Wall Street, Regulation, and the Future of Money | J. Christopher Giancarlo
00:02Bankless Nation, I have the pleasure of being joined with former CFTC Commissioner,Chris Giancarlo. Chris, welcome back to Bankless.It's great to be back, David.And I hope it's been sooner than five years.I know it was at least five years, but I think we've done one more recently.It's great to be with you.You have been in my arc in crypto the entire time.And I remember maybe to start off, because your book is very personal.
00:29We're going to talk about the book that you wrote.I've got it here on.on my desk. The first time you came across my awareness was when I was first getting intocrypto and my imagination was going wild and I was paying attention to your hearing when youbecame crypto dad. And I was a young, millennial, barely an adult at the time. And I heardthis older gentleman who had already had this established career advocating for the curiosity ofthese young kids growing up and finding crypto. And I remember getting very emotional in that moment,feeling very heard as just a young adult coming into the workforce, being interested about tech.
01:14And so your arc throughout crypto has been with me the entire step of the way through your tenureat the CFTC and beyond. And now you've got a second book out, The New Adventures of Crypto Dad,got it here with me. Maybe to start there about this book. Like, why did you writethis book. What does it mean for you? And really, who is this book for? Thank you so much. And that isreally touching. You know, when you go into a hearing like that, you don't know who's listening orwhat impact it's going to have. And quite frankly, I was speaking to people, for the most part,even older than me, a lot of old senators and they're almost by definition fairly old in that body.and I was trying to say to them,
01:58don't turn your noses up at this innovation,don't treat it with, you know, disdain and derision.There's a lot of young people that are truly fascinated by itthat see it as a huge opportunityto actually engage in the financial system.And rather than, you know, taking a, you know,an old boomer view that, well, this is beneath us,you know, there's nothing wrong with the financial system.
02:22There's no problem to be solved.you know, it worked for us, you know, paper checks were good enough for us, why they shouldn't be good enough for the next generation. I was trying to say to them, look, you know, we owe it to the next generation to get the rules right. Let's not create an environment that's filled with fraud manipulation. That's create a smart regulatory framework. So that was the, you know, that day, that's who I was trying to reach. I remember John Kennedy said at the hearing and it's in the transcript.He said, I write, I still write with a quill pen.Why should I have to learn about a new technology?And my response was something to the effect of, you can learn about it or not learn about it.It's going to happen anyway.And so maybe it's a better idea to learn about it.But that was the audience I was trying to reach.
03:13But in fact, as you know, it reached a much broader audience.I came into that hearing with about 1,500 Twitter followers.I left with about 45,000, and they had given me all these nicknames, including Crypto Dad,which is the name that I liked and have adopted and have used a way to communicate.And as you ask the question, what am I trying to do with the new book?A lot of what I tried to do with my previous book is to speak to a broad audience,not just a crypto-efficient audience, but a much broader audience,and explain that this is not just some, you know, funky new alternative asset class.
03:55This is a whole new architecture of finance.And it's going to change everything we know about banking and finance and even money itselfwith the same profound impact that the first wave of the Internet had on information gatheringand social networking and communications and commerce.This is a new wave of the internet.It's almost as if the internet is finally getting aroundto setting its sights on finance,finally getting around to setting its sites on banking,
04:29finally getting around to setting its sights on money,and none of those things are going to be the samewhen this wave completes its course.When you were talking in your hearingto the congressman and senators,and you were imploring them to take this technology with curiosity,with openness rather than with cynicism.Do you think they listened?
04:51Now that it's eight years later,that hearing happened in early 2018,coming up on a decade now,the royal they, the collective they,did they listen, do you think?Well, you know, I ended that plea with,let's create a smart regulatory frameworkand judged by that plea to them,
05:11they were not listening because here we are eight years later and we still don't have that frameworkand the clarity bill got passed in the House. It stalled in the Senate. So many of those samesenators couldn't find the will to put forward that regulatory framework that I called them to do.And candidly, I don't know how many of them were listening that day I spoke to them. It seemsas if it was more people in the Twitter sphere that were listening rather those senators. I don'tthink they paid any attention to crypto until Sam Bankman-Fried. And Sam Bankman-Fried embarrassed thembecause of his campaign contributions. As I write about in this new book, I think that's when,up until that point, crypto wasn't really a Republican or Democrat thing. It wasn't political.
06:00It wasn't political really for the first year or so of the Biden administration. It didn't becomepolitical until Sam Bankman freed. And I think the embarrassment factor led Democrats, certainly the onesthat are in the in the camp of Elizabeth Warren, to take a, the best defense is a good offense.Rather than admit that maybe we got two in bed with a guy who turned out to be a fraudster,they went on to attack mode and became very hostile to crypto. And also as I write about in the book,Donald Trump took advantage of that. He recognized the political opportunity and pitched in with support forcrypto. So it was a combination of Sam Beckman-free. Then the election and the money from Fairshakewoke a lot of these senators and congressmen up to the power of crypto. So I think it was a political
06:57response to crypto. And these are things I write about extensively in the new book. I'm hoping that we'reback to a non-political approach to crypto. I'm hoping that now it's becoming so ingrained,the generation that's grown up with it are taking it forward. And the Luddites in the partyhave now moved on in many ways. Now they've set their opposition to innovation to data centers.And they've set their opposition to AI and maybe they'll leave crypto alone.This is actually one of the threads I really want to pull on with you now that I have theopportunity. You kind of have some inside baseball, some inside perspectives because you were in somepretty key meetings watching the Democrat Party and the Republican Party kind of choose sides,
07:45you know, position themselves around the crypto industry. There was that famous meeting withMark Cuban and Rocana decently into the Republicans, the Democrats' hostility towardscrypto, trying to get the Democrats to open up to crypto. You also talked about in the bookhow just there were relationships with Elizabeth Warren and the banks.My question to you is, was Sam Bank been freed,did that episode with the Democrats mostly or completely explain Democrats' hostility to crypto?Or are there other things to also discuss when we ask the question,why did the Democrats hate crypto?
08:26How did that happen?Yeah.So, you know, we all sometimes can be fallen to the camp of overgeneralizing.and I think it's an overgeneralization to say, you know, all Democrats were opposed.There are some, and there still are, people like Kristen Gillibrand, who I think is really smarton crypto issues and very positive and the new senator from Maryland also Brooks.And there's several others.I don't think it's, you know, a Democrat party thing, but it's definitely the Elizabeth Warren thing.
09:00And, you know, Elizabeth Warren likes to position herself as,a friend of the little guy, but, you know, her campaign contributions come from a lot of large banks.And I think in some ways the resistance to this innovation, sadly, and I write about this in the book as well,our American banks have used their Washington lobbying clout for the last 40 or 50 years to resist every innovation.They used it to resist interstate banking.They used it to resist chips in credit cards.keep the old swipe cards. They used it to resist ATM machines. They use their lobbying cloud.It's almost as the lobbyists run out to the countryside and tell community banks that the sky is
09:45falling. There's some new technology that's going to hurt banking. Then they get the assent from thebanks to go back to Washington and fight the innovation. And it may be a short-term win. It's a long-termfailure because eventually these community banks have to adopt the new technology.anyway. And I think once again, crypto came along and the bank lobbying groups ran to their membersand said, the sky is falling. We need to fight this. Give us more and more resources to do that.And we'll get a win for you and you'll salute us. And I think that's what happened. And theyfought clarity. And the sad part about that is, you know, banks from coast to coast are eventuallygoing to have to adopt tokenized deposits anyway. You know, the whole financial system is
10:33moving to digital rails and resisting, you know, regulatory and authorizing statutes only delaythe inevitable and wind up hurting these regional banks anyway. So, but Elizabeth Warren fought thefight and Gary Gensler saw, I believe, that his pathway to becoming Treasury Secretary in asecond Biden term was through Elizabeth Warren. And to get her support, he had to becomethe prosecutor of crypto.And as I recount in the book in great detail,he used a whole bunch of techniquesfrom refusal to work with Congress on new legislation,
11:14to debanking of not just crypto companies,but crypto executives,to refusing to write rulesand to widely abusing his enforcement power.I detail in great detail,the degree to which he used something called the Wells Notice, which is a common procedure by whichthe SEC informs firms that they're about to commence enforcement action. He used that to actuallystop firms from doing business, even if there was no intention to prosecute them anyway. I mean,
11:49there was wild abuses. It's often said that Donald Trump, at his administrations, break norms,but the norm breaking that took place at the SEC under Gary Gensler is unprecedentedand it needs to be held to account.And I try to do that to some degree in the book.It's not political.It's just factual that the SEC was rogue for the last two years of the Biden administration.And I hope we never see that happen again.During the Gensler era, there was just a persistent question from the crypto community of just why?
12:23Why was he like this?Is your answer that crypto was just a means to an end for Gary Gensler to advance his career?It was just a strategic bet by Gensler to climb a ladder?I don't want to dump on him personally, but I do want to criticize the agency institutionally for where it went under his leadership.But I will say this, if one knows his career.I mean, he started out as part of the new Democrats under Jack Rubin and Clintonadministration that was opposed to regulating the swaps market. And he, you know, he was not a,you know, he was a friend of markets and a friend of innovation earlier in his career. So to become a,
13:09you know, there's a famous medieval inquisition figure called Torquamata who prosecuted peoplethat didn't have the right thinking. You know, he became the Torquemata of the SEC.and, you know, it really held back innovation.But I guess the big takeaway, David, is it didn't stop it.And in fact, the firms that persevered just got stronger.It's amazing under such heavy prosecution and persecution, you might say,digital asset innovation did not die.It survived, and in many ways it's stronger because of it.
13:52firms now that survived that period of time are emerging as some of the leading firms now.And of course, now you're seeing all of traditional finance, including all the major banks,all the major infrastructure providers like Depository Trust Clearing Corporation and Swift andothers are now all moving into this asset class, are moving in adopting this technology.Why?Because it's more efficient.Why?Because it's lower cost.
14:19Why?because it's much more accurate in terms of knowing where their things of value are,their collateral, their money. And so under the most, you know, worst persecution one could see,this innovation didn't die, it thrived. And now the genies out of the bottle, it's becoming soembedded that even if Elizabeth Warren were to be elected president someday and brings him back,I think it's too, the roots are going to be too deep in the ground to be ripped up and we're on our way.I truly believe within the next 12 to 15 years by the year 2040, the entire financial system is going to be moved from its current analog state into digital rails, distributed ledger technology and tokenization.Do you think the hostility towards crypto, which goes back as far as I can remember,
15:15remember, when you were called into the hearing, it was right after the CFTC, under your leadership,approved the first Bitcoin futures. It was the first Bitcoin derivative product.And like, in the world, by the way, it was the first, it was the first regulated framework forcrypto derivatives in any, in any economy, in anywhere in the world.Yeah. And I remember the tone of the hearing was not, hey, what is this? Can you pleaseeducate us, it was explain yourself. What did you just do? And so the hostility has been withcrypto as far as I can remember up until modern times. And even on modern times, I was definitely beingcalled on the carpet. I was definitely being called on the carpet. Yeah. Do you think the era of
16:04institutional hostility to crypto is behind us? Well, you know, the reason I was being called on thecarpet, you know who is really most annoyed at what we did? It was the Wall Street banks. Right.They were the ones who were annoyed.You know, they were the ones that were taking out full-page ads in the Wall Street Journal.They were the ones behind getting the futures industry association to write letters to Congresssaying, you know, you better rein in Giancarlo.He's, you know, he's off the rail.He's off the chain here.
16:32And the reason they were doing that is because they were unprepared.It was moving faster than they wanted to go.And they do what they did what they usually do.They ran to their politician friends to try to.get them to gang up on me. But, you know, I felt as if, look, if Congress wanted to bancrypto, they had all the authority to do so. But if they didn't ban it, if it was a legal product,and there were some people that wanted to trade it, then it was my job. It was my duty to put aregulatory framework around it. I felt as if I was doing the thing I was there to do.
17:09So you opened the door to the very first derivative product that the CFTC as relates to crypto.The march has continued after your tenure.And we've got CME Bitcoin options, ether futures.We had downmarket, alt-coin futures, physically settled futures, and most recentlyperpetuals.Was that the normal arc for the CFTC?Was that about what you expected?Was there anything that has the CFTC missed something?
17:36How would you evaluate or give a report card to the CFTC's progress after your departure?Well, look, eight years later, after we did that, that market today,A, it's deep, it's liquid, it's transparent because it's on a regulated exchange.And most importantly, it's well regulated.I mean, it's well policed against fraud and manipulation.So I think it's been an enormous success.Whenever you see the CFDC Greenlight, a new asset class, it's almost for everybody involved.It's a test case.
18:09And the CFTC usually does not allow a self-certification of a look-alike productfor a couple of months because it's now getting all of its surveillance techniques in place.It's developing its metrics.It's developing its pattern recognition capability for that new asset class.It's gathering data from the exchanges that are sponsoring that product.It's usually assigning an analyst or two to monitor that product, start becoming familiarwith trading patterns, become familiar with a market.at liquidity issues, becoming with familiar with how it trades over the course of five days or seven
18:51days or however the pattern is, it might start working with overseas regulators that havea lookalike markets to see if there's some information sharing. And once it develops familiaritywith the asset class and the product set, now it's ready to start, you know, moving to differentdurations or different settlement periods and variations on the original. So we knew thatgreenlighting that first Bitcoin future was now going to give our agency time to start masteringthe product, mastering, you know, all the different trade flows and liquidity profiles,so that as new products came online, Ethereum futures, XRP futures, Solana futures, et cetera,the CFTC would now have started to build some. What people don't out from the outside don't
19:42understand or don't really appreciate is the degree of really market expertise that are in an agencylike the CFTC. You know, we don't have a disclosure regime the way the SEC does. We're primarilya anti-market manipulation agency. Our job is to really understand market dynamics. And I thinkthere's few agencies that do that as well as the CFTC globally. I mean, compared to our counterpartsaround the world. One of the reasons why we don't merge the two agencies, the SEC and the CFTC,is because of all this experience, all this surveillance and market dynamic understanding theCFTC has that's unique. Agencies around the world that are primarily securities agencies,they do a little bit derivatives. They don't have that same degree of market expertise. The CFTC
20:34is really good at that. And I have every confidence that the CFTC monitoring of thethese listed futures, crypto derivative futures markets is excellent and superb. And they probablyuncover a lot more misbehavior than they ever talk about. And they put a stop to it and penalizefirms for doing it because they really are the masters of understanding market dynamics.One of the main quest lines in crypto these days is the growth of the perpetual, which is a brand newfinancial instrument, absolutely under the jurisdiction of the CFTC, since it's a derivative.It's not often in humanity's history that we create new financial instruments.It's actually a very rare event.
21:17It's like a star is born type of thing.Put us into the shoes of what it's like to be at the CFTC within the birth of a new financial instrument.What does the CFCC need to do in order to do its job on something that's a brand new?Well, so I might push back a little bit.Perps have been around for a while globally.and the CFTC is actually never, unlike some jurisdictions that ban them, the CFTC has nevertaken that position. They've taken the position that if you're serving retail, they've got to be on aproper fully licensed exchange, not on like an exchange light structure. So what we call a DCM
21:56or a designated contract market. The reason why our default thinking aboutderivatives is that they have a settlement date is because most derivatives come out of the ag sector.And ags have a cycle. You plant in the spring and you harvest in the fall and you take your harvestto the grain elevator to the market at harvest time. And so most agricultural derivatives,which for the longest time, most, I mean, 100% of the CFTC oversight were of derivatives of thingsthat came out of the ground and had a growing season, that's why you were, you know, most productshave this default date. But there's nothing that says you can't have a rolling settlement datewith no final settlement. And once the CFTC in the 1970s started accepting products that didn't
22:53come out of the ground, which are based on benchmarks, such as interest rates and exchange ratesand develop the notion of a financial future, it only became in many ways,inevitable that eventually it would also not be restricted to only, you know, fixed settlement datesthat could go to what we call perpetuals or rolling settlement dates. And so it's really not,it's, it is new in terms of the degree of retail engagement in these perpetual markets and thedesire to bring them on shore. But as a product goes, they're not, you know, they're not so novelthat the CFTC is struggling to get their heads around it. It's actually something the CFTC, I think, is quite up for. And I really do commend Chairman Seleague and his desire to not have new markets develop offshore the way the United States allowed the euro dollar market to develop offshore because of boneheaded regulations in the United States. You know, the reason why for many years we priced our mortgages in LIBOR, theinterbank borrowing rate is because in the 1970s, in order to control inflation, the Federal
24:11Reserve put a cap on how much interest American banks could pay on dollar deposits.So what did people do?They put their money offshore in banks that paid a higher rate.Of course they would.And the London banks paid a higher rate.So dollars started accumulating there because of bad American policy.And because the money was accumulating there commercially in depositors fighting for the best rate,the London rate became the real rate of borrowing in lending because it wasn't subject to an artificial cap.
24:46And that's why LIBOR, the London Interbank borrowing rate, was based on an overseas rate.And it became part of our entire financial system that we're relying on dollar deposits offshore.So bad policy can sometimes force things to happen offshore.And Mike Selegg was very concerned that global perp markets, which Americans wanted to access, would develop offshore only.And he was determined, let's bring it onshore.Not only do we support the American economy, we actually then can apply American regulation to it.So American investors can benefit of their home state regulation rather than the regulation of Singapore or the Philippines or some other foreign jurisdiction.So I think this is the right move.
25:29I think the CFDC will not struggle to get their heads around rolling expiration dates, perpetual futures.I don't think it's that technologically that hard of a leap.And I'm very confident.The CFDC's got this.I'm not, I think, look, I think decentralized markets like hyperlicker are a much bigger intellectual and policy bridge or a chasm to cross than ourperpetuals. I've been trading crypto for almost a decade, and I've used so many differentwallets, exchanges, aggregators, or front ends, and I'm basically always looking for the samething, just one interface with a deep liquidity across a bunch of chains and assets, where I can
26:10access markets like perps, earn yield, trade confidentially, and still control all of my funds.And I've never really found it, and I'm just always switching wallets, juggling, gas fees,or getting eaten by slippage. But neer.com feels fundamentally different to me. I can do anythingI want from any chain and keep all of my activity confidential.Crypto, tokenized assets, perps, payments.I can even earn yield confidentially.One account over 30 chains confidential by default.It's the way that crypto ought to work.
26:37And it's powered by NIR, which has moved over $30 billion cross-chain,uses post-quantum signatures, and has run over five years on Mainnet with zero downtime.NIR.com is the best way to be on chain and be in control.Get 20% of your trading fees back on NIR.com using the bankless link and the show notes.investment advice. Dollar stable coins taught Latin America how to store value on chain. Ripio is takingthat same idea in bringing it to the currencies people actually use every day. With wrapped fiat,Ripio is putting more than a decade of experience powering crypto infrastructure for leadingcompanies across Latin America behind a suite of six local currency stable coins covering Argentina, Brazil,
27:14Mexico, Colombia, Chile, and Peru. Each is pegged one-to-one to its local currency andfully backed by reserves held in regulated financial institutions with independent attestations publishedfor each token.But RAPT Fiat is not just designed to sit there.It's built to move.The suite is live across 10 EVM chains with liquidity and integrations already spanningplatforms like Morpho, Uniswop, and ChainLink.Users can move between local payment rails like Picks and Spay and matching Rapt Fiat
27:38one-to-one in real time with zero fees on both on-ramps and off-ramps and no FX conversion.Local Rails In, On-Chane in the middle.And for builders, Ripio offers APIs, webhooks, widgets, and a sandbox just from day one.Start building with Rapt Fiat today at Platform.Your relationship with Mike Seelig goes beyond just being excited to see him at the CFTC.You actually hired him at the law firm that you worked at before you became the CFTC commissioner.And then Mike Seelig, who you hired is now the CFTC commissioner.So it does seem to fit with the crypto dad motif of handing the baton off from the Gen X to the
28:18to the millennial generation.Talk about that story of hiring Mike Seelig at your.your law firm. What did you see in Mike? And how has your guys' relationship evolved?Yeah. So I teased him recently. I had the honor of introducing him at a law symposium at FordhamLaw School two weeks ago. And I said, look, if people call me crypto dad, then Mike Seleague issomething of the crypto prodigal son because he wandered off to the SEC before we got him backwhere he belongs to the CFTC. The history there is when I was a commissioner before I becamechairman of the CFTC. Mike was a law student at George Washington University in law school in
28:58Washington, and I hired him as a law clerk, and he worked for me, and he actually helped me do some of myfirst work on Bitcoin. I gave a speech in 2016 at the Cato Institute calling for a do-no-harmapproach to distributed ledger technology generally, and Bitcoin specifically. And Mike helped mewith some of that research as a young law student. He then went on to begin a practice in New YorkCity advising crypto firms. I then went on to become chairman of the CFTC. But when I left theCFTC at the end of my five-year term in 2019, I joined the New York White Shoe Law firm ofWilkie Far and Gallagher and I helped them build the practice we called Wilkie Digital Works.And Mike Selegg, I then recruited from his law firm to join me at Wilkie and helped him make his way through the firm, eventually earning his way to be a partner in the firm, and helping build that digital practice.
30:00And so Mike and I have a close relationship when the opportunity came in the new Trump administration for him to go to the SEC and serve his chief counsel to the Crypto Task Force.I was very supportive of that, and I was also very supportive of President Trump's nominate him to serve as chairman of the CFTC where he is today.Mike Seleck is a remarkable, as a strong legal mind.He's got enormous energy drive.He shares my view that digital assets are more than just a new asset class.It's a whole new architecture of finance.And he also shares my view that innovation should take place here in the United States,should support American capital formation,
30:42American risk hedging, and the American economy.Well, between you, Chairman Selegg, Hester Pers,and also Paul Atkins,it seems we've finally grown on Avengers of regulatorswho have discourse with the crypto industry,you know, advocate for us.Don't write us a blank check.I don't think any regulator has ever just written crypto,
31:06a blank check, like has been fairand tough when the Times call for it.But I think most importantly, just have engaged with us.And this is something that just gives me renewed optimismabout the state of crypto when it comes to being regulatedinside the United States markets.And, you know, in many ways, we're just refinding our mojo.I mean, financial market innovation
31:27has been part of the American way of lifefor a century or more.Do you know that up until the 1970s,every currency was anchored to,usually a commodity that came out of the ground off in a precious metal,when the United States could have never gone off the gold standard.If we had not invented here in the United States, mostly in Chicago, the financial future.And that allowed holders of dollars to hedge the risk of interest rates, of exchange rates,
32:00in deep liquid markets in Chicago and New York.The financial future was invented by Americans, Dr. Richard Sand,And Leo Malamid, great Americans, great innovators.And that financial future, I could argue, is responsible for the last 30 years of globalizationbecause countries could use dollars as a means of currency, a means of trade, knowing thatthey could hedge the risk in America's deep liquid markets.And during that 30 years, more people have risen out of poverty than ever before in human history.And so it's American financial innovation.
32:40With its shortcomings and risk that it takes of market rises and market falls,that always come with innovation.And yet it's American innovation that I think has served the world well.It's incumbent on regulators to actually play smallball.Regulators shouldn't be sand in the wheels of innovation.They should be standing like mature individuals working with innovators to say,okay, have you thought about this? Have you thought about this? How do we make sure there's,we limit fraud and manipulation? There's always going to be bad guys. There's always going to be
33:15people that seek to, you know, steal people's money. But that's why regulators are. They shouldwork with innovators to make sure these markets are deep and liquid and healthy and robust anddurable, but not try to, you know, insert themselves and say, we know what's best for everybody.We don't like this crypto. We're going to try to stop it. That's not American.I don't know where that comes from.That's not the way we traditionally roll in this country.We usually are open to innovation.We usually find a way to further it, but do it in a way that's smart and safe and healthy
33:47for consumers, for citizens, and for market participants.I want to turn to a few of the key questions that you asked in the book that I found particularlyinteresting that I want to get your perspective on.At the very beginning of the book, you begin with a question that I think I consider, I think,about every single day when I think about crypto,which is, I'll just actually quote you here.The question, however, is whether the traditional hierarchyof value custody and allocation will be displaced
34:16by decentralized networks,or will they be planted by entirely new centralized hierarchiesthat have mastered this new technology,but re-centralized it among themselves,or perhaps it will be a different third outcome?Can you talk about why this question is so important?And maybe what can you say aboutwhat you think the answer is shaping
34:35to be. So it's, you know, it's a theme that, excuse me, that runs through the book. You know, I came out,I came into public life in the 1980s on Wall Street and have watched how through the years,the 80s and 90s, Wall Street really became the allocator of capital. And it was a philosophyreally exemplified by Milton Friedman and before him, Frederick.Hayek that said the market may not be perfect, but it's the best way we know to allocate capital.And then the 2008 financial crisis came along and there was something of a rejection of thatfree market philosophy. And the rejection says, you know what? The market's done a rotten jobof actually allocating capital certainly to certain underserved communities. And therefore,
35:30we need a political component to the allocation of capital. And in many ways,the Dodd-Frank Act passed in 2010 was the victory of Washington over Wall Street. And people,I think, like Elizabeth Warren and others, presume now to have a seat at the table in the allocationof capital. They presume to be able to say to Wall Street, look, you know, do what you do, but makesure you allocate capital to this constituency or that constituency. And in many ways, up untilthe crypto innovation, you had this sort of.shared authority over the allocation, you know, rough equilibrium between Washington andWall Street. Well, crypto challenges all that. What crypto says is actually, you know, we don't
36:16need bankers on Wall Street and we don't need politicians in Washington to figure out how to allocatecapital. We just got to get the algos right. You know, if we get, if we get the protocolright, it should be colorblind and community neutral and should be able to allocate capital basedupon whatever the ALGO standard is. And in many ways, crypto threatens the monopoly of Washingtonand Wall Street with new participants from Silicon Valley and hopefully Main Street challengingthe hierarchy over the allocation of capital. And so I toy with this idea all the way through my bookand where I come out is I believe the digital network future is going to be as complex.as the analog past. It's going to be a sort of rough equilibrium between centralized power in the
37:10financial system and decentralized power. Bitcoin's not going away, and it's the best example we haveof decentralized capital allocation. But at the same time, if you see what the major Wall Streetbanks are doing and working with DTC and others, they are making sure that they're still going toplay a role in this digital network future. And so,I use the example of the American Revolution. My book is being published in 2026, the 250th anniversaryof the revolution. A year before the revolution started, Paul Revere warned and triggereda decentralized network of yeoman farmers and tradesmen to attack what was then the most centralizedpower in North America, the British authority. And it decimated that authority in a battle
38:01when Battlesa took place at Cambridge and Lexington. And yet the war only ended seven years laterwhen that British hierarchy was defeated by a new hierarchy of the American Continental Armysupported by the French Army. But here's the point. What resulted, what was a government that wasdesigned to be both centralized and decentralized, with power centers at the federal level,but also power centers at the state and local level, and divided government, separation of powers.the notion that we don't want all power, political power, centralized in one government,but we want multiple points of power and we want decentralization.And I think that's an example.
38:45That's sort of a model for where we, if we're lucky, and if we work hard, this new internet of value,this new decentralized ledger technology can take us.And it's not a foregone thing that it's going to end up there. It could also end up withenormous state control. That's where China is headed with their digital yuan to amass even morepower in the central state. We need to make sure that as we build digital networks here in theUnited States and in the Western democracies, we build them in a way that actually returns powerto individuals, gives individuals more autonomy over their financial wherewithal, more access tothe system more control over their own financial choices, free from control by either governments or
39:35big technology companies or big banks directing their financial decisions. Also in the beginning ofthe book, you set on the theme of the 2008 crisis. You were born in the 2008 crisis working in theworld of financial regulation. You were at a hedge fund. Is that right? I was at GFI group,which then and today is one of the leading platforms for over-the-counter, non-exchange trading of swaps.And our big product was credit default swaps, about 80%, somewhere around two-thirds or more of the world's credit default swap marketplace traded on our platforms.We were not directional.We just executed trades.We didn't take a position.
40:22Right.And you had an incredible perspective over the 2008 crisis.This is something I go back and forth on where crypto and Bitcoin especially was born out of a reaction to the 2008 crisis.And so some days I wake up and I'm like, oh, crypto is the antidote.Crypto will provide the buffer, the protection, the prophylactic for any sort of future 2008.And then other days I wake up and be like, we're building a parallel financial system.Just because we were built as a reaction to it doesn't mean that we actually have too much to do with solid.some of the core problems that created 2008.
41:01Where do you stand on that?Do you think about 2008 frequentlywhen you talk about and think about crypto systems?You know, we all fell down the crypto rabbit holein our own unique way.I fell down it in the bull's eye of the crisis,the eye of the storm, you might say.When I was getting calls from the New York Federal Reserve
41:24saying, hey, what do you guys doing?again? And I said, well, look, we're the exchange for things that don't trade on an exchange. We'rethe exchange for credit default swaps. And he said, right. Now, what are you seeing in the market?Excuse me. And I said, what we're seeing is that the cost of using these products, it's basicallylike an insurance product against the inability of a financial institution to pay out on itsdebt obligations. The cost of getting that insurance is getting more expensive.by the hour. And he said, right. And he said, well, what about Lehman Brothers? And I said, well,Lehman Brothers are already gone. And he, and this was weeks before they fell. And he said,
42:07well, what do you mean they're gone? He says, because the insurance is too expensive. I said,no, nobody will actually trade with. None of the other banks want to trade with them because theydon't think they'll be around in a few days to make good on those trades. And in fact, Lehman Brothers did,in fact, fall not long afterwards. But my point is this, David, at the time Lehman Brothersfell, the Federal Reserve added up all of the protection that had been written by the other banksagainst the failure Lehman Brothers, and they estimated the cost that the other banks would pay outif Lehman fell at $400 billion aggregate from the other banks. And then they figured, well,if all those banks got to pay out $400 billion, they themselves will have weakened balance sheets,
42:50and then they may fail. And so what we need to do is stuff their balance sheets with cashthe way a fire brigade wets down the houses surrounding the one that's on fire so that they wouldsurvive. Well, I knew then, just intuitively, because of our work on our trading floor, that wheneverone of these banks wrote protection against another bank, they would turn around and rehedge theprotection. So if there was $400 billion in aggregate against the failure Lehman Brothers, the netmust have been closer in my mind to maybe $200 billion. And I spoke to a professor at NYU by thename of Bruce Tuckman, who had done some research, I said, Tuckman, what do you think? And he said,well, I think it's actually, they're more hedge than that. I would estimate that a failure of Lehman
43:33brothers would only have a net impact of 80 billion of payouts from the other banks. Well, eventually,when I became chairman of the CFTC, I offered Bruce Tuckman a job as the agency's chief economist.I said, I'm going to give you all of our data, run the numbers for me, tell me what a failure ofLehman Brothers would have come up with. Well, that research was actually published by our agency,and it's now known as a result of that workthat a failure of Lehman Brothers would have not triggered$400 billion in payout, not $200, not $80,would have triggered less than $9 billion a payout.
44:08Here's the point.If we knew in the summer of 2008that a failure of Lehman Brothers would have triggeredless than $9 billion, we could have let it fail.We could have let it been boughtthat would have been buyers lined up around the block.We could have bailed it out.none of those things would have triggered a financial crisis. Because of the opacity of its balance sheet and all the other banks balance sheet, we did not know. And crises happen when you have opacity because people don't know. If the Federal Reserve could have said, relax everybody, a failure of limbril is going to trigger $9 billion, we might not have had a bank crisis. If all of those swaps had been on a blockchain, we would have known. And to me,
44:53me, that was the lightball moment. This technology is incredible. This technology should bethe mutual ledger of all of Wall Street. If we can move Wall Street, and we are now, onto distributedledger networks, things like bank crises, simply because we don't know the gross exposure,will be resolved. And so I fell down the crypto rabbit hole looking at this as new architecture,better architecture, more efficient architecturefor the financial system,not just on Wall Street, but globally.And I continue to believe in that today.
45:31What does that actually look like?Because we are certainly in the erawhere institutional appetite for cryptofor doing some of the things that you just saidis the highest it's ever been,which makes this a very exciting erato be in crypto.But the idea of putting swaps on the blockchain
45:46still feels a little bit opaque to me.I just don't imagine,and how that would work.Are these banks settling transactions on Ethereum using a layer two?Are they doing their own intranet blockchains?What is the actual technical details to the best that you can imagine them for how this actually manifests?Yeah, well, we're such in the early stage.You know, if, you know, compare it to the railroad stage of the 1840s through the 1880s
46:14in the United States.You know, we're just laying that first rail between Baltimore and wherever it went.there's still a whole continent to be built and to be railroad beds across and new engines to be built.We're still in the very, very early stage of this innovation, and yet it's happening.And one of the areas where we're seeing a real important use case is what the depository trustCleary Corporation is doing with collateral.There's over 50 of the most important financial institutions involved in this experiment.and yes, it's in an enclosed environment.
46:52The collateral is going to stay within depository trust clearing corporation,but within it, it's going to be put into a tokenized form on a distributed ledger.And once these firms get used to the efficiencies, get used to the cost savings,get used to not having to fund hundreds of different accounts,because now they can have absolute precision to the penny of where their collateral is,they're going to say, this is really cool.Now let's take it out of the zoo.let's take this into the wild and they're going to do it.
47:23You know, I used to run a public company, GFI group.You know, our shares were issued in street name.We were lucky if we knew who 30% of our investors were.Well, imagine when shares are on a blockchain and we can have direct proximity with our investors.I think this is going to be as much demand driven as it's going to be supply side drivenin terms of moving to these distributed ledgers.So look, we're in early interest.but I have every certainty that, as I say, that by 2040, the financial system is going to be rebuilt on digital rails.
47:58Now, will there still be, you know, traditional share certificates around? Sure. I mean, depository trust still has bearer bonds in a vault somewhere.You know, Rome was built on top of the cities that came before. We will build this new digital financial system on top of the analog financial system.But the direction of travel to me is just absolutely clear.If I can send a photograph around the world in seconds, why can't I move money in the same way?If I can, you know, why is any money transaction completely intermediated by six different firmsand yet I can send a text message in no time?This is direction of travel.And I'll tell you what's going to absolutely get us there is the new generation coming into the financial system.
48:45a generation that grew up, you know, in their parents' basement trading game tokens and suits of armor are going to say, I want to do the same thing with my money.I don't have patience for paper checks and branch banking.So this is going to happen because it's going to happen generationally.Bankless Nation, we've built something for you.Introducing the bankless MCP.Chat, CBT, and Claude are great at a lot of things, but ask them anything beyond the basics of crypto about protocol mechanics,tokenomics, or just what happened last week in crypto, and the gaps will start to show.The problem is context.
49:16Bankless, on the other hand, has spent almost a decade building one of the deepest archivesof crypto data anywhere.More than 2,000 podcast transcripts, 10,000 articles, and countless conversations withthe people actually building this industry.And now we've structured all of that data into the bankless MCP.So you can go and connect it to your clod or chatDBT, and suddenly your AI can answer yourcrypto queries with the entire bankless archive behind it.And every new bankless article or episode gets added automatically, so the context keeps staying up to date.
49:45The bankless MCP is exclusively available to bankless premium subscribers.So you can go to bankless.com, upgrade to premium, and connect the MCP in just a few minutes.And all of a sudden queries to your AI, LLM, whatever you use, we'll get a thousand times better.So go check it out.There is a link in the show notes.And once you become a bankless premium member, you can hop into the bankless Discord and let me know how you like it.Some exciting news.We are launching a new podcast to help people figure out the criminal.
50:09How to navigate it.The best crypto cycle investor I know, his name is Michael Nato.He runs the Defi report.This is the guy that sent me a sell alert before the 1010 price drop happened.His cycle analysis has been absolutely on point.I've been following him for years.And this year, we started recording weekly podcast episodes.Each one we get into his portfolio, what he's holding, the market structure, entry targets,
50:31fair market value of Bitcoin and Ether.And where we are in the cycle, there's new episodes that are released every Wednesday.They're 30 minutes.They're short.they're punchy. I think this crypto cycle is harder to navigate than most. So let's do it together. Go subscribe to this podcast. Search the Defy Report. Wherever you get your podcast, YouTube, Apple, Spotify, or find a link in the show notes. There's a new episode waiting for you now. You carve out towards the end of your book a section to talk about privacy. And I think the antidote to 2008, as you say, is transparency. But that brings with it a double-edged sword, which is individual privacy, especially on public permissionless transparent and blockchains.And right now, I think that is also one of the main eras that we are finding ourselves in crypto.The extreme levels of transparency is actually showing up in negative ways with home invasions, kidnappings, and France.But then also you write a section about how the IRS demanded Coinbase to turn over a bunch of files about their customers report, which is a violation of privacy.
51:35How do you think privacy unfolds as crypto progresses?Well, this is to me the most fundamental issue of all.As important as this technological changes, it pales in significance to the real value-based issues.So I have every certainty that this technology is going to take hold.I don't have any certainty that we're going to be able to encode our democratic values in this digital future.what I worry about. I think what we already know where China is going with their digital yuan,and that's to be a control instrument. If you criticize the regime, your money will be turned offand you won't be able to get a bus out of your village. We know where Europe is going with their
52:22digital euro, and we already know where they are with their banking system, and it's a surveillanceregime, surveillance by the government. Unfortunately, as intelligent as the Genius Act was,as an important breakthrough as it was, to legitimize stable coins, it imposed upon stable coinsthe very retrograde analog bank secrecy Act, which has nothing to do with secrecy andeverything to do with surveillance. So already going down the road of bringing surveillance,government surveillance into a new financial system, and that's the wrong path to follow.I think the United States has the absolute opportunity to be the big winner in the 21st centuryof distributed ledger technology, but only if we once again regain the right balance
53:12between individual privacy and law enforcement. That relationship has gotten out of balancesince the Bank Secrecy Act was passed in the 1970s, and further out of balance since 9-11,where our financial system today is much closer to Chinese system than anybody wants to admit.It is completely surveilled.You know, our financial transactions are subject to surveillance, and if you think cash gives youany protection from surveillance, just look around the next time you go into a bodega.There's cameras right over the cash register reading every serial number on every bill.there's no privacy in our current financial system, and the Supreme Court is as much guilty of that condition because of what they call the third party rule, which I write about, a third party doctrine, which I write about in my book.
54:02We have to regain that balance.And I think that digital asset technology gives us the opportunity to regain that balance.But right now, we're not heading in the right direction.And as a result, we're losing our advantage.I think the winner in the next century, that's why I call it.call my book The Quest for Financial Freedom, I subtitle it, because what we ought to be doingis, as this technology is coming in, use as an opportunity to say, wait a minute, privacy is notonly a right, it's a social good. We want our citizens to feel they can make private financial
54:37decisions free of eavesdropping, whether those eavesdroppers are big tech companies, whethertheir banks. The OCC just put out a report this week, talking about how the Biden administrationuse their surveillance of financial transactions to actually debank people, CEOs of companiesfor reasons having to do with politics or religion. That's not what we should be doing in a democracy.We've got to get away from politicians using the financial system to eaves, rep, surveil,and ultimately punish their adversaries.If we get this wrong, then all the technology in the world is just going to be used by people to oppress us.But if we get it right, the technology is going to be used by us to free ourselves to engage in financial transactions, to enhance our individual autonomy, our private choices, lawful choices, of course, but private choices that each of us are entitled to make, you know, in the classic notion of freedom and democracy.
55:38Do you think the U.S. government should create a dollar CBDC?Well, I reject the notion that CBDC is somehow an invasion of privacy and stable coinsare somehow a protection of privacy.That's a completely false choice.Stable coins are now legally fully subject to government surveillance under the Bank Secrecy Act.So there's no privacy in stable coins.And I could make an argument under the Fourth Amendment that if the government was an issuer,they couldn't engage in surveillance because there's a right to privacy. Now, as they said,
56:11the Supreme Court has bollocks that all up with their third-party doctrine, so it's not clear.But I don't think CBDC is inherently a, compared to stable coins, inherently a greater source of surveillance.Now, there's no question that what China's done with CBDC is a control instrument. What Europe is doing is a surveillance instrument.So anything that looked like that, we should never do in the United States.But it's the bigger issue, and that's why I'm the co-founder and the chairman of something called the Digital Dollar Project.We exist to ask the question, in any modernization of the dollar, how do we protect the values for which the dollars historically stood?What Congress should have done with the Genius Act, in addition to what they did was add on a section that says, the dollar is a unique instrument.whether it's offered by a private company, whether it's offered by a bank, whether it's offered by a government, it must contain within it the right balance between law enforcement and privacy. And, you know, that's not a hard balance to rediscover. We've been dealing with that for centuries in democracies. We have this notion that what goes on inside your home is your private business. Government can't walk through the door because they want to know what you're up to. Now, if there's probable cause of lawbreaking,
57:35If they can go get a judge to issue a subpoena, they can actually bash down your door.And that's considered the right balance.We've accepted that as a society, this notion of probable cause of law breaking,supported by an independent judge issuing a subpoena to law enforcement.We don't have that in our financial system now.As I write about my book, the IRS can tell Coinbase, give us all your data.We don't have any reason to believe anybody's doing anything wrong.we just want to parse through all that data and have a look for ourselves.
58:07That's not the notion of a right balance between privacy and law enforcement.And so my answer to your question about CBDC is, right now in America, they're both headedin the wrong direction.Let's get back to the notion that the dollar is a sacred instrument.It should distinguish itself from every other currency in the world by having the best balanceof privacy in the world.And if we do that, it doesn't matter whether it's issued by the government or a private sectoractors if the standard is it's a privacy. It's an instrument of freedom. Let's make the dollar
58:37the world's instrument of freedom and then people the world over will aspire to owning it.Incredibly interesting. Chris, thanks for coming back on bankless. I have to say some of my favoriteparts of the book we weren't able to get to on the episode today. I think the section where youtalked about how you were personally involved with introducing SBF to Gary Gensler was particularlyinteresting. I really enjoyed the story of you watching Bill Clinton react to SBF.at FTX Bahamas.I thought these are particularly interesting.For bankless listeners,
59:07the first half of the book,I'll call a crash course in crypto.And then the second half of the book,I kind of will say,is being a fly on the wall of every roomthat Chris here has been onwhen it comes to crypto in the administration'sDemocrat and Republicans over the years.
59:25So it's a wealth of knowledge and experience.Chris, thanks for writing.I've got the book here.If bankless listeners want to go get a copy,it comes out today at the time of release.Chris, is there anything else you want to say about the book?Well, I hope readers enjoy it.I put a lot into it.
59:41I wanted to share a lot of stories.And I hope if they find my points resonate with them,that they'll support me in making surethat the future of finance is a future of freedom.That's former CFTC Commissioner, Chris John Carly.Thanks for coming on Bankless.My pleasure, Dave.Let's do it again.
59:58Bankless Station, you guys know, the deal.Crypto is risky.You can lose what you put in, but nonetheless.This is Frontier. It's not for everyone, but we are glad you're with us on the bankless journey. Thanks a lot.
There aren't comments yet for this episode. Click any sentence in the transcript to leave one.