Introduction
In the not-so-distant future, China becomes the first major economy to issue a central bank digital currency (CBDC). The development goes largely unnoticed at first, since payments in China are already highly digitized. Then, North Korea tests a nuclear missile that demonstrates significant advancements in its nuclear program. Analysts believe it could land a nuclear weapon in the continental United States within a year. These capabilities, it turns out, are funded using the Chinese digital currency, which U.S. authorities cannot track. Soon thereafter, countries that want to escape U.S. oversight and sanctions, like Russia and Iran, begin issuing their own digital currencies.
The President of the United States calls on the National Security Council to assess threats to U.S. national security and recommend responses. Tactically, how should the U.S. respond to North Korea’s missile test if economic sanctions are no longer effective? And strategically, how can the U.S. continue to leverage economic power in the world of national digital currencies?
The mock NSC meeting unfolded at Harvard Kennedy School (HKS) on November 16, 2019, as former cabinet officials, career diplomats, technologists, and academics convened to debate responses to a game-changing technology. Participants had been briefed on the crisis 72 hours earlier, with background research and talking points compiled by HKS students acting as their chiefs-of-staff. As the NSC debated responses in the White House Situation Room, the meeting was interrupted periodically by breaking news alerts about cyberattacks on U.S. financial institutions and human rights abuses in China.
The primary objective of the simulation was to facilitate a policy discussion on the potential role of digital currencies in the global economy and its implications for U.S. national security. While the scenario is fictionalized, it is based on the real and rapid developments in digital currency technology, led by China’s efforts to launch a digital yuan and Facebook’s proposed Libra coin. The simulation illustrated how these and other initiatives to develop alternative monetary systems will affect the ability of the U.S. to implement sanctions, monitor illicit activities, and uphold data privacy standards.
Moreover, and perhaps most important for the live audience comprised primarily of Kennedy School students, the simulation revealed the inner dynamics and decision-making processes of the Situation Room. As former Cabinet and senior government officials reprised their real-life participation on the NSC, the audience observed how policymakers make decisions amidst imminent threats, incomplete information, and competing priorities.
This brief includes the mock memorandum delivered to NSC members explaining the national security crisis, the highlights from their discussion, and lessons learned from the simulation. We hope that it will stimulate more discussion about how policymakers should manage the rise of digital currencies, and more broadly, protect U.S. economic power in a rapidly changing economy.
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