will make their voices heard in the design and operation of the digital future of money. Will the reasonable expectation of privacy from both commercial and governmental surveillance provided by paper money be found in digital money? Will a digital dollar or non-sovereign forms of digital money secure individual economic privacy against government surveillance guaranteed by the US Constitution and expected by the American people? Who will decide?
I am convinced—and I hope to persuade you in this book—that the ongoing evolution of the Internet will revolutionize money and banking in the same way it has revolutionized communications, photography, retail shopping, business meetings, and entertainment. It is naive to think that it will not. Yet, the venerable global financial services industry and its central bank overseers have been slow to even acknowledge its arrival. Some have a vested interest in the old infrastructure. The western economies will not keep pace if the matter is left to politically browbeaten bank executives, political protectors of the status quo, a few snarky financial journalists, and rigid central bankers. We need officials with courage, determination, foresight, and the willingness to take risk.
If we fall behind the curve, then the future rules, protocols, and values of digital money will be set by our nondemocratic economic competitors. Instead, a free society must show the courage of its bedrock convictions. We must fearlessly lead the digital revolution in money and finance and not cede leadership in the Internet of Value to autocratic economic competitors. That's the only way we can counter the values of authoritarianism with democratic values: individual economic privacy, rule of law, and markets free of state control.
That battle is being waged today. It will take daring and determination to regain the initiative. This book is about summoning that courage—both socially and governmentally—to overcome political inertia, institutional complacency, and societal fearfulness in the fight for the future of money.
Notes
1 1. Chris Giancarlo & Ken Hasimoto, “Looking for a Road,” unpublished song lyrics, 1975.
2 2. For thoughtful discussions of the Internet of Value, see: Tapscott, Don, Tapscott Alex, “Blockchain Revolution: How the Technology Behind Bitcoin and Other Cryptocurrencies is Changing the World,” Portfolio Penguin (January 1, 2018) and Casey, Michael J and Vigna Paul, “The Truth Machine: The Blockchain and the Future of Everything,” St. Martin’s Press (February 27, 2018).
3 3. Conventionally, the word “Bitcoin” is often capitalized when referring to the cryptocurrency as a concept, but lower-cased when referring to its individual tokens, or units of value. Since I will discuss Bitcoin as a concept, I will always use the upper case form in this book.
4 4. Mr. Smith Goes to Washington is a 1939 political comedy-drama film directed by Frank Capra starring Jean Arthur and James Stewart about a newly-appointed and naive US Senator who fights to reform a tainted political system.
Chapter 1 Down in the Swaps
If everything seems under control, you're just not going fast enough.
—Mario Andretti (champion auto racer), Interview with Sam Smith
Red Light
Thursday, November 6, 2014 (CFTC Headquarters, Washington, DC)
“You cannot speak at SEFCON V.”
I looked at my senior legal counsel, Marcia Blase, for a moment and let that sink in.
“What? I thought that we were good to go? What happened?”
SEFCON, which had launched in 2009, was the annual Swap Execution Facility Conference. To many readers that must certainly sound like some obscure Wall Street gathering—and a boring one at that. But it was then the premier industry event focused on the important and growing category of trading platforms—swaps execution facilities—that were defined and mandated by Title VII of the Dodd–Frank Act. Dodd–Frank was the landmark financial industry reform legislation passed in the wake of the 2008 crash.1 (More about this swaps business momentarily.)
This conference was organized by a trade association I had helped form a few years before: the Wholesale Markets Brokers Association Americas (WMBAA). I was a past-chairman of WMBAA, stepping down in 2013 when the Obama Administration approached me about serving on the CFTC. Now, as a CFTC commissioner, I had tentatively accepted an invitation to return to SEFCON to address the audience from my new perspective as a regulator.
“The White House will not grant you a waiver. They consider it non-essential. You can't speak at the conference.”
Swaps Breakdown
Before I continue the story of SEFCON and the Obama White House, let's step back to answer a preliminary question: What are derivatives and swaps?
Though unfamiliar and forbidding terms to some, derivatives and swaps are nothing less than the foundations of a stable and secure financial system. And, as I will explain later in this book, the advent of derivatives on cryptocurrencies has paved the way for a dramatic expansion and maturation of crypto as an entirely new investment asset class and subject of innovative financial services.
Derivatives are tools that transfer risk among willing participants. They allow an individual or institution with risk they don't like or cannot bear to transfer that risk to someone who's capable of bearing it in return for some payment. We use this idea all the time in our daily lives. We constantly “hedge our bets” by offsetting our risk. For example, we might stretch to buy a condo near the seashore, but hedge our investment by renting it out to people all summer long to get some money back. We lower the risk of our investment in the condo by sharing it with others.
History of Derivatives
Investors, farmers, and manufacturers have used derivatives for thousands of years to manage commercial and market risk. The classical philosopher Aristotle describes the Greek mathematician Thales making money off options contracts on olive presses as early as the sixth century BCE.2 Derivatives allow users to guard against gains or declines in the value of underlying physical or financial assets, such as agricultural commodities, interest rates, stocks, bonds, trading indices, or currencies. They do this without requiring the user to buy or sell the underlying assets. In this sense, derivatives are a form of insurance, but one that does not require the insured to incur a loss in order to recover.
American derivatives markets go back at least to the nineteenth century. The first were agricultural commodity futures markets in cities like New York, Philadelphia, Chicago, St. Louis, New Orleans, and Kansas City. These markets allowed farmers, ranchers, and producers to hedge production costs and delivery prices. That, in turn, helped ensure that American consumers could always find plenty of food on grocery store shelves.
Derivatives markets are one reason why American consumers today enjoy stable prices in all manner of consumer finance, from auto loans
