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14 Harv. Nat'l Sec. J. 1 (2022-2023)

handle is hein.journals/harvardnsj14 and id is 1 raw text is: ARTICLE THE ORKNEY SLEW AND CENTRAL BANK DIGITAL CURRENCIES Gary B. Gorton & Jeffery Y. Zhang* ABSTRACT This Article on central bank digital currencies is motivated by a parable, The Orkney Slew, which is set in an archipelago. Based on the parable, we point out a significant economic market failure that exists in the cross-border payments realm. The analysis then focuses on real-world examples and the national security concerns, including for Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) and the continued efficacy of U.S. sanctions, associated with the rapidly evolving digital payments landscape. Many central banks around the world are now cooperatively experimenting with cross-border interoperability of digital currencies. These efforts are driven by the idea of building a global network an infrastructure to improve global supply chains and large value cross-border payments, as well as to mitigate national security concerns. While we do not believe that such an infrastructure is necessary at this moment, we do argue that cross-border experimentation is necessary. CONTENTS INTRODUCTION ............................................................................................. 2 I. THE O RKNEY SLEW ................................................................................... 3 II. THE U.S. NATIONAL BANKING SYSTEM .......................................................7 III. CENTRAL BANK DIGITAL CURRENCIES .................................................. 10 A. Market Failure in Cross-Border Payments ...........................................11 B. Interoperability, Standards, and QWERTY............................................14 C. National Security Concerns .............................................................. 27 1. Anti-Money Laundering .....................................................................27 2. Sanctions ......................................................................................... 28 3. D ollar D om inance .......................................................................... 31 D . Building Infrastructure ...................................................................... 33 E. The Lucas Critique and Policy Process ............................................. 34 C ON CLU SIO N ...................................................................................................35 * Gary Gorton is the Frederick Frank Class of 1954 Professor of Finance at the Yale School of Management. Jeffery Zhang is an Assistant Professor at the University of Michigan Law School. The authors thank Michelle Tong for excellent research assistance. The authors also thank Meghan Greene, Howell Jackson, David Wishnick, participants at the Wharton Financial Regulation Workshop Series, and the editors of the Harvard National Security Journal- including Diego Negr6n-Reichard, George Papademetriou, and Nicholas Weigel-for their thoughtful comments and suggestions.