Chris Giancarlo - The Fight for the Future of Money: CryptoDad Talks Blockchain Innovation

Full transcript: Chris Giancarlo on London Real

2:42 This is London Real. I am Brian Rose. My guest today is Chris Giancarlo, the investor, attorney, author and blockchain technology advocate. You served as chairman of the U.S. Commodity Futures Trading Commission from 2017 to 19, where you oversaw the first Bitcoin futures products enter the marketplace.

3:00 You’ve been named as one of the most influential people in financial regulation, and your views on cryptocurrencies and digital assets are regularly featured in the Wall Street Journal, the Financial Times and CNBC. You are the co-founder of the Digital Dollar Project, a not-for-profit initiative to advance the exploration of a U.S. central bank digital currency, where you believe the creation of a digital dollar is a critical move, and one that will provide benefits around the globe. You are also the author of Crypto Dad: The Fight for the Future of Money, where you suggest that money is too important to be left to the central bankers, and then we owe it to the younger generations to explore the potential of virtual currencies.

3:35 Chris, welcome to London Real. Great to be with you, bro. Great to be with you. Look, it’s fantastic to be here with you today, and I want to jump right into Crypto Dad, because it’s a great handle and it’s a great story, and when I look at your history, I’m looking at this seasoned Wall Street veteran who knows everything about some of the most complex instruments in the world, from derivatives to swaps to options, things that I used to even trade, and yet you’re on holiday with your kids and they’re telling you about this thing called crypto and it sounds like you actually listened, and that maybe changed the future of what happened.

4:12 So maybe you can tell me a little bit about that story, because it sounds crazy. Well, so we had been looking at crypto at the agency for years. It started back in 2015, when the CFTC, the Commodity Futures Trading Commission, declared Bitcoin to be a commodity and therefore under its jurisdiction, and from there we went forward into 2017 when I became chairman of the agency, and after a lot of consideration we greenlighted the first regulated market on crypto, which was Bitcoin futures.

4:46 So by the time I met with my kids, we had green lighted it. We had been studying it. It was all very academic and thorough and analyzed but suddenly what the conversation with the kids brought a new facet to it that I hadn’t appreciated and that was the generational aspect. That’s one thing that all of the spreadsheets, all of the staff presentations hadn’t quite brought out that this was a generation unlike mine. Look, I had an institutional relationship with a bank when I was in high school, because I had a summer job, and I needed to cash my checks.

5:18 But these kids, long before they set foot in a branch bank, had had social media accounts, they were online shopping, they had mobile devices for them. A branch banking is a foreign subject compared to these other relationships. And my kids were gamers. They were trading tokens. They were trading suits of armor.

5:37 They were engaged with people in games that were all around the world, and everything was instantaneous. And suddenly, the financial system, three days to settle a check, difficulties moving money around the world, fees, physicality of having to go into a branch to get things done, was so foreign to them, and it was, and their enthusiasm for crypto is really what sent the light bulbs off, that there’s a generational thing going on, and you know, Brian, you and I know life’s a conveyor belt. They’re back on the conveyor belt now, but they’re moving forward, and they’re taking these views with them, and these are probably the same group of people that you couldn’t get too excited talking about a derivative or even a share of a stock, and yet when it’s crypto, all of a sudden it becomes something they can relate to.

6:23 It’s part of their life. They understand it, and then they use it, which is ultimately the definition of something that’s important if it has utility. Well, so there’s one of my favorite authors is Douglas Adams, who wrote The Hitchhiker’s Guide to the Galaxy. I read those books when I was a kid in high school. Amazing, and he said, he said, whatever your whatever error you’re born into is exciting and the process of a lifelong career, if it happened before you’re 35, it’s exciting and it’s the future, but if something happened after you turn 35, it’s dodgy, suspect, needs to be repressed.

6:58 And I’m paraphrasing what he said, but you know, you find that in the crypto world as well, but 10 people tend to be over 35 used to the existing financial system. Seeing this new architecture of money is something suspect, but if you’re under 35 it makes intuitive, immediate sense to them, and the legacy system that you and I grew up in that we worked in, that we supported, is something that’s foreign to them. This generational issue is not only not going away, it’s going to grow and grow, and this is a truly generational, transformational moment in the history of finance, in the history of banking, and the history of money itself.

7:38 Yeah, and I want to talk about that, because it’s very surprising, always, to see someone with your background and your history going head-on into this and telling everybody that this is something we have to embrace. We have to make sure that it’s regulated the proper way, and this whole do no harm mentality. You mentioned kids. My daughter, she’s 17. I had her on the show.

7:57 She now has a wallet with cryptocurrency. She owns assets. I don’t know about you, but when I was 17, the only asset I owned was my 68 Ford Mustang, and it didn’t return any yield. These kids would now yeah, now, right, you know, but like they actually are comfortable with assets because of the gaming world, and now they might actually have something that gives them a return. It’s a whole different relationship with money than you and I did, where yeah, I remember going to the branch and having my little book and having the balance, and the bank controlled the money.

8:24 That’s not the way the kids are understanding it these days. Yeah, that’s so, the bank would tell you how much value you had in the bank, and if you were diligent, you would double check that, you would balance your checkbook, but ultimately they’re telling you where your value is and who has it, and what portion of it you can access. This is a whole different model. This is, no, no, no, I own the value. I confirm my value.

8:51 The World Wide Web and an algorithm is working with me to confirm that value, but I’m not reliant on bank, a pension fund, b to tell me where my value is or tell me when I can have access to it. Monday through F, Friday, 9 to 4 30. No, no, no, no, no. This is a 24/7 global validation of who owns what, who is transferring what to whom, and in most cases peer-to-peer. Now, are we there today?

9:17 No, this is what’s on the horizon, but this is the world our kids expect. Okay, and they’re not going to accept the limitations, the intermediation, the third party validation that you and I grew up within. Yeah, and you’ve said, I think you might have said, in maybe in front of Congress, where you said, it strikes me that we owe it to this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one, which is something we always seem to feel from Washington.

9:48 Even the kids feel it from their parents, and that you are now saying, no, we cannot do this. Let’s proactively go into this. And so you’ve been delivering this message to financial institutions, governments, regulators who aren’t naturally attuned to this idea. Well, let me tell you, actually, that story of where that line came from, and it’s actually where I got the nickname Crypto Dad. So as I said, in 2017 I’d become chairman of the CFTC, and we were focused on crypto.

10:15 We had set up something for the first time in the federal government. We created something called Lab CFTC. We did it in the spring of 2017. And we immediately assigned them to master everything you can find out about Bitcoin, Ethereum and some of the other leading cryptos, and bring the power of the agency, the data capability, the data analytical capability to bear. It got to the point where in the spring of 2017, our Lab CFTC was walking the commission through how to mine Bitcoin in real time.

10:45 We were doing it in the boardroom of the commission, because we were that determined to master this asset class. We knew that some of our large American exchanges were soon going to approach us about, basically, operating Bitcoin futures in the marketplace, and we were going to have to look at that application and green light it. And so we made the decision to go forward. Not easily. We got incoming opposition from European regulators, from some U.S. regulators, from some industry groups, trade associations and the financial press.

11:19 In some cases, we’re lampooning us. Oh, who do you think you are, green lighting this? Somebody took a full page out in the Wall Street Journal. So, not to do it right? Exactly right.

11:28 But we went forward anyway, and not long after, we greenlighted in December 2017. I got a formal summons from the Senate Banking Committee to appear before them, and it was appearing alongside Jay Clayton, the chairman of the SEC at the time, and Jay and I optically were taking very different approaches. We had just green light of bitcoin futures. Jay in the SEC were cracking down on ICOs. And so it was very apparent that going into that hearing, one of us was gonna be a goat, and one of us was gonna be a jackass, depending on one’s point of view.

11:59 And I thought the opposition was probably greater than the support we were going to get, so I was prepared for a grilling over, and if you’ve ever seen any of these Senate hearings, you know, you’ve got these senators on this raised dais, which is perfectly designed to look down on the people at the table in front of them, and behind us we probably had close to 100 people packed in that room, and lights and cameras, and I prepared a 48-page footnotes submission to the hearing explaining chapter and verse of everything we had done to greenlight Bitcoin, because I wanted to justify every decision we had made, but you only get a five minute opening statement, and I knew I couldn’t summarize those 48 pages to the five minutes. In fact, I knew I didn’t even want to try.

12:40 I wanted to talk to those senators on a different level, and so when the light went green on my little dais thing, it was my time to give my five minutes before the gavel came down. I said, I pushed the papers away and I made it a sort of a show of saying, you know, senators, I know I’m here as the head of a federal regulatory agency, but I just want to talk to you as a dad for a minute, and I that’s what I explained. I said, I’ve got three kids in their 20s.

13:05 I tried to interest them in the stock market when they were younger, with, you know, no interest whatsoever, and yet all they now want to talk about is crypto, and that’s why I said, you know, the light’s gone off for me that there’s a generational interest here, and yet we can surely dismiss it, but why don’t we do something different? Why don’t we respond with a thoughtful and intelligent response? And it was when I said I want to talk to you as a dad that I got to handle crypto dad.

13:29 But the point was, there’s, you know, to appeal to these legislators at a very human level that there’s something going on, and you know, I saw quite a few heads nodding, right? They’d had some of the same conversations with their own kids, right? So it worked, or it started the process, because we’ve seen a few of those moments, even the last 18 months, where you see some of these maybe subcommittees actually knowing what’s going on with crypto. Sometimes their constituents are already talking to them, and maybe for the first time in a long time we see that maybe people are listening when it comes to regulation, but back in ’17, very early in ’18, very early days, and hard to start that conversation, especially in the midst of the ICO boom and bust.

14:09 Yes, yes, no, it really is, but you’re absolutely right, Brian. The light bulbs are starting to go off, and you know the funny thing about the, we use the shorthand crypto, but this is much more than crypto. You know, I tell people this is about an entirely new architecture of finance, of banking and money itself. This, this is much more than, I think, some people say this is just some funky new asset class, and to some it’s a dodgy asset class, to others it’s an opportunity to make millions overnight, but it’s much more than that.

14:39 You know, the California Gold Rush was at first about millions overnight, eventually we created the state of California and won the world’s largest economies. Right? Revolutions happen, and they bring many things with them. This is about a revolution in its bookkeeping without bookkeepers. You know, it’s using the World Wide Web to validate who owns what.

15:00 It’s not just money, it’s all things of value. Right, so when people tell me they’re skeptical, I say, well, isn’t it somewhat naive to look back over the last 30 years and see how the internet has changed social networking, online retail shopping, photography, music, entertainment, transportation, and to think it’s not going to do the same thing to money and banking and finance? It is. It’s going to revolutionize it in the same way it revolutionized that, and some of those great incumbents that we used to know, like Kodak, gone.

15:37 Yeah. Sears Roebuck, gone. Right, are gone, and to think that the same thing’s not gonna happen in finance? It will now. Some of the incumbents will also evolve and survive, but the world’s gonna be the world of money and finance is gonna be very different in 15 years from now than it is today.

15:54 Is that the best analogy you use? This is like the internet back in ’98. That’s what I hear people say as a comparison, or I’ve had also guests on here that say this is going to be 10 times bigger than the internet. I think it could be, because it involves money. So the first wave of the internet was an internet of information, right?

16:09 It took information that was controlled by central operators, right? If you wanted to know anything about Edinboro Castle, the starting point was Encyclopedia Britannica, owned by a corporation. Anything you got from that, you paid a fee to access it: your license fee, subscription fee, you went to the library, which paid a fee, but that information was controlled and disseminated from the inward out. What did the internet do? It made information available on a peer-to-peer basis, right?

16:39 So the internet of information was the first wave of the internet, democratizing information, democratizing social interaction. And it extended to the phone company, right? We paid a lot of money to people who owned rails to take phone lines across the Atlantic to anywhere in the world. Now we use the World Wide Web of computers to communicate by FaceTime for no cost, instantaneously. Right, so the first wave of the engine and internet information transforms social relationships, transforms so many things.

17:10 The next wave, an internet of things. Okay, people can talk to each other. Now let’s have devices talk to each other, right? Internet of things. Everything we buy, every place we shop, every place we dwell, every, you know, automobile we travel in is now connected to it to other appliances around the world.

17:27 Well, we’re now going into a third wave of this internet, and this is an internet of value. How do we take value and move it around the world as simply as we take communications? If we can text somebody around the world in a second, if we can send a photograph to somebody in the world in a second, why can’t we move money? Why is it still the quickest way to get money from New York to London is to stuff it in a suitcase and get on a plane? You know, faster than a bank transfer, if it’s not a bank transfer, right?

17:52 And yet we can text. I could text you in a second, but if I need to give you 10 for the bet I lost to you, I’ve got to get on a plane and give it to you because it’d be too expensive and too unwieldy to send it by wire transfer. Well, that’s going to change that and it’s going to change, and this goes back to that generational issue. It’s going to change as much, because the technology now makes it possible, but even more because a whole new generation expects it to be possible, and that’s the real driver, right?

18:20 That’s what makes you say, okay, this is happening whether we like it or not. And is that the message you give to the institutions and the regulators you meet around the world? That this is coming. It’s coming by demand, and we have to find a way to make it happen and not dig our heels in. It’s the message I was giving from 2015, 2016, 2017, 2018 and into 2019.

18:44 Now they know it’s happening, right? This, the, you know, the wiser heads see it’s happening, and now what they’re realizing is in the legacy system that they’re a dozen years behind. Now the legacy system is not asking, is it going to happen? The question is how do we catch up? Right, right.

19:02 So is that make your conversations easier because there are a little more urgency, or also does someone desperate make sometimes desperate decisions? Yeah, well, so it makes the conversations are as complicated, because like new technology, like explaining the internet when it first came, it is somewhat complicated. It’s different. It’s a complete paradigm shift. But, quite frankly, the legacy system is pretty complicated.

19:27 A legacy system is trying to cockamamie this whole thing with paper checks and are they honored, and account novations and moving. I mean, it’s a kind of complicated system, but we grew up with it. We understand it. It’s not necessarily a simple system, but it’s one we understand. This new paradigm in some ways is simpler, but in some ways, because it’s new, it’s hard for people to wrap around it, and I don’t mean this in any way derogatorily to people of an older age, but it’s almost as if the older the person is, the harder it is to undo their understanding of the existing system to accept the new one.

20:01 For young people who have been getting this since they’re 14, so they went online at age 13, and ever since then they get this intuitively, so they get it. It’s almost as if we need to take young people and have them speak to their elders about this all the time. Right, it’s such a fascinating generation gap. Let’s talk about you actually regulating the Bitcoin futures, because it’s probably a very important thing to talk about, how you did it, why it was important, because ultimately everyone keeps asking when will the institutions get involved, and we’ve all been told that they’re still not yet involved.

20:33 My pension fund, my insurance company, a bank’s balance sheet still doesn’t hold these assets. Yes, Michael Saylor, Michael Strategy has Bitcoin on his balance sheet. Elon has a bit, but we don’t see yet that institutional adoption. Can you talk about what that road is, and then what you did back at 17 to create that Bitcoin future? Still very early, when you look back, that you got that done?

20:54 Yeah, so let me explain some dynamics, because we have some unique dynamics in the U.S. that perhaps different than elsewhere. So, first of all, we had a very different administration, in 2016 through 2020 than we do today, and I don’t want to make qualitative judgments, but I would say that the environment, within the Trump administration for crypto was ad hoc and uncoordinated. As I think the Biden administration is trying to take a more coordinated, here’s, here’s the game plan.

21:27 Folks, everybody’s gotta be on the same page, and some of that is simply a function of we’re further down the developed technology development phase. The other difference is, in the United States, we don’t have one market regulator at the federal ledger level. We have two. Yeah, it isn’t, we have the SEC, the Securities Exchange Commission, and we have the CFTC, the Commodity Futures Trading Commission. And I’m often asked why two and what do they do, because the United States is the only major economy to have two.

21:53 Well, here’s what they do in a nutshell. Very simply, the SEC regulates markets for capital formation and capital transfer. Somebody with a great idea that needs money can find people with money, but don’t necessarily have as an idea with as much promise, so they meet each other and businesses are formed. Capital formation, whether that be in the form of debt or whether in the form of equity. The SEC oversees markets for capital formation, and they’re primarily domestic markets, although the world comes to the U.S. for capital, but those markets are primarily domestic, right?

22:26 Typically stock market, corporate bond market. Exactly, talking here, right? Exactly. Well, we’ll summarize that. That’s not what the CFTC does.

22:34 The CFTC is a market regulator, but it doesn’t oversee markets for capital formation. It oversees markets for risk pricing and risk transfer. What does that mean? Somebody with an enterprise, a business that has risk, risk of moving of commodity prices, moving of benchmarks like interest rates or foreign exchange, has the risk that they’ll sell their products but not get as much money back, or their products will cost more because commodity prices have gone up.

23:00 Where they’re a farmer, they don’t know. They plant in the spring, they don’t know what price they’ll get in the fall because commodity prices are moving. They’ve got risk, so they go to these markets and say, “I’ve got risk of prices and I can’t, I don’t want to bear it, I can’t bear it, or I’ll bear half of it. Does anybody want to buy half my risk?” And that’s what derivatives do.

23:18 That’s what futures and options do. They are risk-controlling mechanisms. The United States has the world’s largest risk transfer markets in the world, and because most of the world’s prices for those commodities, soybeans, oil, wheat, cotton, interest rates, the world’s interest rates, the world’s exchange rates, are priced in U.S. commodity markets. And to me it’s not a coincidence. It’s actually a consequence that the United States has a specialized regulator just overlooking those risk markets, that the United States risk transfer world markets are the world’s largest.

23:59 And fortunately for the United States, most of the world’s risk is priced in dollars, which is a tremendous advantage and a tremendous support for the dollar as a reserve currency. So I think the United States brilliantly created two regulators. In fact, it used to be those markets were entirely agricultural. If something didn’t come out of the ground, there wasn’t a risk transfer instrument on it. You know, oil, cotton, wheat.

24:24 But in the 1970s, a few brilliant market engineers, Dr. Richard Sandor, Leo Melamed and the great economist Milton Friedman basically arrived at something called the financial future. In other words, if we can control the risk of prices of wheat going up and down, why can’t we control the movement of interest rates going up and down? And the United States could have never gone off the gold standard. In fact, the world could have never gone off a gold standard if you couldn’t control the risk of interest rates between one country and another moving, or foreign exchange rates.

25:00 And so the United States invented this thing called the financial future. And then policymakers in Washington said, you know what, we actually need its own regulator. This risk control instrument is so important we need a specialized regulator, and they went to the Department of Agriculture, found that the Commodities Exchange Bureau, took it out and created the U.S. Commodity Futures Trading Commission, and that’s when the Commission actually became an independent agency and a sister agency to the SEC.

25:27 That’s the origin, and Leo Melamed writes about this in his new book, Man of the Futures. That’s the origins of the CFTC. It was created because of the fear that the SEC just couldn’t move fast enough, and so the CFTC was actually given a mandate for product innovation. More new products have been evolved under the CFTC governance in the last 20 years than all the world’s market regulators combined. It’s like 12,000, like 12,000 in that period of time.

25:54 It’s remarkable. So here’s my point. It was almost a natural that Bitcoin futures would have been launched under CFTC regulation. The CFTC has in its DNA new product innovation, whereas the SEC, with great respect to the SEC, is more of an investor protection focus, and so if there’s risk involved, they’re cautious, whereas the CFTC, if it’s innovative, their approach is, let’s see how it works in the marketplace. We’ll provide a regulatory wrapper, and that’s what we did.

26:25 So going back to 2017 when we looked at this new pro product, the agency, our response was not, might some people lose money or make money? Do we need to protect consumers? Oh, that was an important issue. Our more focus was how do we put the right regulatory structure around it so that it has the best chance of succeeding, but also it brings it within the regulatory envelope. We can put our analysts on it.

26:50 We can put our crime fighters on it. We can police it for fraud, manipulation and bad actors, and our track record, CFTC’s track record in prosecuting Bitcoin and Ethereum fraud is actually second to none. So, bring it in with the regulatory envelope doesn’t mean creating the Wild West. It means actually putting cops on the beat to police it, but our view was better to have it within the tent, where we keep an eye on it, rather than denying it legitimacy and therefore bad actors have free range because there’s no cops on the beat.

27:22 Yeah, this is such an important point, and if we get, we’re losing people here, please try to pay attention to this, because the SEC is an entity, and I had to take my SEC exams when I went to New York City back in ’93. I spent my summer studying for my Series 7, Series 63 exam so I could become a licensed broker dealer and trade on Bankers Trust, and that agency was created on the back of the stock market crash in ’29, because that damaged a lot of consumers. Now my mom, she’s 78 years old, she lives in San Diego, California, she owns property assets.

27:50 She also has some Ethereum and some stablecoins, thanks to me, and it was there to protect maybe people like her from buying the wrong stock. That was, who knows, pumped and dumped, and never been, you know, actually regulated, and it was created to protect that consumer. Yeah, and so like you said, it always has this lens of protect the consumer, or if you have said maybe it goes to the lowest common denominator. Ultimately it was created to protect someone from fraud.

28:15 The whole country lost money, the world lost money, whereas the CFTC was created to, ha, to actually help create products, create liquidity, regulate those. So even the mentality is one of innovation as opposed to protection, which isn’t bad, but it changes the flavor of how they behave. Yeah, and with great respect to the SEC, for which I have a great deal of respect, I do think they do need to rethink this notion of consumer protection that basically says, if you’re rich and sophisticated, what’s called an accredited investor, you can invest in anything you want, but if you’re, if you’re young, which almost by definition means you don’t have a lot of assets because you’re young.

28:52 Right, you will in time. If you’re young, you can’t engage in anything but the most commoditized stable, and that’s not going to grab their attention, so we’ve got to find some way. I think the SEC has got to find some way to reconsider this and open up more avenues to investing. You know, you can’t have reward without risk, right? I mean, I’m saying this as a former regulator, right?

29:15 We’ve got to find some give in the system. It’s not the job of regulators to stamp out all risk. Risk is part of life, right? You know, the original concept of our securities regulation was don’t stop people from investing, just give them adequate disclosure, true disclosure, right? If firms say something is something, it’s got to be true, right?

29:36 Give them true disclosure, but let people make their own decisions, and I think we need to get back to that concept. Investing. It’s not the job of regulators to squeeze all risk out of the system. It’s to illuminate risk so that market participants, whether they be young and engaged in crypto or older, in investing and pension funds, can know what they’re getting into. It’s a great point, and I found myself a little frustrated as I’ve come back into the crypto space for the last year, and I start looking at it through the lens of just as an investor, and I look at, you know, is a cryptocurrency asset a security?

30:10 Does it pass the, how do we test, and as I start to look at it I’m part of me stops halfway through and say, wait a second, we’re asking the wrong question, aren’t we? We’re using an antiquated case study and story to look at a new token. Who cares if it passes a highway test? What are we doing with that? Why is the SEC involved?

30:27 Shouldn’t we be empowering the use of this information? Absolutely, that’s that’s where we’ve got to get to. And I, and this generational thing, I always come back to that in my analysis of this, because a generation moves forward and they take these ideas with them, and I think the legacy, not only just the legacy financial system, the legacy regulatory system is on the parapet with a revolution going down beneath them, and I think they’ve faced the same risk that the legacy system is.

30:55 If they don’t evolve with the times, they’re likely to be run over with the times. This new generation is impatient for being able to do financial transactions instantaneously without big daddy telling them which ones they can do and which ones is too risky for them, right? And I think the regulators need to get the same, have the same light bulbs go off, that the legacy financial system is, it’s tricky when your institution was created, you know, 100 years ago to do just that, or your institution was created to create liquidity and empower and innovate, you know, actual new instruments, so you got these two things, and now, you know, looking at these things, saying, okay, is a token a security?

31:34 Is it a commodity? which I guess is my next question. You, you know, clearly said Bitcoin is a commodity, and we’re going to now put it as a future, as an exchange. Then you crossed over to Ethereum and I think made that decision. How do you talk to me about that decision?

31:49 Is Ethereum a commodity? And then how do you start to look at other tokens, and then how does it work with SEC remake going forward? Yeah, so it’s challenging. The final decision about Ethereum was made by my successor. We had done a lot of the early work on that, so I don’t want to speak for him.

32:06 I’ll let him do that. Bitcoin, I was very much engaged in that decision. Bitcoin operates very much like a commodity. I mean, it functions in the market like a fixed supply commodity. You know, one of the criticisms of Bitcoin is its volatility.

32:22 And I tell people that’s not a design flaw. That’s a design feature. Commodities 101: if you have a fixed supply commodity and demand rises or falls, there’s only one reaction, price reaction. That’s the only thing that can make up. Even, even, even variable commodities like oil are very volatile.

32:42 Two years ago was below zero, now it’s a hundred dollars or thereabouts, right? And yet you can adjust the supply of petroleum, you know, up or down. It takes time to get the wheels flowing, but it’s an adjustable supply. So Bitcoin is not flawed because it’s volatile. It’s a direct reflection of the fact that it’s programmed scarcity, that scarcity is programmed into it.

33:04 So Bitcoin functions very much like a commodity, very much like a digital form of gold, a very good store of value, not a particularly effective means of payment, and yet for its miners it does serve as a means of payment for their efforts. So, you know, Bitcoin is a very unique, you know, but the thing about crypto, again, it’s a shorthand label for a much, much bigger re-architecting of money. You know, it, we say crypto, people often refer to Bitcoin, but then there’s stablecoins, there, there’s there’s security tokens, there is, there’s, there’s so many aspects to [expletive] as you know, there’s your readers well know there’s thousands of different cryptos, more creating all the time, and some have greater lesser value proposition.

33:47 Some of them are absolutely fascinating. You know, I read white papers regularly. People send me, we’re designing this new thing, and I learned something from everyone. I mean, there’s some really, really forward thinking going on out there, and it’s not going to slow down, but crypto is more than that. It’s NFTs, it is, it’s payment systems, it is, it’s, it’s blockchain uses for both wholesale and retail.

34:09 I mean, this is a true I think revolution in the whole concept, the whole way we do finance, the whole way we move money around the globe, the whole way we are going to price value. And I’ll give you one more point. Yeah, throughout most of human history, money has been valued in commodities. Throughout most of human history, fiat money was either a commodity, a silver coin, a gold coin, or what before, when we’re on the gold standard, priced to a commodity.

34:39 The dollar was priced to gold, currencies were priced to gold. It’s a short period of time in human history, the last few decades, where most of the world’s goods are priced to a currency, the dollar. Yeah, in the future, currencies may be once again priced to commodities, and that commodity is very likely to be a digital one, right? When you, I had Dan Tapiero here at 10T Holdings, and he said, Brian, crypto is like the steam engine. It’s a piece of technology that made the whole world better, and now we have a way of cryptographically ensuring that this asset is secure or it has a specific monetary policy.

35:14 Is that the way you look at these things as a new piece of technology, and that’s why the future could be this digital money? And can you explain that to most people, regulators, banking institutions, etc.? Or is that the way you look at it? That’s one way of looking at it. It is technology.

35:29 The value of crypto to me is less in the tokens than it is in the underlying blockchains, right? And, and basically the token is a call on that blockchain. It’s an ownership of that blockchain. The value is in the whole as opposed to the individual pieces. There’s also another notion.

35:49 So it is technology. It’s a technology revolution in money. One of the aspects of our existing financial system, so I think I always say there’s three shortcomings. Let me even back up further, from the dawn of human history, from the time we came out of the forests and until about 400 years ago, there was really only one form of money, and that was fiat money, something where the token was the representation of value, and the way you validated a transaction was to validate the token.

36:19 You know, you know the old cartoon character taking the coin in his mouth to see whether it’s wooden or whether it’s metal. Right, so you validate the token. You take a 10 bill. You take a 10 pound note. You hold it up to the light.

36:30 You look at the different features of the instrument. You validate the token, and that system really worked great until we’ve discovered its major shortcoming, and that is, it’s local. Tokenized money works locally. Ten-dollar bill works in New York. It doesn’t work in Paris.

36:42 The ten pound note works in London. It won’t work in Singapore. And so the problem with that system is, in this age of discovery when merchants are traveling around the world, the local nature of tokenized money didn’t work, so they came up with a different system. The banknote system. A Dutchman deposited the guilders in the Bank of Amsterdam.

37:01 It gave them a banknote, and they go to Venice with that banknote, and suddenly now the banks aren’t validating the individual. What they’re doing is taking the credit of another bank, and that is 90 percent of the money we have in today, whether you use a paper check, whether you use Zelle, Venmo, whether you use most of our electronic systems. It’s a bank-to-bank transfer. It’s banks trusting the credit. Now they do need to establish, however, that you have an account with that bank, and so therefore the shortcomings once we went to a banking system is, it’s exclusive.

37:33 You can’t join the club of financial inclusion if you do not have credentialed identity and a world of eight and a half billion people. When a billion people do not have identity, they are excluded from our existing financial system. The shortcomings, the shortcomings of the fiat system was, it was local. The shortcomings of our bank system is that it’s exclusive, it’s slow, and it’s expensive, because all that identity has got to be confirmed. Who you are, who your bank is, etcetera, etcetera.

38:00 So if you go to a shop with a 10 note, they validate the note. If you go in with anything else, they got to validate who you are, where you bank with, and it’s going to take time for all that money to move around. Here’s what crypto changes. No longer is it local. It’s around the world in a second.

38:16 No longer is it exclusive because you don’t need identity anymore, and no longer will it be expensive and time consuming, and so it solves the four shortcomings of everything we’ve known so far: the local nature, the exclusivity, the slowness and the expensiveness. Today, financial inclusion means credentialed identity. Tomorrow it’ll mean computing power. If you’ve got computing power, you’ll be able to go into the financial system in the future, provided we don’t get one thing wrong, and that is that we don’t overlay on the future of money the AML KYC, the anti-money laundering, know your customer requirements that we require today, because as important as that is as a law enforcement tool and as a control tool, it actually is the key reason why we are financially under included.

39:08 Because big portions of populations, not only in the developing world but even in our own developed world, either do not have credentialed identity or don’t wish to have credentialed identity, and therefore they’re excluded and they’re reduced to using fiat currency. We can open up this new financial system to much greater financial inclusion. We and still do AML KYC, but not using the current methodology we have today, which is identity first, financial transaction second.

39:35 Okay, this is a really important question, one that comes up all the time on the show. I’ve had people like Mashinsky of Celsius saying, keep the money clean, KYC, AML. The institutions will come, and Stani Kulechov of Aave saying, show the liquidity, the institutions will come, and don’t make them prove the KYC. You’ve just talked about this world, this future world. What we don’t want to overlay this old school KYC AML protocols on the future.

40:00 You’re saying it couldn’t be computing power instead? What I don’t understand, what does that future look like? All right, so I explained to you how we went from fiat money to bank money. Okay, long before AML KYC came around, that banknote system required someone to verify that they have a bank account. So you show identity, right?

40:20 And then the bank, you have sufficient funds and transfer the funds. So the first step in that transaction was identity first. Along in the 20th century comes AML KYC, and they basically adopt that methodology to do anti-money laundering. We’re going to get people’s ID first, right? Because that’s already what was in the underlying architecture, so they just layered it on.

40:41 Okay, but what’s happened today is because we’ve so come accustomed to that methodology of AML KYC, we confuse the current methodology with the policy. The policy of anti-money laundering was good policy, but there’s many methodologies of getting there. It doesn’t always have to be identity first. If I want to buy a 10 sandwich, why does the system need to validate who I am? It doesn’t with cash.

41:07 Why should I have to do it with a financial transaction, right? In fact, look at other forms of law enforcement that we use every day. We don’t get identity first. Look at highway safety. Before getting on the highway, in fact, before freely getting on the freeway, you don’t have to stop at a toll and say, here’s my name, here’s where I live, here’s where I bank, here’s my social security number, my your ID number.

41:31 No, you freely get on the highway, and law enforcement uses pattern recognition if you’re speeding, if you’re reckless driving, to identify the possibility of unlawful contact. They will then stop the activity and then get your identity. Identity not first, but identity last. The same technology that gives us blockchain will give us the ability to do an identity not first but an identity last system. How is that?

41:57 Because we use big data analysis, pattern recognition, the same technologies that Facebook and eBay are using every day to look for consumer trends, we’ll look for trends of illicit conduct, and when we find them, and those technologies are very good, we’ll then shut down the activity and get the identity as necessary to prosecute them. Now, that may sound like a big change, but we have to be honest, Brian, everybody knows the existing system’s not very good, right? We spend more money to run the existing system than we capture criminal activity.

42:29 It’s got a 96 false positive rate. We’re gathering way more information on our fellow citizens and excluding a lot of citizens who would like to come into the financial system by insisting identity is a first step. Identity doesn’t have to be a first step. We could do a better job of anti-money laundering if we didn’t require identity as a first step, if regulators would go from being reactionary to go to being proactive and be quantitative regulators. I gave a speech in 2018 calling for my fellow regulators and Washington to become quantitative regulators.

43:04 We need to adopt the same technology that’s being used in commercial avenues to do law enforcement online without invading people’s privacy, because they may be entirely innocent unless the pattern shows a probable cause of illicit activity. Government shouldn’t have your identity as a first step in every transaction unless government’s objective is more than anti-money laundering, and it’s to actually surveil people’s economic activity. Yeah, this is an important point.

43:29 I’m really glad you made it, and people wouldn’t expect this, to hear this from former chairman of the CFTC, because they assume that all government people want regulation. I’m not against regulation, right? But like you said, there’s billions of people around the world that are on bank. A lot of them in the United States of America and the UK, they have to use Western Union and all these other policies in cash, which detracts from the economy. So you’re thinking, think in the big picture, try to bank as many people as possible and do an intelligent form of qualitative, quantitative regulation.

43:57 And why do you have to have everyone’s identity? Start really looking at, let’s operate, soon anonymously, let people operate on an immutable legislative blockchain, transact, hook up the best data analysis tools on it, and just develop patterns that show illegal conduct. If you find it in this probable cause, and we have rules on that, and democracies go get them. But if there’s not a pattern of conduct, people should be able to transact freely. We require way to, we gather way too much information on people’s financial transactions, and my worry is, as we go from an analog to a digital world, the amount of data collection will only go up.

44:39 And what is government doing with all this data? And you know, they get hacked all the time. What are others doing with this data? Why do we need data on who’s engaged in every transaction, which is what our current trajectory takes us to? Yeah, and the market doesn’t want it.

44:51 And again, I keep having this conversation over and over again with various people in this chair, where they say, I’m throwing a KYC, I’m anti-KYC, but again, it’s a bit like, is it a security or not? It’s the wrong question. Yeah, it’s the wrong question. Why are we doing this? We’re stopping the progression of an incredible technology that’s going to change the world.

45:07 Like you said, we’re over-identifying people. They clearly don’t want to be over-identified, but they want to use the system. They’re doing it whether you want it or not. So when people say that to you, Brian, ask them this question: when you say you’re for AML KYC, are you for the policy of it? Because it’s hard to be against the policy of money laundering or illicit, illicit activity, or are you just identifying the policy with the current methodology, which is get everybody’s identity before you even let them buy that sandwich?

45:35 Yeah, I think, again, talking to, like a machine Celsius, these guys go so head-to-head with the regulators that they don’t see another way around. They’re like, I don’t comply, I’m dead, they’re to seize my assets. So it’s my way or the highway. Take the box, take the box, take the box. And so they probably actually contribute to that poor narrative of, we’ve got it, we’ve got to do it, otherwise you’re a criminal.

45:54 Yeah, again, how could you be against money laundering? You know, how can, before money laundering, no one wants to say, even the terminology in the language is bad. And so then they go one way, then you’ve got the Aave. Strangely enough, you know, younger DeFi coders say, wait a second, this should be free, this should be open for all. Of course we don’t want bad activity, and like you said, it’s on the blockchain, for God’s sakes.

46:14 The analysis able to be done there is amazing. They’re not going anywhere. You know where they live. Right, right, and that’s the thing, they aren’t going anywhere, so it’s actually a perfect system to do what you’re saying, but actually I’ve heard very few people talk about that. This will be some of the great innovation is security and identity and all of these things going forward.

46:35 Right, so the private sector has been experimenting with new forms of money, new architectures, for 12 years. The legacy financial system has woken up to that and is now realizing they’re a decade behind. There’s a third constituency, and that is regulators, and I think regulators are a little bit right now deer in the headlights. They don’t. Some of them don’t know whether their job is to defend the legacy system against this new technology or somehow grudgingly figure it out and start studying it.

47:04 Well, I’m, I was, we studied it at the CFTC. We got to the point of saying, how do we adopt it so we can fulfill our mission as a regulator better? And I think what I say to my fellow regulators is, stop seeing it as a threat. Your job is not to defend the existing system. Your job is to master this technology to fulfill the mission that Congress has given to you, which is to bring proper order, regulation, and to prosecute bad behavior so that the 99 of good people that operate in our financial markets, and I worked in them, I lived in them, I regulated them, 99 percent of people in F and financial services want to do the right thing, and they need to know that regulators are taking the few bad apples out so they can do their jobs with integrity.

47:45 And so that’s the job of regulators: to take the few bad apples out so the market can evolve and serve our fellow citizens. Is it working? We saw the Biden administration recently come out and talk about things. We see other agencies getting involved, like FDIC. Obviously we see the SEC stance, what Gary Gensler was doing, who used to have your job, or after you did, I think he was before me, for you.

48:06 Yeah, he was before me. Now he’s at the SEC, right? Are they how are we doing? I guess is what I’m saying, are they listening? Yeah, I’ll commend the administrator, you know, under the Trump administration.

48:16 So I had the privilege of serving under both Barack Obama and President Trump, two very different administrations. Any administration does say some things well and does some things poorly, and I won’t get into a lot of political dimensions of Trump. The fact of the matter is, I was honored to serve my country for five years, and there were some excellent people in the Obama administrations, excellent people in the Trump administration. I left before the end of the Trump administration and have not had the pleasure of serving on Dubai, but Biden brought back a lot of people from the Obama administration, and some very good people under Trump.

48:44 There was no national policy. There was no administration policy on crypto, and we were free to operate as we saw fit. I would periodically give reports to the White House of the way we were approaching crypto. I never got any pushback from them. I never got pushback from the Obama people either.

48:59 The Biden people are trying very much now to bring a sort of cohesive administration policy to crypto, executive branch policy, the executive order. And for your listeners, an executive order is not law. It does not apply outside the administration. It’s a call to the administration to do certain things. This executive order calls on a dozen or so federal regulatory agencies, in fact, a very comprehensive list, even beyond market regulators, national security agencies, consumer protection agencies, bank regulators, as well as market regulators, to up their game, to study crypto and issue various reports within a period of time.

49:42 I think that’s a very positive thing, because the agencies are all at different levels of of understanding, adjustment to the technology. So I think it’s very positive. I also thought, unlike other reports out of the Biden administration, this one was more balanced between what could go wrong but also what could go right, and I thought that was very positive, positive, and it also recognizes there will be unforeseen good and bad consequences, as there is in any new technology revolution.

50:09 So all that, I think, is very positive. One other positive thing, which we’re going to get to in our conversation, it was very forward-leaning in the question of central bank digital currency in the United States, need, and that was very satisfying, because it was two and a half years ago that I said in an op-ed in the Wall Street Journal that it was time for the U.S. government to take this seriously, so I’m pleased to see a presidential administration do so now. On the other side, I’d like, I’d had like to have seen it better prioritize national leadership in this technology revolution, although it is mentioned in the report.

50:41 I would have liked to have seen that as a higher priority goal, but on the other hand, I understand the different pressures that came to bear. One other point about an executive order. An executive order is as much a top-down exercise from the White House out to the branches as it is the branches telling the White House we need air cover. We’re having to pull resources away from some project we’ve been working on for six years that, you know, five of our biggest constituents, banks, clearinghouses, want us to get done, and suddenly we’re pulling them into crypto.

51:10 We need to point to something, so give us an executive order, we can say, sorry guys, we’ll get to that next year. We’ve, because these agencies’ budgets haven’t changed, because executive order, we’re moving people over to this crypto work, and so it’s as much giving the agencies air cover to move into, you know, and adjust their trajectory as it is the White House trying to get a cohesive policy. Okay, you mentioned digital dollar. Let’s talk about it, because it’s something you’ve been talking about for years.

51:35 Obviously, you’ve got a whole organization that looks at it. Explain what it is, because I think a lot of people don’t understand it. I had Jeremy Allaire from Circle on here, and he said, we basically have a digital dollar. It’s a ledger that moves around the world. When you move a dollar, it’s not a physical dollar, so it is digitized, but that’s very different from a CBDC.

51:52 Also, we’ve heard the horror stories of the, you know, digital yuan and how it controls the populations, and people usually push back. The last thing they do, sometimes, is confuse stablecoins with this. How do you lay this out? Yeah, so, so, you know, what is the dollar in your pocket as opposed to the dollar in your bank account? The dollar in your pocket is a bearer instrument.

52:11 It enjoys the full faith and credit of the United States. A digital dollar would enjoy the full faith and credit of the United States. A stablecoin is an obligation of the stablecoin sponsors. They may be backed with dollars, so its value proposition is sound, but at the end of the day there’s a sponsor. In this case the sponsor is the sovereign government, and that’s the big difference.

52:33 And by the way, I’m a big fan of stablecoins, the ones that are well crafted and well done, and I think what Circle is doing is really forward-leaning, and I think stablecoins have a big role to play in the future. But 85 of the world’s central banks, including all the major central banks, are now experimenting with central bank digital currency, and for me the light went off in 2019. I finished my five-year term at the CFTC, stepped down, and I, the ideas have been forming in my mind for a while, and I had this eureka moment.

53:05 I’ve been studying what China’s doing, and I realized, you know what, the likelihood is that most of the world’s major economies are going to go to a central bank digital currency. The compelling reasons for central banks to adopt their own sovereign digital money are so strong, and my worry was not that the United States would not do it. That’s fine, maybe it’s a stablecoin regime. My worry was that the United States would do it but it would be like too many things in the United States.

53:35 They would rush it together in the course of some congressional weekend, cobble it together, chuck it out there, and it would be bad and would fail and undermine the dollar, and so we launched a private sector effort to start doing some of the advanced exploratory work as to, if the United States adopts a digital dollar, what should be some of the essential components in it? Now, let’s talk about what China’s doing. I’ve just had the opportunity to serve on a one-year study with the Hoover Institute at Stanford University that just released an excellent paper.

54:07 If anybody’s interested in the digital yuan, take a look at this paper. What China is building is an extraordinarily ambitious even audacious undertaking to correct the world for the world’s biggest population center, soon to be perhaps the world’s largest economy, a sovereign digital currency that would be exclusive. It would be exclusive. It would be there would be no stablecoins available. There’d be no Bitcoin.

54:34 They’ve already shutting that down. There would be the digital yuan, or what they call their e-CNY. It’s already available. 660 million Chinese. It’s thousands, tens of thousands of institutions and banks are now making it available.

54:48 It’s a remarkable tool. It’s a surveillance tool. Let’s make no doubt about it. If you criticize the regime, your digital yuan will be disabled from getting a train out of your village. I mean, it’s powerful in that regard, and it’s not just for domestic use.

55:04 It will be, the technology will be exported to regimes around the world that may wish to surveil their populations, control how they spend, will adopt e-CNY technology to develop their own digital Ecuadorian peso, or whatever regime in the world wishes to do that. It also will allow, enable payments outside of the Western, American-dominated banking system. And so sanctions avoidance may be possible in a future state. I disagree with those who think there’s a big role for crypto in avoiding Russian sanctions right now, unsanctioned central banks and individuals.

55:44 But going forward, a lot of nations around the world are looking at this extraordinary use of sanctions power right now, saying how do we get off, and they’re accelerating efforts to central bank digital currency, but not just our economic adversaries. Our economic competitors, the EU, Britain, talk about competitors to the United States, Canada, are moving forward with exploring digital money. So we very much advocate the United States, whether it deploys a digital dollar or not, needs to be leading in the innovation of it, and it’s not just the technological innovation.

56:16 It’s the value sets. And here’s my main point, and I want your audience to hear this, Brian. The United States has an ace to play, and if we play it well, the future is in Western economies, and if we play it poorly, we will lose. And that value is economic liberty. If we program into the digital money of the future, whether that is a stablecoin by Circle or whether it’s a U.S. digital dollar or a digital pound or a digital euro, the type of privacy I talked about, the ability to transact anonymously, in law enforcement, not as an identifying step in the first case, but one when there’s probable cause, that will be an aspirational instrument for a future of digital money.

56:57 But if we maintain this notion that we’re going to get everybody’s identity before they can access the system, and the ability for that to be usurped by politicians, whether to punish their political adversaries, as we saw in Canada with this trucker’s thing, or as we’re seeing in other walks of life, as we’re seeing politicians pressure social media companies to ban certain conversations. If that’s what happens to digital money, we’re way worse off. In fact, we’re not much better than what’s being developed in Beijing right now.

57:27 And so what I tell my friends in government is, let’s get digital privacy right in the future of money. If we do, it will preserve the role of the dollar, the euro and the pound as an aspirational currency for people all over the world. And if we get privacy wrong, we’re no better than those surveillance states. It’s the most important issue of all, is economic liberty and digital money. And I’m not talking about liberty to do illegal transactions.

57:54 I believe in law enforcement. I served five years as a top regulator with a law enforcement capability that was second to none. I believe in policing, but at the same time, people need to know that the same decision they make to shop at Target or Walmart, not only is that their business and nobody else’s, their decision to contribute to a controversial cause, whether that be Planned Parenthood or Right to Life, is also a private decision and not subject to some politician somewhere overseeing it and determining what to limit.

58:30 If we get full economic privacy for legal transactions, we will have digital money that will be the winning route of the future. And then you add programmability, the ability to have money. And this is a point about programmable money: money today is movable across space at great expense and a great time loss. The money of the future will move across space instantaneously, but it will also move across time, because we’ll be able to program money to do things in the future directly without intermediary, serving to do that nature.

59:01 So the future of digital money is very, very exciting, but we’ve got to get privacy right. Right, it all comes down to freedom at the end of the day. All comes out of liberty, and liberty, and that’s what America was founded on. It’s one of, I guess, our great exports. I still am an American citizen.

59:16 It’s what people think of America, the great movies in America. It’s all about this freedom narrative, and this is the chance to preserve that or to lose it, to lose it. And people, you know, I believe that the great period of globalization that you and I grew up in, that existed since really since the 1980s, the world became, you know, one economic unit. Right, there’s a relationship between that and the dollar. There’s a relationship between that and the dollar’s reserve currency, a currency that was an aspirational currency that represented values of economic liberty, of free markets, free and open markets.

59:53 If I came up with a good idea or a good service, I could sell it at home and I could sell it abroad, and the dollar represented those values, also of the rule of law, of economic justice. If somebody wronged me and broke a contract, there’d be avenues for relief. So those values are enshrined in the dollar. We cannot let the movement from an analog dollar to a digital dollar diminish those. In fact, we need to reinforce those values.

1:00:19 If we reinforce those values in a digital dollar or a digital pound, digital euro, it will be the killer currency, and/or stablecoins. I mean, my worry about stablecoins is the same pressure that’s got the social media companies to surveil, to censor certain conversations that go against the political powers that be. If the same thing happens to commercial enterprises in digital money, we’re no better off than we are. The future of commerce, the future of digital economics, the future of digital economies, of digital money, of digital banking, has got to be one of enhanced values of liberty.

1:00:57 We can’t move. We can’t say we love the technology, oh, values are for somebody else. The values go hand in hand with this revolution. Yeah, and you can’t use the knee-jerk reaction, which is to protect it, to censor it, to do all the things that we see happening in the last 18 months on social with some of these protests and things, where a knee-jerk government reaction to suppress something is, let’s control it, but you have to resist that and think, what are our values?

1:01:22 Let’s intertwine these in with our currency, and then we will preserve freedom forever or lose the battle. Absolutely, absolutely. You know, with the worst, I don’t want to become a social critic, but the weaponizing of money without recourse, without being able to go to some court of law and say, you know, my money’s been cut off because of my views. That’s really damaging to the value set around the notion of money as an aspirational instrument for advancement.

1:01:54 You know, in the United States we talk about our freedoms and trying to, the Constitution, freedom of assembly, freedom of religion, freedom of speech. But in a capitalist economy, what do freedoms of worship, assembly and speech mean without economic freedom? Right, how do you express the ability to assemble with people you agree with, but economically, how do you, how do you support a religion except economically? How do you express speech today but economically?

1:02:22 Right, you run an ad, you do things that cost money. If, if we don’t have economic liberty, we do not have freedom of assembly. We do not have freedom of speech. We do not have freedom of religion. Yeah, yeah.

1:02:33 We spent a lot of 2020 fighting for freedom of speech, fighting against social platforms to try to get a message out there. I thought, you know, it was the weirdos that got censored, but I found in that sense that it’s hard to know what was being censored, who was making the decisions, technology companies, and where the government was. And then, you know, we ran to be Mayor London, and at one point I was told I couldn’t actually campaign, and I was wondering where the free and fair elections are.

1:02:56 And now when you see financial freedom, and I had this conversation with Dan Held, which is an OG Bitcoiner, and he said, Brian, yeah, without financial freedom, the other freedoms become moot, because you know, the freedom of speech is only a product of you having the financial freedom to even engage in that. Yeah, and this is easily and quickly forgotten, and we see notions of this, where, yeah, payment platforms cut off from this social platform, or Canadian government suspends platforms because you’re at a protest, and you could take it further too, your nation is now at war, so we’re seizing the assets of every citizen of that country. This is something that should be more alarming maybe than it is.

1:03:31 I agree. People come to me and say, Chris, how could you support central bank, how could you support federal government, the Federal Reserve exploring central bank digital currency? And I say, well, look, you can try to take the view that would just say no, but the federal government, when it decides to do, is going to do it anyway, or you can get in the game today and start saying, what are the core value propositions, so that if and when the federal government or the Federal Reserve takes up creating a digital dollar or a different digital pound or a different digital euro, that they understand that the populace, that there’s a groundswell for preserving these liberties in it.

1:04:10 And so my view is, I’ll leave to others whether it’s a good or bad thing to deploy a central bank digital currency. What I want to do is start almost kind of creating a groundswell of free society that says, okay, we’ll tolerate digital money provided that the government is subject to these restrictions. The same, you know, remember the Bill of Rights in the U.S. Constitution is a set of restrictions on the federal government. We need to put the same restrictions in digital money.

1:04:41 We need a form of money, but it’s got to be within certain restrictions. So my answer to people that say just say no is, that may not work. The better idea is get in the game, join me today in advocating for these freedoms, because if it’s coming, let’s get out in front of it. And that’s why I say in my book, and I used, I took a phrase from French premier George Clemenceau at the end of World War One, looking back on the carnage is said to have said, gosh, you know, worse too important to be left to the generals.

1:05:10 Well, I kind of feel the same way about money. Money is too important to be left to central bankers, with great respect to Andrew Bailey at the Bank of England and Jay Powell at the Federal Reserve. These are public citizens that want to get things right, and yet money is a social construct as much as it’s a government construct. Society needs to be out there now saying what are the values in digital money that must be enshrined? Yeah, and now we see the yuan as a clear example of something that can go wrong.

1:05:40 I’ve had conversations on the show that say World War III is not going to be a military engagement. It’s a currency war of China versus the U.S., and we know globally what they’re doing with all of their outlays and their asset investments, and now, like you said, you want to be a part of this club, you have to, you know, play by the rules of our digital currency. It’s happening, so this will be how the world plays out, right? You know, it’s, it’s funny.

1:06:02 Almost every war is a result of historical disagreements that have come to the surface, and yet every war also gives us a glimpse of the future. You know, the Gulf Wars gave us a glimpse of unmanned combat, drone strikes, everything, which are now part of daily combat around the world. Well, this war is giving us a future of weaponizing of currency to fight wars, and that’s punishing bad actors, oligarchs and the like, but it’s also punishing common citizens throughout that area, whether they be Russian, Ukrainian or other residents of Central Europe.

1:06:38 And so, you know, in any war, you have precision instruments, and you also have fallout that attacked not, you know, non-combatants and people that weren’t, you weren’t intended to attack. I think we are seeing a glimpse of the future, and I, and that is something we need to be concerned about. And I think United States, the United States needs to be concerned when you weaponize the dollar. You know, people are taking notice of that and thinking about not, you know, I don’t want to get into, you know, what the right response is to the aggression we’re seeing in Ukraine.

1:07:07 I, you know, I think these are tough choices for our national leaders, and sanctions, is it, for all their shortcomings, they’re perhaps a better alternative than actual warfare unless people die. So I’m not an opponent to the use of sanctions, but they have every movement has a consequence, and there will be consequences in this as well. Are you surprised how much the dollar has been weaponized in this war, and how that’s been used as a tool? Because it took a little, me by surprise by how much it went, and how that’s been pursued in all countries around the world, seizing assets.

1:07:45 I didn’t see this coming. I agree, the cohesion of the West, I think, has taken a lot of people by absolute surprise. It’s, it’s, you know, this sanctions power is, is the apex of sanctions power and the use of sanctions in history, and, you know, its consequences, you know, may well destroy the Russian economy. I don’t know whether it stops the war, that will remain to be seen, but they’re devastating an impact certainly devastating on the sanctioned institutions and sanctioned people.

1:08:15 And again, I’m not going to argue that, but the point I want to make for us in a free society is we need to make sure that the digital money of the future there are societal and legal controls on weaponization of money. I mean, you know, just as our constitutions reflect certain controls on warfare. You know, there needs to be a vote of the Congress, a legislature, right? Warfare has, we’ve always put controls around the sovereign use of the tula warfare to reflect societal values.

1:08:48 Well, maybe we need similar restrictions. You know, it’s one thing to use the weaponization of money against combatants in a war, but what about using them against political opponents to the party in power? And we’ve seen suggestions of that, if not, you know, use of that in North America. And so I think that time has come. We need a full societal engagement in this dev this digital revolution in finance and banking.

1:09:17 The positives are extraordinary: the ability to bring billions of people into financial inclusion, the ability to lower the cost of money, the ability to, as I said before, move money not just in space but in time, the ability to speed the velocity of money. You know, we’re going probably into a very low growth econom a period of economic growth. Well, if we can speed money, you know, that would could bring us into a new era of enormous economic growth.

1:09:44 Right, so the potential positives on this are extraordinary, but the potential negatives for surveillance, for censorship are concerning, and the answer is not going to be stop time, keep it the way it is, because technology marches on. The answer has got to be we’ve all got to get smarter. We’ve all got to get in the game. We’ve all got to be part of the co of the conversation in government, out of government, as to how do we use this tool to raise society up, to raise civilization up, and not to bring us down.

1:10:15 And the dollar isn’t digital now, and it’s still being weaponized to a very high extent. Is that damage the dollar’s reputation in the long run? Do you think? I’ll let history be the judge of that. Again, I, I, you know, I find the use of sanctions but, you know, as I say, preferable to warfare.

1:10:33 But it’s going to have consequences. We’re going to have to see how that plays out. I will say this, there’s something about a free society that’s a beautiful thing. You know, something about this revolution, this generational revolution, I find a beautiful thing. There are people that have had no interest in Wall Street and finance that are suddenly coming out in this.

1:10:51 There are, there’s a lot of disagreement, but it’s a healthy kind of the public square on this subject. It is one of the most free public squares. There are a lot of other public squares in our modern life that are kind of black and white, you know. If you take one view and then the media points to, the guys with the white hats, and who are the guys in the black hats? And if you’re in a black hat, you’re a big, I mean, I think in this area there’s a lot of free debate going on, and that’s what you want to have in a free society.

1:11:17 I don’t have all the answers, Brian. You don’t have all the answers, but the debate is rich and it’s exciting, and the innovation is there, and that’s what we need to revitalize our democracies. And what are you doing for the next few years? I know you advise, you invest, you’re talking to people all around the world. Like, how do you make the biggest impact, and what do you spend your time doing, because you’re clearly not slowing down at all?

1:11:38 Chris, I’m doing what you’re doing, Brian. I’m having fun. You’re communicating too. I’m having fun, honestly. You know, when the crypto light goes off, you can’t turn it off, right?

1:11:48 And serving in government was a tremendous honor, and it was a lot of fun, and I was able to I think have an impact in certain areas. I loved every minute of it, but I love being back out in the private sector. Now you know, I don’t have handlers all around me. I’m carrying my own bags and finding my own car and all those black limousines moving around Washington. But that’s great, you know.

1:12:07 I’m talking to some young, exciting entrepreneurs. I’m learning something new every day, as you say. I’m doing some angel investing in some exciting new companies. I’m advocating for issues. I’m doing a lot of writing.

1:12:20 I’ve just finished my book. I’ve got a proposal for a second book that I’m working on, which, on the subject really of economic liberty and the future of money. I’m senior counsel to a great law firm called Willkie Farr & Gallagher, and we created Willkie’s digital works within the firm, and we’re really out on the cutting edge in areas of NFTs and blockchain development and new issuance of coins. We’re doing some really fun work. We are building, I think, the quintessential Wall Street practice for cutting-edge new technology, so I’m loving that.

1:12:57 I’m loving the help the firm build it. I’m doing some foundation work. I’ve launched the Digital Dollar Foundation, which has sponsored the Digital Dollar Project. We will be announcing very shortly a series of major pilot projects with some major Main Street, High Street brands that everybody knows, retailers, High Street banks, NGOs that are involved in charitable work with unbanked populations, payment providers, to start testing out some of the uses of central bank digital currency.

1:13:28 You know, it’s like every week there’s a new conference now on central bank digital currency, and you go and all you hear is academic discussions of well, it will increase financial inclusion, it won’t increase financial inclusion, but there’s very little data, there’s very little testing going on. So what we want to do with the Digital Dollar Project is actually engage with the private sector to do some real pilot projects, and then publish the data for the whole world to see, to analyze the data, look at that for regulators to see, for central banks to see, so that when we get ready to make decisions about deploying a digital dollar, a digital pound, a digital euro, there’s some real data there, and not just developed by regulators, but actually developed by the private sector.

1:14:07 Right, right. And how do you tell your peers and friends, and you meet, you know, old friends in banking in the City of London, to start this journey when they’re like, hey, I see you’re doing this crypto thing. How do I learn about it? What are the, what do you usually have people do to get started? I mean, you built this lab like the Skunk Works kind of when you were at CFTC, of this like lab of innovation, but how do you tell the regular person?

1:14:30 Because, again, I’ve done this with my daughter with my mom, and yeah, where do you start? Here it comes, selfless plug: read my book, Crypto Dad: The Fight for the Future of Money. It’s a good place to start. It’s a generalist, and it tells a story, and people like stories, but that’s just a starter. I mean, there’s so much online.

1:14:47 I mean, there is more online about this than anybody. In fact, your own show, Brian, watch five or six episodes of your program, get a real good primer, and then once you start digging in, it just goes from there. And the other thing is, I’d say get a wallet and buy some bitcoin, buy some ethereum, and again, I’m not plugging one crypto or another, but it’s a great way to get started. It’s a great way to teach yourself what’s going on. And the last thing I’d say is, talk to anybody under 25 or at least under 30, because they get it.

1:15:13 Yeah, you mentioned that your kids were trading those you know, video game tokens and things like that, and you know, I’ve had conversations. We’ve seen the NFTs explode as well, and the same passion that you just had there to say we have to fight for a digital dollar that has freedom inside of it, is a similar passion I see. Do people talk about an open versus closed metaverse? I was talking to Yat Siu of Animoca Brands, who’s in Hong Kong, and he’s been a big part of a lot of metaverse startups, and he said, Brian, this is the fight of our lives, of humanity, that if we can keep this metaverse open, then we can control it.

1:15:48 If it’s closed in the hands of a Meta or some other group, then our whole reality will be closed off and we might not get back from that. I see you speaking of the same passion with the digital dollar. It’s like we don’t understand that that will affect our very reality. Have you thought about that? I totally agree, Brian.

1:16:06 You know, there was one of America’s founders, I can’t remember who it was, and I can’t remember the exact quote, quote, but something to the effect of gender liberty is something every generation has to re-earn, was to fight for once again. I truly believe this is the new battle for liberty against powerful elites controlling our choices, our economic choices. With great respect to social media companies, they have sold their souls to the political class to do their bidding in order to maintain their monopolies.

1:16:42 The fight for Web3 is the fight against those big powerful monopolies aligned with powerful political elites to control the choices we make. I think this is the cutting edge of the re-fight for liberty. And I mean a balanced liberty again. I’m not a wild-eyed, tear-down-the-walls guy. I ran a federal regulator proudly for five years, put bad people behind bars.

1:17:06 I believe in proper regulation, but liberty is core to human aspirational growth. I mean, the reason why people from around the world still try to immigrate to the United States or immigrate to Britain is to get that taste of liberty, to be free of powerful elites telling them who they can be and what they can be, and that’s worth fighting for every generation, and this is where the battle is being waged today. Yeah, and I think you actually articulated that the digital dollar, which in itself can get confused with a lot of things, and stable, and the government’s running things.

1:17:37 Just that in itself, if you can keep that free going forward, in a weird way, that is a metaverse, right? Because that is your relationship with the world, is your economic freedom. So before we jump into The Sandbox and Axie Infinity, which are also a version of our future, your own reality is highly affected by the way you can quantify value between people, right? And if that’s done properly with freedom in a digital dollar, then we have a free world, and if it doesn’t, then we won’t.

1:18:04 So one of the things I’ll be writing about soon is some research that I’ve been working on with a scholar from the American Enterprise Institute looking at all of the world’s central bank digital currency initiatives, by all the world, and what we’ve done is to create a scale of one to five to look at what they propose as the key objectives. And on that scale, one to five, we wanted to see where privacy was as a goal of those efforts. And I’m sad to tell you that the average of where privacy is is somewhere between one and a half and two on a scale of one to five, with five is the highest priority and one is the lowest.

1:18:42 We’ve got, I mean, again, I speak to your enormous audience, Brian. We’ve all got to get out there and let people understand, whether they be private operators or government operators, privacy has got to be at the head of the list. That’s got to be our goal in building this revolutionary new architecture of finance. Inclusion has also got to be at the top of the list. We’ve got to build a system that brings more people in, gives them more economic liberty, and yet there is sound effective law enforcement for those who try to prey on all those good people to take advantage of them.

1:19:15 Yeah, such an important lesson. I got to finish by asking you a little bit about derivatives, because I’m a former derivatives trader. I was actually on the Joe Rogan Experience about nine years ago, and I tried to explain derivatives to him. I think derivatives get a very bad rap, and it’s something I teach inside my academy, just derivative instruments. I actually get my students to actually buy an option on ethereum and watch it expire to understand how it works, because I don’t think derivatives are in themselves bad.

1:19:40 Poor risk management is what becomes bad. Exactly, since I have, you know, a former chairman of the CFTC, I was wondering how do you have that conversation with people of explaining, you know, what a derivative is, why it’s neither bad nor good, and then also how they’re going to play out when it comes to cryptocurrencies going forward, because we’re seeing perpetuals, options, futures, etc. So how do you have that conversation? So derivatives are the power tools of a modern economy.

1:20:05 So when I was a kid growing up and they’d built a new house across the street with hand tools, it would go up. It would, they’d start in the spring when the weather would, the ground would thaw and they’d be lucky if they were done by the fall. They’d be hammers and screwdrivers and nails. It would take a long time to build a house. Now, if you watch, the house goes up.

1:20:24 It’s up in eight weeks, and the difference is power tools. And in fact, those new houses are less drafty, they’re much tighter, they’re much more heat efficient because of power tools. Power tools are like, whenever you go from analog to digital, that, the, the tensions get much, much tighter, the precision gets much, much greater, and what derivatives allow pension funds, the people that invest our money for our retirement, to do is take much more precise positions on where they may see the economy growing, and so as a result, the ability to weather different economic storms, the ability to express a view as to the future, and if you get it right, give much more extraordinary returns is what they are now, like any power tool in the wrong hands, for the unskilled, they can be dangerous, you know.

1:21:13 A power hammer can put a nail through your hand the way a hand hammer can’t. Worry as easily, right? A power tool can be a dangerous thing in the unskilled, but in the skilled, it allows that house to go up in eight weeks as opposed to eight months. And so derivatives are very, very powerful tools in the right hands. You know, the proliferation of self-directed retirement plans, we call them 401ks in the United States, and the use of derivative products for those fund managers to build very, very sophisticated portfolios, insurance companies to make sure that our, you know, retirement insurance is much more precise.

1:21:52 Those are all done with derivatives. So derivatives are very, very powerful financial tools. Then the right hands can power the economy. Now, remember one thing: credit default swaps were blamed for the financial crisis, but, you know, that’s a false reading. They never feared that credit default swaps would fail.

1:22:10 They feared they would work. Credit default swaps were like grappling hooks that tied the buildings of the big financial institutions together, and the worry was if one fell, it would pull down the others, using those credit default swaps as grappling hooks. It wasn’t that they might fail. It was that they would do what they were intended to do, which is basically tie all the institutions together. It was the run on the bank caused by dodgy lending, mostly in mortgages to people that couldn’t pay their mortgages, that caused the opacity in bank balance sheets to make people fearful that the failure of those mortgages would trigger the bank’s credit default swaps, bailing each other out, to cause a cascading set of failures.

1:22:54 It wasn’t the derivatives that caused the crisis. It was standard old lending, bad lending practices of institutions that should have known better, and quite frankly, regulators and politicians that should have known better, not to push banks to do some of the lending they were doing, and then the banks were packaging them in opaque instruments so that people didn’t fully know how dodgy some of those loans were. That caused the old-fashioned Mary Poppins, I want my tuppins back.

1:23:24 Oh, the bank doesn’t have tuppins. Something’s wrong. It was a old-fashioned run on the bank, and it was the belief that the credit default swaps would work. So if Lehman fell, Goldman would have to pay out, JP Morgan is the fear of it working that caused the TARP program that caused the government to have to put money in the banks. Well, we now know, we thought at the time.

1:23:48 So let me tell you, we have time, Brian, for one last story. I want to hear this. 2008. I was one of the principals of a firm called GFI Group. We were, you know, it well, we were probably, I don’t know, your firm was a big player in the market, but we like to think we were 75 of the marketplace.

1:24:05 We operated marketplaces for market makers, big banks, to operate, and on our floor they traded these credit default swaps. Credit default swaps are basically a form of insurance on the failure of a financial institution to pay on its debts. And so what they would do is basically insure it, insure against that failure, by buying these credit default swaps. Two days before Lehman Brothers fell, it was pandemonium on our trading floor because the cost of this insurance was going up and up and up by the hour.

1:24:34 We got a call from a senior official at the Federal Reserve Bank of New York, a few blocks away from us, saying, what do you guys do again? I met you at a cocktail reception at the bank a few months ago. Remind me. And I said, well, we operate this marketplace where credit default swaps are bought and sold. He said, right, that’s what I thought you did.

1:24:52 What are you seeing? And I say, well, it’s pretty scary right now, because the cost of buying this protection is going up and up and up, and it’s going up and up by the hour. And he says, right, so that must indicate that some banks think other banks are close to failure, and I said, exactly. He goes, you know, I’d love you to come up here to the, thank you, the Federal Reserve Bank in New York and explain to us better how this market works. And I said, yeah, I’d love to come up.

1:25:14 I’d love to tell you what we’re seeing, but I’m not going to get off the trading floor. Maybe 8 30, 9 o’clock tonight, maybe I’ll be here all night, I don’t know, but I’ll come by then. And he said, oh no, no, not tonight. I’m too busy tonight. I think my kids got a soccer game, and I got to get on.

1:25:26 Look in your diary, see if we can get together, maybe the back end of October. Well, we already knew that within days some of these institutions are going to fail. It struck me that financial regulators had no better way of knowing about the fear and loathing that was taking place in the marketplace for some of the world’s most important financial institutions than to call a shop like mine and ask what do you guys do again? So I became actually a proponent of the reforms of the swap market that made its way into Dodd-Frank.

1:25:58 But here’s my final point. Something else was triggered. It was believed then that a failure of Lehman Brothers would cause about 400 billion dollars in to full in obligations of other financial institutions, and they baked them, and that was based upon the gross notional outstanding amount of those obligations, and they basically extrapolated and say, well, if it’s 400 billion on Lehman Brothers, well, then it must be 700 billion on Goldman Sachs and maybe 1.2 trillion on JP Morgan.

1:26:30 We better flood these banks with capital, and so a program was called the Troubled Asset Relief Program, or TARP. The banks were flooded with capital whether they needed the capital or not. It was almost like the fire company comes in and wets down every house if one of them’s on fire, so they won’t go on fire. Right, but we now know, because of work we did at the CFTC, Brian, that the, the net exposure of Lehman Brothers wouldn’t have caused 400 billion in exposure.

1:26:55 It would have cost less than 9 billion. It was the fog of war. We didn’t know it. If we knew that it was 9 billion, we could have either let them go under, or the Fed could have written a check. Either way, we would have had policy tools that we didn’t know we had, because we didn’t know.

1:27:11 And the big idea for me, when I realized that, was if all those obligations were on a blockchain, regulators in a nanosecond could have known. We’re going to bail them out. We’re not going to bail them out. Let them go under. It’s not going to cause Wall Street to cascade and fall.

1:27:27 But we didn’t know it, and for me that was the eureka moment, and that’s what I say to my fellow regulators: don’t view this revolution as a need to buttress the existing system. See it as a way to make the existing system better and better able to be regulated. Yeah, I was on the trading floor watching Lehman go down. I had five traders. I covered at Lehman, and we watched it all happen.

1:27:48 Watched the stock price go down. I watched them go out of the building, and what a great explanation to know that if that was on the blockchain, we could have made such better decisions, kept the financial world much more alive, less of obstruction, all that. So that is a great example to anybody out here who’s questioning it or resistance to the technology. It can make the system better, better, and like you said, we’re probably going into some slow economic times.

1:28:09 Why not accelerate that with a velocity of money and embrace this technology and power through the next say 10 or 20 years? Those are two great tidbits to lead people with here. The book is Crypto Dad. They can get it audible as well, Amazon as well. What’s the best one?

1:28:25 All the online retailers carry it. If you can’t find it, email me, Chris, johncarlow.org. I’ll find out where to get, but it’s widely available, and it’s, be delighted that people would buy it. Let me know what they think of it. Great, follow this man on Twitter as well.

1:28:40 And John Carlo Markets at Twitter. Yeah, the Crypto Dad himself. Chris, we could talk for hours, and I’d love to do it again. Sometimes we can go deep into all sorts of things, derivatives, crypto, the projects you see in blockchain as well, in the future, but thank you so much for the time. It’s fantastic seeing your perspective.

1:28:56 When you say it, it means something different because you’ve been there, you’ve done that, you’ve regulated it, and now you’re telling us what to look out for. The digital dollar is so important to keep free. That’s the big lesson I got from today. Don’t run away from it. Actually, help make it happen.

1:29:11 Yeah, be a part of it, learn about it, talk to your congressman and senators about it, and help start building it now. Don’t wait for the governments to do it later. We all have to be a part of it. That’s the lesson I got today. You got it.

1:29:22 So thank you so much, Chris. Until next time. Thank you, sir, my friend. This is a pleasure.