“The year is 2021, and the nation is in crisis. North Korea has just tested a missile that will soon be capable of delivering a nuclear warhead to the continental U.S. The move took Washington by surprise as the project was likely funded via a new Chinese digital currency, which allowed North Korea to bypass the global banking system. In response, the National Security Council House has gathered in the White House Situation Room to formulate short- and long-term responses.”
That is the opening of a 2019 simulation on ‘Cryptocurrency and national insecurity’ in which Gary Gensler, who is rumored to be the new chair of the Securities and Exchanges Commission (SEC), took part.
Ignoring the dramatic angle of this simulation, much of it has become real now two years on. The dollar is no longer the only convenient means of international exchange. American banks are no longer the policemen of global monetary transfers.
As a catalyst of change, bitcoin and cryptos more widely are re-shaping global finance and global trade. The question is: what does the United States do about it?
The Banker Academic
Gensler spent much of his life working for Goldman Sachs, with little known about the man except he also spent plenty of his time in the power halls of Washington.
As chair of CFTC, he reformed the institution and woke it up to the challenge of regulating the $400 trillion derivatives market.
Soon after, he went to MIT where he taught on global finance and blockchain tech, with some papers suggesting he is effectively obsessed with this new invention.
“I remain intrigued by Satoshi’s innovation’s potential to spur change – either directly or indirectly as a catalyst,” Gensler said in late 2019, adding:
“The potential to lower verification and networking costs is worth pursuing, particularly to lower economic rents and data privacy costs, and promote economic inclusion.
Further, shared blockchain applications might help jumpstart multiparty network solutions in fields that historically have been fragmented or resilient to change.
Even in this slightly less ambitious form – acting as an innovative irritant to incumbents and traditional technologies – cryptocurrencies and blockchain technology have already prompted real change and can continue to do so.”
The above statement is just one of many that indicate Gensler is a believer as far as the technology is concerned, and we have no reason to doubt it.
There’s a but, or quite a few of them. Where bitcoin is concerned, he considers it just a speculative asset class. A very unsophisticated view in light of the immense sophistication that bitcoin contains.
On ICOs, he said the thousands of them issued in 2017 are all securities and went so far as to court a response from Coin Center after suggesting even eth is a security.
Ethereum however is now decentralized he said so might get away with a commodities classification, as happened, but XRP is definitely a security in his view.
As someone intimately familiar with the blockchain, a more interesting question for him to answer is: what does a security mean in the digital age, or better, in the crypto age?
Jay Clayton’s answer was that it means nothing different to what it meant a century ago during the age of horse carriages.
Gensler’s answer can’t be the same, for it would contradict his own statement, and thus presumably belief, that this technology is a change catalyst.
If Gensler is indeed appointed, he will become the third most powerful person on the economy after Biden and Yellen.
He will be in command of a $20 trillion economy where entrepreneurship is in steep decline, IPOs have fallen, and where tech companies are concerned, they have scathing critiques of the current securities framework being incompatible with new digital businesses and their necessities.
The young across the world are outraged at the investment prohibitions enforced by the law, an outrage that may have well contributed to the 2019 year long protests in France.
Making this a fiery time to be SEC chair and yet a time of great opportunity because the institution is in desperate need of reform and due to its adverse effects on the economy, is under immense pressure to adapt.
As Gensler well knows, there are no rulers without the consent of the ruled, and there are no laws without their general appreciation.
This is something Clayton did not understand. He was of the view that no change was needed even though the world has greatly changed. He thought he could dictate.
Gensler appears to be very different from Clayton. First of all, he doesn’t come across as the school yard bully. Nor does he come across as completely uninformed and dare we say: stupid.
So we should be expecting a very different approach from SEC, but it isn’t very clear just how different considering he has said utility tokens are a fiction.
To help him, we’ll go back to this simulation and give our advice to the president, but this time the events are not unfolding, instead is what we told him two years prior.
The Immortal Race
You have two choices: fight or run. You can fight this technology, you can constrain it, delay it, maybe even injure it, and focus fully on maintaining the supremacy of the current framework, strengthen banks and their role, and promote this new technology only in the context of banks using it.
This can buy some time while the bank rails are upgraded, to the point eventually it may be possible to issue a crypto dollar, but that is difficult to do in a way we can control.
In addition, there are potential externalities. We can fight this only within USA. Other countries might adopt it and might even see strategic value in doing so. That’s a big risk, but you might think we can’t let our banks go the way of blockbuster.
Unless it’s our blockbuster-er. As this is a technology that anyone can put together, the only way we can maintain supremacy is to ensure we have the highest level of expertise, experimentation and even implementation of this technology.
Then, the free market can provide a crypto dollar and since those issuers would be within our jurisdiction, we can regulate them just as we do banks.
In the end, whether it’s a traditional bank or a tech bank is far less relevant than whether the best of them are American ones. To us, to the government and to the country, it makes no difference.
So instead of fighting it, you can run in the race for technological progress and do your best to win because that’s the only option that ends up with a chance of maintaining our most advanced level of development.
Your administration therefore must not only accommodate, but promote the unstoppable march of technological innovation, and know that only by doing so can we not only maintain, but enhance our global standing.
If you do so, then the superiority of our products will naturally attract global usage. If you don’t, then the inferiority of analogue dollars will naturally cause the global adoption of digital and crypto moneys which may well be issued by another country.