Former CFTC Chair on $6B Binance Heist

0:02 Bloomberg Audio Studios, podcasts, radio, news. You're listening to Bloomberg Business Week with Carol Masser and Tim Stenevek on Bloomberg Radio.

0:15 Bitcoin sank below $ 77, 000 for the first time in more than a month. It's deepening the sell-off after Binance revealed a record hack that rattled the crypto industry and renewed questions about the security. of customer assets, even at the world's largest digital asset exchange. We've got with us the perfect voice on this and so much more when it comes to the crypto industry, Jay Christopher Giancarlo, former chairman of the CFTC. He's also the author of the new book, The New Adventures of Crypto Dad. It's a sequel to his earlier book. This one is subtitled The Quest for Financial Freedom in the 21st Century. He joins us here in the Bloomberg Interactive Brokers Studio. Chris, welcome back to

0:51 the program, or I Welcome back.

0:54 It's great to be here, Tim. It's great to be with you.

0:56 You know, you became known as the Crypto Dad about a decade ago. You led the CFTC when the first US-regulated Bitcoin futures launched. It seems like many in the industry may need a parental figure after this latest hack. I mean, we're talking $ 6 billion here.

1:11 What's going on? Is this growing pains or something bigger?

1:14 Well, it's really interesting. If you think about an analogy that I've been sharing with people as to what happened, if you think about a bank... Somebody distracted the teller and reached into the teller's drawer and stole cash out of it. They didn't get into the vault. They didn't get into the basement. They didn't blow up the safe and get the big money. What they really did was took the cash that's there to handle short-term redemptions. And for 20 minutes, they were able to pick out of the drawer before people figured it out. So this is not truly fundamental to crypto. It's not breaking the code.

1:49 What it really was was a bank heist. And the banking system is subject to bank heists all the time.

1:55 But a bank heist of $ 6 billion?

1:57 But a bank heist of $ 6 billion.

1:59 I mean, the traditional fiat currency financial system is not subject to $ 6 billion bank heists all the time.

2:05 Right, right.

2:06 And yet the crypto price today, Bitcoin is down, I don't know, 4% or 5%, maybe even less, 3%.

2:11 Yeah, I mean, not even that much.

2:13 Not even that much. You know, I remember when FTX blew up, the impact on the crypto markets was down 20% or 30%. So I'm not to minimize this in any way. Certainly, there were vulnerabilities that need to be fixed and addressed. And I think the whole industry is coming together to do that. But it's not a failure of the underlying blockchain technology. It's a failure of a firm.

2:38 So how do we go about the regulation? Right.

2:41 And let's come to that. But the other thing about this is this is a hack by a nation state. This is a state-sponsored hacking organization. This is part of the Lazarus group, the trader-trader part of that group. And this is something I write about in my new book. It's time for the United States to get off defense and go on to offense.

3:00 Right.

3:00 A proposal I put to the White House that has been partially responded to is that we dust off the constitutional provisions for privateering to allow America's awesome technological capability to go back at them. I mean, we could hack this back if we had the mind to do so. And it's time for us to stop playing defense and go on offense. Now, the White House has responded to that in part with an executive order in August that is authorizing government contractors under supervision by the Department of Justice to do that. But we haven't seen much evidence yet that that started. But I think this indicates more than anything, we are vulnerable to attack by agents of nation states, and it's time for us to fight back.

3:40 I mean, the thing is about this one is this is a different one than we saw with attacks on wallets or cold storage.

3:47 It sort of seems like.

3:48 Over the last few months, it's been hack after vulnerability after hack after vulnerability.

3:54 Indeed. Are we going to keep saying that?

3:56 Well, you know, it's funny. I ran an agency, this Commodity Futures Trading Commission, with law enforcement capability.

4:01 This little agency.

4:02 Yeah. And, you know, it has law enforcement capability. And the thing you see when you spend any time with finance is that wherever there's money, there's bad guys. And there's bad guys chasing that money. And in some ways... Life is a series of cops and robbers. And as the technology moves, it's usually the robbers that get their hands on it first and figure it out. The job of the cops is to not be more than one step behind. But they're always one step behind.

4:27 Well, I want to use that as a transition to talk about some of the other work that you've done.

4:32 The work that you did also at the CFTC.

4:35 You advise a lot of companies right now, among those as Polymarket, Shane Copeland over at Polymarket. Prediction markets, they are overseen by the CFTC.

4:45 In your view, do you.

4:46 Think the CFTC has the person power to regulate this entire industry?

4:51 Well, if any agency does, it has to be the CFTC. Why? Because these are truly markets. There's no borders on these. These are global markets.

5:00 So sports betting is a global market?

5:05 So sports betting, for the most part, is a bookie model. There is a bookie who makes the odds.

5:10 Not on prediction markets, though.

5:12 Not on prediction markets, right? So we have traditionally regulated retail establishments at the state level, and we regulate markets at the federal level. If you think about it, a bookie model is a retail establishment. The retail establishment says, here's our prices. You can take them. You can leave them, but you can't make them.

5:29 But I know the distinction you're going to make. Prediction markets are a market model.

5:32 Exactly.

5:32 Therefore, they should be regulated by the CFTC.

5:34 Well, they should have to be regulated at a federal level because only a federal agency has the data-sharing arrangements with British authorities, with European authorities, with Singapore, Japan, to police global markets, markets that you can't confine within a border. The state of Utah doesn't have that capability. The state of Colorado and certainly 50 different states are not going to result in a uniform regulatory process. So the CFTC knows how to regulate markets. Now, do we need new rules– uh for things like um mention markets and some of these absolutely and the cftc's at work on it anytime you got a new technology you're going to need to take some of these older rules and modify them for

6:12 a new technology but that has to be done at the federal level not at a state level.

6:16 How long realistically do you think it could take before there are certain regulations that are actually set in place.

6:23 Well, it'll be a lot faster if it's done by one agency rather than 50. I think the CFTC is already working on, in fact, I know the CFTC is already working on this. They have announced some rule proposals. I think they'll get it done pretty quickly.

6:35 But it seems like it's going to go straight to the Supreme Court because you have, you know, different parts of the U.S.

6:39 Judicial system.

6:40 You have a lot of money involved. That's why it's going to go to the Supreme Court.

6:42 A lot of money involved and some very powerful players who advise these, including, you know, Donald Trump Jr., being part of both companies, Calche and Polymarket. Um, I'm just curious about the people who push back on, on, on the question of whether or not this stuff is actually good for society. This is a very existential question, but I have, when I talk, I talk a lot of prediction markets. I have people getting in touch with me on the Bloomberg terminal all the time that are like, I do not want my kids exposed to this stuff.

7:06 Like the gamification of everything in society. They don't see that as a good thing.

7:10 Well, I disagree. I've just come back from Las Vegas. I was there for Money 2020. To get to the exhibition rooms, you had to go through the casino. The casinos are packed. Like it or not, people like to gamble. And we're not going to stop that. If you try to ban it, all you do is send them to the back room of the barbershop to do it.

7:26 A.K.A. offshore in this case.

7:28 A.K.A.

7:28 Offshore, right? So better to set a U.S. regulatory regime around it rather than have Singapore or... Or Myanmar send a regulatory regime around it, if at all. So, you know, human nature is human nature. The other thing is I think there's a social benefit in prediction markets. People like certainty.

7:46 Why during a weather condition are everybody listening to Bloomberg's weather? Because they want some predictability of the weather. Here to fore, there's been no predictably of things that are actually more important than the weather. Interest rates, gas prices, the outcome of elections, those are important things to a lot of people.

8:03 If you can poll the wisdom of crowds of tens of thousands, hundreds of thousands, it's a lot better than your average poll, which maybe polls 800 people. So I think there's a social benefit in this. Whether you participate in these markets or not, you may like the data that comes out of these markets.

8:17 We only have less than about a minute here, but you mentioned that we're not playing offense.

8:21 Why not? It's a great question. I think we're not playing offense. And we are against finally against drug cartels. We are finally against some of these what they call these pig butchering operations in Southeast Asia. But we really haven't gone after the nation state sponsored actors like the Lazarus Group. And, you know, it's time to give them a punch in the nose. We've been taking a beating from them, sitting back and taking it. It's time to go on offense.