Interviewed By Emmanuel Daniel
J. Christopher Giancarlo, former Commodity Futures Trading Commission chairman and author of “CrypotoDad: The Fight for the Future of Money”, speaks to Emmanuel Daniel on the evolution of US regulation and policymaking on cryptocurrencies and his views on the future of finance, including SEC’s recent responses to stablecoin and Coinbase.
J. Christopher Giancarlo has been at the forefront of influencing US regulation and policymaking in response to all of the challenges and pressure that cryptocurrencies and the future of money and finance are putting on the US regulatory system. He spoke about the generation gap where decentralised finance has become a direct rebuke to the institutions of the post-war generation. He believes that regulators need to take a dynamic and principle-based approach to further innovation, rather than dismiss innovation.
“The worst thing that regulators can do is demand that innovation slow down or adapt itself to regulatory convenience. That's a mistake. Regulators must understand that innovation is going to evolve because of its need to solve real world problems,” highlighted Giancarlo.
The following key points were discussed:
The following is the edited transcript of the conversation:
Emmanuel Daniel (ED): The regulation of the huge finance industry in the United States is at an inflexion point. Just as regulators have put in place the infrastructure to strengthen financial markets from the 2008 crisis,cryptocurrencies, stable coins, digital payments, lending marketplaces, financial technology and even non-fungible assets (NFTs) that exist in virtual realities present new challenges never seen before.
Regulating these innovations using laws from the 1930s, 1970s and even the 2000s are clearly becoming untenable. On 1 November, the US Presidential Working Group on Financial Markets, joined by the Office of Comptroller of Currency (OCC) and the FDIC, issued a report on stablecoins to have them regulated as “depository institutions”. At about the same time, Federal Reserve Bank Chairman Jeremy Powell, came out to say that the Fed will issue its own paper on a Central Bank Digital Currency (CBDC) soon as a response to the many similar initiatives taking place around the world today.
The Securities Exchange Commission (SEC) brought charges of unregistered securities against Blockchain Credit Partners and Poloniex. It also warned the largest crypto trading platform in the US, Coinbase, against launching a new lending products. Nobody is agreed on who the regulator should be in the first place. Senator Elizabeth Warren wants the SEC to regulate fees, protect investors and she has been lobbying the various regulators to promote “financial inclusion”.
The questions to be asked are fast and furious: What kind of an asset is a crypto? What laws need to be changed or introduced to regulate digital assets? Should cryptos be traded on regulated exchanges, now that that the token itself is a marketplace that eschews the need for the “exchange” as we know it to be today? Will the US government protect the traditional banks? Should the US eventually create its own digital currency?
The person to answer these questions is surely Chris Giancarlo is at the forefront of influencing financial legislation in the US today. He was a former markets infrastructure man. Then a regulator. Until recently, he was the chairman of the Commodities Futures Trading Commission (CFTC). He has widespread respect from both sides of the aisle, over two presidencies.
During his time as chair of the CFTC, he pioneered the world’s first regulated market for Bitcoin derivatives.He is also the founder of the Digital Dollar initiative, a proposal that there should be a “US dollar” digital currency that is global but one that preserves all of the values enshrined in the US constitution. Most recently, Chris is the author of “CryptoDad: The Fight for the Future of Money” a book that captures all of these ideas and tells it as he sees them to be.
Chris Giancarlo, thank you very much for spending time with me this morning, I'm excited to be able to speak to you. I am reading your book, “CryptoDad: The fight for the future of money”. I want you to know that I’m thoroughly enjoying the book at the moment. I’m very honoured to be able to speak to someone who is at the forefront of influencing public policy and legislation in the future of finance, not just cryptocurrency in the US. Thank you very much for speaking with me from San Francisco. Is that where you are?
J. Christopher Giancarlo (JCG): That's exactly where I am, Emmanuel. It's such a pleasure to speak to you. It's Friday evening here. I know it's a Saturday morning where you are. It's great to have this conversation across the Pacific Ocean, it's pretty remarkable how the technologies enable us to have this conversation in real time, face to face, but a continent apart.
ED: I've heard so much about what you've done not just in recent times but over time. I feel like I have the honour of speaking with someone who influences legislation in the US and, by proxy, the rest of the world. This conversation is going to be broad in one sense, right up to the point of being geopolitical, at the same time structured on markets and on the technology of cryptocurrency. The thing that struck me when I was reading your book is the way in which you describe or weave in your own professional career. What I did was I went back and looked at what you've done in the past. You were, from 2001 to 2014, with GFI Group. It's a market infrastructure technology company. Is that right?
JCG: That’s exactly right. Yes, indeed.
ED: From that origin to where you are today, the world has changed dramatically. If I were to ask you the essence of how you see the world, markets infrastructure and commodities market, which is actually an amazing primer for what bitcoin and cryptocurrencies are today. I'm going to be asking you a few conceptual questions. Draw from your personal experience, technology, infrastructure, and markets, how's that evolved over time?
Markets reflect a culture and the state of technological advancement
JCG: Emmanuel, I'm one of those people who believe that markets and trading is innate to the human condition. Humans have been trading and participating in marketplaces since the dawn of time. And it's something that is just built into our DNA. We intuitively buy and sell as a means of getting on with each other, a means of civilization. For me, markets are something that reflect a culture. And they also reflect the state of technological advancement. When I was on Wall Street in the early 2000s, I was helping to build some of the world's private networks for trading, sophisticated financial products in over-the-counter (OTC) markets in the world's major financial cities, including many of the cities in Asia that you know so well, from Singapore, to Tokyo, and to Beijing, and here across the United States. We introduced some of the first electronic trading systems in these markets. We were part of the evolution away from human intermediation to increasingly electronic intermediation of transactions. It was a very important time in the market. But it also enabled me to see some of the shortcomings in that market, some of the areas that needed improvement. A lot of that trading sat on the balance sheets of some of the world's largest financial institutions and wasn’t conducted through central clearing. It became clear that a central clearing solution for many of these products would be an important market enhancement, and so with greater transparency. I'll tell you a little story, a story that I recount in the book. In September 2008, in the days leading up to the collapse of Lehman Brothers, we started receiving calls from officials at the Federal Reserve Bank of New York. I remember one particular call where the official introduced himself and said to me, “Do you recall meeting me at a cocktail reception at the Federal Reserve a few months ago?” I said, “I did indeed.” He said, “You told me what you guys do. Can you remind me?” I explained to him that we actually operate the marketplaces on which most of the world's credit default swaps traded. And he said, “Right, that rings a bell. That's what I remember. Now, can you tell me what you're seeing in the markets?” And I explained to him that what we're seeing was the deterioration of the credit quality of some of the most important financial service firms in the world, measured in the number of basis points that they were trading over treasuries, in short, meaning the declining credit quality. He said, “Well, that's very interesting. I'd like you to come around to the bank, the Federal Reserve Bank and explain that to us a little bit better.” And I said, “I would but we have pandemonium going on right now in the markets. I'll try to come by later on this evening.” And he said, “Oh, no, I'm way too busy. Maybe next month or the month after that we can get together.” I said to him, “Sure, by then we may have plenty of time, because things are deteriorating by the hour, these banks may be gone by then.” It struck me that regulators had no better way of assessing the credit quality of some of the world's largest financial institutions than to call people like me saying, what is it you do again? And can you explain to me what you're seeing in the market? And so, I became a fan of global efforts and in the United States under the Dodd-Frank Act to introduce greater transparency into regulatory transparency, the ability of regulators to understand the trading conditions in the market, and I became a supporter of what became Title VII of the Dodd-Frank Act, which were the swaps reform provisions. And that's what led to President Obama asking me to join the Commodity Futures Trading Commission (CFTC) as a commissioner.
ED: Let's take it from exactly where you've described it, 2008 financial markets infrastructure. What you're saying is that even regulators were wrapping their minds around the importance of financial markets infrastructure, and that is partly technology and partly markets. Now, in 2008, all of the thinking was about bringing all forms of assets, including OTCs, onto regulated markets. Today, we are looking at the disintegration of that platform, that infrastructure as we know it, or all the work that has been put into building that. Today, on a pancake swap, you actually have a market, and that's totally decentralised and so on. This conversation, if we don't moderate it well, it’s a huge conversation, right? Let me take your perspective on how things have evolved over time and where is it today.
JCG: There's always a dynamic between technology moving fast and regulators needing to catch up. It seems always to be the case. Sometimes regulators, and this is something that I observe Europeans often do, regulators attempt to get in front of technology, and then lay down certain rules and regulations, and then require that the innovation meet those rules and regulations. In the United States, we have much more of a responsive regulatory approach, that is the innovation goes further, and then the regulator's catch up. Either way you do it, it's still the same thing. And that is innovation moves rather fast, and regulators have to catch up. During my time at the CFTC, it was a major impetus of mine to have regulators looking forward to try to anticipate where the innovation was going, and to educate ourselves to be in a better position to make a response to that innovation that was itself dynamic. The worst thing that regulators can do is actually demand that the innovation either slow down or adapt itself to regulatory convenience, that's a mistake. Regulators must understand that innovation is going to evolve because of its need to solve real world problems, consumer problems and business problems. What regulators need to do is try to anticipate the direction and keep pace with it and be unafraid to modernise our own regulatory procedures to anticipate that forward movement of innovation, and if we do it well, we actually benefit ourselves as regulators from enhanced capabilities that the new innovation can bring.
ED: There you are speaking more as a regulator to a regulator, that's my sense of it. When you try to compare the Europeans with America, I’m in Beijing right now and here we have three very huge, different universes. The US is very market driven, it's private sector led, Europe has become highly regulated, because it's more government than private sector. And then you have China, which has got the dynamics of both a very assertive regulatory regime and you have the private sector which had gone off on a tangent or maybe gone off with an energy of its own and now it's being reined in. You’ve got three different universes, three different realities. And the US is only just coming in. One of the reasons for why I'm excited about this conversation is the rest of the world had been looking at the US and seeing how behind a lot of the technology infrastructure in finance had been, and now with people like yourself, it's trying to take the lead. It's trying to redefine its role. Now, in all of these three realities, I want to throw in a small element in here, the desire to protect the institution, how strong is that in the US regulatory culture? I think a few years ago, Larry Summers mentioned that with all the innovations taking place in finance, we’ve got to protect the banks, we’ve got to keep them functioning, we need these institutions to be the harness of the technology to still capture the profits of the industry and so on. What if the future is a disintegration of the institution and the empowering of the individual? How will a country like the US curate that process?
JCG: Poor Larry Summers, he's so wedded to the world that he knew and grew up in, it's hard for him to envision a different world.
ED: Let me slip in there by saying that he's so Singaporean. Anyway, keep going.
A generation gap whereby the new generation entering the economy have lost faith in the institutions
JCG: A remarkable world grew up in the post-World War II generation, of remarkable institutions, like the Federal Reserve, like the big global banks, like great clearing houses and exchanges, and they played an important role. And institutions like the US dollar as a global reserve currency. They've played remarkably important prominent roles in the financial system in the world that we know today. And yet, what people like Larry Summers don't realise is that there's a new generation entering into the global economy, that have lost faith in those institutions. They've lost faith in the institutions that in their eyes brought us the financial crisis. They've lost faith in those institutions and those conventions that seemed to be resistant to change, that seemed to be self-preserving to the expense of innovation. A lot of what those institutions do is become the arbiter of truth in an account-based world. They're the verifiers of identity. They're the verifiers of accounts sufficiency. They're the conveyors of value from one account to the other account upon instructions from instruction-based organisations like SWIFT and others. And yet, this new generation is looking for truth in other forms, looking for truth in the form of consensus-based algorithms as laid out by Satoshi Nakamoto in his famous white paper in 2008, and a generation that embraces bitcoin, because it doesn't rely on large, venerable institutions to verify who has ownership but uses a consensus mechanism in the same way that Wikipedia in the early stage of the internet relies on a consensus mechanism. The reason why I say poor Larry Summers is because he's just not realising. When I grew up in the 1970s, there was something that was called the generation gap. It was a gap between a youth generation that had lost faith in their parents’ generations, ideas about civil rights, the Vietnam War and other social conflicts. Today there is as big of a generation gap as there was then. But now the generation gap is over the validity of venerable institutions and their ability to validate truth as opposed to more of a decentralised truth mechanism. Decentralised finance (DeFi) is a direct rebuke to the institutions of the post-war generation, the very institutions that Larry Summers believes we need to protect at all costs. I think his thinking is right for 30 years ago, but what he's missing is a new generation that reject that thinking out of hand. Time is like a conveyor belt. Larry Summers’ generation may be in charge today, but they won't be in charge ten years from now. There's a new generation coming and they have very different ideas about the importance or the lack of importance of those venerable institutions that Larry would like to protect against at all costs.
ED: Just based on what you've just said, what is the regulatory mandate today as a result? I just want to take it from how you've described it.
SEC’s aggressive clampdown on crypto and the transitory nature of current regulatory responses
JCG: It’s changing. During my time in office, I intended our regulatory response to innovation to be a dynamic one, one that was open, one that was focused on core principles of public policy, but not on the physical processes. And the state of the art of those physical processes. I recognise the state of the art of a lot of our rules and regulations would soon be outdated. I tended to look at the regulatory responses, one that was dynamic and then look to innovate alongside the innovation. That response now is being exited out the door by the Biden administration that is taking, I think, a much less dynamic, a much more static response that says, our regulations are immovable, even in their current form, and innovation needs to measure up to our current state of the art of regulations. And there's no need for any innovation in regulation. And I think that's disappointing, I'm frankly quite disappointed with that regulatory response. And I don't think it will last. First of all, it will not stop the innovation, it will be run over by the innovation. A static regulatory response in a dynamic world is just not going to serve for very long. I think this is, to use a phrase that's in vogue in Washington these days, I think the current regulatory response is transitory. And I think that the innovation will force regulators in the United States, ultimately, to have a much more dynamic response to this innovation and a less wooden one.
ED: For the rest of us looking back into the US, what we see is a very dysfunctional policy formulation process. Firstly, multiple regulators. Secondly, the whole congressional process. In fact, it is to some extent this functionality that creates the opportunity for the markets to keep moving, for innovations to take place, while the regulators formulate their thinking.
Multiplicity of regulators encourages dynamic and innovative approaches
JCG: Emmanual, I might disagree with you if I could and just for the enjoyment of our audience. I might disagree with you on the multiplicity of regulators as being a handicap, I actually think it's an attribute. Because I believe that competition among regulators is actually a healthy thing. I think that if the SEC and the CFTC were merged, you'd have much less dynamic regulator response. A lot of times, the competition between the two agencies spurs each other on to more innovative approaches. That's one area where I actually think the US approach is positive, but that doesn't mean it's positive in every instance. Sometimes they get it wrong, but I'd rather have that healthy competition than a monolithic, siloed regulatory response that often results in what the journalist Gillian Tett calls a “silo effect” where everybody thinks the same way. I think competition among regulators in one domestic environment is a good thing.
ED: I welcome that remark because I'm also very familiar with highly monolithic regulators and the fact that society does not even question the regulators. They actually assume that the regulators know what they're doing. I absolutely welcome the remark and the faith in the US system, because it does look dysfunctional, the process is much slower and maybe more deliberate. But it works when it needs to work. And it is made up of personalities like you, who contribute your thinking and to the whole process. Speaking of personalities, we have Gary Gensler, who was teaching cryptocurrency at MIT before he walked into the SEC. As soon as he walks in, he starts looking around for things to regulate. I'm running a little ahead of myself here, because I wanted to talk about your own regulatory experience, because as CFTC chairman, you oversaw the infrastructure but you also oversaw the markets. For cryptocurrencies, the formulation of a market, you were a pioneer in setting up the futures market for crypto, and that creates depth and perhaps contributes to cryptos becoming more stable over time. Give me a sense of where you think Gary Gensler is taking as the SEC on regulating cryptos. And in that, tell me a little bit of what you think crypto by definition should be treated. Is it a commodity? What kind of an asset is it?
JCG: Where the SEC is today, I'd like to describe as the “Empire Strikes Back” segment of the trilogy. If you follow my drift, I think the SEC right now is a bit of the crypto Death Star. It is looking to really clamp down hard on crypto innovation, which is unfortunate. It's being done with the argument that investor protection must be above all things when it comes to crypto. And yet, I'm not sure that is in our national interest. I think investor protection should be an important component of a broad national interest that also includes making sure that our markets are well functioning, deep and liquid, and set a pricing benchmark for the rest of the world, which is the mission of the CFTC. I also think we have a national interest in innovation, in digital assets and digital money, in the same way we had a national interest in the first wave of the internet, the internet of information. And at that point, the national interest was clearly recognised to be one of “do no harm”. And that was expressed by both Congress and a very enlightened administration that of all people Gary Gensler served in, that was the Clinton administration. And yet, I do not see a “do no harm” regulatory response being put forward by the SEC right now. I see what I would call a much more aggressive and a “shut it down before it goes too far” approach. And I'm quite frankly disappointed. I have great respect for Gary Gensler as an executive. We didn't overlap but we know each other quite well. During my time at the CFTC, I made sure that our LabCFTC kept him informed up at MIT of all of our work. I have great respect for him. But I don't have respect for the SEC’s curret approach to crypto, I think it is going to hold back and stifle innovation in the United States. And I think in a time of competing global responses to crypto, I think that's a disappointment. However, I don't think it will last. I think that there's resistance growing in Congress to this very aggressive response. And I think the pendulum always shifts in democratic societies. We're feeling the shifting tide, already with some recent results in some of our by-elections. And I know that there's some very strong leaders in Congress that are very disappointed in the SEC's approach. If you see a change in control of one of our houses of Congress, which is very likely next year, I think you'll see very strong demands on the SEC to reverse course.
ED: Just based on exactly what you're saying brings me back to this question, what is a crypto as an asset? What is your definition of crypto as an asset? I think the SEC seems to be flipping between treating it as an investment asset and as a token. What do you see crypto to be? What do you think it should be treated as?
A dynamic but yet principle-based regulator response to meet modern needs
JCG: First of all, I refuse to be straitjacketed by the state of the art of 90-year-old statutes, in the case of the SEC’s 1933 and 1934 Act, and the case of the CFTC’s 1936 Commodity Exchange Act. A chairman has a great deal of discretion as to how they apply those regulations. One approach, which I think is the SEC’s current approach, is to apply them in a very wooden, very restrictive, very static approach. Our approach at the CFTC was to approach them on much more of a principle basis to identify what was the public policy that the adopters of this legislation called upon us to do and how do we adopt that public policy in a way that's not completely destructive to the innovation. My approach to digital assets is how do we bring appropriate levels of investor and market protections, obviously, to crack down hard on fraud, manipulation and misconduct, while at the same time giving this innovation room to breathe. And the most important thing is, how do we, if we recognise the innovation is going to happen, as I believe technology does, you can't stop it, then how do we harness it in a way to improve our financial system? How do we make our financial system more inclusive, less expensive, with less latency, and with less rent-seeking conduct? How do we do that in a way to modernise venerable financial systems, but do it in a way that still rids the market of fraud, manipulation and misconduct. Were I at the CFTC today, were I at the SEC today, my approach would be one where our regulatory response is dynamic but yet principles based. It furthers innovation and yet it seeks to thwart fraud and manipulation. That would be the approach that I would recommend to Gary Gensler or someday his successor at the SEC.
ED: In the influence that you're trying to bring to that process, what exactly are you trying to get the policy response to be? On the one hand, you were talking about free market, let the technology evolve and so on. And when we think about how the SEC has been conducting itself, with or without Gary Gensler, it's been responding to each challenge as it comes up. It was initial coin offerings (ICOs) a few years ago, it's now a stablecoin, and stablecoins is like, oh, it's not the technology, it's the governance structure in stablecoin. They are actually responding piecemeal as it's being tabled in front of them. On the other hand, looking at some of the things you've done at CFTC, you took a structured approach, you were guiding the CFTC through a process. Should the regulatory response, start with a basic belief in where this is taking us and an acceptance of the universe that it is going to create. I started this conversation by saying the whole idea of institutions are going to be disintegrating. Is that something that regulators should welcome? In the case of SEC, it's basically when is something of security and when is it not.
JCG: Emmanuel, in order to answer your question, I'm going to tell you a little story. From the beginning human’s emergence on planet Earth until the middle of the last century, the only markets that humans created to manage risk were markets for the risk of changing prices in mostly agricultural and commodity products. Although, the way to hedge that risk was to trade futures products, to buy, to agree on a future price of those commodity instruments. And that served very well to help allow the production of food sources, minerals and energy products to ameliorate some of the changing in prices. But yet, for our global economy, we still had to rely on a commodity as a benchmark for all prices in foreign currency and changes. That was gold, the world remained on a gold standard, used that to calculate the value of one currency to another. And then some visionaries, mostly based in Chicago, saw something much bigger than that. And that is the creation of financial futures, that would allow humans to hedge the risk of floating exchange rates and floating interest rates. It actually allowed the world to go off the gold standard. It gave central bankers enormous new tools to individually make changes in their economic response to different domestic conditions and yet still work within a global structure. It was one of the key factors in the period known as globalisation with global trade, advancing to a level never seen before. Now, those visionaries were unafraid to create that new innovation. And they were so concerned about static regulatory responses that they went to Washington and said, “Please, we cannot have the SEC regulate this new innovation.” There needs to be a new regulatory response. They were greeted with acceptance and that was the beginning of the creation of the CFTC, whose mission was to further innovation, not to stymie innovation, to create deep and liquid markets to set the world price. Today, the world price for interest rates, the world prices for most commodities are still set in those Chicago markets overseen by the CFTC. Now fast forward today, we have another new transformational technology, in this case, digital assets. Instead of a regulatory response that says we need to further this innovation, and we need a regulatory body that respects innovation, what we're getting instead is a regulatory response that says, “All innovation must be for the convenience of regulators, not for solving global problems, as was done the first time.” We're getting a much different regulatory response than was done back in the 1970s. And that's really a missed opportunity, I believe, here in the United States to create a regulatory response, like we did to the last one that furthered the innovation and created enormous prosperity for a generation or more.
ED: We are today in uncharted territory. In some ways, the existing regulators are holding on to whatever they can to chart their way through. There is no underlining or overriding guidance in terms of where this is taking us. Everyone is afraid, regulators are afraid institutions are afraid.
JCG: Whenever humans have been in uncharted territory, great navigators have emerged. History has treated them very well. Courage is unfortunately in short supply, which means that those few people with courage will be very well rewarded in history for being able to navigate those uncharted waters without fear, uncertainty and doubt.
ED: There was Christopher Columbus going westward and there was Vasco de Gama who went eastward. And for a long time, it was Vasco de Gama who discovered the spice trade, and Christopher Columbus, he died a very unhappy man. The explorers, they pay a price too.
JCG: They do pay a price.
ED: This digital dollar thing, you're also a nationalist, you're bringing in the future of the United States into the crypto world. You're thinking aboutthat in a big way. You initiated this thing called the digital dollar as a foundation. How much of that is a reaction to what China is doing in terms of digital currency? When I look at the premises of the digital dollar that you're proposing, a lot of that is so liberal. In a sense, it's open ended and it is designed to keep the primacy of the dollar in the global marketplace. Talk to me about your crypto nationalism.
Key attractions of CBDC to central banks
JCG: I think that every major central bank in the world within a decade or so will adopt a central bank digital currency (CBDC). The reason for that is that the attractiveness of CBDC to central banks is overwhelming. Whether the reason is because of the unwillingness of central banks to allow private actors to have access to the data that's derived from financial transactions by citizens, that was certainly a driver for China but it's also a driver in the West with the reaction of Facebook's announcement of their Libra project. The second reason why I think central banks around the world will adopt this is because of infrastructure modernisation. We have a venerable financial structure in the West. And I think that as enlightened regulators recognise the shortcomings of that system, this technology provides a lot of opportunity to modernise that system, make it faster, more efficient, lower cost. But also, this is the third reason, because of financial inclusion, the ability to bring more people into our financial system. Right now, our financial system because it's account-based system requires identity in every case. And yet, in a world of eight billion people, a billion and a half of them do not have adequate identity and therefore excluded from the existing financial system. That's another reason. Another reason why central banks I think will adopt this is because of its ability to provide monetary policy precision, precision tools for the execution of monetary policy that you can't get with an analogue system. The fifth reason why think central banks will do this is because of this remarkable success of stablecoins, the ability to move money around the globe, 24/7, 365 days a year at low cost threatens the monopolies of wholesale money transmission that central banks have and of retail transmission that commercial banks have. Another reason for this is because of its ability to project economic power internationally. Certainly, China intends to use its digital yuan and its Belt and Road Initiative. And certainly, Europe sees it as an opportunity to advance the euro as a reserve currency. Mark Carney has talked about a stablecoin based upon a basket of reserve currencies as an alternative to the dollar. And so, the ability to have global influence is a role.
Fight for the future of money and embedding its values
But the seventh reason that I cite in my book, and I think the most important reason, is the values that are associated with digital money. I think one of the reasons why the dollar has been the world's favourite reserve currency, aside from its economic power, its stability, its role in international commerce, has been the values associated with the dollar, value as a free enterprise, of financial markets that are free of government interference, and most importantly, of individual privacy, economic privacy. Economic privacy to me is as important a value as freedom of speech, or freedom of conscious. If we're not free to make economic decisions, then we're not free as citizens in a global world.
The question for me, and the reason why the subtitle of my book is “The fight for the future of money”, is I think we're in a fight today for what values are going to be encoded in the digital money of the world. Will digital money be a tool of surveillance of economic activity by governments? Will governments be able to censor our use of money once they surveil our use of money? Or will digital money be a source of greater ability to have individual freedom, individual liberty, and most importantly, privacy in our economic affairs? Now, I'm not talking about illicit conduct. Of course, there needs to be police powers to crack down on illicit transactions. But for legal transactions, I believe that principles of democracy require that people have individual liberty and their economic transactions. But I don't know what values will prevail in the future of digital money. I do know that the future of all money is digital. It will be digital tokens, it will be sovereign and non-sovereign instruments. What I don't know is what rights and values will be associated with it. We see that same fight in digital information. The internet of information freed us from the who owns its information, whether it be encyclopaedia owners or otherwise. But it also provided big tech companies to be able to surveil our use of information. The question is when we go to digital money, will we have greater liberty or less liberty? And that's what the fight for the future of money is all about.
ED: You're describing exactly the same CBDC as China is but imbibing it with a whole different set of values, which you hope will dominate or will define CBDCs.
JCG: I think this fight, as I say, for those values is taking place both in the West and the East as well. I think China has spent a lot of time talking about what levels will receive surveillance and which won't. And I think Chinese citizens have a voice in that. I think people around the world have a role to play in what values will be in the digital money of the future. What we cannot do, Emmanuel, is be silent and assume that the digital money of the future, whether it's operated by the US Federal Reserve, the People's Bank of China, or Facebook, is going to give us economic privacy, if we're silent. The only way that those privacy principles are going to be there is if free peoples around the world speak up and insist that their privacy remain sacred in the future of digital money.
ED: The way you're describing it, what if the definition of digital money ends up being something that neither the Chinese model nor the American model, defines it eventually? Today, it's countries like El Salvador and Honduras.
JCG: And Laos and Cambodia. You're absolutely right.
ED: It's the tail that wags the dog. It comes back to the more structured economies and defines the future. The Chinese have discovered that there’s unintended consequences in CBDCs. If it's so digital, it disintermediates the very banking system on which payments are run. In your model, you've made it very clear that the banks will still be the primary intermediators. There’s a contradiction in there. You're trying to safeguard the existing model and yet you're talking about the future and all of that. That brings me back to the first question, what if crypto eventually disintegrates institutions as we know them to be today?
JCG: I think it will, but there'll be new institutions on their backs. There was a time in America where the largest retailer was an institution called Sears. Sears is long gone now and Amazon has replaced it. There was a time when Kodak played a role in most photography, and Snapchat has replaced it, Instagram has replaced it. People often talk about revolutions and yet economic change is often evolutionary, and a lot of times not as revolutionary as people think. I think there will be new institutions, in some cases, they may be evolutions of old, well-known institutions, in some cases, old institutions may be entirely wiped out and new institutions may take their place. Who ever heard of some of the new stablecoin operators that are doing billions of dollars business today? They very well could replace some old venerable issuers of money. I can't tell you which will be the institutions of the future. I can tell you there'll be new institutions and unknown names. But money will nevertheless change, and it will become, as I believe, digital, borderless, tokenised and decentralised. We are in a long social period of entropy of decentralisation. It's happening not just in economics and in money, but in many of our social convention and social institutions. We were in a long period of building up of organisations in the late 20th century, early 21st. But I think we're now in a reverse. Globalisation is receding, trade barriers are reappearing, markets we're seeing balkanisation again. I think in the area of institutions, global institutions are in for some period of breakdown. I think that is the face that humanity is in right now.
ED: Let me force this question back on you. When you were chairman of the CFTC, the whole orientation of regulation was to bring OTC transactions on to regulated exchanges. Just based on everything you've just said, what's the future of OTC? Are we going back to decentralised?
JCG: I'm so glad you asked that because that's one of the great, I think, misperceptions of global swaps reform. In the United States, the reform of the swaps market that came out of the 2008 crisis is embodied in a portion of the Dodd-Frank Act called Title VII. And yet, Title VII never required that swaps transactions take place on electronic exchanges. It never imposes a central limit order book model on the swaps market. To your point, although many people believe it's the case, the swaps reform in the United States did not require that the OTC market come on to exchange, there's a reason why in every mature market, OTC markets exist, that is for a portion of the market where liquidity is episodic and not constant. You need an OTC portion. If you walk into almost every old stock exchange building in the world, go to the Corn Exchange in London, right across the street from the London Stock Exchange, it's now a food court, and it has shops all around. As you sit in that food court, look up, and you see galleries all around. That's where the off-the-floor brokers took place. That's where the transactions that couldn't be processed in the central market took place because the order size was too large or the parties were too desperate to take place in a central order book market. Every marketplace in the world has an OTC component for those trades that take cannot take place in the central order book. Wisely, the US Congress did not require that the OTC market move on to exchange because they realised it wouldn't work. What Dodd-Frank did do is require greater transparency, a central clearing, and that the OTC brokers be properly licensed to conduct their business. But it didn't require OTC markets to be put on exchange. Thank goodness it didn't because it would have destroyed those markets.
ED: Today, all of that off-market markets function in so many different forms. You’ve got dark pools, you've got retail investors coagulating and becoming a force by themselves. It's a whole new dimension that from what you've described.
JCG: It's all regulated market now. The OTC market is now regulated, but it's not on exchange, it's still OTC. I can tell you, as a student of this over a course of a lifetime, in every market, you will always have the fungible, commoditised end of the market, the highly fungible automated part, but you will always have an OTC part with those trades that are either bespoke or when liquidity is not constant, where it's inconstant, need to take place in an OTC element. And that will always exist, I believe, and it always has always existed in the past. I think it'll always exist in the future.
ED: Talking about adventurers, buccaneers and people who are charting the future, you are one of them. And there's Cathie Wood who says that the US GDP can go to $40 trillion. How much of that is financial GDP? How's that different from the real economy GDP that the whole world measures today? What is she talking about, what do you think she's talking about, and what is your version of a larger US GDP?
Measuring GDP in terms of value creation
JCG: That's a great point. I think of GDP as what is the aggregate value creation of an economy. We have economist-based measures of GDP, and I think they undermeasure the entire value creation of an economy. Some of that is by design because they wish to measure certain things, industrial output, and they don't wish to measure other things perhaps, the ability of information to be virtually free, and the knowledge economy that comes about for that. It's something that's very hard to measure. I'm not sure that our existing measurement tools and yardsticks for GDP have kept up with innovation and kept up with the full value creation of an economy. That's how I think of GDP. I actually think that Cathie Wood is right on this. I think that the productivity and the United States official sector may be a bit of a laggard to the exploration of the digital future of money. But its private sectors that are right on the cutting edge. I'm speaking to you today from San Francisco, I spent the afternoon and evening yesterday with young entrepreneurs, people in their 20s, that are building some of the most exciting new innovations in value creation. And there's nothing in our GDP statistics that measure their contribution to the US and indeed the global economy, but it's there. There's a lot going on here that's not revealed by the relatively laggard response of our Washington regulators, or in our official GDP statistics. But there's a lot of enormous creative energy that's going on here, in New York, in Chicago and elsewhere that’s taking place today, and around the world. But the United States is, as I think, once again, innovating in this new wave of the internet in a way that is very exciting.
ED: The main reason I wanted to have this chat with you today was to get a sense of where US regulation is heading and how it's responding to all of the innovations taking place today. What are you worrying about today? What's on your plate? What is a milestone that you've given yourself that you're looking for and you're trying to influence that you hope that will make a big difference?
JCG: I joked before that I think we're in “The Empire Strikes Back” phase of the trilogy. And I do think we're in a repressive regulatory phase here in the United States about this innovation, and I think a regulatory phase that's more concerned with preserving existing market structures and existing legacy processes and not seeing the potential for the innovation. But I think this phase will pass and I'm quite optimistic for the medium to long term. In fact, I'm extraordinarily optimistic. I think this new innovation has the ability to modernise a creaky old financial system to bring more people to drive financial inclusion, to lower costs, to lower rent-seeking behaviour in our financial system. I'm very excited about it. I think some old and venerable names will be wiped out, I think the correspondent banking system is going to be really challenged by this innovation. But I don't think fractional banking will be challenged by it. And I think already you're seeing some venerable names like JPMorgan, and others actually be very forward leaning in their approach to this. Overall, I'm not that worried. I don't think the mission should be to protect incumbents, the mission is to help the innovation along and those incumbents that get to see the opportunity will do just fine. I'm very optimistic in the medium to long term view. I'm very optimistic that the United States will be a leader in this. I do have some concerns in the very short term, but longer term, I'm very optimistic. And I think this is a world today where innovation is not as concentrated in Silicon Valley as it once was. I think there's an enormous amount that's going on here. But there's enormous amounts that's going on in Austin, Texas, there's enormous amounts going on in Mexico and going on in Colombia, and going on in Southeast Asia and that's going on in Europe. We have a lot of Silicon Valley's around the world today that are involved in innovation. I'm optimistic that the United States will be in the first peloton of innovators, but I don't think it will have the race all to itself as it did with the first wave of the internet. Believe it or not, as much as I am a proud American, I think that's a good thing, Emmanuel. I think this generation is much more international, much more free-spirited, and I think we're going to see innovation come from many corners of the globe. As a global citizen, I think that's good for all of us.
ED: I noticed that the Winklevoss brothers wrote the foreword to your book. What's the relationship, what’s the friendship with Winklevoss? Why did you get them to write the foreword?
JCG: The Winklevoss brothers, when you have a vision of the future, there's many steps along the way where the scales fall off your eyes and your eyes are open. I talk in the book about a visit I received for the Winklevoss brothers in 2015 where they were talking about bitcoin and the need for sensible regulation. That was one of those moments where my eyes opened wide and a light bulb went off. And we've remained in contact. Since I've left the CFTC, I've had the privilege of being in close contact with them and advising them on certain paths forward. I've been a fan of their work. When I was finishing the first draft of my book and my publisher suggested someone to write a compelling foreword, I thought, well, maybe not just someone but two people. I asked the Winklevoss brothers if together, Cameron and Tyler, would write the foreword, and they honoured me by agreeing to do so. It's a terrific foreword and a very exciting one. I'm very proud that it's the lead in to my book.
ED: It's such a readable book. “CryptoDad”, it's also an interesting title. You didn't make it a pedantic title. “CryptoDad”, where did that come from?
JCG: It's one of the fun stories in the book. As I explained in the book, we had been approached by two large US exchanges to launch a bitcoin futures. And we, as a commission under my chairmanship, spent time looking into this to make the decision to allow this to go forward. I received a lot of critical input from regulators around the world, from market participants here in the United States, telling me to stop this, to not allow bitcoin futures to go forward. At the end of the day, we decided to allow it to go forward. Not long after we did, I received a formal summon from the United States Senate, requiring me to come and give testimony to justify why we had made the decision we had made. I fully expected that to be a very bloody hearing that I would be criticised for our decision to go forward. In preparing for it, I prepared a very lengthy summary of every step we had made, a 60-page review of all our decisions. I submitted that the week before. The night before the hearing, as I was getting ready, I thought, you know what, I'm not going to try to summarise that long submission. The next morning when I was sitting in that wood-panelled room in front of all these assembled senators, and it was time for me to give my opening remarks, I looked up at them and I said, “Senators, if you allow me, I want to speak to you for a minute, not as the chairman of a federal regulatory agency, but as a dad.” I explained to them that I just spent a trip with my children and my nieces and nephews skiing. Every day after we skied, we would meet for dinner, and all these young people wanted to talk about was bitcoin. It was bitcoin all evening long. It struck me, as I explained before, that there's truly a generation gap today, among young people. They intuitively understand this innovation, and they want to see it further. I said to those senators in that hearing room, as a father, as a dad, I think we owe it to this generation not to dismiss their interest with disdain and derision. But we should open ourselves to think about it and respond with a positive response, not a negative one. Just as I said those words that I wanted to talk to you as a dad, my Twitter handle exploded. I went from 1,000 Twitter followers to almost 50,000 Twitter followers in the next three days. They started calling me all kinds of names, including CryptoDad. And so, the “CryptoDad” title is not a title I gave myself, it's a title that the Twitterverse gave me for that testimony in front of that Senate Banking Committee.
ED: Chris, your book reads exactly as you speak right now. It’s stories like that that brings to life what it is that we're actually dealing with. I want to continue having this discussion with you at different points, especially when there are major developments in the regulatory framework in the US. It's taking shape, it's still a work in progress. There are so many moving parts, and the technology itself is evolving in a dramatic fashion. I'm excited about blockchain talent among young people and the way in which they're creating interoperability, carrying all kinds of assets on cryptos. This whole space is amazing and the world is going to look very different in the next few years. It's great listening to you and hearing it from you as CryptoDad.