The Pomp Podcast - #874 The Fight For The Future Of Money w/ Chris Giancarlo

Episode Date: March 21, 2022

Chris Giancarlo is the Former Chairman of the Commodity Futures Trading Commission (CFTC) and is the author of the book "CryptoDad: The Fight for the Future of Money" In this conversation we discuss regulation around Bitcoin & Cryptocurrencies, law enforcement In the Crypto industry, and when the Bitcoin ETF will be approved. ======================= Choice is a new self-directed IRA product that I'm really excited about. If you are listening to this, you are likely part of the 7.1 million bitcoin owners who have retirement accounts with dollars in them, but not bitcoin. I was in that situation too. Now you can actually buy real Bitcoin in your retirement account. I'm talking about owning your private keys and using tax-advantaged dollars to do it too. Absolute game changer. https://www.retirewithchoice.com/pomp ======================= Imagine coinmarketcap - decentralized. 3X in valuation is 15 billion dollars from the current price. Cryptotoday.com starts at zero, at fair launch on 7th of March. No VC. No pre-sale. Team tokens locked.  For the people, by the people. For decentralized crypto. Visit http://cryptotoday.com and read the whitepaper for the details.

All right. Chris Giancarlo, ladies and gentlemen. Chris, how are you? I'm great. Thanks, Tom. Bang, bang. Good to be with you. Yeah. All right. This is a very serious show, Chris. We have to take everything very seriously around here. Let's talk first about your time at the CFTC. You became known as Crypto Dad, now the title of your book. Walk us through, as you were kind of presiding over crypto as one of many other things. It seems like crypto became part of the conversation or became the main conversation that you guys were having. Walk us through kind of that time period. Yeah, it's actually fascinating because I didn't go to the CFTC to focus on crypto. I went to focus

on an obscure part of the over-the-counter institutional marketplace known as swaps. And that's what I was there to try to get some of the new regulations that were imposed by Dodd-Frank to actually be well-tailored to that marketplace and to work well. But by 2014, 2015, crypto was really emerging. I talk about it in my book. I received a visit from the Winklevoss brothers and some others, the newly formed at that point Chamber of Digital Commerce, and really started leaning in and started learning and understanding this.

And at first, I was fascinated by the whole world, including, of course, distributed ledger technology, which to me seemed like it might actually have provided a solution to the financial crisis. If we had had all of the credit exposure of the world's largest banks, the Wall Street banks, on a blockchain back in 2008, we wouldn't have had some of the limited choices of policy that we had. At the time, it was perceived that the gross amount of exposure for a failure of Lehman Brothers would have been $400 billion in credit default protection written by the other banks on Wall Street. And they extrapolated from that that if Lehman were to fail and trigger a failure of let's

say Goldman Sachs, then that would be say $800 billion and a failure of JP Morgan would be $1.2 trillion. Basically the feds figured out a failure of one bank could create this domino effect. we now know that while the gross exposure of Ophelia Lehman Brothers was $400 billion, the net exposure was less than $9 billion. That's based on research we did at the CFTC during my tenure. If we knew then, in 2008, that Ophelia Lehman Brothers was $9 billion, one of the policy choices could have been the Fed could have written a check. Another policy choice would allow it to fail. But we didn't know that. And so we responded with the TARP program that showered the Wall

Street banks with trillions of dollars of liquidity because of a fear of their failure. Well, we now know that wasn't necessary. And here's my point. If all of those exposures had been on a blockchain, we could have in real time netted them down to the net exposure and knew really where the risk was. And remember, at the end of the day, it was the fog of war. it was the run on the bank that caused the financial crisis because people didn't know the net exposure. They only knew the gross exposure. So the light bulbs went off for me in 2014, 2015. And at that point, the CFTC and looking at Bitcoin under the leadership of my predecessor, Tim Massad, declared Bitcoin to be a commodity subject to CFTC jurisdiction.

And then I became chairman at the beginning of 2017. And in the summer of 2017, we were approached by CME and Chicago Board Options Exchange about applications for the launch of Bitcoin futures. And that took us to a really different level. We launched LabCFTC then to be our arm of the agency to really lean in and dig in. And ultimately, we were able to get comfortable with green lighting the launch of Bitcoin futures, which then led to a lot of actually pushback and some derision, not just in the press, but also in the industry by some of the bigger legacy players in the industry were opposed. the Industry Trade Association, the FIA took us to task for greenlighting Bitcoin futures, and other regulators here and abroad were not pleased. And they were telling me that if we were to greenlight Bitcoin futures, we would legitimize Bitcoin. And you know, that kind of struck with me because I was, although I was Senate confirmed for the role, I was never elected by anybody to serve in that role, and I was honored to serve, but it wasn't for me as an unelected government, basically bureaucrat,

to legitimize or not legitimize what was effectively a legal product. It was for the marketplace to legitimize it. Our exchanges launch thousands of products, many of which never get off the ground. It could have been the case that Bitcoin futures didn't get off the ground, and that wouldn't be the marketplace determining whether it was legitimate or not. In fact, the marketplace has endorsed the product and Bitcoin Futures has taken off. But it was not long after that decision in the spring of 20, actually the winter of 2018 in February, that I was called to account for our actions before the Senate Banking Committee alongside SEC Chairman Jay Clayton. And as you do for these hearings, I prepared a 40-page

explanation of basically everything we had done to greenlight Bitcoin futures, chapter and verse of why we made the decision we made. And I expected to get raked over the coals by those opposed at that point in 2018 to the emergence of crypto, of which there were many in the US Senate. And so I was prepared for a pretty long day. And as I was looking at that testimony the night before the hearing, thinking, gosh, I could never summarize these 40 pages and hundreds of footnotes into an opening statement. So I'm just going to talk to them as a regular person.

And so the next morning when the lights went on in this hearing room in front of dozens of senators and hundreds of people actually in the audience, I said, you know, senators, I know I'm here to appear before you as the head of a U.S. regulatory agency. But if you don't mind for a second, I just want to talk to you as a dad. And I explained that I had three kids then in their early 20s who were, and where I tried to interest in the stock market, you know, throughout their teenage years with no effect, but all they wanted to talk about now is crypto. And the same with my nieces and nephews. And I said, you know, Senators, I think we owe it to this generation to respond to this interest, not with derision and, you know, disrespect, but with real intelligence. I think we owe it to get this regulation right, to respond to this new innovation, and quite frankly, this generational interest in it with a forward-leaning, thoughtful response. And as I just had gotten those words out of my mouth, my Twitter feed just exploded.

I think I had 1,000 followers when I went to the hearing. And within 72 hours, I think I had 46,000, 45,000 Twitter followers. But it was just, and that's where the name Crypto Dad came from. folks came up with lots of good memes uh crypto dad was the one that seemed to stick because i said i'm here as a dad but the real point of it was it was clear to me in 2015 2017 that this is much more than just some new fad asset class this is really a fundamental re-architecting of financial services of banking and most importantly money itself it's uh uh it's an an incredible story. I think how you got here because this book, most people are going to read

this and say, Oh, I want to know what the former CFTC chairman thinks about Bitcoin and cryptocurrencies. Uh, they're going to read it for the stories, uh, et cetera. One piece that I think a lot of people may not pull out of it, uh, is you use a very specific word in the subtitle, which is the fight for the future of money. The word fight is taken from people in many different ways um is there a fight underway in the political and regulatory landscape not only in like good or bad should we have this should we not but it also seems like on the regulatory side there's various regulatory bodies all trying to compete for who gets oversight over what politicians all competing or fighting over who gets to be the first to do something who gets their legislation put forward

Like, is that a fair analysis from the outside looking in? Yeah, it really is. And it's a multi, it's almost like a multidimensional chessboard. Within governments, there are fights going on for regulatory turf. You know, one that folks note often is, you know, disputes between the SEC and the CFTC over jurisdiction. But it's broader than that. There are other, if you look at the executive order that came out of the Biden White House

just this week on March 9, ensuring responsible development of digital assets. It's amazing how many federal agencies and regulatory bodies and bureaus are given responsibility to formulate a policy response. It goes way beyond the market regulators of the CFTC and the SEC, but it includes the CFPB, the Consumer Financial Protection Bureau, includes bank regulators like the FDIC and the OCC, the Office of Control of the Currency. It includes national security agencies as well, as well as a committee known as the FSOC, or the Financial Stability Oversight Council, which is chaired by the Treasury Department, includes a dozen agencies as part of the US agencies as part of its membership. That's before you even get the state regulators

who have a stake in this. And then you have global regulators and global standard setting policies, like the Financial Stability Board, which is a collection of the world's financial regulators and bank regulators and central bankers, which meets in Switzerland, of which the United States is a member, which is also mentioned in this presidential report. So just within regulators, you've got a battle for turf, responsibility, and authority. I think just this morning, the CFTC current chairman, Russ Benham, with whom I served at an important speech in Boca, Florida, has talked about the CFTC defending its role in this. So that's just the regulators in this fight, but it goes even beyond them.

Because you've got the legacy banking system, and certain portions of it, especially portions like correspondent banking, payments, are also concerned about what their role is in this new, what I call a new architecture of payments, a new architecture of bank services. And then you've got the population itself. And one of the things that I tried to do in my advocacy is speak to our fellow citizens that say, the future of money is being formed now. you've got a role to play in this. Issues of economic privacy, economic liberty, censorship resistance are going to be settled now. We've got to make sure that our fellow citizens understand that there's a scramble underway right now between regulators, between industry groups,

between nations. Look what China's doing with the development of their digital yuan, and they're stamping on that development certain values that are important to them, values like state surveillance of economic activity. They will export that technology that they are developing, along with the values that they're encoding in it, to many parts of the world. What will be the values in the future of money that we developed here in a democracy, that are developed in European democratic countries? Will those values prevail in the future of money? So there's, I call it the fight because the future of money, the future of banking, the future of financial services is being developed now. And ultimately, it's going to come down to what values are going to win out in that future. And that's very much a fight that we need to be engaged in. Absolutely. My last question before my brother's got some questions for you is around the Bitcoin spot ETF. We obviously have seen a Bitcoin futures ETF approved in the United States. There's spot ETFs that have been approved internationally. What's your read on this? And is there a reason why it hasn't been approved? Do you think that it will be approved? I'll kind of leave it open ended in terms of what you can and can't say. But what's your general read on the spot ETF situation?

Well, look, as a former market professional, I spent 30 years in the private sector long before I went into government, I fully understand the need and the demand for a Bitcoin future based upon spot markets. And it's disappointing to me that in economically competing nations like in Canada, Switzerland, and elsewhere, they have found their way to getting comfortable with such a product. And many US investors that are looking for a hedge against price movements have to go offshore to take advantage of those products. That was something we were very concerned about when we green-lighted the Bitcoin future market ourselves here in the US, because we wanted to be the first. That was part of our calculus. We didn't want to get beat to the punch by other

countries. And as a result, I think the United States has benefited greatly that increasingly, the price of Bitcoin is being set in US regulated futures markets. But I must say, I take a little bit of perverse pride in the fact that the first Bitcoin futures market that the SEC was willing to use as a basis for an etf was the one that we launched in 2017 over some vociferous objection so it's a bit of a vindication for that decision but i would say that i think that in the same way that regulators in canada and elsewhere have been able to find their way to get comfortable with a etf based upon a spot market might be a guide for how uh my former sister agency the sec might be able to get comfortable with this in the future and meet that pent-up demand that

clearly exists here in the United States because that demand is being satisfied offshore rather than onshore. Makes sense. Joe, what questions you got? Chris, thanks for joining us. My question would just be around regulatory clarity. We've seen a bunch of countries do different things, right? China has banned it. Other countries have bought Bitcoin. We just saw the president of South Korea is crypto-friendly and he got elected. But when it comes to the US specifically, how important is it that they not only are Bitcoin friendly and crypto friendly, but there's clarity around regulatory decisions? Yeah, you know what? So I don't even feel regulators need to be crypto friendly. They just need to be technology neutral. And they need to

recognize that 99.9% of market participants want to do the right thing. They want to operate in a regulated environment. I just need to know what the rules are. And so I think regulators have a duty to supply the marketplace with clear guidelines, clear rules so that the market can operate in a regulated fashion. And that's what we did at the CFTC over the course of 2017. It's almost four years ago now that we worked to make sure that our rule set was clear. You know, it's interesting. A lot of people have noted this, but I make it clear in our book. We didn't make the path easier for crypto futures. We actually came up with something we called heightened scrutiny. We put crypto futures under a higher standard of compliance. You might say the incline of the path to regulation was slightly more inclined than other paths, but we put lights on the path so that people could follow it. we illuminated the path. We said it's a higher level, but here's how you do it. And you know

what? It's worked very, very well with a continuing number of successful product certifications that have been launched under CFTC jurisdiction. So we didn't, in a sense, say we're going to make it easier. We didn't say we're going to be necessarily crypto-friendly. We said we're going to be technologically neutral. We're going to come up with a few higher standards that we felt were appropriate for crypto, but we're going to say, but here's the path. Follow the path, and you can get to success. And so I think that's the right recipe. I think the job of regulators is not to make it an impossible, obscure, guess right, and you get lucky, guess wrong, and you get an enforcement action on you. It's to say, look, here's the path.

It may be a challenging path, but we've illuminated it. It's clear. We've made our rule set clear to proceed, and we are neutral. You know, if you meet our standards, bingo! You've reached the regulatory realm, and good luck to you. John, what do you got for us? Chris, what are your thoughts around stablecoins

and the involvement they can have in, like, future markets? Oh, look, I think stablecoins have really proven in many ways They're social utility, they're commercial and financial utility, and they speak for themselves. When I talk about things like central bank digital currency, including the potential for a US central bank digital currency, my advice to central bankers is look at the success that's already being had in stablecoins. There's so much to learn from.

It's funny, when we talk about this re-architecting of financial services and money itself. The private sector has been at it now for almost a dozen years since the Satoshi Nakamoto white paper. And the official sector is in many ways just catching up. I think the president's executive order dated March 9th, 2020 is interesting because it's almost 14 years after Satoshi Nakamoto first said, let's consider the digitization of assets, the creation of blockchain technology. And so the official sector is very much catching up. And so it would be, I think, very unfortunate for US leadership in this innovation if regulators were to take a hostile approach to stablecoins. There's so much to be learned. There's such a demand that

they're satisfying now. Now, that's not to say there are not regulatory issues. And that's not to say that issues of transparency, of adequacy, of disclosure, of truthfulness in claims for stablecoins are not appropriate. During my tenure as chairman of the CFTC, we launched some look into some stablecoins. Some of those have resulted in some enforcement action. There is a role for the type of regulation that I've been describing, which is clear rules and enforcement if folks break those rules. But I do think that the innovation of stablecoins is one that there's so much to learn from, there's so much to benefit from. And I think that should be the approach of the official sector in Washington. Chris, before we let you go,

one other big thing I think people are thinking about right now is as we come to midterm elections, as we see politicians starting to kind of put forward what we would call the crypto-friendly approach. I've literally had people reach out to me and say, Hey, I'm going to make Bitcoin legal tender. Hey, I'm going to, uh, you know, be, um, very friendly to a specific sector or a certain type of company or whatever. How much can politicians do versus the regulators? And I think that this, uh, a lot of times for the average American, they just say like, Oh, they're all the same, right? They, they just like they're somewhere in Washington. Uh, but, but maybe just help people understand like, what should they ask of or, or, uh, pay attention to when it comes to

politicians? And then what can they do? Or how should they engage with the regulators themselves if this is something they care about? Well, thanks. And I want to actually respond with two ideas. The first one is a point I always made. Many people said to me, you're crypto-friendly, Chris. You're business-friendly. And I always push back on that. I don't think it's the job of any regulator to be friendly. It's to be market intelligent. It's to be technology intelligence, to understand the innovation, understand the market demand, understand its role in satisfying commercial need. And if you do that, I think it's quite easy to be relatively market neutral, industry neutral. And so I don't consider myself having succeeded as a commissioner

or as a chairman of an agency because I was friendly to an industry. I think to whatever degree I had success. It was because we became market intelligent, understood the demand, understood what the product served, and what the industry was seeking to do. And we reacted accordingly within the rule set that had been assigned to us by Congress, which then comes to the answer to your second question. I think there's a big role for Congress. I think Congress has been largely to date absent from this discussion. And they've left it to basically regulators to, on an ad hoc basis, respond to this innovation as best they can, knowing that the statutes that those regulators, like the SEC and the CFTC, were written in the 1930s,

90 years ago. These are 90-year-old statutes written for an analog world, a face-to-face, person-to-person world, long before the internet was even conceived of. And so those statutes can only take regulators so far. And during the Trump administration, as I write about in my book, it was very much an ad hoc response to this innovation. Now the Biden administration is trying to create some degree of what I would call a theme for regulators to follow. But even with that theme, regulators still only have limited statutory authority because, again, those statutes go back to the 1930s. It's time for Congress to step in with actual legislation that makes it clear, first, that I believe the United States has a national imperative to be a technology leader

in this re-architecting of financial services. We were the world's leader during the 20th century under the old technology. Our regulations, I mentioned they were old, but they were also first. And a lot of the world is modeled on those regulations. So we very much led in the regulatory sphere. We led in the financial sphere. American banks are still the world leading banks. The dollar is the world leading currency. And so the leadership we had, we now need to take to the next level. You can never rest on your laurels. We need to modernize the dollar. We need to modernize financial services. We need to modernize payments. And this new architecture is the key to doing that. So number one, I think Congress needs to make it clear

that there's a national imperative for leadership in this area. And they need to tell the regulators that that is the will of the people. That's who Congress speaks for. The will of the people is that we follow the innovation. And that instruction to regulators, I think, then clarifies some ambiguity. I think to some degree, regulators have been challenged by this. One of the things that Congress needs to make clear, that it's not the regulator's job to, in a sense, buttress or shore up the existing financial system against change. That would be a terrible mistake to do. And I think there's an opportunity for Congress to say, it's not the regulator's job. You talk about being friendly to crypto. It's not the regulator's job

to be friendly to existing legacy analog methods. It's not their job to be friendly to crypto. It's their job to understand the change, understand the architecture, and to move with the times so that we remain in the forefront of financial innovation. And of course, we need to be on guard for fraud manipulation, of which, look, we all know there's enough of it in this industry that needs to be cleaned up, just as there is in the legacy industry, just as there is in any industry there is, but it is the job of regulators to take out the bad actors so the majority of good actors can conduct their business knowing that they're not being scammed. That job exists and will always exist. Financial regulation is to some degree a game of cops and robbers.

The robbers figure out some new technology, the cops are one step behind. That will be always the case, but Congress needs to clarify that as well. I think there's a real role for congress and i'm very optimistic that this is the year that congress is getting uh up to speed is learning and i'm i'm pretty optimistic that 2023 is when we'll actually see action on on a lot of these congressional initiatives and perhaps some legislation i i couldn't say it any better my uh myself i just put into uh the chat uh the link to amazon to go get the book for anyone who's interested. Chris, this is fantastic. And as you know, I could talk to you literally for hours about this stuff, because I think you nailed it with this idea that this is essential to the

future of the United States, the future financial security of literally hundreds of millions of people, both here domestically, but also internationally as well, and billions of people in terms of getting this stuff right. This technology can serve a very specific purpose and is important. So I appreciate all the work that you've done at the CFTC. You know, the 30 years before in the private sector, people kind of forget about that part. It's just like, oh, CFTC.

But it ended up probably being a pretty good foundation. And then the book, Crypto Dad, The Fight for the Future of Money. People can go and get it. And Cameron and Tyler Winklevoss, they wrote the foreword. And the back is a who's who of Bitcoin, cryptocurrencies, and the blockchain industry. So congrats on all the success and highly suggest folks go get the book.

Bob, great being with you. It's a pleasure being with you today. Absolutely. Thanks, guys. We'll talk soon. Thanks, Chris. All right. Bang, bang.

See you, buddy.