Right now,I think the legacy system and and the regulators who they'vecaptured are really trying to almost, stifleadvancement of this innovation to shore up the legacyfinancial system and the legacy regulatory system.The digitalizationof the financial system is already upon us. But what willcurrencies look like in the future and will central banksbe able to compete with the private and growing market of stable coins?To answer this question,I spoke to one of the most influential figures infinancial regulation, the ex chairman of the CFTC.Chris Jeanalo,AKA crypto dad.Chris, thank you so much for taking the time, to chat withus. I'm very excited about chatting today.On so many different topics. Jay, great to be with you.As you've said before,there is a generational gap appearing now. And I think,you know, whether it was your generation,there were other social issues, whether it was Vietnam,more in things that were separating, generations.Now there's there's a typical lower trust of the youngergeneration that call them sub thirty fives on some of thebigger institutions like banks.Can you just talk a little about that?Yeah. So so I'm I'm a proud dad myself.Of, of three twenty year olds that are out in the worldtoday. But, you know, they grew up in a different world.My my generation established a relationship with a bankinginstitution as really the second one to their own school years.But this generation has had relationships with social mediacompanies with online retailers and mobile device providerslong before they set foot into a branch bank.And I think the banking system and and all the theinfrastructure that goes with it, the regulation of it,the central banks have lost the trust of this generation. And Ithink they're struggling to regain it while things likeBitcoin and crypto's got come around.And it's really interesting to watch the Washington response.I, as you know, I spent five years there.Cause I think Washington is really trying to understand whyit is. That their regulatory structures,that their their banking institutions don't enjoy thetrust of this generation.A generation's much more comfortable in an online world,in a in a digital tokenized based,money system,the the then then say my generation.Concepts which are just quite alien to let's say my parentsor the generation of gloves.In fact, you're quite a pioneer to be a man in his, proudly, in his sixties,but you're someone who's certainly among the very fewwho understands that this is the future.So what is happening to try and convince this older generation,the people who are assessing the rules and regulations seeit from the point of view of the younger generation. I really think,if I were to analogize this generation to a popular movie series,I think we're in the empire strikes back segment of the of the trilogy.Right now,I think the legacy system and and the regulators who they'vecaptured are really trying to almost, stifle,advancement of this innovation to shore up the legacyfinancial system and the legacy regulatory system. Remember,our our regulations, whether under the SEC,the thirty three and thirty four act,that's nineteen thirty three, nineteen thirty four,In the case of the CFTC,it's the nineteen thirty six commodity exchange act.These are ninety year old regulatory frameworks.And the principles behind them, of adequacy of disclosure, of registration,of of orderly markets free of fraud manipulation are soundprinciples, they're sound policies.But the formulation of those policies are based on on ananalog physical world.They they the formulation of them is really inapplicable tothis new wave of innovation.So what do you do for your regulator? Well,one choice is to simply say stop the world.We like it the way we are.This evolution must exist for the convenience of regulatorswith regulatory frameworks they're comfortable with.Or as as we tried to do when I was at the CFTC, is say we haveprinciples that make sense,but how do we apply those principles in a new,evolution of the internet, a digital world.And so there's gotta be some give in the system if youbelieve that this innovation as I believe as I do can enhanceour financial systems and make it more inclusive, lower cost,much faster for our fellow citizens.I believe this innovation can help us do that,but only if we give it room to breathe.And I think that's really the path that regulators need tofollow. Okay. So that's,leads me on to what I was hoping to really get into with you.It seems to me like central bank digital currencies areinevitable. I mean, I know obviously,China is is pressing ahead full charge, but the private digitalassets, they don't seem to be going away, and they seem tobe, in fact, growing in popularity. So my question toyou is, do you feel that these two,currency sort of ecosystems can coexist?Are there any hurdles to those ecosystems coexisting?I hope they can coexist.And I actually agree with you that I think central bankdigital currency is inevitable.I believe every major central bank in the world is going todevelop their own central bank sovereign form of money becausethe attractiveness of it is just too great,whether it is the the capturing the data of the economicactivities of citizens as China is doing with their digital u one,whether it's modernizing infrastructure as Singapore is doing.Whether it's greater financial inclusion for citizens as,the Bahamas are doing with their sand dollar. Whether itis for greater monetary policy precision as we wish we couldhave done in our first response to the COVID crisis whenissuing paper checks to people that couldn't either get out oftheir house to the bank or didn't have bank accounts did,or whether it is the rise of stable coins,which has put central banks into what I call a fight or flight moment.Or whether it is geopolitical influence as China's do withtheir digital currency,or most importantly as it is enhancing hopefully the rightvalues in the digital future money values of economicprivacy and lack of censorship.So I think there's a whole host of reasons why every majorcentral bank in the world is gonna move forward with a deCentral Bank digital currency. But as I've written in my book,I actually hope that we have a world of competing sovereignand non sovereign money. And why is that?Because I'm afraid if anybody has a monopoly on this,whether it's a central bank,or whether it's big technology companies. The,gathering of information,the invasion of our financial will be too great of atemptation for all of them to resist.And only if we have competition,could we actually choose a a a a a digital currency sovereignor non sovereign that best protects our privacy.I'm hoping that the United States respects its fourthamendment guarantee privacy encodes that in the future of a digital dollar.But only if there is and this is to your point,competition from the private sector,can we be best assured that they will? So will central banks allow,a situation in which I could buy my things on Amazonusing the central bank digital currency.If I want to donate to a political party and I want tostay anonymous, I could use, you know,a private market currency.Do you think that is a situation which could exist it could.I mean, I think it's gonna take an enlightened approach.The first wave of the internet, the internet of information,developed as a public private partnership,the US government's department of defense work, and,the explosion at Silicon Valley of of enhancements of thatdigital commerce, etcetera,came into a regulatory light zone in Washington. Why?Because of our long standing principles of freedom of speech.The first amendment protection freedom of speech meant there'sno alphabet soup of Washington agenciesprotecting speech. Right? There is no ministry of truth,no ministry of information.But this wave of the internet,what some people call web three point o,the the internet of value is going head on into a regulatoryheavy zone in Washington.We have an alphabet soup of agencies in Washington whosejob it is to protect things of value. We don't have one bankregulator in Washington. We have three.We don't we have fifty states of bank We don't have onemarket regulator in Washington. We have two.Plus many states have securities regulators as well.We have long presumed a balanced role for thegovernment in protecting our assets.We accept that in a democracy. We have bank regulation.We have market regulation.And so this wave of the internet is encountering aregulatory heavy zone those regulators don't wanna yieldground that they've taken ninety years to gather.So a lot of this seems to be,and if there is a lot of resistance about who owns the data,And it's funny because I've heard you speak about this before.It's like we're very unwilling to hand our data over to government,but we do it to Facebook and Amazon every single day and weseem to have no problem with that.So is that something that you think we just need to kind ofchime change our mindset about? I'm really worried about that.We are, just as you say,very about giving our money our information over to big tech companies.Very different in Europe where they have a law preventing bigdata companies from gathering for the g g g d p r. Yeah.And interestingly under GDPR,there's no restriction on government gathering information.So the European approach is is is very these are reverse ofthe Americans. They're sensitive about commercialgathering. Okay. With government gathering.We're hypersensitive about government gathering,but we're not as hypersensitive believe we should be ever sincethe Patriot Act in nine eleven. Gradually,we've been giving more and more of our information togovernment, and that is concerning.I do believe that my generation is the one that's relaxed aboutthis. I actually think that younger people,the reason why Bitcoin is so attractive is because of itscensorship resistance.And I hope that the wildfire that's caught the attention ofyounger people about concerns about censorshipextends to the development of a digital dollar,which I think the US government, ultimately will do.The questions are whether Bex privacy or whether it's a meansof not only information gathering,but censorship of our economic activity. Okay.So I'd love me to explain a bit more about this because I thinkit's it's a concept.I struggle to get my head around a little bit aroundprivacy, which I think is just such a huge topic.When it comes to Bitcoin,Who can see the the data involved in every singletransaction? Like, who is open to be able to see that?And when it comes to central bank digital currencies,who is open to be able to see all those transactions. Yeah.I kinda need to paint a little bit of a conceptual picture.From the dawn of of humanity,until four or five hundred years ago.There was really only one form of money,and that was tokenized money. And with tokenized money,the beauty of tokenize money is you do not need to give up your identity.You walk into a deli and you buy a ten dollar sandwich andhit him a ten dollar bill,Nobody needs to know that your name is Jamie Mcdonald andwhere you bank and how much money is your bank.All they need to do is take that ten dollar bill and verifythat the token is authentic.That system worked really well until we discovered its majorshortcoming. It's local.That same ten dollar bill won't work in a French deli.You've gotta present a different form of token.And so the world developed it actually developed in Europe adifferent system, the bank note system.Take your Dutch Gilders, put them in the Bank of Amsterdam,and they'll give you a bank note. And with that bank note,you can go to Venice or wherever you want and tradethere because it's the bank credit that stands behind it.The bank note system is ninety percent of the world today,and it works really well.The problem with it, though, is it's exclusive.Why is it exclusive? Because if you don't have identity,you cannot use it.Every bank money transactions require identity.You go into that same deli And instead of presenting a tendollar bill, you present a credit card.You present Venmo. You would pay that. Right.Or PayPal or a check.All of those require to know that you're Jamie Mcdonald,you bank where you bank,and there's so much money in your bank account.That's the system that dominates today.And when we think about money at my generation,That's what most people think about.The problem with that system, it's exclusive, it's slow,and it's expensive.The breakthrough about Bitcoin about crypto,cryptocurrency is it goes back to a token based system whereyou don't have to give up identity as the first steppedevery transaction.The transactions are pseudonymous.There's an algorithm and there's a set of keys thatprotect your identity. Okay? It's only it's pseudonymous unlesswe need to trace back to find out I see.So instead of identity as a first step in that ten dollars,sandwich transaction,it's pseudonymous unless there may be some pattern that weneed to unmask, go from pseudonymous to identity.And that's the beauty of it.And I think that's why there's a generational issue because anew generation whether they started trading tokens on videogames or otherwise intuitively gets this in a way that thelegacy systems and the people that preside over the legacy systems,whether they're at regulators or central banks don't quiteget. I've heard you use this example before,and I think it explains it really well.If the idea of if you you don't say who you are going onto ahighway, but if you do something wrong,you could get pulled over.And that's really the the sort of that people need to gettheir head around when it comes to privacy issues withcryptocurrency. Right. So so the the reason we have thecurrent system the anti money laundering know your customerknown as AMLK YC is because we have the existing bank notesystem. So we built that process on top of it.So as we said, you go in the sandwich shop,you've got if you use anything other than cash,you've gotta first identify who you are, where you bank.And our AMO, k, what system operates on that.That's the current state of the art process.And I think in a lot of regulators' mind,they con they they confuse that process as the ultimate representationof the policy of preventing money laundering.What we need to think about is what is the policy How do weget there in a new world that doesn't require identity inevery case? We can. We we just need to be willing to move awayfrom the current policy and move to a different one.So instead of getting identity in every case,why don't we identify patterns of bad behavior and then unmaskthe ident the identity of the people involved in that and getidentity as a last step.And the simple analogy is,if you want to go onto the interstate highway,you get on the highway. You don't have to stop at abarrier, give up your identity,tell them everything about yourself,and then they let you get on the highway in case you dosomething wrong. Most times you won't.What we do is we get on the highway.And if you do something wrong,whether it's a camera or a helicopter or a patrol car,recognizes bad behavior, pulls you over,and what's the first thing they do, get your identity. Right? Right.So we can approach blockchain based transactions on the sameInstead of getting identity of everybody involved,let's let them conduct commerce.Let's use big data recognition, pattern recognition,identify areas of bad conduct.And then we can get identity from the people by going frompseudonymous to unmasking the underlying identity.The ability is there What's lacking right now is the visionto see beyond our own current processesto a different world based upon the policies that we're tryingto get to. In my mind, I don't really see why there is such arush for central banks to get their digital currencies out there.I know the price of Bitcoin and the theorem is growing orgrowing, and maybe it's this, you know,the market caps of those currencies is is challengingthem and making them feel like they need to produce one.But If you're a central bank,why would you not just wait for the private markets for thebitcoins and the polka dots to make their mistakes and thenjust produce your currency just a better version than let themmake mistakes. So you're absolutely right.I think I think that when people describe this as a race,I think they're they're missing the point.It's not a a race to be first. It's a race to get it right. Right?And and getting it right is the central bank that adopts a acentral bank digital currency that reflects the values of their society.The norms, the social conventions, and and in for my mind,issues of privacy and economic liberty and and and freedomfrom censorship. If we get those right in a digital dollar,I don't care whether it's tomorrow or ten years from now,getting it right is more important than getting itfirst. And to his credit,chairman Jay Pallet the Fed has said the same very the verysame thing. However,there is a concern on the global level that the UnitedStates is a bit asleep at the switch in terms of movingforward in exploring this evolution.And the concern is as we know, China is moving very rapidly.Europe is also moving very rapidly,and Europe's concern is that the United States sits out thefirst few rounds of this. And then three years from now,when China is is is successful in this, suddenly wakes up,comes roaring into all these global conventions,meetings that are taking place to develop the conventions formoney and says,we're the United States throw away everything you've done.We need to start from scratch or it's And and they're worriedwe come running in with twenty pound boots late in the process.And so, what I'm an advocate for,and I've started something called the digital dollar project,advocate for the United States to move forward with itsexploration of this. Rolling it out is a separate topic,but get in the game now in the exploration of central bankdigital currency.And get in the game now working with the private sector.You point out the role of the private sector.The private sector has been exploring digital money eversince two thousand and eight. It's almost thirteen years now.And doing things all very, very success. Fully.So the official sector is actually late to the game already.Now some official sectors in Europe and elsewhere are movingforward I think it's time for the United States to get morefirmly in the game. We can make a decision of,of whether to go fo to execute this later on,but let's get in the game of exploring this.So here's the sixty four million dollar question.How do we know when a currency's got it right?I think it's about values. It's about that.I what has made the dollar ascended as the world's reservecurrency? Yes, of course.The strong economy, stability, global trade, of,all of those important elements,economic elements. But on top of that, are certain values.I think the dollar represents to aspiring people around the world,a vision of, of an aspirational economy. Of social mobility, ofeconomic liberty, of of of free enterprise, of the rule of law,and perhaps most importantly,of economic liberty for legal transaction.And my worry is that we don't take those value seriously aswe design the digital dollar for the next generation.So in your opinion, Bitcoin does do those things,but perhaps there isn't enough people around the world to havetheir trust in it yet. Am I on the right track? Well,I think Bitcoin has been remarkably successful.I I think it's been successful even beyond its own economicsuccess. Bitcoin, if it's done nothing else, has revealed theinefficient seas, the rent collection, the cost, theexpense, the exclusivityof our existing system. If Bitcoin has done anything,it's been a rebuke to the exclusiveness,the the the the latency,the the the rickettiness of our existing financial system.If Bitcoin does anything,it tells us we need to modernize our existing system.We need to give more people economic,opportunity. We need to lower the cost.We need to take out the rent collection that's in ourexisting system. So if Bitcoin has done nothing else, it's putus on notice that our existing system needs a lot of upgrades.Well, Chris,I really feel like I could talk to you for hours and I reallyenjoyed our conversation. So thank you so much for joiningus. Brenda, good luck with the book. Thank you very much.The debate is over as to whether digital currencies willbe a part of our lives or not. They emphatically will be.The question is how and when will they be adopted and whowill win between the private and public markets?Is there room for both?Well, the race is on, and the winner is likely to appear inthe next few years,and that's why it's crucial to be learning about this now.If you'd like to read more on this topic,please go to footsie russell dot com forward slash researchwhere you'll find much more information.
