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Crypto part of 'multigenerational change,' need to get the regulation right: Ex-CFTC chair

·Senior Reporter
·7-min read
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Cryptocurrencies could usher in the next wave of innovation that will drive economic growth, according to the former head of the Commodities Futures and Trading Commission.

Prior to COVID-19, U.S. economic growth and productivity had plateaued, having the knock-on effect of stagnating wages. The post-lockdown era has unleashed a productivity boom and pushed up worker pay in the face of a worsening labor shortage.

But digital currencies could be the economic game-changer that puts the economy on a path to far more sustainable growth, according to Chris Giancarlo, the ex-CFTC regulator who’s now the co-founder of the Digital Dollar Project.

“The internet is going to do to finance and money itself what it's done to retail shopping, what it's done to information, what it's done to journalism, what it's done it to so many walks of life,” Giancarlo, who’s also a senior counsel to the international law firm, Willkie Farr & Gallagher, told Yahoo Finance in an interview.

Giancarlo believes cryptocurrencies are the key to creating a global, fully networked digital economy. He points to China as the first to do this, with the adoption of a central bank digital currency.

“All transactions in their economy, whether it be securities transactions, future transactions, commercial lending, commercial payments, retail payments, will be fully networked with their digital currency as almost the software operating system for a digital economy,” he said.

According to his logic, that will wring huge amounts of percentage points out of cost and latency out of China’s economy and drive the world’s second largest economy into hyperdrive in terms of speed and efficiency.

I believe that the emergence of crypto is very big. This is a multi-generational change in the nature of finance and the nature of money. The question is what is the right regulatory envelope for it to fit into.Chris Giancarlo, attorney and ex-CFTC chair

On Friday, digital coins were roiled by news that the world’s second largest economy declared all crypto transactions illegal, the latest move by Beijing to exert more influence over key sectors.

Citing a passage from his book, Giancarlo said China appears to be mimicking a “fight or flight” response of central bankers about whether to co-opt or clamp down on stablecoin’s success.

He pointed out that Beijing has been on the offensive against digital tokens since at least the early summer, moving to ban crypto mining, prohibit online platforms from facilitating crypto transactions and tightening the reins on mobile payments.

“​​Today’s announcement by China is just a more aggressive version of earlier announcements. It does not change my thesis in the least,” Giancarlo added.

‘Expensive burden’

Elsewhere, firms like Yellowcard Cardano, and others are rapidly moving to offer payment services, micro-loans, yield bearing accounts, and more to places in the world where the infrastructure does not yet exist in the traditional banking sector.

People in places like Europe and North America are quickly realizing that they can park their assets in accounts earning significant yield — sometimes as high as 10 percent or more — rather than leave them in a brick and mortar bank. `

The U.S. payment system is still clunky, often taking days to cash a check and 30 days for small businesses to receive payment.

“It’s a burden on the economy and it’s expensive,” Giancarlo told Yahoo Finance.

“The cost of transactions cost Americans 5% or 6% a year of GDP…are we going to allow our money as well to fall behind the times, when the rest of the world is moving rapidly forward and creating digital tokenized based money?” he added.

The former regulator believes the U.S. is in a space race when it comes to digital currencies. With more digital coins proliferating and investors piling in, regulators are increasing their oversight of the industry.

Giancarlo wasn’t sure if the U.S. needs to adopt a central bank digital currency in the near term, but America needed to be at the leadership table as innovation explodes.

The Federal Reserve is weighing the pros and cons of adopting a central bank digital currency and is expected to put out a white paper soon. When asked this week whether the central bank was falling behind in the crypto race, Fed Chair Jay Powell said it was “more important to do this right than to do this fast.”

Within the U.S. central bank there are diverging views. Fed Governor Lael Brainard is a champion for a U.S. central bank digital currency, but head of supervision Randy Quarles has expressed doubts.

Over the next decade, Giancarlo thinks that nation states will move forward, including the U.S., with creating sovereign digital currency. He noted it will be useful in paying taxes and other government obligations, and will be the dominant form of payment systems in most economies.

Key to making a central bank digital currency work is ensuring that Americans’ privacy is protected.

“If they censor their transactions— if one government comes in and says, well, we're going to disallow it, as China's doing, they're going to be able to disallow certain transactions,” he explained. “If governments start using digital money as a political plaything, they'll destroy value in it.”

Getting regulation right as crypto rises

WASHINGTON, DC - SEPTEMBER 14: Gary Gensler, Chair of the U.S. Securities and Exchange Commission,  testifies before a Senate Banking, Housing, and Urban Affairs Committee oversight hearing on the SEC on September 14, 2021 in Washington, DC. (Photo by Evelyn Hockstein-Pool/Getty Images)
WASHINGTON, DC - SEPTEMBER 14: Gary Gensler, Chair of the U.S. Securities and Exchange Commission, testifies before a Senate Banking, Housing, and Urban Affairs Committee oversight hearing on the SEC on September 14, 2021 in Washington, DC. (Photo by Evelyn Hockstein-Pool/Getty Images)

But in order for innovation to take root, regulators need to put in place the proper regulations tailored to the new digital asset class. “I believe in regulation,” Giancarlo said. “We've got to get regulation, but we've got to get it right.”

“I believe that the emergence of crypto is very big, Giancarlo told Yahoo Finance. “This is a multi-generational change in the nature of finance and the nature of money. The question is what is the right regulatory envelope for it to fit into.”

As the former head of the CFTC, Giancarlo was responsible for creating regulations to oversee crypto derivatives and futures as well as derivative exchanges. Current statutes written in the 1930s are antiquated, he explained, and while certain parts could be applied to the crypto world, the space also requires new rules for the road.

“Now we've got something that's fundamentally different than what we've had before, and we need to think about whether those regulatory schemes without any further amendment are fit for purpose or whether we do need to make some adjustments to them to better accommodate this technology,” he stated.

The former CFTC chair warns if regulators use regulations from a previous century that are not well designed for crypto and are inapplicable they will stifle crypto innovations.

Giancarlo suggests that one of the first steps Congress should take is forming a new class of regulations for crypto called non securities crypto, that recognizes the new architecture. The regulation would cover commodity and security-based cryptos, as well asspot markets.

“We don’t have a regulatory mandate for what's called SPOT, physical delivery exchanges of non securities, crypto, which is basically Bitcoin and Ethereum,” he said.

“So if Congress could fill that gap, then those two regulators could bring to it long, well-developed standards for how exchanges should treat customer monies, customer accounts,” he added.

While Giancarlo is bullish on the innovation that blockchain technology and the cryptocurrency space offer the economy and payment system, some current regulators are more skeptical. Just this week, Securities and Exchange Commission Chair Gary Gensler expressed that he doesn’t see much long-term viability for cryptocurrencies.

And Acting Comptroller of the Currency Michael Hsu said in a speech Tuesday that crypto and Decentralized Finance (DeFi) are on a path that looks similar to credit derivatives leading up to the 2008 financial crisis.

“I have seen one fool’s gold rush from up close in the lead up to the 2008 financial crisis,” said Hsu. “It feels like we may be on the cusp of another with cryptocurrencies and decentralized finance.”

The OCC head also cast doubt on whether crypto would help with getting more people into the U.S. banking system, and said just because something can be innovated, doesn’t mean it should. He noted that filling gaps could also lead to amplifying vulnerabilities within the financial system.

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