The Pomp Podcast - Is Regulation Actually Bullish for Bitcoin? | Chris Giancarlo

Starting point is 00:00:00 I've always looked at crypto as a better architecture of finance. Crypto builders are going to build. We're going to build here in the United States, we're going to build overseas, but we're going to build no matter what the government does. TradFi, on the other hand, can't just go overseas. If we put the American economy on a digital network architecture, we're going to win the next century. We've got to have that legislation, I believe. All right. Everyone is very interested and worried about regulation. They saw that once politicians got into Bitcoin, that seemed to be like it was a good thing.

Starting point is 00:00:34 But now we're back to where we were before the politicians really were excited about this. How do you think about whether the political process has been a net positive or negative so far for Bitcoin? So when the Trump team came in, they came in with a three-phase approach. And two phases of those have been completed. and yet now because the third phase is not done we're forgetting about what was all that's been accomplished so let me go through it phase one was to just get rid of the bad policy the suppression of crypto the attack on crypto and that was a matter of replacing rogue regulators with a good set of regulators well we've got paul atkins at the scc mike selig the teams at occ

Starting point is 00:01:19 the Fed, the bad policy has really been stopped. And let's take a moment and breathe and realize what a change of pace that is. The second stage was to deliver on a series of campaign promises, crypto counsel, crypto, stop selling the crypto, Bitcoin and others that were seized as part of the federal government's actions, and to create the type of full government approach to the furthering of crypto innovation, which is part of an overall approach of furthering all kinds of innovation, space travel, AI, drone technology, biotechnology, nanotechnology, all of which are now being accelerated. So the first two phases of this approach have been done and we can't lose sight of it. But the third phase is the ultimate one. And that is not only having executive actions and good

Starting point is 00:02:12 regulators in place but actually codifying it in law well let's tip our hat i know it was only an appetizer but getting genius done think about it the first financial major financial service legislation in 15 years since dodd frank was done within five months of the new president taking office that's a pretty awesome accomplishment but we do need to get the clarity act done and i would argue that crypto doesn't need the clarity act as much as tradfi needs clarity act crypto crypto builders are going to build we're going to build here in the united states we're going to build overseas but we're going to build no matter what the government does tradfi on the other hand can't just go overseas and if they're going to commit the type of

Starting point is 00:02:57 billions of dollars necessary to really build crypto out as financial service architecture then they need regulatory clarity to do it so they need this and i tell the banks all the time you need this more than the crypto builders don't if you don't do if you don't get this done they're going to go overseas and build and then 10 years later they're going to come back and eat your lunch now what's interesting to me is you can decipher what the rules are or set the rules by going through the legislative process sometimes you got to go through the judicial process. And it feels like everything pre maybe 2024 was all done in courts. And I think that was something that a lot of the industry was very frustrated by. But it definitely created the rules

Starting point is 00:03:39 that I think maybe the politicians and or law enforcement wanted. Now that we're going through the legislative process, it feels like people are getting kind of introduced to the grinding of, you know, this checks and balance system to actually get these rules created. Are there times where maybe we should have been happy that the courts were setting some of the rules rather than going through, you know, kind of the drama of the Clarity Act and some of the stuff that we're watching now? So the courts didn't want to be doing that. It was foisted on them by the Biden administration, where their official, although never announced policy, was to not make rules and try to suppress crypto as much as possible. And if necessary, force it to the courts where it would be a jump ball in terms of what decisions would come out. And that's exactly what happened. That's no way to run a railroad. That's no way to run the world's largest economy. The right way would be to get legislative action. And I know you spoke to former Chairman Henseling earlier, and I understand he's handicapping in this at 60-40.

Starting point is 00:04:43 I think that's probably about right. We'll have to see the way the wind blows. A lot of this is political, and a lot of it is congressional politics, Senate politics. Some of it is Trad 5 versus crypto. So it's complicated if this is going to get done. But I would also agree that it's probably a better chance it gets done than it doesn't get done. You mentioned that this stuff helps the banks and the traditional institutions much more than it helps the crypto people. If clarity gets passed, is it beneficial?

Starting point is 00:05:15 Like, are we actually better off if it doesn't get passed because it gives the crypto people an advantage because the banks are still kind of boxed out? Or is this something that gives kind of both sides, you know, kind of same playing field? And actually, that's what crypto people should want. ever since I fell down the crypto rabbit hole at the end of the last financial crisis, I've always looked at crypto as a better architecture of finance. And I still look at it that way today. Of course, it's an awesome new alternative asset class, but far more important, I believe, is its role to underpin the new financial system. It's a digital network architecture of finance. It's in all of our interests that we have the

Starting point is 00:05:56 type of national legislation that we had back in the 1990s the telecommunications act that unleashed the first wave of the internet it gave it a sound financial a sound legislative and legal underpinning i think we all need a sound legal underpinning so that whoever is elected in the next presidential election can't at a whim as it was done in the last become hostile to this innovation. If we put the American economy on a digital network architecture, we're going to win the next century. We've got to have that legislation, I believe. Now, there's a case in, I think it's Nevada, crypto.com. You filed an amicus brief, which makes me sound smart, but I don't know what that is. Describe what's going on in this case and why are you getting

Starting point is 00:06:43 involved? So, first of all, I'm a big believer in prediction markets. I think prediction markets, along with stable coins are one of the first big use cases of what i call the internet of value this new digital architecture of finance i think prediction markets who here actually agrees with me prediction markets are a fundamental social improvement so let me tell you why i think that's the case and i'm going to ask another question how many people here checked the weather report before they came out today or at least half i tell you a lot of times i do this it's always two thirds or of people you check the weather report to give you some degree of certainty right and you know it may be 10 wrong but 90 odds that it's going to rain are a good enough reason to bring an

Starting point is 00:07:31 umbrella but think about all the other things in your life where you have no certainty will an air traffic controller strike go another week in which case maybe you cancel that trip to chicago will a will interest rates go up or down maybe you're going to buy that condo in florida or not depending on interest rates will in a presidential or congressional election turn out one way in which case i'm going to buy energy stocks or not or sell energy stocks these things have real impact in our life and polls just don't do it polls contain a lot of bias the average polling sample is 1200 people but with prediction markets where you're incentivizing people not to give you their bias but to give you their informed opinion on something, you can get samples of 10,000,

Starting point is 00:08:17 100,000, a million people. And in 2024, where more people went to the polls than ever before in human history all over the world, the prediction markets at Polymarket and Kelshi were right in every one to a fraction of a percentage point. Think about that types of predictability in our lives that we're now going to enjoy once these markets are properly regulated and licensed. And that's the reason why I filed my amicus brief, because what's happened is under the Biden administration of not asserting federal jurisdiction in this area or challenging federal jurisdiction, the courts have been left to making decisions and they're making a patchwork of decisions at the state and local level. It reminds me a lot of when Uber first came out

Starting point is 00:09:03 and people said, wow, ride sharing is a really great service, only to discover they flew into a local airport and there was no ride sharing available because the local monopolies, taxi monopolies or taxi and limousine commissions limited their access. And it was only when society said, no, no, no, no, we want the service and we're going to bust through these monopolies to make it available everywhere that ride sharing really took off. I think the same thing is going to happen with prediction markets. But fortunately, this time around, Congress gave a federal agency, The CFTC, the Commodity Futures Trading Commission, which I formerly chaired, authority over these markets and preemptive authority over state and locals. Up till now, though, the role of the CFTC has been given short shrift in a lot of these cases.

Starting point is 00:09:55 And Mike Selig is still getting his feet under his desk at the CFTC. so as a former chairman i decided to file a brief in a major case that's taking place between the state of nevada and crypto.com which where where the federal preemption argument was rejected at the state at the local level and now it's gone to the ninth circuit and i inserted a brief making clear that congress intended for federal preemption it really was something of a placeholder before the CFTC itself can intervene. And just last week, they announced that they do intend to intervene in that case.

Starting point is 00:10:32 So it's always fun when I disagree with somebody about something. I agree for every different example you use, the prediction markets are incredibly powerful and are net positive. The thing I've always been like, eh, this feels a little crazy, is if we have young people who are betting

Starting point is 00:10:47 on how long the press conference is or what color the tie is, or is somebody going to say a certain word, et cetera. so i'm fully well aware that sometimes you get you know things that may not be as constructive along with the innovations and the positive impact do you think that there should be a line absolutely it's kind of like the same thing with the crypto tokens right it was like hey some of these are really valuable and some of them are pretty obvious like well you know when you see it this is you know not conducive to what we're trying to accomplish so look cfdc has been

Starting point is 00:11:15 regulating contract markets for 90 years they've worked out where there are fraudulent activities market manipulation in traditional markets like wheat futures and gold futures and they're still you know going after people today the same thing will happen in prediction markets once it's clear the cftc's authority then they will write the rules they will work out these issues i think you're absolutely right and things like these mention con contracts will somebody mention something in a press conference those could be easily manipulated but i have every confidence the cfdc will be able to work it out so you'll be able to have good true markets for election outcome and for some of these more dodgy ones and by the way the states may still have a role

Starting point is 00:11:59 i could see a state saying look we don't want gambling on high school basketball games it's too easy to manipulate we don't want minors engaged there's still a role for the states under federal regulation and i have every confidence the cfdc will address those issues those type of ancillary contracts. And yet we still can have a national market. Today's episode is brought to you by Simple Mining. Bitcoin mining has a reputation for being complicated, risky, and hard to evaluate as a real investment.

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Starting point is 00:14:48 If we follow this down, I actually think prediction markets are a pretty interesting corollary to what we've experienced in crypto. So if you go back a decade ago, everyone was talking about, and there was many cases where a coin is going to get listed on an exchange and some employee knows that and they front run it yeah and they go buy the coin or they change the you know user interface or whatever so it was a version of insider trading that did not require kind of the material non-public information of a public security it seems like that's a big topic now there's a big interview on cnbc today of you know how do you as a prediction market stop this stuff because part of it is also well that is the value proposition is someone in

Starting point is 00:15:24 the world knows something and so they're putting it forward and that should help with the predictability And so if you go back to the presidential election market, the big one, I think it was on Polly Market, the French whale, as they called him, he basically ran his own study, which was like the neighbor poll. And he came to the conclusion, hey, the regular polls are wrong. This is right. Here's going to be the conclusion. So to me, that feels like a really valuable piece of information. Right. And it's not insider trading.

Starting point is 00:15:49 And he brought it to the public. Right. The beauty of these markets. Right. But, you know, insider trading under American law is actually a very narrow area. It only applies where you have an enterprise where the insiders in the enterprise know how the company is doing. They know that it's going to make a new acquisition and they have an obligation. They have a limitation on trading on that information.

Starting point is 00:16:16 It actually doesn't apply in many other markets. So in in commodity markets, commodity futures markets, only Mother Nature knows what the weather is going to be like in a given area and whether the crops are going to be good. But somebody who may be following the weather and thinks that, you know, in our county, the weather's been really bad. So the crop's going to be bad. So what does that mean? That actually means the price is going to go up because of scarcity. Somebody can actually trade on that information. And it's in society's interest that they trade on that information. Why? Because that person hedges his or her risk. But more importantly, they bring that information to the market. So in commodity markets, we don't have the same concept.

Starting point is 00:16:54 We actually want people to trade on their knowledge. And by trading on it, they're expressing a view into the marketplace so you get the true price discovery. So this notion of insider trading, our law has recognized only limited areas when it applies. That doesn't mean that in some of these other areas, people might not have a duty. So whoever knew that we were going to get Maduro overnight and traded on it, that person may have been an employee of the Department of Defense who had an obligation not to trade on it. And there are sanctions for that even under CFTC laws as well as the Department of Defense. So the point I'm making, though, Anthony, is we can work through these issues in a mature, sensible way. But we shouldn't simply say, well, because there's possibility, let's get rid of this whole new innovation.

Starting point is 00:17:38 Yeah. Well, what I find interesting, I think the one they were talking about this morning is there was somebody who knew whether it was the songs or whatever for the halftime of the Super Bowl and because they were there for the rehearsal. So they turn around and they tell people, which is that insider trading? Is it not? It kind of goes to this thing that you're talking about. But I do think as we innovate in all these areas, whether it's artificial intelligence, crypto, prediction markets, et cetera, we start to introduce these new kind of paradigms. And what I find maybe most fascinating is sometimes the law is very clear, right? I used to say when it came to Bitcoin and crypto, like, if you commit fraud, it is fraud. Vice versa, there was a ton of stuff of like, what exactly is a security? And I think that people are very surprised and kind of how this came down. And so you still practice law today. As you kind of go through this and you talk with clients, when do you kind of say, hey, look, let's go in and be the one to go in, you know, actually help create what these rules are going to be and be innovative versus, you know, kind of first man through the door usually gets shot. And it's the second one who may be a little bit safer. Yeah, you know, when so back in 2017, when I became chairman of the Commodity Futures Trading Commission, we were approached by a number of the big exchanges, CME, CBOE, Cantor Exchange, about their launching a Bitcoin futures market. And it became very controversial as to whether we at the CFTC were going to allow this marketplace to go forward.

Starting point is 00:19:01 there were full page ads in the wall street journal taken out saying don't green light this new product because if you do it's going to be too dangerous it's going to destabilize the financial system there were calls from european regulators saying junk carlo if you do this you're going to let pandora out of the box you're going to bring down the system and i said wait a minute hold it it's not for presidential appointed regulators to decide whether a new market can go forward we're not king solomon if if congress wants to ban an otherwise legal product that's fine but our job in fact our duty is to put a regulatory structure around a legal product if people want to use this product we don't get to say whether it's in their interest or not we're not it's not

Starting point is 00:19:51 a paternalist we're a we're a capitalist system if people want to use something our job as regulators is to find a safe way free of fraud manipulation for people engaged in it and i i stick to that today so we've got these new things stable coins we've got these new things prediction markets we've got these new things purpose markets regulators job their duty is to build a regulatory structure to figure out all these complicated things and write the rules for but it's not for them to say oh it's too dangerous so we're just going to somehow try to stop it that was the flaw of the biden administration they they didn't like it and they tried to stop it any way possible and quite frankly that was an illegitimate and actually unlawful approach

Starting point is 00:20:33 to that innovation any of them gonna get in trouble no it's a truth uh yeah they didn't get re-elected i guess that is one piece of it um cftc and sec to me kind of see my brother and sister usually they get along every once in a while though you ain't got a spat when mom and aren't looking. How does that relationship, like you sat on one side of that, you obviously have friends who've worked in the SEC, et cetera. For the people who are not familiar with the regulatory bodies, et cetera, how much of it is collaboration versus they're kind of two different domains and there's not a lot of overlap? It's Venus and Mars. You know, when I was, I spent 30 years in business before going into government and I couldn't figure out why do we

Starting point is 00:21:16 have two different market regulators and and their rules are so different it took going into government and working at one of them to realize there's really a fundamental difference that c sdc real sdc oversees markets for capital formation cfdc oversees markets for risk transfer and risk reallocation but the sdc exists really to do one thing and that is where there's a corporate enterprise and you've got insiders with information, their role is really to even out those information asymmetries. They oversee a whole structure of disclosure documents and registration to make sure that those insiders share with the public what they know on a regular basis. And even we have to acknowledge it's an imperfect sharing because it only happens every

Starting point is 00:22:07 90 days. So on day 89, the insiders have, again, all this information. On day 90, they share it every quarter. The CFTC has a completely different framework. The CFTC operates in markets where nobody has insider information. It's not an enterprise. It's futures on commodities. It's futures on metals. It's futures on petroleum. It's futures on interest rates. Nobody knows where that's going to go. And so you encourage everybody in your markets to bring that information to the marketplace. So you share it with everybody for a market structure and you get better price discovery. And I believe the reason why these two agencies have always been rivals because the SEC looks over at the CFTC and says, you guys don't have a disclosure regime.

Starting point is 00:22:56 And the CFTC says, why do we need disclosure regime when we get everybody to disclose what they know through the marketplace, and then everybody benefits from what everybody else knows. So it's a completely different structure. Now, I'll say this. Our founders believed in divided government. They said if government is competing with each other, then they're not competing with the citizens to strip them of their freedoms. And I think the two agencies, because they're in constant competition, have become better. The CFTC has traditionally been a much more innovative organization. I think it's challenged the SEC to do a better job. It was the CFTC, this first regulator, not just in the United States, but in the world, to create a full regulatory structure for derivatives on crypto, which has become the model for the rest of the world.

Starting point is 00:23:43 We forget that because we think the United States is so behind. We don't have market structure legislation. The CFTC was ahead of the world. We're good at regulations, is that what you're saying? We are. We are good. We are better. Our regulations are more flexible than most of the rest of the world.

Starting point is 00:23:56 I completely agree. That's why we're a nation of risk takers. It makes complete sense. before i let you go you wrote a best-selling book crypto dad uh talk a little bit about that book and you have another book coming out in october which is the new adventures yes crypto dad so crypto dad was a name that i'm very proud to have been given as opposed to adopted and in 2018 not long after we green-lighted bitcoin futures despite all of that controversy i was hauled before the senate banking committee to justify what we had done and in those days crypto wasn't

Starting point is 00:24:26 a Republican or Democrat issue. It was more of a generational issue. And you got a lot of old senators who are pretty upset with me for greenlighting something. And so I had to explain what I had done. And I had submitted a brief that was like 60 pages, chapter and verse what we had done. And if you've ever watched these hearings on television, you realize they're meant to intimidate the witnesses. And the most intimidating of all is the Senate Banking Committee. These senators sit on a raised dais and they have these bright lights behind them and they put the witnesses at a table that's just markedly lower than most tables. It reminds you of like a first grade classroom.

Starting point is 00:25:06 You're sitting there like this and you've got to stare up at them and they're staring down at you. And so when my time came and you have these lights in front of you, the green, yellow and red. You've got four minutes of green, then it goes yellow and then it starts flashing red and they'll cut you off with the gavel. So when it came my time to speak, I made a showing of pushing my papers away. And I said, you know, senators, I know you called me here as the head of a fancy federal

Starting point is 00:25:34 regulator, but if you don't mind, I just want to talk to you as a dad. And I said, I have three kids that are now young adults. My wife and I have tried to interest them in Wall Street and the stock market since they were babies with absolutely no interest whatsoever. but now all they want to talk about is crypto and i said you know centers probably some of you have had the same conversation with your kids or your grandkids and i saw a few heads nodding and i said well you know what i think we owe it to our kids and our grandkids to get the regulation right and not dismiss it as some childhood thing but to actually build a proper regulatory structure

Starting point is 00:26:10 around it and as i was saying those words i just want to talk to you as a dad my twitter handle just exploded and i got this name crypto dad and i've stuck with it ever since the twitterverse they say oh you want to be a dad you're fine well i'll adopt you all right thank you very much book comes out in october we appreciate everything you've done

The Pomp Podcast - Is Regulation Actually Bullish for Bitcoin? | Chris Giancarlo

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