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‘Money Is Too Important To Be Left To Central Bankers’

Former CFTC Chair and ‘Crypto Dad’ Chris Giancarlo

Chris Giancarlo

Chris Giancarlo, commonly referred to in the industry as “Crypto Dad,” served as the 13th chairman of the U.S. Commodity Futures Trading Commission (CFTC) from June 2014 to April 2019. His tenure is best known for the CFTC’s 2017 approval of the first bitcoin derivatives products, a precursor to today’s bitcoin futures ETFs.

Upon leaving the regulator, Giancarlo became an advocate for the U.S. to create a CBDC (aka the digital dollar), arguing that money is too important to be left to the central banks and that the country must join the fight against China trying to impose its Orwellian standards on the next financial system. He also came out with his first book, Crypto Dad (Wiley), which recounts his time at the CFTC, lessons-learned, and ways that the U.S. can preserve its stature and core values of freedom, privacy, and independence in this new financial world.

Forbes: How did you get the name Crypto Dad?

Chris Giancarlo: That’s actually a fun question. In the fall of 2017, the CFTC was approached by the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) about self-certifying two bitcoin futures products. The process of self-certification garnered a lot of interest both in the trades from the Futures Industry Association, by both domestic and overseas regulators, and in the press, and the issue became somewhat controversial. There was a fair amount of pressure on the CFTC to find a way to block the self-certification of these two products.

Forbes: Pressure from whom?

Giancarlo: Pressure from regulators here and abroad, pressure from the industry: the Futures Industry Association wrote letters to the CFTC. In the press, there were questions as to whether we were risking the financial system. The arguments were that we were validating bitcoin. A number of central bankers around the world felt that that was a risky step. At the end of the day, after very careful analysis, study and effort, we made the decision to greenlight bitcoin futures at the CFTC, and they launched in December of 2017. 

Not long after, I was noticed to appear before a Senate Banking Committee hearing alongside SEC Chairman Jay Clayton. At the time, Jay Clayton’s SEC was taking a fairly aggressive stance against the launch of initial coin offerings (ICOs), and that itself was garnering some controversy at the SEC, which Jay is better placed than I am to recount. But the point is that we were now scheduled to appear together before the Senate Banking Committee, and, depending on one’s point of view, either I was a hero and he was a fool or I was a misguided fool and he was a hero. We expected that hearing to be a fairly contentious one, but the night before the hearing I came to the conclusion that I wanted to talk to the Senate in a very different way. 

So, the next morning when I was given five minutes to address the Senate, I said, “Ladies, gentlemen, if you allow me, I don’t want to speak to you as the chairman of a federal regulatory agency. I want to talk to you as a dad. I told them how we had just come back from our annual family ski trip with my siblings and their children, all kids in their 20s, whom my brothers and I tried to interest in the stock market growing up. For the most part, they had no interest. But suddenly, they had this really deep interest in crypto, especially bitcoin. I had this eureka moment when I realized there is a generation gap that exists today that has to do with technology. It also had to do with who owned the truth, whether the truth was in the hands of venerable institutions, like encyclopedias in the case of information, or banks in the case of things of value, whether this new consensus-based digital technology was a better establisher of the truth. 

So, I said to the Senate, “Look, I think we owe it to this new generation to treat their interest not with disdain, but with respect. We owe it to them to get these regs right, not treat this as some sort of juvenile fantasy.” With that, my Twitter handle just exploded. The Twitterverse gave me the title “Crypto Dad.” They gave me a lot of other names as well, some of which I didn’t care for as much. But the “Crypto Dad” seemed to stick. At first, I didn’t quite know what to do with the title, what to make of it. But then I realized it was a way of communicating. I mean, sometimes your five minutes of fame can be something that you can use to a certain advantage. So, I’ve embraced the crypto dad moniker and use it as part of my messaging about what the right role for regulation is in this emerging industry.

Forbes: I think a lot of people who will read this will know that Hester Pierce is called “Crypto Mom.” Have you guys ever talked about your nicknames? 

Giancarlo: Absolutely. Hester and I have a friendship that goes way back. In fact, I recount a story about a dinner we had together back in 2016, during which we recognized this sort of generational opportunity. I think she was at the SEC when I became “Crypto Dad”. She became “Crypto Mom” not long after. There are pictures floating around of us together, with a caption “Crypto Dad, Crypto Mama.” I think she embraces that title like I embrace “Crypto Dad” because it’s a shorthand way of communicating a certain affinity and openness to this innovation and trying to find the right regulatory response, a crypto native regulatory response rather than one based upon statutes written in the 1930s, which were not assigned for crypto.

Forbes: Can you briefly describe the role of CFTC and how it applies to crypto for people who may not know?

Giancarlo: Most of the major economies in the world have one regulator for financial markets and another regulator for, say, the banking industry. We, in the United States, actually have not only three regulators for the banking industry at the federal level, but we have two at the federal level for financial markets, and they serve very different purposes. When you think about the size of the U.S. financial markets in the world, maybe it’s not so unusual that we have two. The SEC, which many of your readers know and understand, regulates markets for capital formation. 

The CFTC oversees markets for risk trades. What that means is someone with a business or enterprise that has risk—take the risk of commodity prices going up or down, the risk of interest rates moving, or the risk of foreign exchange—can find a party willing to bear the part or all that risk, allowing that enterprise to mitigate or manage risk. If you think about it, in a global economy where exchange rates and interest rates are moving all the time, if enterprises could not manage that risk, they will have a lot more difficulty engaging in global commerce, even regional commerce, here in the United States. I believe there’s a correlation between the fact that America’s derivatives markets are not only the world’s largest, they’re also the world’s standard. 

Forbes: And as it pertains to crypto, where does the CFTC come in?

Giancarlo: Risk mitigation is critically important for crypto because more and more institutional investors are now holding crypto. They’ve got risk hedging needs in that market as well. Crypto futures—bitcoin futures, ethereum futures—provide ways for firms to gain exposure in a regulated transparent, deep and liquid market, but are also ways to manage that exposure by hedging.

Forbes: I want to touch on one of the things you’ve mentioned before because I think there’s an important distinction to make: the idea of self-certification, where essentially CFTC-regulated bodies are able to approve products that fall under the CFTC’s remit on their own. This appears to be a very different process from the SEC when it comes to crypto ETFs, where they have to formally apply and cannot start trading until they get approved or the review period expires without the SEC intervening. Could you talk about the difference between those two processes?

Giancarlo: The CFTC actually has, in my view, a very enlightened approach to innovation and product launches in CFTC-regulated markets. That enlightened view is that if politically appointed commissioners are charged with green lighting, approving, making value judgments on new products, the inevitable dynamics are they are going to be reluctant to approve new products because of the political risks involved. You can hear it, right? “Oh, Commissioner, so how could you approve this new product, when my constituents back in, you know, some small town invested in it and lost their life savings? How could you have done that?” And so, political appointees have been reluctant to take the political risk to approve new and novel products. 

The enlightened approach at the CFTC, instituted by Congress, is to basically say, look, they’re these licensed exchanges, which will bear commercial and reputational risks if they get these products wrong. We, Congress, and you, the CFTC, are going to put down a series of core principles, and the exchanges are going to come in and certify that these products meet those core principles. Provided there are no major discrepancies in those certifications, those products will then go forward. 

As a result of that enlightened approach within the CFTC’s jurisdiction, more new products have been launched since 2000 on CFTC-regulated markets than in any other financial regulatory regime in the world by a long mile. I think something like 12,000 new products launched within the CFTC’s jurisdiction since the year 2000—more than in the rest of the world combined. The reason is that you’re not having a political choice, you’re basically trusting the marketplaces and market professionals to work out the value propositions of these new products. Now, many of those new products didn’t succeed after they launched and were discontinued after a short time. But if you’re a believer in markets, that’s exactly what should happen. It’s for the market to determine the value of a new initiative, a new product. Not for politicians or politically appointed commissioners. People may like that system, not like that system, but that’s the system we have, and I think it’s worked very well. 

I will say one thing though: CFTC-regulated markets are, for the most part, not retail marketplaces—you don’t have individuals putting the 401k’s into oil or interest rate products. Because the CFTC oversees, for the most part, institutional markets, we perceive that there should be more leeway there, as opposed to primarily retail markets. I’m praising the CFTC’s approach, which I inherited by the way. It existed under both Republican and Democrat administrations. I’m praising it but I’m not there to criticize different approaches by different regulators that have different mandates. The SEC has an investor protection mandate; the CFTC does not. 

Forbes: I’d like to ask you about FTX.US’s recent acquisition of LedgerX. In many ways, it’s seen as just acquiring a license. Since they will now be CFTC-regulated, do you foresee an opportunity for LedgerX to start offering derivative products focused on other digital assets, provided that they are of the belief that they’re not securities?

Giancarlo: Sorry for such a short answer, but I think the answer is yes. 

Forbes: Self-certification can certainly accelerate innovation. But at the same time, there are ways for the CFTC to step in if there’s something that they feel is truly non-compliant, correct?

Giancarlo: Oh, absolutely. That doesn’t mean every self-certification goes forward. We took months to review those self-certifications. It’s not like the CME would come and say, “okay, here’s our self-certification, we’re good to go.” We spent a lot of time, a lot of painstaking time, going through that. In a number of cases, we came back and said: we’re not comfortable with this, we’re not comfortable with that. And a number of changes had been made to meet CFTC’s concerns before they went forward. The self-certification process doesn’t mean that the CFTC doesn’t have input. It actually is the beginning of a conversation, which allows the CFTC to intervene and set concerns.

Forbes: I want to talk a little bit about the futures that were approved at the end of 2017—the Cboe and CME bitcoin products. First of all, how long was the certification process, or the self-certification process, for those offerings? 

Giancarlo: I recall that CFTC’s announcement that they wouldn’t seek to block them, I believe, was issued on December 1, 2017. I believe, Cboe first approached the CFTC in June-July of 2017. The CME began talking to us, I think, in October 2017. As you can see, there’s a fair amount of months of lapse. Now, none of this was a surprise because the CME had begun its bitcoin index work the year before. We were aware and familiar with it. We started actually tracking that index ourselves. We launched LabCFTC in May 2017, and I immediately charged LabCFTC with getting up to speed on everything that had to do with bitcoin. The agency was getting up to speed on bitcoin and other cryptos in the summer of 2017—even before the CME announced that they were going to try to self-certify a bitcoin product—because we kind of had a sense it was coming and we wanted to prepare for it.

Forbes: Were there any major alterations made to either of the products before they launched?

Giancarlo: Yes. We worked with them to raise the amount of initial margin that would be required. We worked with them on the large trader reporting thresholds in order to garner more information to be reported to the CFTC; on establishing information-sharing agreements with the spot market platforms that provided the prices that they use to set their benchmark; on the degree of monitoring of price settlement data. We worked with exchanges to conduct inquiries at our request on trade settlement and trigger level data when we saw anomalies. We agreed on a whole series of regular communications; on how product searches would be timed so that our market surveillance people could monitor minute-by-minute developments. And, perhaps most importantly, we worked with exchanges on where they set their initial and the ongoing maintenance margin levels for the instrument. So a series of steps from the time they first approached us to when they went live in areas where the CFTC required changes or greater collaboration.

Forbes: As you know, the buildup to those launches led bitcoin to approach $20,000 for the first time. However, the actual launches coincided with a big market collapse. I’m interested in your thoughts on the timing and whether or not you think it was just a coincidence, or there’s some degree of causality.

Giancarlo: The San Francisco Federal Reserve did a study after that launch, and they concluded that there was a relationship between the launch of bitcoin futures and the subsequent resetting of the bitcoin spot price. The linkage was the fact that you now had a two-way market. When you have only a spot market, that means that non-participants in the market can’t express a view as to the market. You can buy or you can sell but you can’t really express a view the way you can long or short an instrument. So the presence of a futures market allowed them to express that bitcoin’s price was not $20,000 a bitcoin, but closer to $10,000 a bitcoin. 

And quite frankly, in every major commodity market, the ultimate price is not set in the stock market, it’s set in the futures market. That’s Economics 101. The price of oil is not set at the gas pump, it is set in the futures market. The price of wheat is not set at the grain elevator, it is set in the Chicago futures market. The price of interest rates is really set in the interest rate futures market. The price of foreign exchange is not set when you go to the Travelex office or when you get on an airplane, it’s set in forex markets. Commodity economics will tell you that the prices of commodities are set in futures markets and that’s a healthy market condition. Why is that? The reason is that spot markets are diffuse, they are in many different locations. That’s why I’ve just explained that the price of wheat is not set at thousands of elevators all over the country—because they don’t have the same information at the same time. The prices are set in a place that centralizes all the demand, all the bids and all the offers—the futures market

As part of the maturation of bitcoin, the emergence of regulated, transparent, professionally managed markets for futures (which is what you have with players like CME and Cboe) creates a place where the price can be set, where all demand can be entertained, both long and short. So, I believe, it’s part of the long-term maturation. The launch of bitcoin futures in 2017, when bitcoin was at $20,000, certainly hasn’t stopped bitcoin from getting to $50,000. It just may have provided a shorter-term roundabout. 

Forbes: I want to hear your thoughts on the ETF that has gotten approved this week. What is the significance of bitcoin ETF being approved and why do you think it was a futures-based product before spot?

Giancarlo: Well, if I can say, I’m rather proud of the work we did back in 2017 and 2018 to create a healthy, transparent, well-regulated financial derivatives market. I think the SEC allowing ETFs based upon that market to go forward is a compliment to the work we did. The SEC is still not yet uncomfortable with an ETF based upon spot bitcoin prices, and I can’t tell you whether they’re right or wrong. I think that there is room for more than just ETFs based upon bitcoin futures. I hope more work will be done to establish whether it’s possible to create and greenlight SEC-regulated ETFs based on spot bitcoin prices. 

Forbes: Since you left the CFTC, you’ve become a strong advocate for the digital dollar, you founded the Digital Dollar Project. Can you talk about how your work at the CFTC led you to this new initiative and why you think it’s so important right now?

Giancarlo: Having done the work we did on bitcoin futures, it really became clear to me that something bigger is going on. And that is, I think, the Internet, having totally changed everything we know about retail, shopping, transportation, entertainment, media, has now set its sights on financial services and things of value. As I reflected on the rise of bitcoin and other cryptos, it struck me that something really big is going on, and that is the Internet of Money or the Internet of Things of Value. It became clear to me that ultimately central banks are going to recognize those changes and seek to take a role in them. So in October two years ago, Daniel Gorfine and I published an op-ed in the Wall Street Journal titled “We Sent a Man to the Moon. We Can Send the Dollar to Cyberspace.” The point was that it was time for the United States to get in the game.

I think there are at least seven drivers for the central banks’ interest in CBDCs. And the very first one might surprise your readers because it is about data capture. We know that the most precious resource today, perhaps more than oil, is data. The People’s Bank of China saw that Alipay and WeChat Pay, which were quickly taking over electronic payment activities in China, had access to the data of Chinese people. In the communist system, must be the exclusive instrument of state engagement in the movement of money. It moved forward with digital yuan first, I believe, because of data capture. But it wasn’t just the Chinese. Look at the reaction of Congress and the EU in response to Facebook’s announcements of its Libra project, subsequently renamed Diem. That’s all about data capture: who’s going to own that data? So, I think the first driver of central bank digital currency was data. And the second driver is the modernization of financial market infrastructure. That’s certainly the case in China but that’s also the case for large important financial centers like Singapore and London that see the opportunity. And I think that should be an imperative for the United States—to modernize our financial system. I would say that the third driver is financial inclusion. The account-based system that moves money around the world today is inherently exclusive. Why is that? Because you cannot use it if you don’t have an identity. And while that may not seem like a big deal in the United States where most of us have a credential identity, out of 8 billion people in the world today, a billion people don’t have an established identity, and therefore they’re excluded from the existing financial system. The beauty of crypto is that on a tokenized basis you don’t need the identity as a first step to participate in the system. So, identity is a third driver of CBDCs. 

The fourth driver is precision monetary policy, and this really became apparent in the United States during the COVID-19 pandemic, when tens of billions of Americans had to wait a month or more to receive paper check payments. The fifth driver is really the rapid rise of stablecoins. I think stablecoins have sent central bankers into, what I call, a ‘fight or flight’ mode: they’re very concerned about central banks’ monopoly over global payments to be challenged by stablecoins. 

Of course, a big driver is the global influence of power. There’s no question that China sees a digital yuan as a way to achieve long-desired enhancements of the yuan as a global reserve currency. We often talk about the dollar zone, the eurozone—those are analog network effects. The dollar has tremendous network effects, but it’s not digitally connected. It’s a network of influence. China is going to use the digital yuan as basically an operating system for a completely digitally connected and networked economy. Lastly, I’d say the seventh driver of central bank digital currencies is about setting the standards. China was successful in setting the global standards for 5G in the way the United States was successful in setting the global standards for the first wave of the Internet. Now, we’re in the battle for the third round, which is the Internet of value. Who sets the standards for this and what values are in those standards? Ultimately, it’s going to come to values. Money carries with it values. The dollar has historically carried with it the values of free enterprise, free capital markets, the rule of law, and privacy, individual economic privacy. China’s designing a digital yuan to have other values: values of state primacy over the rule of law and state surveillance. Are those values going to be the values of the future of money or the traditional democratic values? He who sets the standard is going to control the values. That’s why I think the United States needs to stop leaning from behind and take a leadership role in the future.

Forbes: I’m interested in one anecdote, something you learned in the course of researching the book that really kind of became apparent after you’ve dedicated some time to really deeply study these issues.

Giancarlo: It’s this: money is too important to be left to central bankers. At the end of World War I, French prime minister Georges Clemenceau said, “War is too important to be left to the generals.” Similarly, I feel that money is too important to be left to central bankers. A free society has so much to gain from the modernization of our financial system that could be brought about by crypto. But it has so much to lose if it doesn’t have a say in what values are going to be encoded in the future of money, whether it’s non-sovereign money of the likes of Diem or whether it’s sovereign money in the form of a digital dollar. 

The values that got us here—values of free enterprise, free economic activity, individual privacy, free of censorship by governments, for legal activities, people need to know that their affairs are private. So the battle, both domestically and internationally, for what those values are going to be in the future of digital money is the essential fight, as I described in my book—the fight for the future of money. And a free society has to speak up. That’s why we launched the Digital Dollar Project. 

Forbes: That’s a great way to end it. Thank you. 

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