Chris Giancarlo is the former Chair of the U.S. Commodity Futures Trading Commission and the author of an important new book called Crypto Dad: The Fight for the Future of Money. As Washington’s chief regulator who oversaw the emergence of cryptocurrencies, Chris has seen up close how important it is to encode democratic values and economic privacy into digital money. Chris and I discuss the history of money, the Internet of Value, the risks of crypto censorship and suppression, and whether free enterprise can be cool again.
Guest:
Chris Giancarlo is the former Chair of the U.S. Commodity Futures Trading Commission and the author of an important new book called Crypto Dad: The Fight for the Future of Money.
Josh Burek: This is Immutable, from Harvard Kennedy School’s Belfer Center for Science and International Affairs. I’m Josh Burek. In today’s episode, we hear from Chris Giancarlo. He’s the former Chair of the U.S. Commodity Futures Trading Commission and the author of an important new book called Crypto Dad: The Fight for the Future of Money. As Washington’s chief regulator who oversaw the emergence of cryptocurrencies, Chris has seen up close how important it is to encode democratic values and economic privacy into digital money. Chris and I discuss the history of money, the Internet of Value, the risks of crypto censorship, and whether free enterprise can be cool again.
Josh Burek: Chris Giancarlo. Welcome to immutable. Great to have you.
Chris Giancarlo: It’s great to be with you.
Josh Burek: Your new book, “CryptoDad,” opens with some bold claims, including that crypto will potentially have greater impact than the printing press, the personal computer. And the Internet itself. Now skeptics might say, “Yeah, this sounds like classic over-hype.” So I just want to ask you, what gives you confidence that this crypto movement is a once in a century type phenomenon – and can you say a little bit more about this idea of a blueprint for the decentralization of everything?
Chris Giancarlo: Look, I’m not going to back off in any way how big I think this innovation is, but the particular reference to the printing press was actually made in the foreword by Tyler and Cameron Winklevoss. So I don’t want to take their words. I use the description of this as being more than once in a generational event, but more perhaps a once in a several centuries event. Those are my words and I’m quite comfortable saying that. And the reason is because money, from the dawn of civilization and until quite recently – well, it continues today – is something that humans understand intuitively in its tokenized form. Whether that form was shells or beads or wampum or metal coinage or even paper money invented by the Chinese.
What makes a token so intuitive is, to verify its value, you only look to the thing itself. You don’t really need to know the identity of the person you’re transacting with. You don’t need to know where they bank. You don’t need to know their wherewithal, what money they have in the bank.
None of that matters so long as the thing itself is a representation of value that you’re willing to accept. And that worked very, very well for most of human history until society really discovered its major shortcoming. And its major shortcoming in an analog way is it local nature. The further you went from the site of issuance with a site of acceptance of that fiat, the less valued it became. A Dutch guilder just didn’t work in Venice, where the token of acceptance was Venetian ducats. And so European merchants at the end of the medieval period, the beginning of the Renaissance, came up with a different system that’s in wide use today, and that’s the system of bank notes. You take your Dutch guilders, you put them in the vault of the bank of Amsterdam. And in turn, you’re issued a bank note and you can take that bank note down to Venice and trade it in for Venetian ducats, or just use it on its own.
That system is the system that dominates today. That’s the system of bank money. About 90% of what we use in global commerce today is bank notes. That system also has shortcomings. In fact, those shortcomings have become perhaps more evident in the recent few years of COVID and otherwise, because its shortcomings are number one, it’s exclusive. Why is it exclusive? Because you cannot use it if you do not have identity. Why do you need identity? Because whenever you use a check, use a debit card, you use a credit card, you use Zelle or Venmo, somebody somewhere needs to identify who you are, where you bank, and how much money you have in your bank.
That’s a lot of information you’ve got to give up just to do a credit card transaction. And you may not see all that identification, but it’s taking place by these trusted intermediary banks and other validators. The second shortcoming is, it’s expensive. It actually costs a fee to pay people to validate all this identity and bank sufficiency and bank transfer.
And it’s slow. It takes three days to get a check cleared and cashed in United States. It takes four or five days to move money around the globe. So the shortcomings of the existing system really become apparent as the Internet continues to wield its magic. We know we can move a photograph around the world in a second, and yet it still takes five or six days to move money.
So the shortcomings of the tokenized system, very simply – local. The shortcomings of the bank note system – expensive, slow, and worst of all, it’s exclusive. That identity issue is a big issue in a world of 8 billion people, where a billion or more of them don’t have identity. So what does that bring us to? Well, it brings us to a new form of tokenized money, digital tokens, and guess what that does?
It solves those four shortcomings. It’s no longer local. It’s no longer expensive. It’s no longer slow, and it’s no longer exclusive. That’s why I say this is a change that is certainly more than once in a generation, but perhaps one in several centuries. And according to the Winklevosses, it’s as big as the printing press. And I’m not going to second guess them. They’ve certainly got a lot of experience thinking and looking at this.
Josh Burek: There was a second part of the question I want to unpack with you a little bit, because this goes to the idea of a once in a generation or once in a century change. And that is that this isn’t just solving the shortcomings of fiat money, but it could unlock the decentralization of everything. Can you talk a little bit about the broader decentralization that this could unlock?
Chris Giancarlo: Oh, yeah. I think that’s really one of the more remarkably interesting aspects of this. This whole existing legacy system we have now relies on these trusted intermediaries to do all this validation of identity and maintain accounts, and then to transfer accounts upon the instruction of account holders.
And that’s an enormous amount of intermediation that needs to take place. And this heavily intermediated prudential system actually serves the regulatory system in interesting ways. When regulators step up to regulate any ecosystem, it doesn’t have to be financial services, it can be healthcare, it can be the taxi business or other activities. When regulators look at any ecosystem, the first thing they do is identify where are the intermediaries, who they are, what role do they play in the system. Second thing they do is assign to those intermediaries various duties to gather information to identify and in many cases, sub-license their participants, and then to perhaps establish local rules of order for those participants. In so doing, then the regulators give to those intermediaries. So regulators identify the intermediaries, they then assigned to them certain duties, and then they give them in return, certain privileges, certain, barriers to entry, quasi monopolies over the activities they do.
And so there’s a symbiotic relationship between regulation and intermediated ecosystems. And that’s very much the case in financial services. What challenge does DeFi present? Enormous challenge. Enormous challenge to an ecosystem of longstanding, highly legacy, structured intermediaries – an enormous challenge to regulation itself, which has a symbiotic relationship with those intermediaries. And therefore the notion of de-centralizing any activities in the case of financial services especially is very challenging, both to the legacy players in the industry, and very challenging to the regulators. And hence you get a fair amount of resistance to a decentralized environment, and yet there really doesn’t need to be that level of resistance.
Why? Because there are other ways to conduct regulation. We tend to think that what we have, which is effectively an entity-based regulatory system, is the only way to go about it. But in fact, it’s not the only way to go about it. What we need to do is stop thinking so much about entity-based regulation and start thinking about activity-based regulation. And if we do, we’ll actually discover that a lot of the new exponential digital technologies present us with the ability to conduct activity-based regulation, as opposed to entity-based regulation.
What do I mean by that? Well, big data analysis and pattern recognition will allow us to actually track certain activities that we wish to curb, activities that we wish to prevent. And then working backward, we can identify the participants in those activities and sanction them directly without needing to rely on these intermediaries that have belonged perform that function for government.
So it’s not impossible to reset our focus, both as regulators and the beneficiaries of regulation. I’m by no means anti-regulation being a former regulator, but I do think regulators can be somewhat resistant to change because they’re confused as to how to do their jobs in a new world. And what I’m here to say is that if we’re willing to look at this with new eyes and think more about activity-based regulation, then entity-based regulation, regulators can do their jobs without a world of needing to license and grant monopolies to intermediaries.
Josh Burek: Chris, you wrote “CryptoDad” to, as you put, “take a stand for the future of economic privacy and financial liberty.” Those are worthy goals, but there have always been these threats recurring in history. Do you see us at a particularly acute inflection point now?
Chris Giancarlo: I do. Because once you go from an analog bank system to a digital-based system, it presents enormous opportunities, but it also gives enormous amount of power to the governance and governing entities in these new systems. The temptation to be able to mine people’s economic data, whether that be by governments or by a big technology provider, the ability to censor people’s economic activities or try to condition economic activities by sleight of hand type influencing is going to be a tremendous temptation. And so I’ve always been a big believer that our Fourth Amendment in the United States that guarantees us a right to privacy, extends to our economic privacy. But protecting that privacy and making sure that the right to economic privacy is a design feature of digital money is a driving issue for me. I’m very concerned that in the digital future, the same governments that wish to have information censored on social media, the same big tech companies that are only too happy to censor information on social media, may wish to have those same temptations with digital money. In my book, I refer to the fight for the future of money. It’s a fight about values. It’s a fight about what values will be encoded in digital money.
Some of the developers of digital money in the case of sovereign states, such as non-democracies, like China, will encode surveillance features, will encode social crediting systems into digital money. Some commercial designers of digital money may have the same temptation to gather economic data that they have to gather social data.
And so in a free society, I think a democratic people must speak up and make clear that, as in democracies, every several generations, citizens always need to reassert their liberty from their governments. In this case, we need to assert our liberty, both from governments and big technology firms that our economic data is our private information.
Of course I’m talking about lawful uses, and the need for law enforcement to conduct law enforcement efforts against illicit uses remains standard, but for run-of-the-mill economic activity, people’s privacy must be sacred and I’ve written my book to get the word out to society that money is changing right before our eyes. And what that money is going to look like and what rights it’s going to carry and what value its going to carry need to be determined now. And the public needs to stake its claim to those values in the future of money.
Josh Burek: You talk about three waves of the Internet. An Internet of information. An Internet of things. And now an Internet of value. Chris, how will people who aren’t crypto nerds start to experience this Internet of value?
Chris Giancarlo: It’s already happening. And it’s been happening since Satoshi Nakamoto wrote his white paper about Bitcoin out of the ashes of the 2008 financial crisis. It’s happening now as we every day read here about the explosion of interest in Bitcoin and crypto. It’s happening now as we hear about non-fungible tokens, NFTS, and decentralized finance.
So it’s happening already. And what do I mean by an Internet of value? Well, the same Internet that gave us an Internet of information, the ability to not have to go to Encyclopedia Britannica and pay a license fee to the publishers of that publication as a trusted repository of all truth about any given thing, but to be able to go online and look to Wikipedia, where truth is established as a consensus amongst people with knowledge on the subject. That same Internet that brought us the ability to shop online, the ability to record a video and post it online, the ability to send a photograph around the world in a second: that’s an Internet of information, to be able to move information through this giant, worldwide web on a peer-to-peer basis. That was the first wave of the Internet. And it’s remarkable how transformational that’s been for all of our lives.
The second wave is one that has to do with the Internet of things, of devices, talking to devices. And there, too, it’s amazing how every device we interact with, every automobile we take, every shop we step into, the things we wear, are all speaking to each other, gathering and transacting information, in many cases for our benefit. People love Alexa in many cases, but in other cases, they’re also gathering a lot of information about us. That is a concern.
Well, the third wave of the Internet is about the same borderless, peer to peer, globally distributed transfer of value that’s happened with the transfer of information and the transfer of device-based information gathering.
It’s just naive to think that the Internet will not do to things of value, to financial services and money itself, what it’s done to information, to retail, shopping, to photography, to entertainment, and what it’s done to automated devices. It will. And the question is, do we take hold of that change and direct it to the betterment of society? Or do we let it in a sense happen, with ramifications that we may not be so happy about.
Josh Burek: You’re a co-founder of the Digital Dollar Project. How should American consumers think about the mix of digital dollars and potentially other crypto assets in the wallet of the near future?
Chris Giancarlo: So I think when we launched the Digital Dollar Project, there was some belief that we advocated a digital dollar to the exclusion of non-sovereign money. And that’s not at all the case and our writings on that subject make that very clear. We launched the Digital Dollar Project because we think the attractiveness of digital money will be too great for governments to forgo. Governments will, and we already seeing it. Uh, of the central banks in the world are all actively experimenting with digital money. Now governments will, and I believe the United States ultimately. Create a digital dollar for many good reasons. But I’m convinced that within a decade there’ll be a digital dollar.
And so we started the Digital Dollar Project to assert that the private sector has as much to say in what that dollar looks like as does the central bank. Money’s as much a social contract as it is a government construct. And so therefore I say in my book, that I think money is actually too important to be left to central bankers.
It’s design must reflect a healthy dose of society’s concerns. Whenever the United States has done something big technologically, whether it was the space program or whether it was the first wave of the Internet, there’s always been this sort of wonderful and kind of unplanned combination of private sector and public sector involvement and development. And so what we seek to do with the Digital Dollar Project is to bring that private sector input to bear. If the United States is – as I believe it will – eventually going to create a digital dollar, then we need to make sure that digital dollar reflects a broad range of, modern society, societal norms, and values.
Now at the same time, we do not call for the suppression of non-sovereign digital monies. If nothing else, the official sector has got a lot to learn from the now 12-year experiment in digital money that the private sectors have been embarked upon. But more importantly, as I explain in my book, I actually think the presence of both sovereign and non-sovereign money will keep each other honest.
What do I mean by that? Well, I’ve talked about these values that I think need to be built into a digital dollar and other sovereign monies and other non-sovereign monies. And that is economic privacy, economic liberty, lack of censorship. If either side, the private sector or the public sector, has a monopoly on money, the ability of society to vote with their feet and use a different form of money if they don’t feel those values are being upheld will then be limited. By having competition between non-sovereign and sovereign money, I think we can best protect those rights and liberties. And so we certainly don’t call for the suppression of private efforts right now.
But as I say, I’m convinced that the U.S. government will do this. I’m convinced every major economy, central bank will do it. And therefore we want to get out in front to talk about some of these values as well as design features, as well as the importance of greater financial inclusion of strong, protection against exploitation, against corruption of the system. The Digital Dollar Project recently published a series of privacy principles that we feel are essential to encoding in the digital dollar. And I commend everybody to our writings on this at DigitialDollarProject.org, our website.
Josh Burek: Crypto began with libertarian roots, Chris, but it’s easy to see ways that authoritarians could co-opt this movement for coercive ends. And you preview some of the Orweillian themes in your book. You write, “What if you were prevented from donating to advocacy groups for such causes as LGBT+ rights or Second Amendment freedoms, depending on your point of view?” How real are these risks?
Chris Giancarlo: Well, I think they’re quite real. I hope they’re not front and center here in the United States. But then again, you know, you do hear U.S. Senators calling on Amazon to stop selling certain books, online books about the origins of COVID or alternative treatments for COVID. And I don’t take any position, pro or con on those writings, but then again, the First Amendment is supposed to protect people [in] writing and retailing books on topics that they wish to take an interest in and may have people that wish to read.
And yet we have politicians calling for the suppression of that. We have politicians calling for suppression of videos on Facebook, etc. So these concerns are real. Where we see them perhaps more fully realized is in some of the non-democracies. China’s digital yuan will be integrated into their social credit system.
So if you criticize the government, you suddenly will find your digital yuan disabled from being able to purchase or a rail ticket out of your village. Or worse, being able to ration the amount of food you can buy or the apartments you can rent. We’ll have to see how that manifests itself. But I think the price of liberty means eternal vigilance of its citizens.
We need to make sure that a digital money that gives powers to governments of this magnitude – the ability to turn it on and off – that that power cannot be exercised. A free society must be, it must enjoy economic privacy, must enjoy freedom from censorship in its use of money for legal purposes.
And if governments ban certain practices in a free society, they should be able to be voted out of office if that’s what society feels. So we have to have digital money that is free of censorship.
Josh Burek: It seems fair to describe the crypto movement as less a technology with philosophical implications, then a philosophy with tech implications. You conclude “CryptoDad” with a robust defense of democratic capitalism, and even the Golden Rule. You write, “For an emerging generation fascinated by crowdsourcing, free capital markets are the ultimate in crowdsourced decision-making.” Crypto Dad, are you trying to make free enterprise cool again?
Chris Giancarlo: I think free enterprise is still cool. I had the privilege in my time as CFTC Chairman to travel to over half of the United States. I walked on factory floors. I visited with grain elevators. I milked cows. I went 900 feet underground in a coal mine, 90 feet in the air on an oil rig, and 900 feet in the air on a crop duster.
You know, once you get out of the Washington beltway and perhaps some academic institutions, free enterprise is wildly popular in the United States. I mean talk to small- and medium-sized business owners. They love free enterprise. Talk to our rank and file people, talk to people around the world that do not enjoy economic freedom, and they will tell you that they wish that they enjoyed the type of economic freedom that we have in the United States. I think economic freedom, I think economic liberty, is the source of so much human creativity, so much potential to make our lives better.
Now, does it have its downsides? Absolutely. Do regulators have a role to sanction improper activity? We need robust law enforcement. We need robust regulation, but at the heart we need the energy and dynamism and the aspirational aspect of free markets. And so, yes, I’m an unabashed believer in economic freedom, economic liberty, and free capital markets free of state manipulation.
And I make no apologies for it. I believe it works. I think wherever you see it in the world, you see people have rising means of greater aspiration for themselves and for their children. And I think wherever it’s denied, you see stagnation, you see rationing, you see ill health, you see shortened lives, you see lowered expectations. So I’m a great believer. I think it’s really popular in most of the world and here in the United States.
Josh Burek: As parents try to teach their kids sound money habits, how, if at all, should the best practices that they preach change as the nature, or at least the form, of money is changing before our eyes?
Chris Giancarlo: That’s a great question. I think about that a lot myself, both in my own portfolio and with my own kids [who] are in their 20s. And I think still a lot of the old adages apply about diversification, about risk balance, about long-term investment strategies and long-term investment horizons. In a time of a changing paradigm, which is where I think we are right now, I think there’s tremendous risks, but I also think there’s tremendous opportunity. One needs to both be looking long-term at the opportunities of the future, but be flexible in the short term, because of how quickly things can change. What seemed like a good investment in a particular sense a few months ago can change very rapidly.
So I think the advice I would give is to keep our eyes on the long-term goal, that the nature of money in financial services is going to change rapidly. Look for the legacy systems that are attempting to adapt to that change and get out in front of it and look at the new entrants that have their eye on the long-term transformation and have a range of business offerings that take advantage of that long-term transformation. And least that’s the approach that I’ve been taking.
Josh Burek: One of my favorite authors, George Gilder, once wrote that the central event of the 20th century was the overthrow of matter. Chris, do you think we’re on the cusp of overthrowing matter in money or will physical cash be with us for as long as the eye can see?
Chris Giancarlo: Well, that’s an interesting question. First of all, George Gilder is also one of my favorite authors and I’ve had the great pleasure to meet him a few years ago, and, in fact, cite him in a number of cases in my book. I don’t know. I have to think about whether this is a matter of overthrowing matter. I’m always reluctant to make as bold claims for that. Sometimes things take a lot longer than one thinks, but I do think this is, as we began the conversation, a truly transformational change. And in some ways, it’s a back to the future change because, if it is truly the reestablishment of digital tokens, I think that’s something that has tremendous appeal to non-elites around the world, to the traditionally financially excluded, because as I explained, tokens are intuitively understandable by humans.
It’s almost as if that system is encoded into our DNA going back to the mist of time. You asked about physical cash. You’re already, we’re seeing societies, modern societies, advanced societies, like Sweden, actually doing away with physical cash. And I think you could actually see China eventually do away with it.
If we do away with physical cash; there’s an anonymity that comes with physical cash. There’s an economic privacy that comes with physical cash. As societies do away with physical cash, this issue that I’ve raised about economic privacy and digital money becomes even more important, it becomes even more essential that we make sure economic privacy is written in digital money, if governments were to do away with [physical] cash.
Josh Burek: Chris Giancarlo, you’ve given us a lot to think about. Thank you so much.
Chris Giancarlo: My pleasure. This was fun. Thanks.
Julie Balise: Immutable is a production of the Belfer Center for Science and International Affairs at Harvard Kennedy School. Our program is produced and edited by Josh Burek, Director of Global Communications and Strategy. The Associate Producer and Technical Director is Benn Craig. Digital Communications by me, Julie Balise. Thanks to Deb Henderson for our podcast artwork. Upcoming episodes and additional information can be found at belfercenter.org/immutable.