sudden shift from non-issuance to potential issuance, which led to expedited research, development, and pilot-testing of CBDCs. As in the case of the digital yuan, the BOK envisions a hybrid architecture for the digital won, wherein central banks and associated partner institutions are CBDC distributors, though they are distinguished by placing the digital won on distributed ledger technology rather than by centrally controlling it. However, South Korea’s previously rash decision to forego DeFi under an undemocratic process has deprived the country of the time and opportunity to develop new innovations as a leading country in the digital frontier. By sticking only to digitalizing centralized finance, the country now aims to be in “standby” mode for its CBDC launch if and when required, so as not to fall behind in digital financial architecture. This paper scrutinizes the South Korean government’s moves on crypto and CBDCs and argues that 1) the Moon administration has shown incapability in addressing DeFi amid the crypto boom and bust, and 2) the BOK’s shift from non-issuance to potential issuance of the digital won is driven by its interest to uphold central bank independence amid swaying geopolitics between the U.S. and China and an unpredictable upcoming presidential election in South Korea.
Topic:
Economics, Elections, Finance, Cryptocurrencies, and Digital Currency
Political Geography:
China, Asia, South Korea, North America, and United States of America

2. North Korean Cryptocurrency Operations: An Alternative Revenue Stream

Author:
Heeu Millie Kim, June Lee, and Rachel Paik
Publication Date:
05-2022
Content Type:
Policy Brief
Institution:
Belfer Center for Science and International Affairs, Harvard University
Abstract:
As cryptocurrency has risen to prominence within the past decade, its widespread use has like- wise created great potential for exploitation by malicious actors. With a cyber arsenal capable of reaching cryptocurrency platforms and users, North Korea has increasingly targeted virtual assets as a source of revenue for its regime. In its 2021 final report, the United Nations Panel of Experts estimated that North Korea stole approximately $316.4 million in virtual assets between January 2019 and November 2020. The decentralized nature of the cryptocurrency market is well-suited for a heavily-sanctioned and financially-isolated state like North Korea, especially given tighter trade restrictions and border closures during the COVID-19 pandemic. The ease of obscuring ownership of virtual assets and the lack of regulatory oversight make cryptocurrency all the more attractive for North Korea. Although North Korean cyber operations have been widely publicized, the purpose of this report is to focus on three ways North Korea obtains cryptocurrencies, specifically cryptomining, cryptojacking, and fraudulent initial coin offerings (ICOs). Given observed trends and changes in the cryptocurrency environment—namely, the rise of decentralized finance (DeFi) and over-the-counter brokers—this paper finds that North Korea’s crypto operations are consistent with its national objectives and likely to continue. Second, North Korea’s cryptocurrency operations offer an attractive and transferable model for other financially-isolated states and non-state actors. Finally, governments should work with law enforcement agencies, multilateral institutions, and non-traditional actors to mitigate the national security threat from North Korea’s cryptocurrency activities.
Topic:
Science and Technology, Finance, Cryptocurrencies, and Virtual Assets
Political Geography:
Asia and North Korea

3. China's Blockchain and Cryptocurrency Ambitions: The First-mover Advantage

Author:
Alice Ekman
Publication Date:
07-2021
Content Type:
Policy Brief
Institution:
European Union Institute for Security Studies
Abstract:
China was initially cautious in the development and application of blockchain technology. Among the technology’s best-known attributes are the relative anonymity and immutability of the information, as every blockchain transaction has a digital record and signature that can be identified, validated, stored and shared. This technology could therefore become a double-edged sword for the Communist Party of China (CPC), as it goes against the government’s efforts to censor content it considers sensitive and, in more general terms, efforts to assert its cyber-sovereignty. However, after at first observing the emergence of blockchain technology with concern, China’s central government has increasingly seen it as an opportunity, as has been the case with most emerging technologies. Since the launch of the 13th five-year plan in 2016 and the release of the first White Paper on Blockchain Technology and Application Development by the Ministry of Industry and Information Technology the same year, the CPC has increasingly considered that blockchain could become an economic, political and geopolitical asset for the country, if ‘guided’ well. China has continued to shape its positioning on and conceptualisation of blockchain technology on a regular basis over the last 5 years: the China Blockchain Industry White Paper (1) was published in 2018, another White Paper entitled Blockchain Technology Application in Judicial Evidence Storage was published in 2019 (2) and the 14th five-year plan (2021–2025), released in March 2021, also refers to blockchain and cryptocurrency (see timeline diagram on page 7) (3). China’s unique approach to blockchain is conditioned precisely by this paradox, stemming from the decentralised nature of the technology and the highly centralised nature of the Chinese political system. While blockchain technology is essentially decentralised, regulations in China have aimed to guarantee state control over its development and application. As part of this dual policy, which is analysed in the first part of the Brief, the Chinese government has launched its own digital currency – the digital yuan. At the same time, it dislikes bitcoin, which relies on a truly decentralised type of blockchain. Although blockchain is best known for being the technology behind cryptocurrency, the Chinese government’s approach towards blockchain is very comprehensive, going far beyond cryptocurrencies. It promotes application of the technology in a variety of fields, ranging from energy conservation to urban management and law enforcement, and has strong ambitions to become the world leader in the field. In October 2019, China’s President Xi Jinping, speaking at a study session for members of the Politburo, declared that he wanted the country to be a ‘rule-maker’ on blockchain, suggesting that this technology will increasingly become a key arena in the country’s race against the United States for technological supremacy (4). Blockchain has become a fast-growing sector in China over the last two years. But is China likely to succeed in the global promotion of an alternative form of blockchain? This Brief answers this question by analysing the development of different applications at national level, before and during the Covid-19 pandemic, but also the emergence of international cooperation on blockchain and cryptocurrency.
Topic:
Science and Technology, Cryptocurrencies, and Blockchain
Political Geography:
China and Asia

4. Imagined Currencies: How the DPRK Uses Cryptocurrency to Blunt Sanctions

Author:
Michael Buckalew
Publication Date:
11-2021
Content Type:
Special Report
Institution:
Pacific Forum
Abstract:
This research provides a contemporary study of how and why the Democratic Peoples’ Republic of Korea (DPRK) chose to integrate cryptocurrency into its sanctions evasion strategy, as well as the US government’s response to this via its financial services regulatory and federal law enforcement agencies. The increased coverage and efficacy of US and international sanctions, especially during and since President Obama’s second term (2013-2017) forced the DPRK to find new sources of revenue to maintain elite domestic support and fund their weapons programs. The creation and proliferation of cryptocurrency, which allows for both a digital store of value and a means of exchange outside of the traditional international finance system, opened up an entirely new means by which the DPRK was able to obtain and move funds. Much the DPRK’s cryptocurrency is obtained by the through the use of illicit methods and their success has blunted the impact of sanctions as a policy tool. As a result, US financial services regulators and law enforcement have moved to regulate cryptocurrency and crack down on illegal activities associated with it, such as ransomware payments. However, US regulations regarding cryptocurrency remain largely fragmented across agencies and various local jurisdictions. This research highlights the underappreciated role played by the US Treasury Department and the semi-independent agencies under its aegis in turning policy goals into enforceable administrative law. It also finds a high degree of continuity in the development and application of sanctions between the Obama and Trump administrations against the DPRK. Furthermore, this study demonstrates the need for policymakers to develop a more comprehensive US legal framework around regulation of cryptocurrency to close off growing illicit revenue generation by hostile actors. The study then briefly touches on the increased importance of the DPRK’s digital activities during COVID-19. Finally, this study outlines three potential methods by which to manage risks posed by cryptocurrency: 1) a public-private partnership to create s standards setting or certification organization to self-police the industry; 2) the US government using its sovereign authority to legislate and regulate; or 3) an outright banning of cryptocurrency activities in the United States.
Topic:
Sanctions, Finance, Cryptocurrencies, and Illicit Financial Flows
Political Geography:
Asia and North Korea