It’s a fight for the future of money in the US, says Christopher Giancarlo

Transcript

Angie Lau: Digital currencies are the future of finance, and with each passing day, they’re becoming more and more relevant. But as the U.S. Government grapples with how to regulate and maybe embrace this new era of finance, we’re left with a lot of topics under discussion. From the SEC’s enforcement actions, anything but an embrace right now against crypto, to the exploration of a digital dollar. We’re going to get insights from one of the leading experts in the industry. 

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Forkast Editor-in-Chief Angie Lau.

Today, I sit down with a major Washington insider now turned true maverick, and I’m thoroughly thrilled to welcome him and introduce him to the show again. Someone who’s not afraid to challenge the status quo and shake things up in the world of finance. He’s been called ‘Crypto Dad’ for his forward-thinking approach to crypto regulations, he is the former chair of the U.S. Commodity Futures Trading Commission, or CFTC as we know it, who’s now blazing a new trail in the digital currency landscape. Audience, I’m thoroughly excited, as I said, let’s welcome Chris Giancarlo to Word on the Block. 

Chris, it’s a pleasure to have you with us today. Let’s get straight to it. Are you ready to go?

Giancarlo: I am. It’s so great to be back with you. This is not our first rodeo, so it’s so great to be rounding up again.

Lau: It really is. We talked early in the day for Forkast as we saw the emergence of this industry. You were coming out of the CFTC and you’ve been a trailblazer, as I’ve said. Your book’s title ‘CryptoDad: The Fight for the Future of Money’ is a must-read. I love the title. And it’s spot on, isn’t it? It’s a fight. It truly is a fight.

Giancarlo: It truly is a fight. We think about technology, we think about other things, but the fight is really about values. Money carries with it values. Our financial system carries with it values — the values of a society, the values of a  free society, values of a closed society. The fight is on right now for what values? The financial system, the banking system, and most importantly, the money of the digital future will carry within it. That’s what the fight is all about. What were those values? Will they be values of individual privacy? Will they be values of economic liberty and economic freedom? Or will they be values of closed societies, values of control, values of censorship and values of political power over those economic choices? That’s what the fight is all about.

Lau:  And here we are today, the struggle of who’s going to be in control as a decentralized technology in the hands of individuals and aggregating and finally restoring power in many of our views, restoring power back to the individual from an economic perspective for the first time, and then the powers that be. That is the evolution of what we’ve seen in the past five years.

Why are we seeing such a divide in Washington right now? We’ve had five years to look at the landscape, five years to learn, five years to assess and five years to determine where we want to go collectively as a society. I don’t want to even just frame it within the United States, but globally. But why, specifically in Washington, are we seeing such a divide?

Giancarlo: It’s complicated, but let me take a stab at it. The 20th century is a world of analog banking. The banking system that is in place today which was built largely over the last century has come to be dominated by the United States. Whether it’s our central bank serving as the central bank to the world central banks, whether it’s our dollar being the dominant reserve currency by a country mile over everything else — at least historically — whether it’s our banks being the kings of the realm, the most powerful banks in the world, all of that only consolidated itself with the arrival of Dodd-Frank. In many ways, Dodd-Frank was the last piece of that, with Washington taking a big leadership role in our financial system. In many ways, Dodd-Frank was the victory of Washington over Wall Street. If you think about it, the power that this gives Washington, the power that gives the United States is a remarkable and unprecedented thing in global history.

Now, along comes a new technology that threatens all that. Along comes a new technology that decentralizes the centralizers. A new technology that has the potential to return control, that has the ability to resist inflationary pressures coming from the devaluation of our currency through money printing. So it is an incredible threat to that entire hierarchy.

I also don’t mean to speak just in terms of libertarian grounds. There is a reason why the United States has benefited from the historical system. So it’s understandable that as the leaders of that old system, there’s resistance to a new architecture of finance, an internet-based architecture of finance. The resistance, or at least I’d say the confusion over this, is understandable. It’s a confusion that is particularly strong in the United States. Why? Because of our dominance of the existing system, which it threatens.

Other countries that haven’t enjoyed that dominance are actually welcoming this innovation because it’s a way of perhaps, themselves, gaining prominence in this new architecture. So we are a bit, in the United States right now, like deer caught in the headlights, at least in the official sector, because of this transformative, challenging new technology. If you look at the revolution it potentially offers in payments, that’s a threat to central bankers that have traditionally dominated and had a monopoly over payments — certainly in wholesale payments — in the banking system. If you look at how it’s a rebuke to money printing, because certainly in the case of Bitcoin, it’s programmed scarcity. That is a rebuke to a government profligacy in its own currency that we’ve known for the last several decades.

And by the way, both parties are indicted in this critique. Is it surprising that Washington is not greeting this innovation with the same embrace that it greeted the internet 30 years ago in an internet of information? It’s not surprising. It’s not surprising to me the degree of resistance.

What I would say is, I’m disappointed — not the confusion, I understand that. I’m disappointed in the hostility. 

Because, if instead of viewing this as a threat to what the United States has dominant dominance over the existing system, we view it as an opportunity to reset our financial system in a more democratic, open, financially inclusive, consistent with our constitutional principles of rights to privacy, an opportunity to reconsider the extraordinary scope of financial surveillance that is taking place already in the existing system, then this is a great opportunity. I’d like to see the United States, rather than resisting it, be more open to it. 

I’ll leave you with one last thought on this point. Gandhi talked about social change and he said: ‘At first they ignore you, then they ridicule you, then they fight you, and then you win.’

Lau: You make a really great point. What I’m hearing is that. Politically, this has become a political football, for lack of a better word. There are so many incumbents here. And by incumbents, I say, those entities, those agencies, those institutions that are interested in navigating this world with a sense of central control. That’s got to be around the dollar. 

Politically, though, Washington has been very much embarrassed by FTX. Here’s the darling of the crypto industry who had been throwing around dollars, if you will, to many campaigns, and it was a real problem. 

Do you think that fanned the flames of discontent?

Giancarlo: Absolutely. It fanned the flames of discontent. It fanned the flames of a political scandal, which is always good for a lot of clicks and a lot of newspaper articles. It created a lot of heat. And wherever there’s heat, you’ll find people gathering around the campfire in Washington. But it doesn’t undermine the basic premise of crypto.

The scandal, by the way, of FTX is entirely a Washington scandal. I’ve recently been in Sao Paulo, Brazil, I was in Europe, I was in Japan talking to financial regulators there. They’re not overly focused on FTX. They’re focused on the opportunities that are coming with this technology and how to further it to further their own economic interests. And we need to move beyond it. But it’s still Washington after all. It’s still going to draw heat for a while.

Lau: You are so right. When we have global conversations, they’re not talking about Sam Bankman-Fried, they’re not talking about FTX, they’re talking about the latest innovation, what protocols are still doing, where to invest, which projects they want to save and invest in and promote, how they’re going to seize market share and how they’re going to regulate. They’re not talking or fixed to this idea that we’ve got to figure out how to get over our embarrassment from somebody who gave us money. 

But that’s another show. Chris, That’s another show. 

Let’s take a quick break here because when we return, Chris, I want to talk to you about central bank-backed digital currencies, CBDCs, why we’re hearing concerns about privacy and why some regulators and policymakers downright want to ban the whole thing. So stay with us, audience. It’s going to be a really hot next segment.

Welcome back, everyone, to Word on the Block. I am here with Chris Giancarlo. He is Crypto Dad. He’s fighting for the future of finance. That’s the title of his last book.

But in fact, you’re also the founder of the Digital Dollar Foundation or one of many. Tell us about this entity and tell us about the fight that you foresaw and one of the reasons why you put the foundation together, as we talk about CBDCs right now.

Giancarlo: Today, over 130 countries around the world are looking at central bank digital currency, or CBDC, with 50 of them in advanced stages of development. China having launched its digital yuan and placed it in over 240 million wallets. Europe saying they will start deploying a central bank digital euro within a few years. Britain saying they will have a digital pound by the end of the decade. So this is moving very, very rapidly. Nineteen of the G20 countries are working on some form of sovereign money right now. Whether we have a digital dollar in the United States is almost irrelevant because we’re all going to be dealing with sovereign digital money in a global world in the years to come, even if the United States doesn’t go down.

We’re going to have the equivalent of Amazon.com of money, and the temptation for politicians to want to control that, surveil that and potentially censor that, is just going to be as great.  Whether it’s done by a central bank or whether it’s done by a stablecoin operator, the concern about privacy applies. Whoever does it, whether it’s done by a central government or whether it’s done by a private actor.

Lau: How are people going to think about wanting to embrace a digital dollar when it intrudes on their privacy? That big ‘P’ word has become really a fight for individual rights.

Giancarlo: So first of all, your paper dollar, you can’t use it in e-commerce. And as we all move to a networked world, the privacy inherent in that you can’t just apply into a digital world. The digital transaction is a digital footprint.

The ‘P’ word needs to also go to the ‘C’ word of censorship. It’s not just that we’ll be surveilled, it’s that we could also be censored. 

In a digital world, your digital dollars or your stablecoin could be turned off to do certain transactions that a government doesn’t want you to do. So again, it’s not just the central bank digital currency where we’re concerned about both privacy and censorship, it’s whether it’s done by the private sector or the public sector, whether it’s sovereign or nonsovereign, the same technology will be applied.

That’s why what we need to do is come together and reaffirm our First Amendment rights, reaffirm our Fourth Amendment rights and demand that whether digital currency is done by the government or the private sector, there must be no way to have individual surveillance.

However, if the pattern of your activity demonstrates probable cause of crime being committed, then there’s a legitimate state interest in monitoring that activity. We’ve got to work out that balance. 

But what I do want your listeners to understand is there’s no protection if it’s done by the private sector. The government will be all over stablecoin operators as well as if they run it themselves. In fact, it may be easier for them if they don’t run it themselves to influence what stablecoin operators do. We need to make sure in this new stablecoin legislation, any type of legislation, that the same freedom from surveillance and freedom from censorship is written into the digital money of the future, whether that digital money is run by a central bank or run by a private stablecoin operator.

Lau: Is that what is causing this tension right now? You say something really similar in your book as well, that that money is too important to be left to central bankers. Is the digital dollar then best safeguarded by the Constitution, by the set of laws instead of people and agencies and groups?

Giancarlo: Before we even get into a digital dollar, there are three things right now that are detrimental to the continuation of the dollar as the world’s primary reserve currency.

The first and foremost and by a long mile, the most important one is just fiscal profligacy. Just the printing of dollars to meet short-term needs, whether that be Covid relief or whether that be infrastructure projects or whatever it may be, the profligate spending and debasing of our currency is the biggest threat to the dollar.

The second one, I would say, is the degree of financial surveillance that has become almost gratuitous. [September 11] — it’s gotten all out of proportion and it’s reached unconstitutional levels.

The third thing that I think harms the continuing prevalence of the dollar is, quite frankly, our unwillingness to embrace modernization. FedNow, which is going to be hopefully completed this summer of 2023, should have been done in 2013. Europe has already had real-time payments in wholesale money for a long time and so on and so forth.

We’ve only got touchless readers on our credit cards in the last few years. Europe’s had those for years. We have rested on our laurels and we have been unwilling to modernize. This is particularly acute now as we think about tokenization and digitization.

The United States is the laggard in experimenting with digital currency and the political reaction is to just say no to CBDC. 

Again, it’s unfortunate it’s become a political issue, but it’s shortsighted. we’re taking a societal antipathy to digital modernization of the dollar, which is going to undermine it as the rest of the world moves forward with this.

Lau: It’s a great point. I want you to hang on to that thought because when we come back, I want to ask you about what is happening at the SEC and the CFTC and the different stances on regulating digital currencies. And I also want to know what’s on Chris Giancarlo’s plate.

Stay with us, folks. You’re with Word on the Block.

Welcome back. You are with me, Angie Lau, your host of Word on the Block, and Chris Giancarlo.

I want to ask you about the SEC and the CFTC. Hester Peirce recently came out. Wow, what a blockbuster really, coming against Gary Gensler in public statements. And then you, as a former chairman of the CFTC, you’re watching what your former agency is doing as well in this space. But you’ve got internally different commissioners. We recently talked to Commissioner Caroline Pham, who’s just so thoughtful about this space as well. But you’ve got this kind of disparate conversation happening internally within different agencies and then different agencies within the umbrella of the United States.

But just so much disconnect here. How is anybody supposed to navigate this space even when they want to? For the past couple of years, we’ve repeatedly heard that people want to engage and then they get the wells notice or enforcement action.

Giancarlo: It’s easy to view it as one or another person’s personal vendetta because it’s easy to personalize things. But the fact of the matter is, this is administration policy. Administration policy is to resist and to diminish and degrade crypto technological innovation here in the United States as much as possible. Now, there may be many who believe that crypto is somehow a detrimental force, that it’s evil, and that it allows for fraud and manipulation, and therefore they support administration policy to degrade it. We do need to be clear that, right or wrong, this is administration policy. It’s being carried out by the agency.

What I do find surprising is that agencies like the CFTC and the SEC are actually not executive branch agencies. They’re independent agencies. Their duty is to report to both Congress and to the White House. But I do find they are acting, certainly in the case of the SEC, as if they are actually executive branch agencies carrying out administration policy. I do find that remarkable and actually worthy of criticism. What I would say between the CFTC and the SEC is that the CFTC has historically been open to innovation. It was built upon a very interesting historical basis for the creation of the CFTC. The CFTC had started just at the same time as the SEC, but as a branch of the Department of Agriculture.

And for the reason that at that point, every type of derivative was based upon something that came out of the ground, whether there’s wheat or soybeans or oil, it was based upon that and it was markets where the risk of that changing price in that underlying commodity was hedged. The CFTC overseas markets for risk transfer, and the SEC overseas markets for capital formation.

But in the 1970s, when the United States went off the gold standard for the dollar, it became very apparent that countries around the world that use the dollar would need to hedge the exchange rate between that and their own currency. And it was believed to be so important to the dollar’s prominence as a reserve currency that there be deep and liquid markets to hedge that, that the CFTC was taken out of the Department of Agriculture, made its own agency and charged with overseeing these new derivative products based upon global benchmarks on currencies and interest rates. It was perceived at the time that the SEC didn’t have enough of a mandate for innovation to oversee these new products. So the CFTC was given a mandate for innovation

To this day, 40 years later, the CFTC has overseen the launch of more new products than virtually every other financial market regulator in the world combined. Literally, tens of thousands of new products have seen the light of day under the CFTC stewardship because it’s built into its DNA that it is an innovation-focused regulator.

The SEC has other strengths. It’s very focused on investor protection and consumer protection, and so it tends to take a more cautious approach.

So there’s an inherent reason why five years ago, the CFTC launched a successful market for crypto, Bitcoin futures, which to this day remains liquid, transparent, well-regulated, and an orderly market. Who would acknowledge that right now we have in our own shores one of the best-regulated crypto markets in the world, but it does under CFTC? 

Meanwhile, the SEC still hasn’t found its way to creating any type of regulated market for crypto which to many people is rightfully disappointing. So there is a difference in the DNA of these two agencies. They do operate differently and the issue right now is not who is going to be the one regulator for all crypto.

If the CFTC were given that authority over the spot markets, the presently delivered markets, that would basically relaunch a whole new burst of activity because now you’d have regulated markets for spot Bitcoin and Ethereum, you’d have the derivative market and the SEC would no longer have an objection or at least a colorable objection to a regulated spot Bitcoin ETF and that would allow traders to have the full suite of trading products, which I actually think would be good for a rebirth of market activity in digital commodities like Bitcoin and Ethereum.

I’ve recently been in Brazil, I was in Europe and I was in the Far East in Japan. Those countries are passing laws that are going to be tough, but they’re going to provide rules of the road for innovation. And when they do, innovation is going to leave American shores. It’s going to go offshore in a complete turnaround to what we did 30 years ago with the first wave of the internet where it all came out of the U.S. It’s all going to come elsewhere.

But I will tell you one thing. No administration lasts forever. I used to be chairman of the CFTC. Today I’m former chairman. The day will come when our current chairs will be former chairs and the next administration is always a reaction to the previous one. This policy will not last forever. As Winston Churchill said, the Americans always do the right thing after trying all the alternatives. Well, we’re trying all the alternatives right now to do the right thing. Eventually, we will come around and once again take a leadership role in this innovation.

Lau: You’re writing a book next. Surprised everyone! Chris is writing a book. I hope I didn’t reveal any surprises that you didn’t intend to. But I’m thoroughly excited about it. It’s coming out next year. You’re still working on it right now, just like your first book, which is really a reference and should be to a lot of people. What do you think the next issues will be that are critical to this evolution that we are headed on this path that we are headed on right now?

Giancarlo: Thank you so much, Angie. I’m writing this with Jim Harper, who’s a scholar at the American Enterprise Institute. And what we’re looking at is the unmistakable trajectory of where digital currency is taking us, and it’s taking us toward massive scale, singular platforms for digital currency. They’re going to be very efficient and like Amazon, people are going to quickly warm up to them and adopt them for the efficiency factor, but they will be huge honeypots for information. We need to be very concerned about our privacy rights and the ability to maintain our anonymity in those systems and really concerned about censorship and those systems, whether they be sovereign or nonsovereign, it’s irrelevant.

Lau: Chris, I wish this could go on forever, but I know that you’re a busy man. You’ve got a book to write. And I will see you soon. And I’m thoroughly excited about that. And we will do this again.

Giancarlo: Great to see you as well. Let’s do it again soon.

Lau: Absolutely. And thank you, everyone, for joining us on Word on the Block. It was amazing to have you here and what a treat it was today. I’m Angie Lau, editor-in-chief of Forkast. Until the next time.