Mar 27, 2023

J. Christopher Giancarlo, Willkie Farr & Gallagher Senior Counsel and former CFTC Chairman, discusses the state of U.S. crypto regulation, as a deal has been finalized for what’s left of Silicon Valley Bank.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. All right. Joining us now with more analysis on first season's purchase of Silicon Valley Banks. Uh The rest of their assets is Chris, uh former FTC chair, Chris G Car, currently senior counsel at Wilkie Far and Gallagher Chris, always a pleasure to have crypto dad on the show. So your reaction first of all to a deal, but being finalized for what's left of Silicon Valley Bank, Christine. Good morning. Good to see you, Lawrence. Good to see you and it's good to see Nick, a great, great journalist there. Um Very interesting news. Um It seems to be Sunday night uh in the last few weeks seems to be a big news night for our, our friends in Washington to drop news about the uh their response to the sort of um run on the bank that we've seen in the last few weeks. I'm very pleased to see uh a credible buyer for Silicon Valley Bank as, as Nick pointed out a lot of the details um are still to come out as to exactly what's being sold and, and what's being done, um, during the last crisis, a lot of those deals were done much more quickly. Um, and it's, it's, I think we have a lot to learn about what's gone into the making of the soup, how these choices were made about who was able to buy and perhaps who was not able to buy. And of course, the sign assets are a very important part of the crypto ecosystem. So it'll be interesting to see uh what the FDIC plans to do with them. It would not be appropriate in my mind for the FDIC to hold on to that very important piece of infrastructure. So it'll be interesting to see what happens there. Uh But, you know, all of this um seems to me strikes me as a bit of uh Amos toward crypto, triggered uh a bit of a bank run um uh in, in some ways, makes the value proposition even more stark for a, a, an internet of value uh with the durability that comes with an internet based architecture of finance. You, you bring up this whole thing about uh how, how Washington is viewing uh uh crypto and, and we're seeing the sec right now, send wells notice potentially to uh to the, to coin base. And we're seeing uh the sec having these views that basically everything in crypto is a security. Now. Uh uh What do you think it, I, I mean, II I think you've met Gary against a couple of times. What would you say to him right now about this? Well, you know, like I, I, I'd like to avoid personalizing it. Um I think this is uh a Biden administration policy. Um and certainly the Financial Stability Oversight Council, which I have the honor to serve on uh uh has been uh uh somewhat asleep at the switch in terms of rising interest rates and impact on uh depository institutions. I haven't heard the FDIC uh sorry, the uh FSOC Financial for the Oversight Council talk about this risk to the banking system until just now when we have this crisis. So I think the better little better anticipation of the uh uh a sudden change in monetary policy over the last 18 months from 18 months ago, it was said to be transitory and now inflation is a real problem. We have rapidly rising rates and, and one could have anticipated the impact that would have had on our, on our midsize and our regional banks. Um And yet, uh it doesn't seem as if either the Federal Reserve System or um the FOC were particularly concerned with that issue. Uh At least as we've seen over the last two months as far as the Se C's approach. Um uh Look, I, I uh someone who was involved in the decision at the CFTC to designate Bitcoin a um a commodity under CFT CS jurisdiction and then did a lot of the initial work for Ethereum. Uh and, and, and other crypto before I left. Um uh you know, I think it's, it's not correct that all crypto is a security. Well, crypto is architecture, crypto is algorithms. Crypto is uh a, a means of recording value and it doesn't have to be uh monetary value or value using the internet as opposed to um uh double entry bookkeeping on proprietary balance sheets, which is the way we've done it for the last 400 years. Uh in the world crypto is, is a new architecture. Now, sometimes that architecture might serve a capital formation purpose. And in that case, the SEC absolutely has an important role in our constitutional system. We've designated the securities exchange Commission to oversee capital markets and capital formation and to the extent that crypto serves the purpose of capital formation, then there's a legitimate absolute role for the SEC with its long tradition of investor protection. How do you think sometimes that architecture serves as a commodity and not as a capital formation instrument? In which case, there's a role for the SEC, sometimes those algorithms serve as a uh a banking function. In which case, there's a role for our banking, right? And one of the above, do you think Ethereum has evolved into a security because it offers staking rewards? Well, that, that seems to be the developing position of the se of the SEC. And I'm not gonna use this opportunity to challenge it it's uh that, that view of theirs, I think ultimately, um in our consti again, in our constitutional system, the courts or Congress, he need to make those determinations. The SEC, the CFTC can act in the meanwhile until Congress steps in, until the courts step in. Um So we, we very much need Congress now to step in it. It, but it doesn't seem as if Congress is in any rush, at least in, in, in, let's say, in the next six months to a year, which as you know, in crypto is, is a decade uh to jump in and uh settle this dispute and it's gonna take a while for the courts to settle it. So, in the meantime, we have the SEC. Is there anything uh do you see the CFTC potentially challenging how the SEC interprets things? If so what ends up happening if you have two different agencies with two different views on, on how to regulate the same product? Well, it's built into our system that you've got that um uh instability until we develop. What is our national policy. You know, if you look at this in, in a very macro historical way, this is a new architecture of recording value. This is the internet doing to banking and finance and money itself, what it's already done to social networking, to entertainment, to information gathering, it's moved it away from rec record holding. Uh you know, we still hold uh information and proprietary ownership that we've opened it up to the internet in the same way the internet is doing. And to think that somehow we're going to turn that around and stop the progress of time is just naive. Of course, the internet is going to do it. But unite the United States as the dominant player in the last century's financial system. In the analog bank based proprietary balance sheet financial system is struggling with this change. It, it doesn't surprise me that we have forces of resistance and forces of progress battling out for what is going to be the United States. Now, other countries have worked this out. They didn't dominate the old system so greatly that they're going to resist this new transformation. They're gonna accelerate it. The United States is trying to work that out. Ultimately, the United States is as I think it was Winston Churchill said, after trying all the alternatives, the United States always does the right thing. Eventually we'll realize that our future is in an internet of value. Eventually we'll take a rightful place as a leader of this change. But right now we're still fighting out as to whether we're going to be a leader or whether we're gonna be a resistor to this movement of value away from proprietary balance sheets to an internet based basis. In the meantime, though, they it's going to, it's gonna be a while. So what happens? I I'm thinking about the next six months to a year which you know, is a long time for us. What happens, how, how do what end up happening on the outside? So, so my views from the outside are probably no better than yours. What I've really been focusing on this day is looking further down that road. I'm and I'm looking around the world. It's clear to me, very clear that the world is advancing with central bank digital currency. Many central banks reaction to this movement of value to the internet is to say if we can't beat them, let's join them. And it began with China which is as you know, already placed its digital yu on what it calls its ecny in over 240 million Chinese wallet holders. And that's an 18 month old figure, by the way, it may be double that number by now. But around the world, over 100 and 14 countries are working on central bank digital currency. 50 of them are advanced stages of development. 19 of the G 20 Europe has said they'll start beginning rolling out their digital digital euro by 2025. And Great Britain has said they'll have a digital pound by the end of the decade. So the question is what is gonna be the United States response to this? That's yeah, the perfect uh segue because we also learned last week that Senator Ted Cruz was introducing a bill aiming at blocking CV D CS at the federal level in the United States. Uh Governor desantis also in Florida want to ban it at the state level. And then we also hear from the FED wanting to create FED now. So where does that put the development of a CV C in the United States with the digital dollar project which you've been working on and what the FED is now wanting to release FED now and what we're seeing in policymakers wanting to ban them altogether. Well, with so much development going on and here in the United States, uh um a lot of public figures, leaders are now coming to this issue. You know, I've been focusing on it for about three years. A lot of folks are now coming to it and, and they are rightfully quite legitimately and I include Ted Cruz and this, I include uh uh congressman uh House Whip Tom Emmer. I include Governor Santis. They are rightfully concerned about how do we protect privacy, how do we protect people's autonomy in a digital based, an internet based financial system, a, a central uh uh a sovereign and non sovereign digital currency. And they are looking to the Chinese model, which is it, let's face, it has already created a benchmark for what a central bank, digital currency could look like. And they're saying that does not, that is not sufficiently private for our citizens that provides the state with the ability to not only surveil but potentially even censor people's economic choices. And they're saying just say no to that form of central bank bank digital currency where I differ with them is the assumption that we in America, the world's most ingenuitive nation history has ever known could not design a very different central bank digital currency. What I'd like to call a, a liberty coin, uh A AAA freedom coin where we actually as an affirmative choice, design privacy into this central bank digital currency. Why can't we counter China and to some degree Europe with a digital currency that actually affirmatively creates privacy and not even affirmatively operationally and transparently as privacy. So you don't need to have the government, trust us, say trust us, we're not surveilling, you build it into the architecture using open, open architecture so that people can satisfy themselves that they're not being surveilled. If the United States were to develop that form of central bank digital currency, that digital dollar would take over the world. Because aspirational people, the world over would want to use that currency as opposed to another central bank digital currency. That is a surveillance tool for a government. Well, we, it seems like we have an administration right now that I don't want to say it is hostile to crypto but certainly isn't friendly, as friendly as it was even a few months ago. Uh And then we have Governor DeSantis who, who seems to uh uh II, I don't wanna say call it exactly. Woke money. But, I mean, that's kind of what he was hinting at that, that, uh, CBD C he, he called it Woke Mo, yeah, basically III, I guess, I don't know if it was protesting a couple of years ago on the streets or rioting or whatever it was. But nonetheless, uh this is, um, this is something that is starting to become, I don't want to say a bipartisan uh issue but certainly that it seems like both sides don't have the same enthusiasm as they would have a few months ago. How, how do you get the likes of a Ted Cruz or a Ronda Santa to say, look, this is, this is the liberty coin. This is something that we can design that would be uh pro uh uh civil liberties, pro personal rights pro uh you know, and I wouldn't have AAA form of government censorship that would force, uh you know, it can only be used with certain vendors who, who hold uphold uh ESG uh uh regulations, things like that. How do you talk to a Senate? Uh Governor desantis, how do you, how do you bring them to the table? Do you bring them to the table? Uh And have you tried? Well, thank, thank you. I mean, look, unfortunately, and I wrote about this in my book Crypto Dad. We, we live in a time where almost every issue uh gets politicized down to a black and white, you know, if you're on the right. It's, yes, it's no, if you're on the left, it's right. It's a yes or no. Everything gets down to black and white with, with no nuance and, and central bank, digital currency to the uninitiated can be a scary thing. Especially if you're already, I, if you've observed the way government has, uh, uh, has, has surveilled and censored, certainly censored activity in the public square on Facebook and Twitter and youtube and, and, and follow the Twitter files. You realize government has instructed firms that are not subject to the first amendment to, to censor censor first amendment freedoms. And so it's a legitimate concern that central bank digital currency could be used in the same way to censor otherwise lawful activity. Right? You can imagine a left wing government says, uh, we don't, even though ammunition is legal, we don't want you to use or we don't want you to fund right to life. And then you can imagine a right wing government saying we don't want you to fund abortion or we don't want you to fund uh Planned Parenthood. And you know, it would be a ping pong ball depending on which governments in as to how you can use your money. Now, that's totally an illegitimate. I would call that a surveillance censorship coin. But what I'm advocating is let's go the opposite direction with these very concerns in mind. Let's unite the right and the left around the notion of, let's use our ingenuity to build a central bank digital currency that is not an exclusion to private, to private uh stable coins and others that exist side by side. But where privacy is built into your digital dollar. And let's, let's let me also disabuse another notion, the notion that somehow if we just let the private sector build a, a digital currency and stable coins that somehow build privacy will be protected there, you could very much imagine a government saying, OK, stable coin operator, you want your license to operate your stable coin, then here's the list of things we don't want that stable coin used to buy and ammunition or, or or contributions to controversial causes would be the top of the list. So there's nothing inherently superior about privacy, about the private sector doing sovereign money. The best protection and listen to me for this. The best protection of all in a future of digital money is choice that citizens have a choice between private operators of stable coins or central bank digital currencies that are properly designed with privacy at their center so that government can neither surveil nor censor lawful otherwise, lawful activity. So what is the status of this us digital dollar, this liberty coin? When when will we actually see something like fed now, which is a real time payments network that's going to be launched in July? And some say that it'll, it'll pose uh it will potentially override a lot of the um benefits of the CBC because it will already have it there. So, so how do you manage that? And, and when you actually see a pilot or a prototype that ordinary us citizens can use in terms of the US digital dollar? So the Fed now is an important project. But the FED now is basically modern, modernizing the fed's existing monopoly over wholesale bank payments. It's not a full blown digital currency. And um if, if you, you know my work, you know, I absolutely believe that the future of finance and banking and money is internet based. It is a digital internet of value. And I think whether the US tries to resist it under the current administration and by the way, every administration comes and goes, this won't last where we are today won't last forever. Uh The work that Jay Clayton and I did in, in trying to put a proper foundation under crypto has passed to where we are today. But then this will pass to another generation. The reason why this will happen is because the next generation below the septa genes that run things today, understand a network of value and they will bring that with them when they enter into government service. So this is coming, it's a question of it may not come now, but it's going to come. The real question is whether we get the values. Right. Right. The the most important aspect is not. What is it worth? The most important thing is what are its values? Do its values protect civil society and freedom? You know, all are our vaunted, constitutional rights, freedom of assembly, freedom of speech, freedom of worship are all based on how we spend our money. We pay dues to organizations. We subscribe to certain publications. We pay internet fees to watch this program. We, we tie to a church if a government can surveil and worse censor that activity, then those first amendment freedoms are gone. So we've got to get the values right in the digital future of money. And we cannot rely on the private sector to do that because they've already shown us that in return of making money and getting their government license in their favor with government, they'll do what they're told. We must insist that government offered money can, reflects the rights and the values in our constitution. And so that's why I started the digital Dollar project to advocate for that very form of digital money, not in exclusion to private efforts, but alongside and the more choice there is the more of a launch. No, but you know what uh um things happen faster. I, you know, I, I'm an old timer. I was back around in 2000 when the dot com crash came and I remember people saying that's it. E-commerce is dead. Nobody's gonna buy anything online anymore. Well, it was only a few years before ebay emerged before Amazon emerged and the infrastructure that was needed to build it out. You know, it wasn't that people didn't want to buy pet supplies online that killed pets dot com. They didn't want to do it using dial up mode waiting four weeks for the pet supplies to arrive. Right. The paypal wasn't around the, the payment systems didn't work. The infrastructure wasn't there. The same thing is going to happen. It's not that people don't want 24 73 65 digital access to goods and financial goods and services. They do. The infrastructure has got to be built up and the regulatory framework is got to be worked out and we're in that phase right now of resistance and pro progress competing with each other. And of course, we've had these spectacular frauds and flame outs and that hasn't helped help things either. And of course, we're going through a rapid change in monetary policy from free money to expensive money in a very short period of time. So we're in a very, you know, this is, it always is darkest before the dawn. This is a dark phase. What I tell firms right now is hang in there. The tide always change turns the pendulum changes. This is the future. Undoubtedly, we, by the way, young people are not gonna listen to their elders and be said and, and, and be told, hey, be happy with three day checking, be happy with three day settlement. Branch banking is kind of cool. Go back to branch banking. The world is not gonna go backwards. Young people are not gonna go back to their grandparents financial system. They grew up in a networked world. We wait for that digital dollar Chris we want, we want to see it. We want the options to them. Three days is, is how long they want the work week to be? Yeah. Yeah, because everything will be more efficient, right? All right, we gotta wrap it there. But thank you so much Chris for joining us as always. That was former CF DC chair and current senior counsel Wilke Farr and Gallagher Chris John Carlo. Also, Chris will be joining us as a guest speaker at Consensus in Austin next month. Check it out coin consensus dot co dot com for tickets and more information.

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