Wall Street, Regulation, and the Future of Money | J. Christopher Giancarlo

David Hoffman:

[0:02] Bankless Nation, I have the pleasure of being joined with former CFTC Commissioner,

David Hoffman:

[0:06] Commissioner Chris Giancarlo. Chris, welcome back to Bankless.

J. Christopher Giancarlo:

[0:09] It's great to be back, David, and I hope it's been sooner than five years. I know it was at least five years, but I think we've done one more recently. It's great to be with you.

David Hoffman:

[0:19] You have been in my arc in crypto the entire time. And I remember maybe to start off, because your book is very personal. We're going to talk about the book that you wrote. I've got it here on my desk. The first time you came across my awareness was when I was first getting into crypto. And my imagination was going wild. And I was paying attention to your hearing when you became crypto dad. And I was a young millennial, barely an adult at the time. And I heard this older gentleman who had already had this established career advocating for the curiosity of these young kids growing up and finding crypto. And I remember getting very emotional in that moment, feeling very heard as just a young adult coming into the workforce, being interested about tech. And so your arc throughout crypto has been with me the entire step of the way through your tenure at the CFTC and beyond. And now you've got a second book out, The New Adventures of Crypto Dad. Got it here with me. Maybe just start there about this book. Like, why did you write this book? What does it mean for you? And really, who is this book for?

J. Christopher Giancarlo:

[1:33] Thank you so much. And that is really touching. You know, when you go into a hearing like that, you don't know who's listening or what impact it's going to have. And quite frankly, I was speaking to people, for the most part, even older than me, a lot of old senators, and they're almost by definition fairly old in that body. And I was trying to say to them, don't turn your noses up at this innovation. Don't treat it with disdain and derision. There's a lot of young people that are truly fascinated by it that see it as a huge opportunity to actually engage in the financial system. And rather than taking an old boomer view that this is beneath us, there's nothing wrong with the financial system. There's no problem to be solved. It worked for us. Paper checks were good enough for us, why they shouldn't be good enough for the next generation. I was trying to say to them, look, you know, we owe it to the next generation to get the rules right. Let's not create an environment that's filled with fraud manipulation. Let's create a smart regulatory framework. So that was the, you know, that day, that's who I was trying to reach. I remember John Kennedy said at the hearing, and it's in the transcript, he said, I still write with a quill pen. Why should I have to learn about a new technology? And my response was something to the effect of, well, you can learn about it or not learn about it. It's going to happen anyway.

J. Christopher Giancarlo:

[3:02] And so maybe it's a better idea to learn about it. But that was the audience I was trying to reach. But in fact, as you know, it reached a much broader audience. I came into that hearing with about 1,500 Twitter followers. I left with about 45,000, and they had given me all these nicknames, including Crypto Dad, which is the name that I liked and have adopted and have used in a way to communicate. And as you ask the question, what am I trying to do with the new book? A lot of what I tried to do with my previous book is to, Speak to a broad audience, not just a crypto aficionado audience, but a much broader audience and explain that this is not just some, you know, funky new alternative asset class. This is a whole new architecture of finance. And it's going to change everything we know about banking and finance and even money itself, with the same profound impact that the first wave of the internet had on information gathering and social networking and communications and commerce. This is a new wave of the internet. It's almost as if the internet is finally getting around to setting its sights on finance, finally getting around to setting its sights on banking, finally getting around to setting its sights on money.

J. Christopher Giancarlo:

[4:24] And none of those things are going to be the same when this wave completes its course.

David Hoffman:

[4:29] When you were talking in your hearing to the congressmen and senators, and you were imploring them to take this technology with curiosity, with openness, rather than with cynicism, do you think they listened? Now that it's eight years later, that hearing happened in early 2018, coming up on a decade now, they, the royal they, the collective they, did they listen, do you think?

J. Christopher Giancarlo:

[4:53] Well, you know, I ended that plea with, let's create a smart regulatory framework. And judged by that plea to them, they were not listening because here we are eight years later and we still don't have that framework. And the clarity bill got passed in the House. It stalled in the Senate. So many of those same senators couldn't find the will to put forward that regulatory framework that I called them to do. And candidly, I don't know how many of them were listening that day I spoke to them. It seems as if it was more people in the Twitter sphere that were listening rather than senators. I don't think they paid any attention to crypto until Sam Bankman freed.

J. Christopher Giancarlo:

[5:35] And Sam Bankman-Fried embarrassed them because of his campaign contributions. As I write about in this new book, I think that's where up until that point, crypto wasn't really Republican or Democrat thing. It wasn't political. It wasn't political really for the first year or so of the Biden administration. It didn't become political until Sam Bankman-Fried. And I think the embarrassment factor led Democrats, certainly the ones that are in the in the camp of Elizabeth Warren to take a, the best defense is a good offense. Rather than admit that maybe we got too in bed with a guy who turned out to be a fraudster, they went on to attack mode and became very hostile to crypto. And also, as I write about in the book, Donald Trump took advantage of that. He recognized the political opportunity and pitched in with support for crypto.

J. Christopher Giancarlo:

[6:31] So it was a combination of Sam Bankman free, then the election and the money from Fairshake woke a lot of these senators and congressmen up to the power of crypto. So I think it was a political response to crypto. And these are things I write about extensively in the new book. I'm hoping that we're back to a non-political approach to crypto. I'm hoping that now it's becoming so ingrained, a generation that's grown up with it are taking it forward. And the Luddites in the party have now moved on in many ways. Now they've set their opposition to innovation to data centers, and they've set their opposition to AI, and maybe they'll leave crypto alone.

David Hoffman:

[7:15] This is actually one of the threads I really want to pull on with you now that I have the opportunity. You kind of have some inside baseball, some inside perspectives, because you were in some pretty key meetings watching the Democrat Party and the Republican Party kind of choose sides, you know, position themselves around the crypto industry. There was that famous meeting with Mark Cuban and Ro Khanna decently into the Democrats' hostility towards crypto, trying to get the Democrats to open up to crypto. You also talked about in the book how just there were relationships with Elizabeth Warren and the banks. My question to you is, was Sam Bankman freed? Did that episode with the Democrats mostly or completely explain Democrats' hostility to crypto? Or are there other things to also discuss when we ask the question, why did the Democrats hate crypto? How did that happen?

J. Christopher Giancarlo:

[8:11] So, you know, we all sometimes can be fall into the camp of overgeneralizing. And I think it's an overgeneralization to say, you know, all Democrats were opposed. There were some and there still are people like Kristen Gillibrand, who I think is really smart on on crypto issues and very positive. And the new senator from Maryland, also Brooks. And there's several others.

J. Christopher Giancarlo:

[8:36] I don't think it's, you know, a Democrat Party thing. But it's definitely the Elizabeth Warren thing. And, you know, Elizabeth Warren likes to position herself as a friend of the little guy. But, you know, her campaign contributions come from a lot of large banks. And I think in some ways, the resistance to this innovation.

J. Christopher Giancarlo:

[8:56] Sadly, and I write about this in the book as well, our American banks have used their Washington lobbying clout for the last 40 or 50 years to resist every innovation. They used it to resist interstate banking. They used it to resist chips in credit cards to keep the old swipe cards. They used it to resist ATM machines. They used their lobbying cloud. It's almost as the lobbyists run out to the countryside and tell community banks, that the sky is falling. There's some new technology that's going to hurt banking. Then they get the ascent from the banks to go back to Washington and fight the innovation. And it may be a short-term win. It's a long-term failure because eventually these community banks have to adopt the new technology anyway. And I think once again, crypto came along and the bank lobbying groups ran to their members and said, the sky is falling. We need to fight this. Give us more and more resources to do that. And we'll get a win for you. And, you know, we'll we'll you'll salute us. And I think that's what happened. And they fought clarity. And the sad part about that is, you know, banks from coast to coast are eventually going to have to adopt tokenized deposits anyway. You know, the whole financial system is moving forward.

J. Christopher Giancarlo:

[10:16] To digital rails and resisting, you know, regulatory and authorizing statutes only delay the inevitable and wind up hurting these regional banks anyway. So, but Elizabeth Warren fought the fight and Gary Gensler saw, I believe, that his pathway to becoming Treasury Secretary in a second Biden term was through Elizabeth Warren. And to get her support, he had to become the prosecutor of crypto. And as I recount in the book in great detail, he used a whole bunch of techniques from refusal to work with Congress on new legislation, to debanking of not just crypto companies, but crypto executives, to, refusing to write rules, and to widely abusing.

J. Christopher Giancarlo:

[11:04] His enforcement power. I detail in great detail the degree to which he used something called the Wells Notice, which is a common procedure by which the SEC informs firms that they're about to commence enforcement action. He used that to actually stop firms from doing business, even if there was no intention to prosecute them anyway. I mean, there was wild abuses. It's often said that Donald Trump and his administrations break norms, but the norm breaking that took place at the SEC under Gary Gensler is unprecedented, and it needs to be held to account. And I try to do that to some degree in the book. It's not political. It's just factual that the SEC was rogue for the last two years of the Biden administration. And I hope we never see that happen again.

David Hoffman:

[11:53] During the Gensler era, there was just a persistent question from the crypto community of just why? Why was he like this? Is your answer that crypto was just a means to an end for Gary Gensler to advance his career? It was just a strategic bet by Gensler to climb a ladder?

J. Christopher Giancarlo:

[12:12] I don't want to dump on him personally, but I do want to criticize the agency institutionally for where it went under his leadership. But I will say this, if one knows his career, I mean, he started out as part of the New Democrats under Jack Rubin and the Clinton administration that was opposed to regulating the swaps market. And, he was a friend of markets and a friend of innovation earlier in his career. So to become a, you know, there's a famous medieval Inquisition figure called Torquemada, prosecuted people that didn't have the right thinking. He became the Torquemada of the SEC, and.

J. Christopher Giancarlo:

[12:59] It really held back innovation. But I guess the big takeaway, David, is it didn't stop it. And in fact, the firms that persevered just got stronger. It's amazing under such heavy prosecution and persecution, you might say. Digital asset innovation did not die. It survived. And in many ways, it's stronger because of it. Firms now that survived that period of time are emerging as some of the leading firms now. And of course, now you're seeing all of traditional finance, including all the major banks, all the major infrastructure providers like Depository Trust, clearing corporation and swift and others are now all moving into this asset class are moving in adopting this technology why because it's more efficient why because it's lower cost why because it's much more accurate in terms of knowing where their things of value are their collateral their money and so under the most you know worst persecution one could see this this.

J. Christopher Giancarlo:

[14:02] Innovation didn't die, it thrived. And now the genie's out of the bottle. It's becoming so embedded that even if Elizabeth Warren were to be elected president someday and brings him back, I think it's too, the roots are going to be too deep in the ground to be ripped up. And we're on our way. I truly believe within the next 12 to 15 years, by the year 2040, the entire financial system is going to be moved from its current analog state into digital rails, distributed ledger technology and tokenization.

David Hoffman:

[14:38] Do you think the hostility towards crypto, which goes back as far as I can remember, when you were called into the hearing, it was right after the CFTC, under your leadership, approved the first Bitcoin futures. It was the first Bitcoin derivative product. In the world, by the way.

J. Christopher Giancarlo:

[14:58] It was the first regulated framework for crypto derivatives in any economy and anywhere in the world.

David Hoffman:

[15:07] Yeah. And I remember the tone of the hearing was not, hey, what is this? Can you please educate us? It was explain yourself. What did you just do? And so the hostility has been with crypto as far as I can remember up until modern times. I was definitely being called

J. Christopher Giancarlo:

[15:24] On the carpet. I was definitely being called on the carpet. Yeah.

David Hoffman:

[15:28] Do you think the era of institutional hostility to crypto is behind us?

J. Christopher Giancarlo:

[15:33] Well, you know, the reason I was being called on the carpet, you know who was really most annoyed at what we did? It was the Wall Street banks.

David Hoffman:

[15:41] Right.

J. Christopher Giancarlo:

[15:41] They were the ones who were annoyed. You know, they were the ones that were taking out full page ads in the Wall Street Journal. They were the ones behind getting the Futures Industry Association to write letters to Congress saying, you know, you better rein in Giancarlo. He's, you know, he's off the rail. He's off the chain here. And the reason they were doing that is because they were unprepared. It was moving faster than they wanted to go, and they did what they usually do. They ran to their politician friends to try to get them to gang up on me. But I felt as if, look, if Congress wanted to ban crypto, they had all the authority to do so. But if they didn't ban it, if it was a legal product, and there were some people that wanted to trade it, then it was my job. It was my duty to put a regulatory framework around it.

J. Christopher Giancarlo:

[16:32] I felt as if I was doing the thing I was there to do.

David Hoffman:

[16:35] So you opened the door to the very first derivative product at the CFTC as it relates to crypto. The march has continued after your tenure. We've got CME Bitcoin options, Ether futures. We had down market altcoin futures, physically settled futures, and most recently, perpetuals. Was that the normal arc for the CFTC? Was that about what you expected? Was there anything, has the CFTC missed something? How would you evaluate or give a report card to the CFTC's progress after your departure?

J. Christopher Giancarlo:

[17:07] Well, look, eight years later, after we did that, that market today, it's deep, it's liquid, it's transparent because it's on a regulated exchange. And most importantly, it's well-regulated. I mean, it's well-policed against fraud and manipulation. So I think it's been an enormous success. Whenever you see the CFTC green light, a new asset class, it's almost for everybody involved, it's a test case. And the CFTC usually does not allow a self-certification of a lookalike product for a couple of months because it's now getting all of its surveillance techniques in place. It's developing its metrics. It's developing its pattern recognition capability for that new asset class. It's gathering data from the exchanges that are sponsoring that product.

J. Christopher Giancarlo:

[17:58] It's usually assigning an analyst or two to monitor that product, start becoming familiar with trading patterns, become familiar with market liquidity issues, becoming familiar with how it trades over the course of five days or seven days or however the pattern is. It might start working with overseas regulators that have lookalike markets to see if there's some information sharing. And once it develops familiarity with the asset class and the product set, now it's ready to start, you know, moving to different durations or different settlement periods and variations on the original. So we knew that greenlighting that first Bitcoin future was now going to give our agency time to start mastering the product, mastering.

J. Christopher Giancarlo:

[18:47] All the different trade flows and liquidity profiles, so that as new products came online, Ethereum futures, XRP futures, Solana futures, et cetera, et cetera, the CFTC would now have started to build some. What people from the outside don't understand or don't really appreciate is the degree of really market expertise that are in an agency like the CFTC. You know, we don't have a disclosure regime the way the SEC does. We're primarily an anti-market manipulation agency. Our job is to really understand market dynamics. And I think there's few agencies...

J. Christopher Giancarlo:

[19:28] That do that as well as the CFTC globally. I mean, compared to our counterparts around the world, one of the reasons why we don't merge the two agencies, the SEC and the CFTC, is because of all this experience, all this surveillance and market dynamic understanding the CFTC has that's unique. Agencies around the world that are primarily securities agencies, they do a little bit of derivatives, they don't have that same degree of market expertise. The CFTC is really good at that. And I have every confidence that the CFTC monitoring, of these listed futures, crypto derivative futures markets is excellent and superb. And they probably uncover a lot more misbehavior than they ever talk about. And they put a stop to it and penalize firms for doing it because they really

J. Christopher Giancarlo:

[20:15] are the masters of understanding market dynamics.

David Hoffman:

[20:18] One of the main questlines in crypto these days is the growth of the Perpetual, which is a brand new financial instrument, absolutely under the jurisdiction of the CFTC since it's a derivative. It's not often in humanity's history that we create new financial instruments. It's actually a very rare event. It's like a star is born type of thing. Put us into the shoes of what it's like to be at the CFTC within the birth of a new financial instrument. What does the CFTC need to do in order to do its job on something that's brand new?

J. Christopher Giancarlo:

[20:50] Well, so I might push back a little bit. Perps have been around for a while globally. And the CFTC has actually never, unlike some jurisdictions that ban them, the CFTC has never taken that position. They've taken the position that if you're serving retail, they've got to be on a proper, fully licensed exchange, not on like a light exchange light structure. So what we call a DCM or a designated contract market.

J. Christopher Giancarlo:

[21:18] The reason why our default thinking about derivatives is that they have a settlement date is because most derivatives come out of the ag sector and ags have a cycle. You plant in the spring and you harvest in the fall and you take your harvest to the grain elevator to the market at harvest time. And so most agricultural derivatives, which for the longest time, most, I mean, 100% of the CFTC oversight were of derivatives of things that came out of the ground and had a growing season. That's why most products have this default date. But there's nothing that says you can't have a rolling settlement date with no final settlement. And once the CFTC in the 1970s started accepting products that didn't come out of the ground, which are based on benchmarks, such as interest rates and exchange rates and developed the notion of a financial future, it only became in many ways inevitable that eventually it would also not be restricted to only fixed settlement dates. It could go to what we call perpetuals or rolling settlement dates. And so it's really not, it is new in terms of the degree of retail engagement in these perpetual markets and the desire to bring them on shore.

J. Christopher Giancarlo:

[22:43] But as a product goes, they're not, you know, they're not so novel.

J. Christopher Giancarlo:

[22:48] That the CFTC is struggling to get their heads around it. It's actually something the CFTC, I think, is quite up for. And I really do commend Chairman Selig and his desire to not have new markets develop offshore the way the United States allowed.

J. Christopher Giancarlo:

[23:05] The euro dollar market to develop offshore because of boneheaded regulations in the United States. You know, the reason why for many years we priced our mortgages in LIBOR, the London interbank borrowing rate, is because in the 1970s, in order to control inflation.

J. Christopher Giancarlo:

[23:24] The Federal Reserve put a cap on how much interest American banks could pay on dollar deposits. So what did people do? They put their money offshore in banks that paid a higher rate. Of course they would. And the London banks paid a higher rate. So dollars started accumulating there because of bad American policy. And because the money was accumulating there commercially in depositors fighting for the best rate, the London rate became the real rate.

J. Christopher Giancarlo:

[23:56] Of borrowing and lending because it wasn't subject to an artificial cap. And that's why LIBOR, the London Interbank Borrowing Rate, was based on an overseas rate. And it became part of our entire financial system that we're relying on dollar deposits offshore. So bad policy can sometimes force things to happen offshore. And Mike Selig was very concerned that global perp markets, which Americans wanted to access, would develop offshore only. And he was determined, let's bring it onshore not only do we support the American economy, we actually then can apply American regulation to it so American investors can benefit of their home state regulation rather than the regulation of Singapore or the Philippines or some other foreign jurisdiction. So I think this is the right move. I think the CFTC will not struggle to get their heads around rolling expiration dates, perpetual futures. I don't think it's that technologically that hard of a leap. And I'm very confident the CFTC's got this. I'm not, I'm not, I'm, I think, look, I think decentralized markets like hyper liquid are much bigger than,

J. Christopher Giancarlo:

[25:04] intellectual and policy bridge or a chasm to cross than are perpetuals.

David Hoffman:

[25:11] Your relationship with Mike Selig goes beyond just being excited to see him at the CFTC. You actually hired him at the law firm that you worked at before you became the CFTC commissioner. And then Mike Selig, who you hired, is now the CFTC commissioner. So it does seem to fit with the crypto dad motif of handing the baton off from the Gen X to the millennial generation. Talk about that story of hiring Mike Selig at your law firm. What did you see in Mike and how has your guys' relationship evolved?

J. Christopher Giancarlo:

[25:42] Yeah. So I teased him recently. I had the honor of introducing him at a law symposium at Fordham Law School two weeks ago. And I said, look, if people call me crypto dad, then Mike Selig is something of the crypto prodigal son because he wandered off to the SEC before we got him back to where he belongs to the CFTC.

J. Christopher Giancarlo:

[26:04] The history there is when I was a commissioner before I became chairman of the CFTC, Mike was a law student, George Washington University Law School in Washington. And I hired him as a law clerk and he worked for me and he actually helped me do some of my first work on Bitcoin, I gave a speech in 2016 at the Cato Institute calling for a do-no-harm approach.

J. Christopher Giancarlo:

[26:28] To distributed ledger technology generally, and Bitcoin specifically. And Mike helped me with some of that research as a young law student. He then went on to begin a practice in New York City advising crypto firms. I then went on to become chairman of the CFTC. But when I left the CFTC at the end of my five-year term in 2019, I joined the New York white shoe law firm of Wilkie Farn Gallagher. And I helped them build the practice we called Wilkie Digital Works. And Mike Selig, I then recruited from his law firm to join me at Wilkie and helped him make his way through the firm, eventually earning his way to be a partner in the firm and helping build that digital practice. And so Mike and I have a close relationship when the opportunity came in the new Trump administration for him to go to the SEC and serve as chief counsel to the crypto task force. I was very supportive of that. And I was also very supportive of President Trump's nominating him to serve as chairman of the CFTC, where he is today. Mike Selig is a remarkable, is a strong legal mind. He's got enormous energy drive. He shares my view that digital assets are more than just a new asset class. It's a whole new architecture of finance. And he also shares my view that innovation should take place here in the United States, should support American capital formation, American risk hedging, and the American economy.

David Hoffman:

[27:56] Well, between you, Chairman Selig, Hester Peirce, and also Paul Atkins, It seems we've finally grown an avengers of regulators who have discourse with the crypto industry, you know, advocate for us. Don't write us a blank check. I don't think any regulator has ever just written crypto a blank check, like has been fair and tough when the times call for it. But I think most importantly, just have engaged with us. And this is something that just gives me renewed optimism about the state of crypto when it comes

David Hoffman:

[28:29] to being regulated inside the United States markets.

J. Christopher Giancarlo:

[28:32] And, you know, in many ways, we're just refinding our mojo. I mean, financial market innovation has been part of the American way of life for a century or more. Do you know that up until the 1970s, every currency was anchored to usually a commodity that came out of the ground, often a precious metal? When the United States could have never gone off the gold standard. If we had not invented here in the United States, mostly in Chicago, the financial future. And that allowed holders of dollars to hedge the risk of interest rates, of exchange rates in deep liquid markets in Chicago and New York. The financial future was invented by Americans, Dr. Richard Sandor and Leo Malamed, great Americans, great innovators. And that financial the future, you might are, I could argue, is responsible for the last 30 years of globalization because, countries could use dollars as a means of currency, a means of trade, knowing that they could hedge the risk in America's deep liquid markets. And during that 30 years, more people have risen out of poverty than ever before in human history. And so it's American financial innovation with its shortcomings and risk that it takes of market rises and market falls that always come with innovation. And yet it's American innovation that I think has served the world well.

J. Christopher Giancarlo:

[30:00] It's incumbent on regulators to actually play small ball. Regulators shouldn't be sand in the wheels of innovation. They should be standing like mature individuals, working with innovators to say, OK, have you thought about this? Have you thought about this? How do we make sure we limit fraud and manipulation? There's always going to be bad guys. There's always going to be people that seek to steal people's money. But that's why regulators are there. They should work with innovators to make sure these markets are deep and liquid and healthy and robust and durable, but not try to, you know, insert themselves and say, we know what's best for everybody. We don't like this crypto. We're going to try to stop it. That's not American. I don't know where that comes from. That's not the way we traditionally roll in this country. We usually are open to innovation. We usually find a way to further it, but do it in a way that's smart and safe and healthy for consumers, for citizens, and for market participants.

David Hoffman:

[30:59] I want to turn to a few of the key questions that you asked in the book that I found particularly interesting that I want to get your perspective on. At the very beginning of the book, you begin with a question that I think I consider, I think about, you know, every single day when I think about crypto, which is, I'll just actually quote you here. The question, however, is whether the traditional hierarchy of value, custody, and allocation will be displaced by decentralized networks, or will they be planted by entirely new centralized hierarchies that have mastered this new technology but re-centralized it among themselves, or perhaps it will be a different third outcome? Can you talk about why this question is so important, and maybe what can you say about what you think the answer is shaping up to be?

J. Christopher Giancarlo:

[31:43] So it's, you know, it's a theme that, excuse me, that runs through the book. You know, I came out of, came into public life in the 1980s on Wall Street and have watched how.

J. Christopher Giancarlo:

[31:57] Through the years, the 80s and 90s, Wall Street really became the allocator of capital. And it was a philosophy really exemplified by Milton Friedman and before him, Frederick Hayek, that said the market may not be perfect, but it's the best way we know to allocate capital. And then the 2008 financial crisis came along and there was something of a rejection of that free market philosophy. And the rejection says, you know what, the market's done a rotten job of actually allocating capital, certainly to certain underserved communities. And therefore, we need a political component to the allocation of capital. And in many ways, the Dodd-Frank Act passed in 2010 was the victory of Washington over Wall Street. And people, I think, like Elizabeth Warren and others presume now to have a seat at the table in the allocation of capital. They presume to be able to say to Wall Street, look.

J. Christopher Giancarlo:

[32:56] Do what you do, but make sure you allocate capital to this constituency or that constituency. And in many ways, up until the crypto innovation, you had this sort of shared authority over the allocation, rough equilibrium between Washington and Wall Street. Well, crypto challenges all that. What crypto says is actually, we don't need bankers on Wall Street and we don't need politicians in Washington, to figure out how to allocate capital. We just got to get the algos right.

J. Christopher Giancarlo:

[33:28] If we get the protocol right, it should be colorblind and community neutral and should be able to allocate capital based upon whatever the algo standard is. And in many ways, crypto threatens the monopoly of Washington and Wall Street, with new participants from Silicon Valley and hopefully Main Street, challenging the hierarchy over the allocation of capital. And so I toy with this idea all the way through my book. And where I come out is, I believe the digital network future is going to be as complex as the analog past. It's going to be a sort of rough equilibrium between centralized power in the financial system and decentralized power. Bitcoin's not going away, and it's the best example we have of decentralized capital allocation. But at the same time, if you see what the major Wall Street banks are doing and working with DTC and others, they are making sure that they're still going to play a role in this digital network future. And so I use the example of the American Revolution, My book is being published in 2026, the 250th anniversary of the revolution. A year before the revolution started, Paul Revere warned.

J. Christopher Giancarlo:

[34:49] And triggered a decentralized network of yeoman farmers and tradesmen to attack what was then the most centralized power in North America, the British authority. And it decimated that authority in battles that took place at Cambridge and Lexington. And yet the war only ended seven years later when that British hierarchy was defeated by a new hierarchy of the American Continental Army supported by the French Army. But here's the point. What resulted was a government that was designed to be both centralized and decentralized with power centers at the federal level, but also power centers at the state and local.

J. Christopher Giancarlo:

[35:29] Level and divided government separation of powers. The notion that we don't want all power, political power centralized in one government, but we want multiple points of power and we want decentralization. And I think that's an example, that's sort of a model for where we, if we're lucky, and if we work hard, this new internet of value, this new decentralized ledger technology can take us. And it's not a foregone thing that it's going to end up there. It could also end up with enormous state control. That's where China is headed with their digital yuan to amass even more power in the central state. We need to make sure that as we build digital networks here in the United States and in the Western democracies, we build them in a way that actually returns power to individuals, gives individuals more autonomy to, over their financial wherewithal, more access to the system, more control over their own financial choices, free from control by either governments

J. Christopher Giancarlo:

[36:35] or big technology companies or big banks directing their financial decisions.

David Hoffman:

[36:40] Also, in the beginning of the book, you set on the theme of the 2008 crisis. You were born in the 2008 crisis working in the world of financial regulation. You were at a hedge fund?

J. Christopher Giancarlo:

[36:54] Is that right? No, I was at GFI Group, which then and today is one of the leading platforms for over-the-counter non-exchange trading of swaps. And our big product was credit default swaps, about 80%, somewhere around two-thirds or more of the world's credit default swap marketplace traded on our platforms. We were not directional. We just executed trades. We didn't take a position.

David Hoffman:

[37:20] Right. And you had an incredible perspective over the 2008 crisis. This is something I go back and forth on where crypto and Bitcoin especially was born out of a reaction to the 2008 crisis. And so some days I wake up and I'm like, oh, crypto is the antidote. Crypto will provide the buffer, the protection, the prophylactic for any sort of future 2008. And then other days I wake up and be like, we're building a parallel financial system. Just because we were built as a reaction to it doesn't mean that we actually have too much to do with solving some of the core problems that created 2008. Where do you stand on that? Do you think about 2008 frequently when you talk about and think about crypto systems?

J. Christopher Giancarlo:

[38:06] You know, we all fell down the crypto rabbit hole in our own unique way. I fell down it in the bullseye of the crisis, the eye of the storm, you might say. When I was getting calls from the New York Federal Reserve saying, hey, what do you guys do again? And I said, well, look, we're the exchange for things that don't trade on an exchange. We're the exchange for credit default swaps. And he said, right. Now, what are you seeing in the market?

J. Christopher Giancarlo:

[38:36] Excuse me. And I said, well, what we're seeing is that the cost of using these products, it's basically like an insurance product against the inability of a financial institution to pay out on its debt obligations. The cost of getting that insurance is getting more expensive by the hour. And he said, right. And he said, well, what about Lehman Brothers? And I said, well, Lehman Brothers are already gone.

J. Christopher Giancarlo:

[39:02] And this was weeks before they fell. And he said, well, what do you mean they're gone? He says, is it because the insurance is too expensive? I said, no, nobody will actually trade with them. None of the other banks want to trade with them because they don't think they'll be around in a few days to make good on those trades. And in fact, Lehman Brothers did, in fact, fall not long afterwards. But my point is this, David. At the time Lehman Brothers fell, the Federal Reserve added up all of the protection that had been written by the other banks against a failure of Lehman Brothers. And they estimated the cost that the other banks would pay out if Lehman fell, at $400 billion aggregate from the other banks. And then they figured, well, if all those banks got to pay out $400 billion, they themselves will have weakened balance sheets and then they may fail. And so what we need to do is stuff their balance sheets with cash the way a fire brigade wets down the houses surrounding the one that's on fire so that they would survive. Well, I knew then just intuitively because of our work on our trading floor that whenever one of these banks wrote protection against another bank, they would turn around and rehedge the protection. So if there was $400 billion in aggregate against the failure, Lehman Brothers, the net must have been closer in my mind to maybe $200 billion.

J. Christopher Giancarlo:

[40:19] And I spoke to a professor at NYU by the name of Bruce Tuchman, who had done some research. I said, Tuchman, what do you think? And he said, well, I think it's actually, they're more hedged than that. I would estimate that a failure of Lehman Brothers would only have a net impact of $80 billion of payouts from the other banks. Well, eventually, when I became chairman of the CFTC, I offered Bruce Tuchman a job as the agency's chief economist. I said, I'm going to give you all of our data. Run the numbers for me. Tell me what a failure of Lehman Brothers would have come up with. Well, that research was actually published by our agency, and it's now known as a result of that work that a failure of Lehman Brothers would have not triggered $400 billion in payout, not $200, not $80, would have triggered less than $9 billion a payout. Here's the point. If we knew in the summer of 2008 that a failure of Lehman Brothers would have triggered less than $9 billion, we could have let it fail. We could have let it be bought. There would have been buyers lined up around the block. We could have bailed it out. None of those things would have triggered a financial crisis. Because of the opacity of its balance sheet and all the other banks' balance sheet, we did not know. And crises happen when you have opacity because people don't know. If the Federal Reserve could have said, relax, everybody, a failure labor is going to trigger $9 billion, we might not have had a bank crisis.

J. Christopher Giancarlo:

[41:42] If all of those swaps had been on a blockchain, chain, we would have known. And to me, that was the light bulb moment. This technology is incredible. This technology should be the mutual ledger of all of Wall Street. If we can move Wall Street, and we are now, onto distributed ledger networks, things like bank crises, simply because we don't know the gross exposure, will be resolved. And so I fell down the crypto rabbit hole, looking at this as new architecture, better architecture, more efficient architecture, for the financial system, not just on Wall Street, but globally.

J. Christopher Giancarlo:

[42:23] And I remain, I continue to believe in that today.

David Hoffman:

[42:26] What does that actually look like? Because we are certainly in the era where institutional appetite for crypto, for doing some of the things that you just said is the highest it's ever been, which makes this a very exciting era to be in crypto. But the idea of putting swaps on the blockchain still feels a little bit opaque to me. I just don't imagine how that would work. Are these banks settling transactions on Ethereum using a layer two? Are they doing their own intranet blockchains? What is the actual like technical details to the best that you can imagine them for how this actually manifests?

J. Christopher Giancarlo:

[42:59] Yeah, well, we're such an early stage, you know, if you know, compare it to the railroad stage of the 1840s through the 1880s in the United States, you know, we're just laying that first rail between Baltimore and wherever it went. There's still a whole continent to be built and to be railroad beds across and new engines to be built. We're still in the very, very early stage of this innovation, and yet it's happening. And one of the areas where we're seeing a real important use case is what the Depository Trust Cleary Corporation is doing with collateral. There's over 50 of the most important financial institutions involved in this experiment. And yes, it's in an enclosed environment. The collateral is going to stay within Depository Trust Cleary Corporation, but within it, it's going to be put into a tokenized form on a distributed ledger. And once these firms get used to the efficiencies, get used to the cost savings, get used to not having to fund hundreds of different accounts, because now they can have absolute precision to the penny of where their collateral is, they're going to say, this is really cool. Now let's take it out of the zoo. Let's take this into the wild. And they're going to do it. You know, I used to run a public company, GFI Group.

J. Christopher Giancarlo:

[44:18] Our shares were issued in street name. We were lucky if we knew who 30% of our investors were. Well, imagine when shares are on a blockchain and we can have direct proximity with our investors. I think this is going to be as much demand driven as it's going to be supply side driven in terms of moving to these distributed ledgers. So, look, we're in early innings, but I have every certainty that, as I say, that by 2040, the financial system is going to be rebuilt on digital rails. Now, will there still be, you know, traditional share certificates around? Sure. I mean, Depository Trust still has bearer bonds in a vault somewhere.

J. Christopher Giancarlo:

[44:58] You know, Rome was built on top of the cities that came before. We will build this new digital financial system on top of the analog financial system. But the direction of travel to me is just absolutely clear. If I can send a photograph around the world in seconds, why can't I move money in the same way? If I can, you know, why is any money transaction completely intermediated by six different firms, and yet I can send a text message in no time This is the direction of travel. And I'll tell you what's going to absolutely get us there is the new generation coming into the financial system, a generation that grew up in their parents', basement trading game tokens. And suits of armor are going to say, I want to do the same thing with my money. I don't have patience for paper checks and branch banking.

J. Christopher Giancarlo:

[45:47] So this is going to happen because it's going to happen generationally.

David Hoffman:

[45:50] You carve out towards the end of your book a section to talk about privacy. And I think the antidote to 2008, as you say, is transparency, but that brings with it a double-edged sword, which is individual privacy, especially on public permissionless transparent blockchains. And right now, I think that is also one of the main eras that we are finding ourselves in crypto, the extreme levels of transparency is actually showing up in negative ways with home invasions, kidnappings in France. But then also you write a section about how the IRS demanded Coinbase to turn over a bunch of files about their customer's report, which was a violation of privacy. How do you think privacy unfolds as crypto progresses?