US regulators: Cryptocurrency is “a new chapter of economic history”
CFTC Chairman Giancarlo comes out as crypto bull, says it will change the world and the world needs to get ready.
The US Senate Banking Committee is scheduled to hear on cryptocurrency on 6 February 2018, but the written testimony has been revealed ahead of time.
You can find the full testimony here (PDF):
- Part 1 - Testimony by J. Christopher Giancarlo, Chairman of the Commodity Futures Trading Commission (CFTC).
- Part 2 - Testimony by Jay Clayton, Chairman of the US Securities and Exchange Commission (SEC).
In a nutshell, the speakers conclude that effectively regulated cryptocurrency is going to be bigger than The Beatles, and that despite currently operating beyond the scope of most existing regulatory frameworks and with a relatively small piece of the market, cryptocurrency may already be the greatest thing since sliced bread.
Emerging financial technologies broadly are taking us into a new chapter of economic history"
Fintech as a whole is changing the world, says Giancarlo. He specifically names machine learning and artificial intelligence, as well as the cryptocurrency-specific smart contract and distributed ledger systems.
"They are transforming the world around us, and it is no surprise that these technologies are having an equally transformative impact on US capital and derivatives markets."
Two sides of the argument
"There is clearly no shortage of opinions on virtual currencies such as Bitcoin," Giancarlo says. "For some [cryptocurrency is] potential riches, the next big thing, a technological revolution, and an exorable value proposition."
"Others, however, argue that this is all hype or technological alchemy and that the current interest in virtual currencies is overblown and resembles wishful thinking, a fever, even a mania."
But "perspective is critically important. As of the morning of February 5, the total value of all outstanding Bitcoin was about $130 billion based on a Bitcoin price of $7,700. The Bitcoin market capitalisation is less than the stock market capitalization of a single large cap business, such as McDonalds (around $130 billion)... Clearly, the column inches of press attention to virtual currency far surpass its size and magnitude in today’s global economy".
Giancarlo's conclusion is that the cryptocurrency hype is clearly outsized for the market's current monetary value, but that in the end, it's not all about the money. The heart of the issue is the innovative potential of cryptocurrency. This novelty and disruptive potential mean cryptocurrency poses more challenges and opportunities than the current numbers would suggest.
Cryptocurrency is here to stay, and distributed ledger technology (DLT, or "the blockchain") in particular is just super. Super duper even.
What a difference it would have made on the eve of the financial crisis in 2008 if regulators had access to the real-time trading ledgers of large Wall Street banks."
Describing the CFTC chairman as bullish on crypto would be an understatement. In his testimony, Giancarlo rattles off some of the potential implications of DLT beyond Wall Street and thinks aloud on how the blockchain could have prevented, or mitigated, the global financial crisis of 2008.
"DLT is likely to have a broad and lasting impact on global financial markets... DLT could eventually allow financial institutions to save as much as $20 billion in infrastructure and operational costs each year... cut trading settlement costs by a third, or $16 billion a year, and cut capital requirements by $120 billion... Outside of the financial services industry, many use cases for DLT are being posited from international trade to charitable endeavors and social services."
"Banks have just completed the first agricultural deal using distributed ledger technology for the sale of 60,000 tons of US soybeans to China. Other DLT use cases include: legal records management, inventory control and logistics, charitable donation tracking and confirmation; voting security and human refugee identification and relocation."
"While DLT promises enormous benefits to commercial firms and charities, it also promises assistance to financial market regulators... I have previously speculated that, if regulators in 2008 could have viewed a real-time distributed ledger... they may have been able to recognize anomalies in market-wide trading activity and diverging counterparty exposures... Such transparency may not, by itself, have saved Lehman Brothers from bankruptcy, but it certainly would have allowed for far prompter, better informed, and more calibrated regulatory intervention instead of the disorganized response that unfortunately ensued."
We are entering a new digital era in world financial markets. As we saw with the development of the Internet, we cannot put the technology genie back in the bottle. Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity. Ignoring these developments will not make them go away."
A note of caution
Giancarlo says cryptocurrency is here to stay. Although it can be difficult to understand at a glance, he points out that distributed ledger framework and the ability to truly digitise value marks a sharp paradigm shift for the world and a revolution of the financial system of previous centuries.
But if cryptocurrency is money, then understanding it is just as important as any other financial education. This is one of the main challenges, and the CFTC has already "launched an unprecedented consumer education effort" to this end.
"The CFTC believes that the responsible regulatory response to virtual currencies must start with consumer education. Amidst the wild assertions, bold headlines, and shocking hyperbole about virtual currencies, there is a need for much greater understanding and clarity," Giancarlo warns.
In the smallest of nutshells, Giancarlo says cryptocurrency will be taking over the world, like it or not, so the world had better get ready.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM