Current U.S. Federal Reserve governor Lael Brainard is considered by analysts on Wall Street and Washington D.C. to be a leading contender for the position of U.S. President-elect Joe Biden’s Treasury Secretary. Similarly, Gary Gensler, a Goldman Sachs Group Inc (NYSE: GS) banker and former Commodity Futures Trading Commission (CFTC) Chairman, is rumored to be tapped as an Adviser on helping Biden with plans for Wall Street oversight.
Identified together in Barron’s ‘Who’s Who’ in Biden’s Economic World as ‘Obama Moderates’, both Brainard and Gensler are exemplary in their understanding of crypto and blockchain. Ever since Brainard first addressed the Fed’s role in exploring distributed ledger technology, five years ago, she has been the central bank’s de facto spokesperson on all things digital currency, blockchain, stablecoins, and central bank digital currencies. Gensler, a professor at MIT on blockchain, digital currencies, financial technology, and public policy, was described by the Wall Street Journal in 2018 as having ‘Bitcoin on the Brain’, after his tour of duty at the CFTC during the 2008 Global Financial Crisis.
Below are six documents that provide some clues as to the understanding and philosophy of cryptocurrency and blockchain by Brainard and Gensler. Spoiler alert: Brainard does not think bitcoin is very good as money and Gensler does not think bitcoin is a security. It is clear that they have the know-how and understanding to bring regulatory clarity for cryptocurrencies, stablecoins, and blockchain to U.S. markets, should that be a priority within the Biden Administration.
1) Governor Lael Brainard’s speech on October 7, 2016 called “Distributed Ledger Technology: Implications For Payments, Clearing And Settlement”.
Brainard shares in this speech how the Fed is “paying close attention to distributed ledger technology, or blockchain, recognizing this may represent the most significant development in many years in payments, clearing, and settlement.” She highlights how cross-border payments and trade finance use cases could provide significantly faster processing and reduced costs.
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Brainard also touches on smart contracts, and explains how one financial instrument may interact with a smart contract on blockchain technology. “To take a familiar example, for a corporate bond with a specified par value, tenor, and coupon payment stream, a smart contract would automatically execute payments on the specified schedule to the assigned owner over the life of the bond,” says Brainard.
Brainard highlights at the end that “…the public needs to have confidence that any system employing distributed ledgers will operate properly, particularly in stressed conditions, and know that when adverse scenarios do occur, there will be robust management and governance to respond effectively.”
2) October 16, 2019 Digital Currencies, Stablecoins, and the Evolving Payments Landscape by Governor Lael Brainard
Three years later, Brainard commented on how technology is driving rapid change in the way we make payments and in the concept of money. According to Brainard, “There is a long history of technological advances challenging the prevailing notions of money, from the trading of coins to the use of paper currency, to the electronic debiting and crediting of funds on the accounts of banks.” In other words, cryptocurrencies are not the first time that technology has challenged our notion of what money is.
Brainard then highlights the promise of Bitcoin, “Bitcoin was heralded as a new kind of digital money that would address frictions in payments as well as serve as a unit of account and store of value without the need for centralized governance.” However, Brainard indicates that ultimately, “…Bitcoin and some other early iterations of cryptocurrencies have exhibited extreme volatility, limited throughput capacity, unpredictable transaction costs, limited or no governance, and limited transparency, which have limited their utility as a means of payment and unit of account.”
Her speech then moves onto global stablecoins and how the introduction of Facebook’s Libra cryptocurrency has accelerated the conversation as potential global adoption of this new kind of digital currency seemed possible. “We have seen the growth of massive payments networks on existing digital platforms, such as Alibaba BABA and WeChat, and the issuance of stablecoins on a smaller scale, such as Tether, Gemini, and Paxos. What sets Facebook’s Libra apart is the combination of an active-user network representing more than a third of the global population with the issuance of a private digital currency opaquely tied to a basket of sovereign currencies,” said Brainard.
While not necessarily picking any one cryptocurrency or stablecoin as a gamechanger, Brainard hinted that perhaps we are at a new phase in our society in the evolution of money and payments. “Our nation has rich and varied experiences to draw on as we assess various proposals for private money, from the period in our history when the colonial states each issued their own currencies to the many decades when the circulation of private commercial banknotes stood in for a national currency,” noted Brainard.
3) August 13, 2020 An Update on Digital Currencies
In the latest update from Brainard, she highlights the critical importance of stimulus payments from the ‘CARES Act’. Brainard points out that, “after a sharp reduction in spending early in the COVID-19 crisis, many households increased their spending starting on the day they received emergency relief payments under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and continuing for the following 10 days–especially households with lower incomes, greater income declines, and lower liquid savings.” Brainard argues how this “underscores the importance of immediate and trusted access to funds for the many households and businesses that face cash-flow constraints.”
Brainard describes in the speech how banks, fintech companies, and technology firms are all exploring the use of innovative technologies to, “enhance payments efficiency, expand financial inclusion, speed up settlement flows, and reduce end-user costs.” She touches on how digital currencies – including central bank digital currencies (CBDCs) -present opportunities but also “risks associated with privacy, illicit activity, and financial stability.”
As the conversation around CBDCs had increased in the U.S. over the last year with other countries considering adoption and conducting pilots, Brainard laid out the way CBDC had been explored by the Fed at the Board’s ‘Technology Lab’. Brainard notes, that it, “…has been building and testing a range of distributed ledger platforms to understand their potential opportunity and risk. This multidisciplinary team, with application developers from the Federal Reserve Banks of Cleveland, Dallas, and New York, supports a policy team at the Board that is studying the implications of digital currencies on the payments ecosystem, monetary policy, financial stability, banking and finance, and consumer protection.”
Brainard touched on how the Federal Reserve Bank of Boston had announced a collaboration with researchers at the Massachusetts Institute of Technology in a “multiyear effort to build and test a hypothetical digital currency oriented to central bank uses.” Michelle Bond, the CEO of the Association for Digital Asset Markets (ADAM) and former counsel on the Senate Banking, Housing, and Urban Affairs Committee during proceedings on the Dodd-Frank Wall Street Reform and Consumer Protection Act, commented that, “Governor Brainard’s launch of a partnership with the Massachusetts Institute of Technology is a welcome sign that she is eager to engage on digital asset issues. Her understanding of global policies and America’s leadership role, her past executive experience at Treasury, and her commitment to thorough, high-quality analyses are all important to shaping right-sized regulations for this growing industry.”
Brainard also mentioned how the U.S. worked with the CBDC international coalition of central banks – and that while there were many experiments and projects looking at CBDC, there were both legal and policy questions that the Fed needed to further explore before issuing a CBDC.
4) April 23, 2018 ‘More Than 1,000 ICOs Are Not Following the Law”
Gensler drew a great deal of attention at MIT after he had recently accepted the role of a Professor of the Practice at MIT Sloan and also as a Special Advisor to the MIT Digital Currency Initiative.
At a Business of Blockchain Conference at MIT in 2018, Gensler describes the lack of a public policy framework for blockchain tokens. “More than $10 billion has been raised via ICOs, a blockchain-based fund-raising method. But a significant fraction of these are fraudulent, and many were launched in a way that is not compliant with US securities laws established in the 1930s,” said Gensler
“We’re not in very good shape right now, “ Gensler warned. He then took the view that he thought both XRP and Ethereum are securities. Gensler commented on what was referred to as his ‘blockchain duck test’ in determining whether a blockchain token was a security. To the surprise of the moderator, Gensler claimed the ‘Crypto Kitties’ token was not a security.
5) July 17, 2019, Senior MIT Lecturer And Former CFTC Chairman, the Honorable Gary Gensler Testimony at the House Financial Services Committee Hearing on Facebook Libra
In his testimony, Gensler doubles down on his ‘duck’ analogy where he notes, “As Indiana poet James Whitcomb Riley wrote over 100 years ago, ‘When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck.” In his opening statement at the hearing, Gensler described that first and foremost the most important aspect of operating in financial services is having trust. Gensler then highlighted that Facebook was a company that was the farthest from a major public company that the U.S. public could trust and feel comfortable with to either protect their data or store their digital currencies.
Gensler highlights the number of risks in general that Facebook’s proposal brought, including investor protection, privacy, systemic risk, guarding against illicit activity, monetary policy, and others. Ultimately, it was clear from his previous judgments on XRP and Ethereum, that the broad Libra project and Calibra wallet represented serious threats to the financial ecosystem that he fully highlighted in his testimony.
6) November 20, 2019 ‘Cryptocurrency and National Insecurity’
For Gensler, the exploration of a simulation on how CBDC used by other countries may damage the U.S., this was nothing new as he had dealt with bringing the regulation of the notional derivatives market under the CFTC after the 2008 Global Financial Crisis. Personally having spent time as a former regulator at the FDIC in the Capital Markets group at FDIC, not fully recognizing risks that may be hidden in shadow banking and off-balance sheet assets is something that can be avoided through engaging in simulations as the one Gensler participated in here.
“Gary Gensler’s prior work on Dodd-Frank to elevate the CFTC is a testament to his ability to chart policy paths on important financial services issues. In his new role, he is likely to drive forward the creation of a roadmap for digital assets, and I welcome to the opportunity to work together again and share our membership’s policy perspectives and Code of Conduct as he brings into focus digital issues,” said Bond.
The Digital Currency Initiative – prior to the Covid-19 pandemic at the end of 2019 – hosted a ‘National Crisis Simulation’ describing the national security threat of cryptocurrency with a role-playing exercise that included Gensler. The crisis simulation, held at Harvard’s Business School, maps out the national security risks of crypto – where a new Chinese digital yuan is used to hide payments by North Korea in amassing nuclear weapons. As the simulation was titled, “Digital Currency Wars: A National Security Crisis Simulation,” it is evident that Gensler in his role in the Cabinet will be intricately familiar with the danger of the spread of CBDCs by foreign nations that represent threats to the U.S.