Former CFTC chairman Christopher Giancarlo talks about how his experience of the financial crisis piqued his interest in blockchain technology, why the CFTC thought the introduction of Bitcoin futures would help pop the 2017 Bitcoin bubble, and how “there’s no simple answer” to explain when a token goes from being a security to a commodity. He discusses why he believes there needs to be a “refresh” of regulations written decades ago that are difficult to apply in a digital world, why he thinks Libra represents a fundamental generational change and why he thinks the project should be allowed to go forward. We also cover the Chinese digital yuan, why the USD should not assume that its global dominance today will translate into global dominance tomorrow, and his own proposal for a digital dollar, which he dubs “Zelle + JPMorgan Coin.” Plus, he gives the behind-the-scenes look at why he decided to speak “as a dad” in the Congressional hearing that made him an overnight crypto celebrity.
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Episode links:
Christopher Giancarlo: https://twitter.com/giancarloMKTS
https://www.cftc.gov/About/Commissioners/JChristopherGiancarlo/index.htmCFTC: https://www.cftc.gov/
Chamber of Digital Commerce: https://digitalchamber.org/
Let the technology evolve before regulating/CFTC is behind on regulating: https://www.coindesk.com/cftc-chair-says-regulator-is-behind-on-blockchain
Popping the Bitcoin bubble: https://www.coindesk.com/trump-administration-popped-2017-bitcoin-bubble-ex-cftc-chair-says
Talks with Facebook pre-Libra launch: https://www.coindesk.com/facebook-holds-talks-with-cftc-over-globalcoin-cryptocurrency-report
The introduction of Bitcoin futures helping to pop the crypto bubble: https://www.frbsf.org/economic-research/publications/economic-letter/2018/may/how-futures-trading-changed-bitcoin-prices/
Wall Street Journal op-ed proposing a digital dollar: https://www.wsj.com/articles/we-sent-a-man-to-the-moon-we-can-send-the-dollar-to-cyberspace-11571179923
Initial confusion over LedgerX not receiving approval or disapproval within 180 days to launch Bitcoin futures: https://www.coindesk.com/what-happened-why-the-first-us-physical-bitcoin-futures-contracts-havent-launched
CoinDesk article with emails from LedgerX on CFTC dispute: https://www.coindesk.com/ledgerx-claims-personal-animus-drove-ex-cftc-chair-to-stall-approvals
Commodity Exchange Act: https://legcounsel.house.gov/Comps/Commodity%20Exchange%20Act.pdf
Emails sent from LedgerX to the CFTC: https://static.coindesk.com/wp-content/uploads/2019/09/19-00104-FOIA-Records.pdf
Paul Chou’s blog post summarizing what happened: https://blog.ledgerx.com/let-me-set-the-record-straight/
More context from Noelle Acheson on the dispute: https://www.coindesk.com/derivatives-drama-the-unintended-consequences-of-crypto-regulation
Transcript:
Laura Shin:
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Laura Shin:
My guest today is Chris Giancarlo, the former Chairman of the Commodity Futures Trading Commission. Welcome, Chris.
Christopher Giancarlo:
Thank you, Laura. It’s great to be with you.
Laura Shin:
And where are you?
Christopher Giancarlo:
Yeah, I’m up at Skidmore College where I’m here for a short research and writing sabbatical, and they kindly made available to me the Grossman Recording Studio at Skidmore Zankel Music Center for me to speak to you this afternoon, and it’s terrific to be on your program. I’m a big fan, and at long last, here I am with you, so I’m delighted.
Laura Shin:
Great, and your sound is great, so thank you to the center. Let’s start with your background. Tell us how you became CFTC Commissioner and generally what you did before you became Crypto Dad.
Christopher Giancarlo:
Yeah, well, thanks. You know, I probably have a pretty unique lifetime experience to be a CFTC commissioner and then chairman. I spent 16 years practicing law in New York and London with technology companies, especially at the intersection of technology and markets, but then in 2000, I teamed up with some entrepreneurs and created the world’s first electronic trading systems for over-the-counter derivative, and we raised private equity in 2005.
We took that company, GFI Group, public first onto the NASDAQ and then a year later, in a secondary offering onto the New York Stock Exchange. We built a great company and some great technology and really melded humans and machines for really sophisticated trading platforms, but in 2008, we found ourselves right at the center of the 2008 financial crisis. We were the platform where credit default swaps against the major bank names were trading.
So we got to see, in real time, the panic that was hitting the marketplace about the potential for major money center banks to fail and not meet their financial obligations, and I remember back then, a call from a senior regulator at the Federal Reserve asking what we were seeing in the marketplace, and this was about two days before the weekend when Lehman Brothers fell, and I explained that the credit spreads, meaning the cost of providing protection against the failure of these firms in their debt, was growing by the hour.
And it struck me that financial regulators had no better way of really assessing the panic in the marketplace, other than to call around to platforms such as mine to get a sense of what was happening in real time, and I became an advocate for structural reforms of the over-the-counter derivative markets that eventually made their way into Title VII of the Dodd-Frank Act, which are the derivative provisions.
In 2010, when the Dodd-Frank Act passed, I put out a statement commending President Obama and Congress for passage and pledging to work with regulators to implement them in the over-the-counter derivative markets, in which my company was one of the leading operators. In 2013, I got a call from the Obama White House, and they asked me if I wished to serve as a commissioner at the CFTC, and I agreed to do so.
So I was appointed by President Obama and took my position in June of 2014, and I was unanimously confirmed by the Senate, and then in 2017, President Trump asked me to serve as chairman, and I was once again unanimously confirmed by the Senate. Now, I don’t know how that happened. Either people didn’t know what the CFTC was doing, which is probably the case, or I hadn’t annoyed enough politicians in my first two and a half years.
But somehow, I would up being unanimously confirmed a second time and served my full five years, which ended in April of this year, and I stayed on until my successor completed the process and took oath of office in July. So, for the last 100 days or so, I’ve been footloose and fancy free and enjoying life as a retired federal officer, and as I say, I’m up here at Skidmore College. I’m doing a little bit of research and writing. There’s many areas that interest me in the area of technology and markets and public policy, as I’m sure we’ll talk about as we go ahead this next hour.
Laura Shin:
So, during this time period that you mentioned, you must’ve first started hearing about bitcoin. So how did you first hear about it, and what were your initial thoughts?
Christopher Giancarlo:
Well, it’s interesting, right? At the same time that the world was in a financial panic, that the traditional financial intermediaries, banks, and other participants, the marketplace for mortgage securities, the world’s second largest market, were going through this enormous crisis, the failure of competence, this failure of trust. What emerges from that, but bitcoin. It’s an interesting juxtaposition, and I became aware of bitcoin I think in the years that followed, and not just the crypto asset element of it, but also the core technology innovation of blockchain, and in 2005, at the end of 2005, I did a fair amount of research in the area of blockchain, and in 2006…
Laura Shin:
You mean 2015?
Christopher Giancarlo:
Sorry, 2015 and 2016, spoke…boy, the years go by fast, don’t they? In 2016, did an op-ed in the Wall Street Journal and spoke at the Cato Institute and also at DTCC’s Blockchain Summit saying that this is something that regulators really need to find a way to embrace, and the reason why it struck me so formidably was because of that experience back in 2008 as Lehman Brothers was falling.
At that time, the two days before, when I got the call from the fed asking about credit spreads, the general estimation was that there was about 400 billion of credit default swaps protection written against the failure of Lehman Brothers, with Lehman Brothers as a reference entity, and that was because the measurement was notional outstanding amount of credit default protection written against the failure of a given name.
And regulators estimated if there was 400 billion written on Lehman Brothers, there was easily twice or three times that written on Citigroup and JPMorgan and Chase, et cetera, and the worry was that a failure of that magnitude would bring down the entire global economy. Well, Laura, we now know that the net exposure of credit default protection written against Lehman Brothers was not 400 billion. It was less than 9 billion, and 9 billion is a much more manageable number.
And if we knew the net exposure of the various financial institutions, the policy response of the federal government or the Federal Reserve could’ve been a much different one and perhaps a much more tailored one and perhaps a much more modest one than what eventually emerged in the TAR program. How would we have known that back then? Well, the technology didn’t yet exist, but that technology is blockchain. If the derivative exposure of a financial institution were, and I believe it will be some day, recorded on a blockchain, we could’ve gone from gross notional amount to net notional amount fairly instantaneously.
So what blockchain offers, and this is what I wrote about back in 2016, blockchain has the potential to bring a degree of instantaneous precision and almost cartographic precision to mapping interrelationships in the financial ecosystem in order to expedite policy response to given market conditions, and so I think it’s an enormous potential and I think will be realized breakthrough in the way policymakers and regulators oversee markets and of great benefit to our societies as a result, and so I’m a big advocate and proponent.
Laura Shin:
As you mention, you wrote about that, you know, I guess about three years ago now, and in terms of progress, what do you feel the banking sector I guess has done to achieve that vision? Do you feel like people are using distributed ledger technology in any significant way, and I’m sure you know that there are a lot of people who say, oh, using a private blockchain is basically just the same thing as a database.
Christopher Giancarlo:
So, look, there’s no doubt hype always moves faster than reality, and there’s certainly been some disappointment along the way, but nevertheless, it’s still happening. We’re seeing it in the commodity distribution markets. We’re seeing it in many cases, and I think that, like all technological innovations, it happens in fits and starts, but the progress forward I think is exorable.
I mean, it is moving forward in those steps, and when we look back…I think it was Bill Gates who said when you look forward into technology, it always seems like it takes longer than you want, but when you look backwards, it’s amazing how far it’s come, and I think that’s where we’ll be 10 years from now. I think blockchain…I’m confident blockchain is truly transformational. It’s just it takes time to get there.
Laura Shin:
Are there any particular projects right now that you’re kind of keeping an eye on or most interested in in that regard?
Christopher Giancarlo:
Yeah, well, so many. I mean, again, as a former market regulator and as someone who spent a lifetime at the junction between markets and technology, it’s really in that area that I’m most enthusiastic. The ability to bring precise understanding of market interrelationships. You know, the front office in our financial markets has been digitized for some time now, and yet it’s still the middle and back office that are going through that transformation, but it’s happening. It is happening.
Laura Shin:
All right. Well, we started, actually, talking about blockchain. So I was curious, like, at the CFTC, because blockchain really became the first way that you guys had a deal with the space, so what were the early conversations at the CFTC like about blockchain?
Christopher Giancarlo:
Step one I think for any regulatory body is learning and understanding, and my predecessor Tim Massad and his team at the commission had identified bitcoin as meeting the statutory definition of a commodity and therefore, under CFTC jurisdiction in 2015. When I took over in 2017, that position of the commission was fairly well established.
We therefore worked to better understand its activity in the marketplace. Now, the CFTC has an interesting jurisdiction. Its jurisdiction is over derivative markets for commodities, not over the cash market, except to the extent of fraud and manipulation, but does not oversee cash exchanges for commodities. We were approached in the summer of 2017 by two large exchange operators to go through a process of self-certifying bitcoin futures.
The United States and the CFTC are fairly unique amongst global regulators in that the commission itself does not approve new derivative products. What it does is it allows licensed exchanges to self-certify the products they wish to offer, derivatives they wish to offer, meet the core principles set out by the CFTC as a regulator, and based upon that self-certification, the product goes forward. Now, why is that important?
Since that became the statutory basis for the CFTC’s operation in the year 2000, from 2000 to 2017, over 12 thousand new products, close to 250 products a year, are self-certified through the CFTC, and just to give you a sense of comparison, a colleague of mine at the CFTC, who used to be an official at the Indian Stock Exchange, told me that during the same period of time, less than several dozen new products had been confirmed in India, and the reason is because India requires the commissioners to vouch that the product is safe for the market.
Now, you think about politically appointed officials having to vouch that a product is safe, they’ll never do so because of the reputational risk, right? Well, Congress wisely took that away from the CFTC commissioners and said don’t bring political judgment to bear. Allow the exchanges to self-certify new products. So when we were approached in the summer of 2017, we instructed the staff to go ahead and treat this like any other new product and verify the self-certification, but we were also…
Laura Shin:
And you’re talking about from CME and CBOE when they wanted to offer the bitcoin futures contracts?
Christopher Giancarlo:
Exactly, Laura. That’s exactly right, but at the same time, we had our Office of Chief Economist look at where the pricing of bitcoin was taking place, and what we saw is from its origins in 2008 / 2009, all the way through early 2017, early first quarter 2017, the cash bitcoin had traded in a fairly consistent correlation to its fundamentals, which would be the cost of production, and you can trace back over those years and see a fairly close correlation.
But in the late first quarter and beginning of the second quarter of 2017, that correlation broke, and bitcoin was headed straight upward, and by the time we received these self-certification applications, we recognize that bitcoin had broken from its correlation and was now increasing in value very, very rapidly, and there was a concern that there were bubble conditions arising. Most markets trade in correlation to fundamentals.
You know, a classic bubble is when fundamentals are broken and you have a market without an underpinning, and while the staff was advising to go forward with the self-certification, we were also conscious that the presence of a derivative as exists in virtually ever other asset class that exists…and in fact, we were aware that over-the-counter derivatives were beginning in bitcoin, and so we had the expectation that the launch of the derivative would have the effect of regaining some equilibrium in the market, and that’s what happened.
From a high point of close to 20 thousand dollars per bitcoin, over the next six months, bitcoin returned to a rough correlation with its cost of production, still with a great deal of volatility, but volatility in many of the markets overseen by the CFTC is not unique. The VIX Futures, for example, as very volatile, and other asset classes at volatile, as well. So volatility is not unique to bitcoin, but a return to its correlation with its cost to production was one of the results of the self-certification of bitcoin futures by two leading operators.
Laura Shin:
And it’s interesting you bring this up because I was going to ask you about these comments that you had made which basically referenced this. You said at the Pantera Summit, “One of the untold stories of the past few years is that the CFTC, The Treasury, the SEC, and the National Economic Council Director at the time Gary Cohn believed that the launch of bitcoin futures would have the impact of popping the bitcoin bubble, and it worked.” So I’m just curious to hear also, in general, what were the conversations like between all those agencies, and how concerned were you about that bubble?
Christopher Giancarlo:
So the agencies that you mentioned have regular phone calls to keep each other abreast of activities in the market that the various agencies and the various heads oversee, and I kept my colleagues at the other agencies abreast of the process of the self-certification of bitcoin futures and also advised them of the estimation of the CFTC’s Office of Chief Economist as to what we thought the impact of the bitcoin future would be on what we were then perceiving to be a bubble and what would be the impact of it, and it played out as the economists and others would’ve seen.
But the other thing, Laura, that’s critically important to remember, is that bitcoin futures brought a degree of transparency to the market that was vitally important. The spot exchanges are not regulated by any federal regulator. The data that’s made available is not subject to any type of regulatory minimum standards. The presence of two regulated operators, CME and CBOT into the space and the transparency that a listed market brings as opposed to the over-the-counter derivatives trading that was already beginning to take place brought a degree of transparency that’s vitally important to the market.
Laura Shin:
The first bitcoin futures were cash settled, and that means they pay out in the US dollar value of the contract, but more recently, firms have been launching physically delivered bitcoin futures, which pay out in the bitcoin value of the contract. Do you think physically settled bitcoin futures will affect the market differently from how the cash settled ones did?
Christopher Giancarlo:
You know, here, I don’t have the benefit of the Office of Chief Economist to give me a kind of metric analysis of that, but I do believe that, generally, in maturing asset classes, the combination of both a cash settled and a physically settled derivative is just another step forward in the development and the establishment of that asset class as a viable, global, tradable marketplace.
Laura Shin:
And we’ve been talking about bitcoin, but obviously, a lot of people are curious about ether, as well. Were there conversations between the CFTC and the SEC or other agencies over whether ether should be classified as a security or commodity, and if so, what were those conversations like, and how was it ultimately decided that, in its current form, ether is not a security?
Christopher Giancarlo:
Yeah, so one of the things that Chairman Jay Clayton of the SEC and I at the CFTC did in 2017 is created an informal, ad hoc cryptocurrency working group between the two agencies, and the working group did a number of things. One is it made sure that on the identification of new crypto asset classes, that our analysis…
That each agency’s analyses were done in a coordinated fashion and that we would consult with each other to tell each of our firms, each of our agencies how we were seeing that asset class against our statutory authority, and in a sense, making sure that asset classes that the SEC might’ve seen as a security, we agreed with that, and we didn’t have a contradictory view that it was a commodity under CFTC jurisdiction.
Chair Clayton and I were very determined both to have certainty on our end, but also to provide certainty, to the degree we could, to the public. The other thing the ad hoc working group did was to make sure that when it came to matters of enforcement, that our activities were coordinated and not at odds with each other. In the case of bitcoin, we shared our analysis with them that the CFTC viewed it as a commodity.
And in the case of ether, we had numerous conversations sharing our analysis, and in the LabCFTC Primer on virtual currencies that asked questions about ether and discussed cryptocurrencies in general, we drew on some SEC input there, and it was part of the ongoing consultation between the two agencies, and I believe that consultation continues to this day following my departure from the CFTC.
Laura Shin:
One of the questions the crypto community has been asking a lot is how and when something such as ether goes from being a security to a commodity. Do you have an answer to that yet, or what is your thinking on that?
Christopher Giancarlo:
You know, I could give you a complex legal answer, but the simple answer is there is no simple answer, and why is that, and how unsatisfactory is that? I mean, it’s tremendously unsatisfactory, but one has to remember that the statutory basis for the SEC’s jurisdiction and the statutory basis for the CFTC’s jurisdictions are over 80 years old. They go back to the 1930s. They were written in an analogue world, a world of paper documentation, of truly analogue sales activities and market activities.
And the world has changed so dramatically, and the digitization of trading, the digitization of sales, on offerings, of securities, today results in a world that looks nothing like the world that existed when these statutes were written, and that’s why I, for one, have encouraged, and continue to encourage, policymakers on Capitol Hill to look at these statutes and refresh them for a new digital era, but until they do, we are a nation of laws.
And both the SEC and the CFTC must, as best as they can, work with an old statutory framework and try to find a way to repurpose it for a vastly different digital marketplace, a digital securities marketplace, a digital commodities marketplace. Now, in that challenging environment, the CFTC has one advantage, and that is it is a principle’s based regulator.
It has a long tradition of looking at its statutory framework and discerning from it what are the principles on which those provisions were written and applying them to new environments based upon core principles. The SEC is very much of a rules-based regulator, and it’s very challenging to repurpose rules that’ve been applied in very, very specific fashion for decades in an analogue world and then try to apply them in a different way for a digital environment and for new digital asset classes.
And so I do not want to underestimate the challenge this poses to the SEC to do that, but we ultimately…and there are some very good projects and thought underway about what digital-based tools could be available to regulators, but we really are reaching the point, and I think that digital asset classes are really forcing the point, that it’s time for a refresh in many of our core statutory frameworks.
Laura Shin:
And yeah, can you get more specific on that? Because you also were quoted…and this is from July 2015. You said, “In the 1990s, a Democrat White House and a Republican Congress worked together around this thing called the internet and took a first do no harm approach. Regulation came slowly and let the technology evolve. I think we need to stay close to it. We need to be careful…”
And there was a little break in the article, so I think you were talking about, you know, blockchain technology. “I think we need to stay close to it. We need to be careful, but I think we can let it develop a little bit before we run in with regulation.” So since this was July 2015, are you saying that now is the point where we do need that refresh, or would you continue to kind of let things develop further?
Christopher Giancarlo:
I think we are approaching the point in which we do need that refresh, and I think that one of the challenges I think for the CFTC and the SEC is to analyze the changing nature of the markets that the two agencies oversee to identify public policy issues in those changes, to identify shortcomings and limitations in their existing statutory frameworks, and to go to Congress with recommendations for updating the statutory frameworks to enable the two agencies to continue to serve the public in making sure that securities offerings are done with adequate disclosure, with accurate financial and other information, and that the CFTC can make sure that markets in which Americans and people all over the world engage in for commodity derivatives and maybe crypto asset derivatives are well regulated, are transparent, are free of fraud and manipulation, and are safe for engagements by Americans from retail to institutional. I think we are clearly reaching that point.
Laura Shin:
You know what I’m just realizing? That last quote actually was from July 2018. There must be a typo here. I don’t know why I wrote 2015. Anyway, so in the same interview in the summer of 2018, you said that you felt that the CFTC was getting behind in regulating blockchain related issues, and you were saying that the agency was hamstrung in different ways.
For instance, you said that the CFTC can’t operate a node on a banking consortium’s blockchain, even if it had been invited by those institutions, because the information and data that they would share with you would be considered a gift. Another example you gave would be that the CFTC could not purchase or rent the ability to run a node because it would require an appropriations bill from Congress, and you drew a contrast with how the Bank of England has already had four years of tests under its belt. So is the CFTC still hamstrung in this way, or has the agency been able to remove these obstacles?
Christopher Giancarlo:
So this is part of the CFTC’s authorization by Congress. During my tenure and continuing today, there are limitations in the CFTC’s ability to participate in a proof of concept and other innovation developments and beta tests and innovation frameworks, because, to do so would be considered a gift to the federal government by the other commercial entities involved in those projects.
And during my time as chairman, I advocated forcefully that our authorizing committees should draft legislation allowing the CFTC, in the name of good public policy, to participate in those technology innovations in order to both learn from them, but also to adopt those innovations in the agency’s own operations, and I pointed out the FCA, the Financial Conduct Authority, in the UK has that very power and was active in areas that the CFTC had to remain inactive, and that we were losing ground as a result of that. I’m pleased to…
Laura Shin:
And why is it that we haven’t been able to change that situation?
Christopher Giancarlo:
It’s simply Congressional rule writing. It’s not within the power of the CFTC to change its own statute. It needs to be changed by Congress. Now, I understand that there is legislation potentially to be introduced that will change that and give the CFTC the authority to participate in these programs, and you know, I have statutory requirements for one year after I leave the agency not to be advocating for particular legislation. So I don’t want to say more. I just do hope that Congress finds a way to address this issue so that the CFTC can engage in a lot of these very important developments that are going on around it.
Laura Shin:
Great. So, in a moment, we’ll be discussing some of the other big developments in this space, such as Libra, the Chinese digital Yuan, and also what Chris plans to do next, but first a quick word from the sponsors who make this show possible.
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Laura Shin:
Back to my conversation with Chris Giancarlo. Around the time you left the CFTC is when Facebook announced its plans on Libra. What is your take on Libra?
Christopher Giancarlo:
Well, I think it’s…just putting aside my public policy point of view, I just think it’s a fascinating development. To me, it speaks of a fundamental generational change. So when I was entering my public life, one of the most important relationships that I had was with a banking institution, banking institution to provide financing for a car and ultimately a house, banking institution to cash my paychecks, et cetera, et cetera.
But the current generation coming into public life has much more foundational relationships with online merchants, with social networks far more important than their relationship with their banks, and so it’s no surprise to me that, as they think about mediums of exchange, as they think about payment mechanisms, that more primary relationship with, whether it be online merchants or social media, is an area they may look to provide them with payment rails.
So I think there’s a generational change going on, and I think that, in some ways, whether it’s Facebook or Uber, are recognizing the importance of the relationships they have with members of society, and I think banking is late to the table. I mean, if you walk into most bank branches today, they look like the bank branches that I grew up in and not that this generation feels comfortable in, and I think banking relationships are way behind the curve of human relationships.
And I think that, in some ways, Libra is a reflection of that. So that’s aside from my public policy hat. That’s just, as an individual, I’m fascinated by it. I think that, however, the outrage over the last few years of the mismanagement of personal data and the handling of that has raised a lot of public policy concerns, and I think that perhaps Libra has suffered from that in its launch in recent times.
Laura Shin:
So meaning you feel like if it were an entity other than Facebook making the same proposal, that it would’ve had a better reception?
Christopher Giancarlo:
I think that’s quite likely, and certainly from policymakers.
Laura Shin:
So before Facebook announced its plans with Libra, it was reported that you did speak with them. What did you say to them at that point, or what did they come to you for?
Christopher Giancarlo:
Yeah, so, Laura, I think as a chairman, I made it…I endorsed the same policy as my predecessors as chairman, as not to share those conversations, and I think I’ll maintain that since, but Libra came to the agency to disclose their plans, as they did with most of the other financial regulators, and gave regulators the chance to ask questions and understand their operations. Now, as a derivatives regulator, the CFTC would’ve been more likely not on the front line, but on the second or third line in the rollout of Libra. So it was good to have a chance to hear their presentation. It was a good chance to ask questions. I think that’s broadly what was discussed.
Laura Shin:
And now that you have seen the full plans for Libra in terms of the structure of it, et cetera, there’s been a lot of discussion around, you know, which agencies need to regulate it, et cetera. Who do you think needs to regulate it?
Christopher Giancarlo:
Well, certainly, there’ll be regulation in the form of anti-money laundering, AML regulation in terms of what level of traditional market participants are engaged, whether it be banking institutions or traditionally regulated entities in the space. I think there is some challenge with the evolution of the proposal itself to identify which agency and how it would be engaged from a frontline regulatory basis.
Laura Shin:
But do you have any thoughts on which one that would be?
Christopher Giancarlo:
You know, since I’m not a regulator right now, I don’t want to call for a regulatory response. What I broadly believe is that there is room for a lot of experimentation and development broadly in the payment rail process. I believe, as you know, because I’ve written about this recently in a digital central bank currency and certainly a digital dollar, but I don’t believe in it at the exclusion of other offerings, and I think competition is good for virtually most things in the marketplace, and I think competition for payment mechanisms is a good thing. I’m following the launch of Uber’s direct payment mechanism. I think that is helpful. I believe that the backed offering is also a positive development, and I…
Laura Shin:
You’re talking about the Starbucks…
Christopher Giancarlo:
Yes. Yeah, and that’s the backed being offered by ICE, and I really want to see how Libra develops. Now, I believe that the issues of customer data is a critically important feature, and I think that is something that needs to be satisfactorily addressed in all offerings, not specific to Libra.
Laura Shin:
Okay. Yeah, so I was going to ask you a question just directly. You know, do you think…or if you were in the position, would you allow Libra to go forward? And it sounds like you’re saying yes, that you feel like all kinds of different options should be allowed to go forward.
Christopher Giancarlo:
You know, I tend to look at development from a market regulator point of view. You know, markets are healthiest when they have a great deal of diversity, when they have both diversity of offerings, but also diversity of market participants, and markets will establish the value better than virtually anything else of an offering and of a new asset class, and so I think there are public policy concerns outside of markets. There are public policy concerns about access to participant data.
There are public policy concerns about the right oversight and regulation. I believe all of those can be addressed over time. Ultimately, though, I think that, in a free market system, if the rules are clear, if the regulation’s clear and the market participants play by those rules and play by those regulations, the market is enhanced by more offerings than it is where offerings might be suppressed for vague notions of what’s in the best interest of market participants. I think markets themselves can often work out what’s in their own best interest best.
Laura Shin:
Okay. Well, in a related note, let’s talk about China’s digital currency plans. What is your take on the digital yuan?
Christopher Giancarlo:
Well, it’s fascinating. I think, as in many things, China’s very good at setting a forward direction, and even if all of the details aren’t worked out, heading in that direction, I think the launch of a digital yuan is an important step. You know, I recently, for another project I’m working on, have been looking at a little bit of the history of currencies and international commerce, and many times in human history, many currencies have vied for utilization in cross-border trade.
In the 17 and 1800s, the dominant coinage in international trade was the Spanish dollar, and it was perceived to be superior to other currencies for a number of technical reasons. One is that its silver content was more consistent and more pure, and therefore, the currency was more stable, vis-à-vis competing currencies. In that way, you might consider the dollar today to have some of that same perception, but the other reason why the Spanish dollar was considered a superior currency in international commerce was because it had a technological superiority.
It was both lighter than other coinage, but it could be broken into eight separate pieces, known as pieces of eight, and that allowed a fractualization of it, and that’s a really interesting technological enhancement if you analogize that to the fractional ability of cryptocurrency, and it strikes me that when we think about a global competing market, which the dollar is every day, the dollar is competing for the patronage of the world’s population against other currencies.
You think about it traditionally providing stability and a lack of inflationary pressure, but also its convenience factor is vitally important, and for the same reason that I said a little while ago that I thought there’s a societal change going on today with young people having close connections with their social media providers and their online merchants, they’re also living in a digital world, and they want to be able to have electronic transfers directly from their mobile device.
And so if the dollar is going to maintain its global predominance, which I argued in a Wall Street Journal piece two weeks ago, isn’t I believe in the best interest of the United States, then the dollar needs to also focus on its convenience factor, not just its perhaps stability and soundness, but also its convenience factor, and creating a digital component to the dollar in an increasingly digital transactional globe I think is a vitally important step that I strongly advocate the Federal Reserve to consider.
Laura Shin:
So we’re going to talk a little bit more about your proposal for the digital dollar in a moment, but I actually just wanted to ask one more question about the digital yuan, which is do you view that as a threat to the US dollar?
Christopher Giancarlo:
Well, again, I view the Chinese as being very clever. There’s no doubt in my mind, and I think many people’s mind that China would like to have the yuan have the advantages that the dollar has in being an important global reserve currency. They’re taking steps to develop commodity markets priced in yuan. They’re taking a number of steps to make the yuan a global benchmark and a global reserve currency, and I think they have recognized that part of the attributes of a truly digital currency is convenience.
I think moving to a digital yuan is a smart move, and I think that we in the United States cannot sit on our laurels and assume that the dollar’s predominance today will be the dollar’s predominance tomorrow or 10 or 20 years from now. Look, the dollar has enormous strengths, and those aren’t going to dissipate overnight, but again, we can’t sit on our laurels, and I think developing a digital component to the dollar is a smart move to preserve the dollar’s predominance as a global reserve currency.
Laura Shin:
Yeah, so why don’t you now describe the proposal for listeners. There were certain features of it that kind of piqued my interest, but why don’t you just sort of generally describe what it is that you envision.
Christopher Giancarlo:
Sure. So it’s actually quite simple, and I believe it’s quite non-revolutionary. We are not proposing that other crypto assets that could be used as currencies be suppressed or prohibited, so our proposal would be compatible with the development of Libra. Would be compatible with bitcoin. It’s not calling for any type of doing away with any other asset classes. Secondly, it would be compatible with existing market infrastructure players.
So the traditional banks, other financial institutions, but also non-bank institutions like social media platforms, like online merchants, would be able to utilize it, as well. What we’re proposing is very simply a standard protocol that would be made available to anyone who wished to use it that has accounts with individuals or institutions that our dollar-based account could transfer fiat-based accounts into digital accounts and make them available to market participants and others in the marketplace.
So it is not exclusionary. It would rely upon existing infrastructure. It would be available to existing infrastructure providers. We are proposing, though, that the protocols and the algorithms be developed in the private sector, and that’s simply from experience to know that if it’s going to be done and going to be done anytime soon, it really needs the private sector determination to be able to get it done.
You know, a federal government that unfortunately couldn’t build a healthcare website and eventually had to go to the private sector to get it built I don’t think is capable of building itself, but there’s no reason why the federal government shouldn’t have governance over this protocol builder, shouldn’t have a stake in it, shouldn’t have oversight over it. You know, it should be done properly with proper oversight, but with the determination and facileness of the private sector.
Laura Shin:
Yeah, and just in your description of it, you said that it should be created and maintained by an independent non-governmental group. So it seemed to me what you were saying was that you’re not proposing a central bank digital currency, and it seems even from your description here…am I right?
Christopher Giancarlo:
Exactly. Exactly. So if you bank with a major mainstream bank, you would probably electronically instruct your bank…if you’ve got a thousand dollars in the bank, you may say load 500 digital dollars onto my mobile phone through my bank app, and I can go buy my Starbucks in the morning using that and the transaction goes through your traditional bank relationship. If you’ve got an account with Amazon or PayPal, you could utilize digital dollars through that. So the Federal Reserve is not going to get into the retail banking business. This would all be done through traditional dollar-based account relationships that everybody has in one form or another. It would be combination of Zelle meets JPMorgan coin.
Laura Shin:
That’s a great description. One other thing I did notice in your Wall Street Journal op-ed was you said that the Federal Reserve actually should hold the dollars that back the digital dollar, like an escrow account. So, basically, that is the role that you would delegate to the fed?
Christopher Giancarlo:
Well, the key, though, is that what we’re proposing would be monetary policy neutral. It’s not meant to put more currency into the system or be deflationary, either. It’s meant to be money supply neutral. So for every digital dollar made available, a traditional dollar would be put on reserve so that it is monetary policy neutral. I should say, money supply neutral.
Laura Shin:
Okay, and for the independent non-governmental group, who would you suggest for the members of that?
Christopher Giancarlo:
You know, as we did with the space program back in the 1950s and ‘60s, I would say let’s get the best minds available. Let’s get the best development teams available, and let’s build this with the sense of what’s in the national interest, and there’s a lot of good technology out there, from crypto secure digital wallets to a lot of standard blockchain construction components, being made by very forward-thinking firms. So I would say let’s get the best and the brightest and the most advanced and put it to work in a way that would establish this digital dollar sooner rather than later.
Laura Shin:
Oh, interesting. Oh, now I understand. So, basically, like private companies?
Christopher Giancarlo:
Yeah. Exactly, and private companies that may also be contributing to the Libra project or other projects. As I say, our proposal is not to the exclusion of them, but it’s to enhance the dollar. Now, some of those offerings may change as the result of a digital dollar, but I still there’s room for many in this environment, just as, historically, there’s been room for many different mediums of exchange.
Laura Shin:
Okay, so I was going to ask you about Libra, you know, if you felt that their initial plans to make it a global stablecoin that isn’t tied to any particular fiat currency, if you felt that that was the way to go or if they should go the other route that is being suggested where they have many stablecoins tied to fiat currencies, but it sounds like you feel like maybe both have their place or something like that?
Christopher Giancarlo:
I do, and the other thing, Laura, is that I don’t want to position myself as a critic of one offering or another offering. I think that the marketplace will establish what are the right features, as it should, and I think that the various offerings will find their way to the right value proposition or not. That should be for the marketplace to determine.
I put my hand up really in a very singular and simple fashion, is to say that amidst all that’s going on, it’s in the best interest, I believe, of the United States to create a digital dollar for the maintenance of the dollar’s primacy as a reserve currency in the market, and I view that as something that’s doable. I think it’s doable in a fashion that would be inclusive of many different innovators in the space.
And I think it’d be a way that would not be exclusive to curtail all the competition and innovation and healthy give and take in the marketplace that’s taking place amongst other crypto assets and cryptocurrencies.
Laura Shin:
So in terms of talking about the private sector and competition, I did also want to ask about an incident that happened in the last couple months where LedgerX CEO Paul Chou wrote a series of tweets claiming that the reason that LedgerX would not be the first to have physically settled bitcoin futures is because of personal animus that you had toward LedgerX over a blog post he wrote.
I guess he or his firm had submitted an amendment request to add futures in November 2018, and normally, there’s a 180-day window that the commission has from the filing of the application to either approve or deny, and there was not a response. There were other pieces of information that came out where, you know, they I guess had written letters saying that you had called one of LedgerX’s board members and said you were going to make sure that their DCO order was revoked and other things like that. What is your response to their allegations?
Christopher Giancarlo:
Well, Laura, you know, as chairman of the agency, it’s a longstanding practice, going back to the founding of the agency, for chairs not to talk about individual applicants and their applications, and it’s inappropriate for a chairman, having left the agency, to suddenly start talking about applicants. So I’m not going to respond to that, and that’s the way it is. I think that people that know my enthusiasm for innovation, development in the space, will form their own judgment as to what the statements by that CEO is.
Laura Shin:
And after leaving the CFTC, you joined the Chamber of Digital Commerce as an advisor and obviously, made your proposal about the digital dollar. What are your own plans in the crypto and blockchain space going forward?
Christopher Giancarlo:
Well, it’s an exciting time for me. I can now focus on developments in the area that have long fascinated me. For most of my professional career, 35 years or more, I’ve operated in sort of the intersection of markets, technology and law public policy, and there’s so much going on in that triangle right now, and it’s a time when I can engage on those issues of interest and not strictly in the area of CFTC jurisdiction, but more broadly, and so I intend to do this.
I’ll be serving on a number of boards. I’ll be doing some advisory work, and really focusing on topics and areas of interest, and there’s so much going on in the space. It’s kind of a fun time to be a former chairman of an agency and an agency with a well deserved reputation for being on the cutting edge of markets and being ahead of the curve, and so it’s an exciting time. I’m having a lot of fun.
Laura Shin:
You’re famous for telling Congress in February 2018 about how your kids were interested in bitcoin and how your niece is a Hodler. How do your kids and niece feel about bitcoin now when the price is a little bit different from where it was in February of 2018?
Christopher Giancarlo:
Well, my niece, to her great credit, got in very early, so she’s still in a good position, but she’s still a Hodler and has been buying other asset classes, as well, and likes to tell me about the different features. She’s actually in the world of software development, is very technologically proficient herself, and so she’s a great resource to me.
I come from a family that has long been active in technology. My father was engaged in medical technology, developing some of it. My brother Charlie Giancarlo is a very successful Silicon Valley entrepreneur and CEO of an online storage company and was chief technology officer as Cisco Systems for many years, and we’re a family that really is fascinated by the ability of technology to bring societal change, to bring convenience, to improve our lives.
And in my world of financial markets, I had a very successful time at GFI Group building some of the first electronic trading systems for over-the-counter derivatives, and I saw the way technology can improve markets, and so this is a time where, as a private citizen, I can engage in different areas of technology innovation and have some fun doing it. So I’m having a ball.
Laura Shin:
Great. So I guess that means that you would try to retain your title of Crypto Dad?
Christopher Giancarlo:
Well, you know, if I can just actually take a moment to tell you, that was a very exciting moment. Who would’ve thought that one would get the title Crypto Dad and tens of thousands of Twitter followers from a Senate hearing, but…
Laura Shin:
Things like that happen in crypto.
Christopher Giancarlo:
They do. So, as in most Senate hearings, you’re required to give a long written testimony, and the night before, I was flipping through the 80 or so pages and hundreds of footnotes of the written testimony I had submitted to Congress in advance of that hearing, and I had to prepare a five-minute oral statement, and I thought, there’s no way I’m going to summarize these 80 pages, and so I said, you know, tomorrow, I’m just going to go in and talk to them just person to person.
I went in the next morning, and it was my time to speak, and the lights on the dashboard went green, and the studio lights lit me up, and all those senators were sitting up there on the dais. I took my glasses off, and I said, senators, if you don’t mind, for one minute at least, I’m not going to speak to you as the chairman of a regulatory agency, but I’d like to speak to you as a dad and say I’ve just come back from our annual family ski trip with my kids and my nieces and nephews.
And every night at dinner, all everybody was talking about was bitcoin, and this is a generation that…at least my kids, I had tried to interest them in the stock market when they were growing up and had opened small brokerage accounts for them and had gotten no interest, but suddenly, they were just fascinated by bitcoin, and as I was saying this, I could look up on the dais, and I saw all the senators’ heads nodding, or at least some of them, up and down.
And I said, you know what, I think perhaps some of your have witnessed the same thing at your own dinner tables, and so, senators…and I knew I had their attention at that point. I said, you know, I think we owe it to them to give a really…not to be dismissive about this, but to give it the respect it deserves and to treat it with seriousness and to build a regulatory structure that is sensible and which there’s going to be some rationality and thoughtfulness to it.
And if nothing else, let’s protect them from people that would try to take their enthusiasm and scam them, but at best, actually build something that’s better than we have today, and just as I finished saying that, my Twitter account just exploded, and I went from something like 11 hundred Twitter followers to, you know, 40 thousand or so in the next 24 hours. You’re right. Strange things happen in crypto land.
Laura Shin:
I love that story, and your family, do they tease you about it?
Christopher Giancarlo:
Oh, tease me about it all the time. Tease me about it all the time, but you know, that’s the way I feel today. I mean, I still feel that way. I still feel that my generation has a responsibility to the next one not to leave them with a mess of 80-year-old regulatory provisions that really don’t make sense a century after they were written, but to kind of enhance them and make them work, or at least write new rules that make them work for a new era so that my kids can build what that tomorrow looks like on the basis of a sound regulatory footing.
And I think that’s the challenge that exists right now in this new environment, is to take the enthusiasm, the energy, the innovativeness and give it a sound regulatory footing built upon age-old principles of transparency, of openness, of fair dealing, of sound regulatory practices.
When people put, you know, any asset into an account that they have knowledge of where it is and it’s there when they want to go take it out, that there’s sound practices, that there’s sound cyber penetration practice, that there’s proper disclosure of the financial underpinnings of the venture, all the ones that are there, but they’re there for an analogue world. We need to make them apply to a digital world. So I think it’s a big challenge, but I think it’s one really to embrace, and I’m really enthusiastic about embracing it.
Laura Shin:
Great. Well, thank you so much, Crypto Dad. This has been a great discussion. Thanks for coming on Unchained.
Christopher Giancarlo:
Thank you so much, Laura. It’s been fun, and I follow your show, and I look forward to hearing the episode.
Laura Shin:
Oh, yeah, yeah, and you’re welcome back. We will talk about that offline. Thanks so much for joining us today. To learn more about Chris, check out the show notes inside your podcast player. If you’re not yet subscribed to my other podcast Unconfirmed, which is shorter, a bit newsier, and now features a short news recap, be sure to check that out. Also find out what I think are the top crypto stories each week by signing up for my email newsletter at UnchainedPodcast.com. Unchained is produced by me Laura Shin with help from Fractal Recording, Anthony Yoon, Daniel Nuss, and Josh Durham. Thanks for listening.
