Jeffrey Bandman is CEO and Founder of BlockAgent, building new market infrastructure for the digital blockchain securities industry. He is also Founder and Principal of Bandman Advisors, a consulting and advisory practice focused on innovation and regulation in financial services. The firm specializes in crypto assets, FinTech, and RegTech. Mr. Bandman is also a Lecturer in Global Affairs at Yale, where he teaches about crypto assets and public policy at the Yale Jackson Institute for Global Affairs. He is Co-founder of the Global Digital Finance initiative and serves on its Board as well as the GDF Advisory Council, helping develop an industry-driven global code of conduct and taxonomy for crypto assets. He acts as FinTech regulation mentor for the Techstars Barclays FinTech Accelerator program, Research Fellow of the Blockchain for Algorithmic Regulation and Compliance initiative at University College London’s Centre for Blockchain Technologies, and Member of the RegTech Council.
Mr. Bandman previously served the U.S. Commodity Futures Trading Commission (CFTC) in four senior leadership roles. As the CFTC’s first FinTech Advisor, he was Founding Director and architect of LabCFTC, the first-ever hub for FinTech innovation established by a U.S. market regulator. He led FinTech and RegTech coordination with domestic and international regulators, chaired a new international regulator workstream on post-trade digital innovation, and chaired the CFTC staff FinTech working group. He originally joined the Commission as Special Counsel to Chairman Timothy Massad, and also led the CFTC’s Office of International Affairs. Prior to the CFTC, Mr. Bandman advised the Futures Industry Association on launching the SEF Tracker, worked as Head of Partnerships & Alliances for LCH’s SwapClear service, established LiquidityHub’s trading platform, rebuilt and managed Cantor Fitzgerald’s market data business, served as General Counsel for Prebon Yamane, and worked as an associate at Cravath, Swaine & Moore. Mr. Bandman graduated from Yale magna cum laude with honors in both History and English.
The Politic: How’d you get involved?
Jeffrey Bandman: I’ll start with my background. After graduating from Yale as a liberal arts major, I did some international backpacking. I went to law school, clerked for a judge for a year, and then did some more international backpacking. I really wanted to see the world a bit.
Then, I started my career as a corporate lawyer, later switching from law to business. I worked on rebuilding the data business of Cantor Fitzgerald. I went there shortly after 9/11, so it was quite an intense experience, and then I worked on various financial services and market-structure type businesses in data, clearing, and trading in London.
It was in late 2013 to early 2014 that I first got exposed to cryptocurrencies and blockchain. I’d probably seen some things about it, but I hadn’t really looked into it that closely. I only really started to pay attention when I got a call from David Rutter, one of the founders of what’s now R3 who I’d worked with earlier in my career. “Hey Jeff, have you looked at this Bitcoin thing?” he asked, to which I said what probably many people said at the time: “Isn’t that just for criminals, money laundering and terrorists?” He said, “No, no. There’s more to it. There’s transparency, traceability, and all these great features.”
I spent some time with the R3 founders: Todd McDonald and some of his other colleagues. We went to some Bitcoin conferences, read material, and I bought a little bit of Bitcoin– I wish I’d bought a lot more at 2014 prices. Then, I ended up going to work in financial regulation as a Senior Official at the CFTC, advising in the Chairman’s office. That position was held by Timothy Massad at the time, who I’d worked with earlier in my career. My initial areas of focus were around data, technology, trading, and clearing. I also had some responsibility with respect to international affairs and the Chief Economist’s office. I was working on policy, financial institutions, and market infrastructure.
In 2014, CFTC Chairman Massad also first testified our view that virtual currencies such as Bitcoin would fall within the definition of a “commodity” under the Commodity Exchange Act. In 2015, I became Chair of a working group that we assembled. The purpose was to start monitoring crypto and blockchain tech. That’s when I got more deeply involved in the space, looking at it from a regulatory and policy perspective, as well as trying to understand the technology itself.
When David Rutter called you on the phone, was he already involved in crypto and blockchain?
I’d say we were just brainstorming different ideas at the time, and they hadn’t yet arrived at the idea that would eventually become R3. That came later.
I’d been working in the derivatives industry, and I’d worked on swaps, futures, and clearing. So, I thought it would be interesting to have some kind of Bitcoin futures product and maybe a cleared Bitcoin future. There are now Bitcoin futures that were launched in 2017 by CME, BitMex, and so on. In hindsight, I think 2014 would have been way too early for a Bitcoin future. IT would have been a good idea but not the right time.
Still, thinking about Bitcoin futures really prepared me for my job at the CFTC. When Bitcoin appeared on our radar screen, it was natural for me. I already knew something about it and was thinking about it. Conducting that early research work and attending those Bitcoin conferences was definitely helpful when we started up the working group at the CFTC. At the time, there really weren’t that many regulators paying attention to it. They were starting to, and because it was a relatively small group of us at various agencies in the U.S., U.K., Australia, and Asia, we were learning from one another. We shared information, and we were all learning about it at the same time.
For me, I get really excited when I’m working on new markets and innovative areas. It’s exciting to see this tech, these new types of assets, the tokenization and digitization– but it’s also exciting to have the training, education, and experience to be able to think about it from the regulatory perspective.
My familiarity was very helpful in getting the CFTC caught up to speed, but since leaving them in 2017, I’ve been advising various clients–both startups and existing businesses–about digital asset strategies and business opportunities in the U.S. and internationally. Again, thinking about it from the business and regulatory perspective is helpful in the domain of financial services, because it tends to be a heavily regulated area, but there’s room for innovation if you understand regulation. If that’s the case, then you’ll understand how new technologies can help you comply better and where you need flexibility, too.
Having worked at the CFTC, what do you think about the idea that central planners are antagonistic toward blockchain and crypto because they fear losing power?
Yeah. I certainly didn’t see anything like that. In general, it’s hard work just to have coordination within a single agency and all of its different divisions, agencies, and silos. One of the reasons we formed this working group was just to promote communication and understanding across the different divisions. I’m not saying it’s impossible to have these different government organizations conspire with one another, but it’s actually very difficult. A lot of people would have to be involved to make it happen, and it can be a challenge for different organizations to work with one another even on benign projects that aren’t secret conspiracies.
Working with central bankers and regulators not just in the U.S. but in the UK, Europe, the Middle East, Asia, Australia, and so on, I’ve seen a lot of real open-mindedness with respect to crypto and blockchain. People are trying to understand the technology’s potential: whether it can promote greater efficiency and stronger payments.
Regulators and government authorities tend to be balancing different missions, so the image I sometimes use is that of a seesaw. When you look at how the SEC has been trying to deal with tokens, ICOs, crypto assets, and digital assets that are securities, they have multiple missions: promoting efficient capital formation and customer protection. They’re balancing these missions, and sometimes it seems like they’re putting more weight on customer protection, so the seesaw is down on one end. Other times, they’re putting weight on efficient capital formation, and the seesaw is down on the other end. Really, they’re trying to do multiple things, and that’s true of regulators around the world.
I think the reaction to Facebook’s Libra and Calibra wallet has been consistent with other cryptocurrencies. They’re concerned about money laundering and customer protection. Generally speaking, I think there’s been a degree of dismissiveness toward Bitcoin and cryptocurrencies because they’re not backed by anything, they’re still relatively small, and there’s a lot of price instability. It seems that government officials are more concerned about Facebook, because they perceive it as so big with billions of users, than with Bitcoin or other cryptocurrencies.
What do you say to someone that’s dismissive of Bitcoin?
Clearly there was a lot of exuberance and a big run-up in the price. Everyone’s got to do their own research and make their own investment decision. My general outlook is that you should only invest what you’re prepared to completely lose, for instance, if these cryptocurrencies turn out to be risky or have unknown attributes. But, Bitcoin has been out there for 10 years. It’s been this open and permissionless network. It’s been an attack surface, and it’s performed very well. The investment thesis is probably store of value or digital gold. There’s the attribute that it’s inherently deflationary because its supply is limited to 21 million and the reward size is dropping, which could be a value proposition. That could be wrong.
I think we’re really at the beginning of the innovation cycle. First, we had the internet. The internet was about data and efficient transmission of information. It took a while before people figured out what to do with it: Twitter, social networks, and so on. Crypto is just such a fundamental game changer, allowing you to execute transactions on your phone or on your desktop in a way which was previously impossible.
To me, blockchain, cryptoeconomics, and cryptocurrencies relate to the internet of value: the ability to transmit things that are natively digital, or exist in a digital format, in a way that reliably moves value across the internet and not just information. We’re just starting with that. A lot of what people are doing is taking existing things and finding a way to do a digital blockchain version. We will do new things we couldn’t previously imagine as the digitizing process develops and there’s greater adoption and understanding of the technology. That’s because we’ve solved the problem of double spending. We know a natively digital thing we transmit electronically actually has value without having been endlessly reproduced or duplicated already.
What’s the problem of double spending?
If I have a physical dollar in my hand which I give to you– you know you’ve got that dollar. But, let’s say I send you an email. It’s so easy to copy and paste emails, or to reproduce things digitally. If I send you a digital dollar or coin, how do you know that I haven’t already spent it elsewhere? I could have used it to pay for a gazillion things. That’s the double spending problem, simply put. Bitcoin solves more issues on top of that. In the absence of a centralized, trusted third party to confirm that a digital item hasn’t been spent, how can I trust that such a unit has value? How can I trust that the unit isn’t just a valueless thing that appears to have value but doesn’t actually? That’s the core problem that Bitcoin solves, and it does so in a particular way: requiring intensive computation to show Proof of Work. There are other potential solutions, but that one in my view has been effective.
It’s interesting. It seems to me that Bitcoin was borne out of the 2008 financial crisis, and now that we’re potentially heading toward a smaller recession, Bitcoin is taking off again. Is this something that people only value in a bear market?
It’s hard to say. In difficult times, people will have a flight to quality. They’ll invest in assets. In healthy, non-distressed times, people will make riskier investments that are potentially high-reward. When times are different, they’ll move toward investments they perceive as less risky, whether that’s buying gold, U.S. Treasuries, or German government bonds. Some people perceive Bitcoin as digital gold, and something that’s deflationary rather than inflationary, whose value will not be debased by central banks printing more money and doing quantitative easing. Other people would argue that it’s vaporware, that it’s a digital representation backed by nothing, and that it’s the riskiest possible investment. Everybody’s got to make their own decision.
To me, the spirit or ethos out of which Bitcoin and the Bitcoin Blockchain grew relates to the financial crisis and mistrust of central banks and large financial institutions. Today, I think there’s varying mistrust of those entities, but big tech companies like Facebook, Google, and others are much more on people’s radar screen. A lot of people have enormous mistrust of these companies and what they’re doing with our data and privacy.
To me, that’s one of the biggest changes from 2008 to 2009. There are these new and untrusted entities that are perceived as being as powerful as governments. Something that might promote adoption of crypto assets and blockchain might be that they are somehow an antidote to these big tech companies. This all needs to play itself out: the answer remains to be seen.
I think that raises so many concerns: If there’s going to be privacy, how are these companies going to comply with AML? How is FB or Libra going to respect people’s privacy? Is the impact going to be so significant that it actually interferes with monetary policy? Is this really a bank, payment system, or even a shadow bank that should be regulated like a payment system?
Facebook wanted to set up this Swiss-based reserve and council that would be regulated by the Swiss government. It’s not clear whether they should be regulated by the market regulator. Maybe they should be regulated by the central bank, the data protection and privacy regulator, or the competition authorities. There’s a lot of different dimensions to that. But, I think governments are interested in the opportunity for blockchain to introduce financial inclusion, transparency, and efficiencies– and those are perceived as beneficial.