Chris Giancarlo, popularly known as “Crypto Dad,” a former Commodity Futures Trading Commission chair, believes that today’s youth turn towards an online digital tokenised-based money system having lost faith in the centralised banking system. But Chris warns , that the importance of money is far too great to be left solely to the central banks.
Jamie: Chris, thank you so much for taking the time to chat with us. I’m very excited about chatting today on so many different topics but if you wouldn’t mind just to begin with, can you do a quick introduction about yourself and your recent background?
Chris: Yes, Jamie, great to be with you. And you know, I served as the 13th chairman of the US Commodity Futures Trading Commission. I had the honour to be appointed by President Obama to serve as a commissioner and I had the rare opportunity to be reappointed by President Trump and to serve as chairman. And I’m very proud of the fact that I was unanimously confirmed. Very few of Trump’s appointees were unanimously confirmed and I think it’s a testament to either most people don’t know what the CFTC does, or I hadn’t annoyed enough senators to earn my first term in office.
But it was a great honour and since I left the agency, I’ve been focused on a number of things. I’ve created something called the Digital Dollar Project and I’ve recently completed a book called CryptoDad: The Fight for the Future of Money about both my experience in Washington, greenlighting the first Bitcoin futures but also my looking forward to the future of money, both sovereign and non-sovereign money, here in the United States and around the world.
Jamie: Which is so great, and I’m fascinated to hear you’re through as a talking head on this space. And you are a dad.
Chris: Yes, I am indeed a dad.
Jamie: Okay, it’s a great name by the way.
Chris: In fact, well, do you know how I got the name Crypto Dad? It was because after we greenlighted Bitcoin futures, I was called on the carpet in front of the Senate Banking Committee to explain what we did. And the week before we had prepared a 60-page treatise explaining every step along the way of our greenlighting Bitcoin futures. And the night before as I was preparing for those opening remarks, we only have five minutes and they’ll gavel you shut if you go on, I thought there’s no way I can condense 60 pages into an opening statement. So, I pushed that aside and on the following morning when my light went green, I looked up to the senators, I said senators, if you’ll allow me, I’m not here. I won’t speak to you as the chairman of a federal regulatory agency. I just want to talk to you as a dad.
Jamie: There it is. And it was born.
Chris: And Crypto Dad was born. And what I pointed out to them was that there’s a generation gap present today in a new generation that has really lost faith in the institutions that presided over the financial crisis, the institutions of central banks and banks. And see a trust established through more algorithmic methods of consensus, methods that we learned in the first wave of the internet and are now taking over, whether it’s Bitcoin or cryptocurrency. And so, it was with that that my Twitter feed exploded and the word, the name Crypto Dad was given to me.
Jamie: Well, it’s a fun one that serves you well. So perhaps we’ll just start on that because as you’ve said before, there is a generational gap appearing now and I think whether it was your generation, there were other more social issues, whether it was Vietnam War and things, that were separating generations. Now there’s a typical lower trust of the younger generation, let’s call them sub-35s on some of the bigger institutions like banks. Can you just talk a little about that?
Chris: Yes, so I’m a proud dad myself of three 20-year-olds that are out in the world today, but they grew up in a different world. My generation established a relationship with a banking institution as really the second one to their own school years. But this generation has had relationships with social media companies, online retailers, and mobile device providers long before they set foot into a branch bank. And I think the banking system and all the infrastructure that goes with it, the regulation of it, the central banks, have lost the trust of this generation. And I think they’re struggling to regain it while things like Bitcoin and cryptos come around.
And it’s interesting to watch the Washington response. As you know I spent five years there, so I think Washington is really trying to understand why it is that their regulatory structures, that their banking institutions don’t enjoy the trust of this generation. A generation that’s much more comfortable in an online world, in a digital tokenised-based money system than say my generation.
Jamie: Concepts that are just quite alien to let’s say my parents or the generation above. So, in fact, you’re quite a pioneer to be a man who is proudly in his sixties but you’re someone who is certainly among the very few who understands that this is the future. So, what is happening to try and convince this older generation, the people who are setting the rules and regulations, to see it from the point of view of the younger generation?
Chris: Well, I must say here we are in the waning months of 2021, and I really think if I were to analogise this generation to a popular movie series, I think we’re in The Empire Strikes Back segment of the trilogy. Right now, I think the legacy system and the regulators who they’ve captured are really trying to almost stifle advancement of this innovation to shore up the legacy financial system and the legacy regulatory system.
Remember, our regulations, whether under the SEC, the 33 and 34, that’s 1933, 1934. In the case of the CFTC, it’s 1936 Commodity Exchange Act. These are 90-year-old regulatory frameworks. And the principles behind them of adequacy of disclosure, of registration, of orderly markets free from manipulation, are sound principles. They’re sound policies. But the formulation of those policies is based on an analogue physical world. The formulation of them is inapplicable to this new wave of innovation.
So, what do you do for your regulator? Well, one choice is to simply say stop the world, we like it the way we are. This evolution must exist for the convenience of regulators with regulatory frameworks they’re comfortable with. Or as we tried to do when I was at the CFTC, is say we have principles that make sense but how do we apply those principles in a new evolution of the internet, a digital world? And so, there’s got to be some give in the system if you believe that this innovation as I believe as I do, can enhance our financial systems and make it more inclusive, lower cost, much faster for our fellow citizens. I believe this innovation can help us do that but only if we give it room to breathe. And I think that’s really the path that regulators need to follow.
Jamie: Okay, so that leads me onto what I was hoping to really get into with you. It seems to me like central bank digital currencies are inevitable. I know obviously China is pressing ahead full charge but the private digital assets, they don’t seem to be going away. They seem to be in fact growing in popularity. So, my question to you is do you feel that these two currency ecosystems can coexist? Are there any hurdles to those ecosystems coexisting?
Chris: I hope they can coexist. And I agree with you that I think central bank digital currency is inevitable. I believe every major central bank in the world is going to develop their own central bank’s sovereign form of money because the attractiveness of it is just too great. Whether it is capturing the data of the economic activities of citizens as China is doing with their digital yuan, whether it’s modernising infrastructure as Singapore is doing. Whether it’s greater financial inclusion for citizens as the Bahamas are doing with their Sand Dollar.
Whether it is for greater monetary policy precision as we wish we could’ve done in our first response to the COVID crisis when issuing paper cheques to people that couldn’t either get out of their house to the bank or didn’t have bank accounts did. Or whether it is the rise of stable coins which has put central banks into what I call a fight or flight moment. Or whether it is geopolitical influences as China is doing with digital currency. Or most importantly as it is enhancing hopefully the right values in the digital future of money, values of economic privacy, and lack of censorship. So, I think there’s a whole host of reasons why every major central bank in the world is going to move forward with a central bank digital currency.
But as I’ve written in my book, I hope that we have a world of competing sovereign and non-sovereign money. And why is that? Because I’m afraid if anybody has a monopoly on this, whether it’s a central bank or whether it’s big technology companies, the gathering of information, the invasion of our financial privacy will be too great of a temptation for all of them to resist. And only if we have competition could we choose a digital currency, sovereign or non-sovereign, that best protects our privacy. I’m hoping that the United States respects its Fourth Amendment guarantee of privacy and codes that in the future of a digital dollar, but only if there is, and this is to your point, competition from the private sector can we be best assured that they will.
Jamie: So, will central banks allow a situation in which I can buy my things on Amazon using the central bank digital currency but if I want to donate to a political party and I want to stay anonymous, I could use a private market currency? Do you think that is a situation which could exist?
Chris: It could. I think it’s going to take an enlightened approach. The first wave of the internet, the internet of information, developed as a public-private partnership. The US government’s Department of Defence work and the explosion of Silicon Valley of enhancements of that digital commerce, et cetera. It came into a regulatory light zone in Washington. Why? Because of our longstanding principles of freedom of speech. The First Amendment of protection of speech meant there’s no alphabet soup of Washington agencies protecting speech, right? There is no Ministry of Truth, no Ministry of Information.
But this wave of the internet, what some people call Web 3.0, the internet of value, is going head-on into a regulatory heavy zone in Washington. We have an alphabet soup of agencies in Washington whose job it is to protect things of value. We don’t have one bank regulator in Washington, we have three. We have 50 states of bank regulators. We don’t have one market regulator in Washington, we have two, plus many states have securities regulators as well. We have long presumed a balanced role for the government in protecting our assets. We accept that in a democracy. We have bank regulation, we have market regulation and so, this wave of the internet is encountering a regulatory heavy zone and those regulators don’t want to yield ground that they’ve taken 90 years to gather.
Jamie: So, a lot of this seems to be, and if there is a lot of resistance about who owns the data, and it’s funny because I’ve heard you speak about this before. It’s like we’re very unwilling to hand our data over to governments but we do it to Facebook and Amazon every single day and we seem to have no problem with that. So, is that something that you think we just need to change our mindset about?
Chris: I’m really worried about that. In the United States and in our culture, we are just as you say, very relaxed about giving our information over to big tech companies. Very different in Europe where they have a law preventing big data companies from gathering information.
Chris: GDPR, yes. And interestingly under GDPR, there’s no restriction on government gathering information so the European approach is the reverse of the Americans. They’re sensitive about commercial gathering, okay with government gathering. We’re hypersensitive about government gathering but we’re not as hypersensitive as I believe we should be. Ever since the Patriot Act of 9/11, gradually we’ve been giving more and more of our information to the government and that is concerning.
I do believe that my generation is the one that’s relaxed about this. I think that younger people the reason why Bitcoin is so attractive is because of its censorship resistance. And I hope that the wildfire that’s caught the attention of younger people about concerns about censorship extends to the development of a digital dollar which I think the US government ultimately will do. The questions are whether it respects privacy or whether it’s a means of not only information gathering but censorship of our economic activity.
Jamie: Okay so allow me to explain a bit more about this because I think it’s a concept I struggle to get my head around a little bit around privacy which I think is just such a huge topic. When it comes to Bitcoin, who can see the data involved in every single transaction? Like who is able to see that? And when it comes to central bank digital currencies, who is able to see all those transactions?
Chris: Yes, so I kind of need to paint a little bit of a conceptual picture. From the dawn of humanity into four or five hundred years ago, there is only one form of money, and that was tokenised money. And with tokenised money, the beauty of tokenised money is you do not need to give up your identity. You walk into a deli and you buy a $10 sandwich and hand them a $10 bill, nobody needs to know that your name is Jamie McDonald and where you bank, and how much money is in your bank. All they need to do is take that $10 bill and verify that the token is authentic. That system worked well until we discovered its major shortcoming; it’s local. That same $10 bill won’t work in a French deli. You’ve got to present a different form of token.
And so, the world developed. It developed in Europe, a different system, the banknote system. Take your Dutch guilders, put them in the Bank of Amsterdam and they’ll give you a banknote and with that banknote, you can go to Venice or wherever you want and trade there because it’s the bank credit that stands behind it. The banknote system is 90% of the world today and it works well. The problem with it though is it’s exclusive.
Why is it exclusive? Because if you don’t have identity, you cannot use it. All bank money transactions require identity. You go into that same deli and instead of presenting a $10 bill, you present a credit card, you present Venmo, or PayPal, or a cheque. All of those require knowing that you’re Jamie McDonald, you bank where you bank and there’s so much money in your bank account. That’s the system that dominates today. And when we think about money at my generation, that’s what most people think about. The problem with that system is it’s exclusive, it’s slow, and it’s expensive.
The breakthrough about Bitcoin, about cryptocurrency, is it goes back to a token-based system where you don’t have to give up identity as the first step to every transaction. The transactions are pseudonymous. There’s an algorithm and there’s a set of keys that protect your identity, okay? It’s pseudonymous unless we need to trace back to find out identities.
Jamie: I see.
Chris: So instead of identity as a first step in that $10 sandwich transaction, it’s pseudonymous unless there may be some pattern that we need to unmask and go from pseudonymous to identity. And that’s the beauty of it. And I think that’s why there’s a generational issue because the new generation whether they started trading tokens on video games or otherwise, intuitively gets this in a way that the legacy systems and the people that preside over legacy systems, whether they’re at regulators or central banks, don’t quite get.
Jamie: So just what you said, I’ve heard you use this example before and I think it explains it well. It’s the idea of you don’t say who you are going onto a highway but if you do something wrong, you can get pulled over. And that’s really the thing that people need to get their head around when it comes to privacy issues with cryptocurrency.
Chris: Right. So, the reason we have the current system, the anti-money laundering knows your customer, known as AMLKYC, is because we have the existing banknote system, so we built that process on top of it. So, as we said, you go in the sandwich shop, if you use anything other than cash, you’ve got to first identify who you are, where you bank, and our AMLKYC system operates on that. That’s the current state-of-the-art process.
And I think in a lot of regulator’s minds, they confuse that process as the ultimate representation of the policy of preventing money laundering. What we need to think about is what is the policy, how do we get there in a new world that doesn’t require identity in every case? We can. We just need to be willing to move away from the current policy and move to a different one. So, instead of getting identity in every case, why don’t we identify patterns of bad behaviour and then unmask the identity of the people involved in that and get identity as a last step. This simple analogy is if you want to go onto the interstate highway, you get on the highway. You don’t have to stop at a barrier, give up your identity, tell them everything about yourself, and then they let you get on the highway in case you do something wrong. Most times you won’t.
What we do is we get on the highway and if you do something wrong, whether it’s a camera or a helicopter, or a patrol car, recognises bad behaviour, pulls you over and what’s the first thing they do? Get your identity, right? So, we can approach blockchain-based transactions on the same basis. Instead of getting identity of everybody involved, let’s let them conduct commerce, let’s use big data recognition, pattern recognition, identify areas of bad conduct, and then we can get identity from the people by going from pseudonymous to unmasking the underlying identity. The ability is there. What’s lacking right now is the vision to see beyond our own current processes to a different world based upon the policies that we’re trying to get to.
Jamie: Another one final question that I wanted to ask you which is the pace at which we’re likely to see central bank digital currencies. In my mind, I don’t really see why there is such a rush for central banks to get their digital currencies out there. I know the price of Bitcoin and Ethereum is growing and growing and maybe it’s this, the market caps of those currencies is challenging them and making them feel like they need to produce one. But if you’re a central bank, why would you not just wait for the private markets, for the Bitcoins and the polka dots to make their mistakes and then just produce your currency, just a better version, and let them make the mistakes?
Chris: So, you’re absolutely right. I think that when people describe this as a race, I think they’re missing the point. It’s not a race to be first. It’s a race to get it right, right? And getting it right is the central bank that adopts a central bank digital currency that reflects the values of their society, the norms, the social conventions, and from my mind, issues of privacy and economic liberty, and freedom from censorship. If we get those right in a digital dollar, I don’t care whether it’s tomorrow or ten years from now, getting it right is more important than getting it first. And to his credit, Chairman J. Powell at the Fed has said the same, the very same thing.
However, there is a concern on the global level that the United States is a bit asleep at the switch in terms of moving forward in exploring this evolution. And the concern is as we know China is moving very rapidly, Europe is also moving very rapidly. And Europe’s concern is that the United States sits out the first few rounds of this and then three years from now when China is successful in this, suddenly wakes up, comes roaring into all these global conventions, meetings that are taking place that develop the conventions for money, and says we’re the United States, throw away everything you’ve done, we need to start from scratch. And they’re worried we come running in with 20-pound boots late in the process.
And so, what I’m going to advocate for, and I’ve started something called the Digital Dollar Project, to advocate for the United States to move forward with its exploration of this. Rolling it out is a separate topic but get in the game now in the exploration of central bank digital currency and get in the game now working with the private sector. You point out the role of the private sector. The private sector has been exploring digital money ever since 2008. It’s almost 13 years now and doing things very, very successfully so the official sector is late to the game already. Now some official sectors in Europe and elsewhere are moving forward. I think it’s time for the United States to get more firmly in the game. We can make a decision of whether to execute this later, but let’s get in the game of exploring this.
Jamie: So, here’s the 64-million-dollar question, how do we know when a currency has got it right?
Chris: I think it’s about values. It’s about that. What has made the dollar ascended as the world’s reserve currency? Yes of course its strong economy, stability, global trade, all those important elements, economic elements, but on top of that, are certain values. I think the dollar represents to aspiring people around the world a vision of an aspirational economy, of social mobility, of economic liberty, of free enterprise, of the rule of law, and perhaps most importantly, of economic liberty for legal transactions. Obviously, if you’re engaged in illicit conduct, you deserve the punch. And my worry is that we don’t take those values seriously as we design the digital dollar for the next generation.
Jamie: So, in your opinion, Bitcoin does do those things but perhaps there isn’t enough people around the world to have their trust in it yet. Am I on the right track?
Chris: Well, I think Bitcoin has been remarkably successful. I think it’s been successful even beyond its own economic success. Bitcoin, if it’s done nothing else, has revealed the inefficiencies, the rent collection, the cost, the expense, the exclusivity of our existing system. If Bitcoin has done anything, it’s been a rebuke to the exclusiveness, the latency, the ricketiness of our existing financial system. If Bitcoin does anything, it tells us we need to modernise our existing system. We need to give more people economic opportunity, we need to lower the cost, we need to take out the rent collection that’s in our existing system. So, if Bitcoin has done nothing else, it’s put us on notice that our existing system needs a lot of upgrades.
Jamie: Well, Chris, I really feel like I could take to you for hours and I really enjoyed our conversation so thank you so much for joining.
Chris: My pleasure let’s do it again.
Jamie: Good luck with the book.
Chris: Thank you very much.
Originally Posted on January 12, 2022 – CryptoDad: Restoring A Generation’s Lost Trust in Money
Disclosure: FTSE Russell
This material is not intended as investment advice. Interactive Advisors or portfolio managers on its marketplace may hold long or short positions in the companies mentioned through stocks, options or other securities.
© 2021 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®“ and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided “as is” without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of the FTSE Russell products, including but not limited to indexes, data and analytics or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained herein or accessible through FTSE Russell products, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB, BR and/or their respective licensors.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from FTSE Russell and is being posted with permission from FTSE Russell. The views expressed in this material are solely those of the author and/or FTSE Russell and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.
Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
Disclosure: Digital Assets
Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to sustain losses. Eligibility to trade in digital asset products may vary based on jurisdiction.
Disclosure: Futures Trading
Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.