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[SQUEAKING]

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[RUSTLING]

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[CLICKING]

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GARY GENSLER: So we've
got a lot to cover,

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00:00:12,450 --> 00:00:15,520
but I'm going to start with
a little background about

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the internet and the payment
riddle; something about money,

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00:00:19,490 --> 00:00:23,680
which is at the core, really,
of all classes on finance but we

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usually take for
granted; and then Satoshi

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Nakamoto's innovation--
who was Satoshi Nakamoto,

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what is that innovation; a
bit about crypto markets;

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the blockchain
technology use cases--

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and then the core
really is, how to think

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about viability of
those use cases;

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a little touch on central
bank digital currencies;

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and ground truths.

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So, a lot to cover.

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If we don't get
through it all, we

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00:00:47,260 --> 00:00:49,330
will talk about
this again when we

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talk about payments in class 6.

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In terms of some
of the readings,

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I shared with you two write-ups
that were done for a class

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that Neha Narula and I
teach, an online class

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called Cryptocurrency, which
is available through MIT.

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And those two write-ups,
the "Economics of Money

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and Technology"--

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I'm sorry, and the
"Responses of Big Finance"

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sort of give you some
of the challenges

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and how to think through
these technologies.

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Also, the Bank of
International Settlement

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did a review just
earlier in 2020

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about the central
bank digital currency

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space, because so much
is going on there.

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And particularly after Facebook
announced their Libra project

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in June of 2019, many central
banks took note and said, wait,

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maybe there's
something going on here

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that we too need to do more.

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Now, before Facebook
Libra, there

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were many projects the bank--

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one of the world's
largest central banks,

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the Riksbank in
Sweden, was already

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looking at an e-krona project.

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There were other projects.

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But all of a sudden, that
Facebook Libra project kicked

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into high gear central
bankers around the globe,

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and particularly
China's look and review

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and announcements around the
Digital Currency Electronic

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Payments Project also
got kicked into gear.

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So regardless of
where you come out,

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whether blockchain technology,
cryptocurrencies, are getting

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rolled into the stack, rolled
into the technology stack

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of big finance.

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What we can say as of 2020,
what's really the case,

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is that cryptocurrencies
and blockchain technology

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have at least been a
catalyst for change,

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an important catalyst for
change pushing upon big finance,

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pushing upon central
banks to reconsider

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how they do payments, how
they do the basics of money.

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And I laid out a few questions.

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Again, Romain will
look for some hands.

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We're going to keep this a
little shorter than we usually

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do, just because we have
so much to cover, but,

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how does Bitcoin fit into
the history of money?

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What are the strategic and
tactical considerations

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assessing viability
and value propositions?

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And how are these
central banks thinking

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about what they're doing?

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And Romain, if we can just
see if we could get one or two

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people in kind of each of
these three questions--

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and these are the
essential questions

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I'm going to try to cover
in the next hour or so.

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AUDIENCE: OK.

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Sounds good.

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Who would like to
get us started?

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I'm watching for
your blue hands.

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GARY GENSLER: Quiet day today.

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AUDIENCE: If you wish, Gary,
I'm also happy to cold call.

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GARY GENSLER: All right.

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Well, I'm going to start.

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I'm going to kind of just go.

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But I hoped that
everyone would come in.

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I start with this scene--

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and I don't know anyone who
wants to raise a blue hand

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and tell me what movie
this is from and the era.

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But this is the opening scene
of a movie from the mid 1990s,

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The Net, 1995, Sandra Bullock.

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Now, I start with this, because
Pizza Net was actually real.

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Now, this cyber security
sort of spy thriller

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with Sandra Bullock sort of
cracking through the computer

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network--

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remember, let's place this.

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Mid 1990s.

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It was only the early 1990s
that Tim Berners-Lee, associated

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with MIT, actually came
up with the protocols that

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connects the world wide web.

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The internet had been
around for some time,

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coming out of DARPA and
the Department of Defense

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in the US and
academic institutions.

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But by the early
'90s, it was actually

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something that those
of us in the public

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could use beyond universities,
beyond the defense

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establishment and the like.

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But what hadn't
been solved, what

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hadn't been solved
by 1995, was how

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to move money on the internet.

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And Pizza Hut founded something
called Pizza Net, which

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is thought to be the
first commercial use where

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you could actually
order something online--

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just 25 years ago--
order something

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online through Pizza Net.

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There was only sort
of one problem.

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You ordered the
pizza, and guess what?

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You couldn't pay online.

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Nobody had figured
out how to pay online.

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You had to have the pizza
delivery at your door,

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and you paid.

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So just think.

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It's in the middle of
the corona lockdown,

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we're sheltering at home.

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And if it weren't for these
inventions of 25 years ago

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we're about to discuss, you
would be paying for that pizza

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at the door when the
delivery truck arrived,

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or for your groceries, or
for any other household

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goods that you have.

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So this riddle, what I call the
payments riddle, what others

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call the payments
riddle, was at the core

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of this new technology,
the internet.

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Now, the internet has been fully
adopted into the technology

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stack of finance by now.

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But in the mid 1990s, it
was, in essence, fintech.

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But the question is how to
move value on the internet,

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to do it securely, efficiently,
and really importantly,

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similar to the packets of
data that move on the internet

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as packets of data,
and thus peer-to-peer.

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So the internet doesn't
really have central control.

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All the data that we're
live streaming right now

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between and amongst us, between
78 participants on this Zoom

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meeting right now,
is through packets

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of data that's not through
one central control,

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even though we think, well, Zoom
might be controlling all this.

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But the challenge really
was, how could you

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prohibit double spending?

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How could you send a packet
of data to one person

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and ensure that
that packet of data

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wasn't also sent to another,
in essence, double spending?

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Having some data
like an email that we

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might send to two people--

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they were both reading
the same email,

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they don't know that each
are reading the same email.

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So that was this
payments riddle--

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secure, efficient
packets of data,

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but avoiding double spending.

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Lots of challenges,
lots of attempts.

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And there were
dozens of attempts.

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Somebody even went to
go in to get patents

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and started businesses,
raised money.

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Some of them through the
earlier days of venture capital

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were backed like
CyberCash and DigiCash,

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and E-gold, B-Money,
all of these failed.

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All of them, and
dozens more beyond what

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I list here in the 1990s,
and the hurdles were, well,

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of course the same hurdles
that any startup would

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have around merchant adoption--

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would the stores
actually adopt it--

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but this issue of
double spending.

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And the only sort of
solution to double spending

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was using centralization.

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There was one central computer,
one central controller,

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to avoid the double spending.

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Or the other side of it,
how did you form consensus?

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If you didn't have a
central controller,

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how to form consensus on
the say of who had the money

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and who didn't have the money.

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So this sort of central
payments riddle,

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a big issue in the
1990s, attracted

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the interest of a
cryptography group

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called the cypherpunk community.

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I kid you not, it's called
cypherpunk community.

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It was an email list that
had started in the late 1980s

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and had gone on for some time.

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And so there were early
digital solutions that

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were a little bit different.

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And some of the cryptography
that was brought to it

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was not brought from the
cypherpunk community,

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it was brought to bear from
great cryptographers, some

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of them at MIT, some
elsewhere, that came together

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by 1996 with a solution.

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It's this updated today the
same solution we use now--

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secure socket layer and
transport layer security.

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These two protocols, on hop
of Tim Berners-Lee protocols

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about the world wide web from
four or five years earlier.

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These are the main protocols--

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there are many others
that were added.

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But these are the main
protocols that allowed

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us to secure the internet.

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It's how we do it right now--

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a transfer of data
that's secured

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by the use of cryptography.

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And what did that lead to?

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That led to a lot
of things where

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we could accept Visas and
MasterCard, American Express,

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by the mid 1990s.

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Amazon, eBay were
both formed in 1995.

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It's a founder's dream
to get formed right when

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a technology is transitioning.

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If Amazon, if Jeff Bezos
had been formed in 1992,

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would it still have
been around by 1996

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when the secure socket
layer and the cryptography

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was there for him to get going?

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If Jeff Bezos had decided
to form it in 1998 or '99,

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it might have been too late.

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Now, there's a lot
of things that Amazon

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00:10:35,870 --> 00:10:37,460
got right and Visa's got right.

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But I'm saying timing was
one that was remarkable.

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PayPal came along in 1998.

215
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And interestingly, the
first mobile payments

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was actually Ericsson teaming
up with Telenor in 1999.

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Now, that product is
not around today--

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00:10:54,062 --> 00:10:55,770
or maybe somebody will
correct me and say

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00:10:55,770 --> 00:10:57,250
there's still a little bit.

220
00:10:57,250 --> 00:10:59,190
But one of the early
ones that really took off

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00:10:59,190 --> 00:11:03,510
was Alipay and then
M-Pesa in Kenya.

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00:11:03,510 --> 00:11:08,640
Now, All of this still
left the payments riddle.

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00:11:08,640 --> 00:11:11,510
That payments riddle
was still there

224
00:11:11,510 --> 00:11:15,130
to some in that
cypherpunk community.

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Now, the internet could
get commercialized,

226
00:11:16,980 --> 00:11:18,750
the internet could move on.

227
00:11:18,750 --> 00:11:21,660
We had this way
through cryptography

228
00:11:21,660 --> 00:11:23,670
to secure payments.

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But there was still
this question.

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00:11:26,410 --> 00:11:30,100
And it goes to the
heart of, what is money?

231
00:11:30,100 --> 00:11:33,310
And so I'm going to turn a
little bit to chat about money,

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00:11:33,310 --> 00:11:37,258
but just see if Romain
has any questions so far.

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00:11:37,258 --> 00:11:38,550
AUDIENCE: Nobody at the moment.

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00:11:38,550 --> 00:11:39,390
GARY GENSLER: OK.

235
00:11:39,390 --> 00:11:41,250
So I'd like to go back in time.

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00:11:41,250 --> 00:11:47,697
I'd like to go back 2,300, 2,400
years in talking about money.

237
00:11:47,697 --> 00:11:49,530
It's not the first time
money was discussed,

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00:11:49,530 --> 00:11:51,270
because money was
really an invention

239
00:11:51,270 --> 00:11:54,210
of humankind thousands
of years before that.

240
00:11:54,210 --> 00:11:57,510
But I'd like to go back
to Plato and Aristotle.

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00:11:57,510 --> 00:11:59,880
Plato did not write
extensively on money.

242
00:11:59,880 --> 00:12:03,510
But what he did
write is interesting.

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00:12:03,510 --> 00:12:05,730
It's that money is
a symbol devised

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00:12:05,730 --> 00:12:07,290
for the purpose of exchanges.

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00:12:07,290 --> 00:12:09,720
To think, you and I were
going to exchange something--

246
00:12:09,720 --> 00:12:13,050
at the time, maybe it
was a goat for wheat,

247
00:12:13,050 --> 00:12:16,890
maybe I needed the goat today,
you needed the wheat tomorrow--

248
00:12:16,890 --> 00:12:20,790
but we can use this
symbol, as Plato wrote,

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00:12:20,790 --> 00:12:23,160
as a purpose of that exchange.

250
00:12:23,160 --> 00:12:26,700
And interestingly,
separately Plato wrote--

251
00:12:26,700 --> 00:12:30,540
Plato wasn't in for using
gold and silver for money.

252
00:12:30,540 --> 00:12:32,430
Now, this is
interesting in contrast

253
00:12:32,430 --> 00:12:34,550
to Plato's student, Aristotle.

254
00:12:34,550 --> 00:12:37,420
Now, Aristotle wrote
extensively about money.

255
00:12:37,420 --> 00:12:41,220
It seemed like Aristotle wrote
extensively about many things,

256
00:12:41,220 --> 00:12:43,650
but one of them was money.

257
00:12:43,650 --> 00:12:45,960
And Aristotle wrote
that it solves

258
00:12:45,960 --> 00:12:47,780
the problem of
commensurability--

259
00:12:47,780 --> 00:12:50,950
the same sort of issue that
Plato was grappling with,

260
00:12:50,950 --> 00:12:53,040
commensurability.

261
00:12:53,040 --> 00:12:57,060
You need rice, you need
grains, I need goats.

262
00:12:57,060 --> 00:13:00,584
How do we have some
commensurability between that?

263
00:13:00,584 --> 00:13:03,960
Or the second point here,
money is a guarantee

264
00:13:03,960 --> 00:13:07,150
that we have what we
want in the future.

265
00:13:07,150 --> 00:13:09,900
So this is sort of a
time commensurability.

266
00:13:09,900 --> 00:13:13,210
I need something today, you
need something tomorrow.

267
00:13:13,210 --> 00:13:19,620
So these two forms of marrying
up needs and wants and values--

268
00:13:19,620 --> 00:13:24,690
Aristotle talked also
as a philosopher about,

269
00:13:24,690 --> 00:13:27,000
what is values?

270
00:13:27,000 --> 00:13:30,660
And then talked about
four absolute values.

271
00:13:30,660 --> 00:13:32,940
Now, I hate to disagree
with Aristotle.

272
00:13:32,940 --> 00:13:35,940
But, you know, over
time, there are

273
00:13:35,940 --> 00:13:38,460
many of Aristotle's
great writings that

274
00:13:38,460 --> 00:13:40,890
have been challenged--
about the Earth and about

275
00:13:40,890 --> 00:13:45,060
the solar system, about the
heavens, the skies, the bodies.

276
00:13:45,060 --> 00:13:48,090
So why not say that maybe
Aristotle didn't quite

277
00:13:48,090 --> 00:13:49,320
have it right about money?

278
00:13:49,320 --> 00:13:53,740
He talked about durability,
portability, divisibility.

279
00:13:53,740 --> 00:13:54,910
I still sort of agree.

280
00:13:54,910 --> 00:13:58,360
And most monetary economists
would agree on that.

281
00:13:58,360 --> 00:14:01,510
It's this fourth point--
did it have intrinsic value?

282
00:14:01,510 --> 00:14:04,135
I find myself more
associated with Plato, who

283
00:14:04,135 --> 00:14:06,730
had said it was just a symbol.

284
00:14:06,730 --> 00:14:08,740
It's but a symbol.

285
00:14:08,740 --> 00:14:11,770
And so today when we
think about money,

286
00:14:11,770 --> 00:14:14,810
we often think of six
key characteristics.

287
00:14:14,810 --> 00:14:16,840
Is it durable,
portable, divisible?

288
00:14:16,840 --> 00:14:20,050
These were--
Aristotle seemed to--

289
00:14:20,050 --> 00:14:23,320
2,300 years later people
still tend to agree.

290
00:14:23,320 --> 00:14:28,600
But rather than intrinsic value,
that it's uniform, acceptable,

291
00:14:28,600 --> 00:14:31,930
and stable we'll talk
a little bit more

292
00:14:31,930 --> 00:14:35,830
about that when we get to the
economics of cryptocurrencies.

293
00:14:35,830 --> 00:14:38,440
But remember, instead
of intrinsic value,

294
00:14:38,440 --> 00:14:41,890
that it's uniform; that it's
the same unit of account

295
00:14:41,890 --> 00:14:46,150
within some local
or national economy;

296
00:14:46,150 --> 00:14:49,430
that others accept it, because
if others don't accept it,

297
00:14:49,430 --> 00:14:56,270
how can I know that that which I
take today I can use tomorrow?;

298
00:14:56,270 --> 00:14:59,000
and then its value is stable.

299
00:14:59,000 --> 00:15:02,380
And we think over the
last 300-plus years

300
00:15:02,380 --> 00:15:05,920
about institutions
that help ensure

301
00:15:05,920 --> 00:15:10,940
that currency value is stable,
we call them central banks.

302
00:15:10,940 --> 00:15:12,940
So instead of an
intrinsic value, that we

303
00:15:12,940 --> 00:15:16,990
humans create some form of
acceptability, uniformity,

304
00:15:16,990 --> 00:15:18,940
and stability.

305
00:15:18,940 --> 00:15:21,570
Questions?

306
00:15:21,570 --> 00:15:24,380
AUDIENCE: None so far, but I'll
give our students a few seconds

307
00:15:24,380 --> 00:15:26,570
to raise their hand
if they want to.

308
00:15:26,570 --> 00:15:28,720
Yes, we have a
question from Hassan.

309
00:15:28,720 --> 00:15:30,410
GARY GENSLER: Please, Hassan.

310
00:15:33,635 --> 00:15:34,760
AUDIENCE: Hello, professor.

311
00:15:34,760 --> 00:15:40,100
Yeah, my question
is, when you said

312
00:15:40,100 --> 00:15:46,440
that people could exchange
things for other things

313
00:15:46,440 --> 00:15:46,940
as a mean.

314
00:15:46,940 --> 00:15:51,880
So I mean, how could
the cryptocurrency

315
00:15:51,880 --> 00:15:55,210
survive if there is no
intrinsic value in it

316
00:15:55,210 --> 00:15:57,190
and it's so volatile?

317
00:15:57,190 --> 00:15:59,770
And when you said that
central banks make

318
00:15:59,770 --> 00:16:04,500
sure that these currencies
are stable, it's because--

319
00:16:04,500 --> 00:16:07,960
like for instance, in my
country the central bank

320
00:16:07,960 --> 00:16:11,680
has to have gold
and other currencies

321
00:16:11,680 --> 00:16:19,340
to support our currency,
our local currency.

322
00:16:19,340 --> 00:16:25,030
So I'm just baffled to see like
someone speak about, well, you

323
00:16:25,030 --> 00:16:27,340
know what, it's only a symbol.

324
00:16:27,340 --> 00:16:30,190
OK, I know that it
is a symbol, but it

325
00:16:30,190 --> 00:16:32,250
has to have some value in it.

326
00:16:32,250 --> 00:16:34,210
Otherwise, the other
party would not

327
00:16:34,210 --> 00:16:38,390
accept it as a means of
exchange, if that makes sense.

328
00:16:38,390 --> 00:16:41,330
GARY GENSLER: So Hassan
is associating himself

329
00:16:41,330 --> 00:16:43,310
more with Aristotle
than Plato, and I

330
00:16:43,310 --> 00:16:47,250
find myself more associated
with Plato than Aristotle.

331
00:16:47,250 --> 00:16:48,740
So this is a worthy
debate that's

332
00:16:48,740 --> 00:16:52,700
gone on for well over a
couple of thousand years.

333
00:16:52,700 --> 00:16:56,330
But when I say that it
doesn't have intrinsic value,

334
00:16:56,330 --> 00:16:59,400
and it's more about uniformity,
acceptability, instability,

335
00:16:59,400 --> 00:17:00,800
think about--

336
00:17:00,800 --> 00:17:02,420
I'll take the US dollar.

337
00:17:02,420 --> 00:17:05,910
I don't know-- what
you're country?

338
00:17:05,910 --> 00:17:07,839
AUDIENCE: I'm from Bahrain.

339
00:17:07,839 --> 00:17:09,339
GARY GENSLER: So
I'm not as familiar

340
00:17:09,339 --> 00:17:11,079
with your central bank.

341
00:17:11,079 --> 00:17:15,520
But let's take the US
dollar instead of Bahraini.

342
00:17:15,520 --> 00:17:17,980
If you walk into
the Federal Reserve,

343
00:17:17,980 --> 00:17:22,480
the US Federal Reserve, and
you have $100 bill-- you know,

344
00:17:22,480 --> 00:17:25,470
paper currency, $100--

345
00:17:25,470 --> 00:17:26,963
what will they give you?

346
00:17:26,963 --> 00:17:29,130
I mean, other than that
they would probably send you

347
00:17:29,130 --> 00:17:31,980
on your way and the
security guard would say,

348
00:17:31,980 --> 00:17:34,170
we're in this
coronavirus period,

349
00:17:34,170 --> 00:17:35,580
nobody's allowed
in the building.

350
00:17:35,580 --> 00:17:39,060
But what would they
do if you showed up

351
00:17:39,060 --> 00:17:43,500
at the New York Federal
Reserve or the Richmond Federal

352
00:17:43,500 --> 00:17:48,630
Reserve, and you said, I
want something for this $100?

353
00:17:48,630 --> 00:17:52,490
AUDIENCE: I suppose
that a few years ago

354
00:17:52,490 --> 00:17:55,152
that they would give you like
gold, if that makes sense.

355
00:17:55,152 --> 00:17:55,860
GARY GENSLER: OK.

356
00:17:55,860 --> 00:17:58,900
So we got rid of that in 1933.

357
00:17:58,900 --> 00:18:01,830
So "a few years ago" would
be like at the beginning

358
00:18:01,830 --> 00:18:05,460
of the Great Depression under
President Roosevelt. What

359
00:18:05,460 --> 00:18:08,130
would they give you in 2020?

360
00:18:08,130 --> 00:18:13,080
AUDIENCE: They would give me,
I think, the government's--

361
00:18:15,800 --> 00:18:19,350
that the government
basically would support

362
00:18:19,350 --> 00:18:22,918
this piece of paper, I assume.

363
00:18:22,918 --> 00:18:25,210
GARY GENSLER: So you're
getting at the government which

364
00:18:25,210 --> 00:18:29,240
sort of insure, through
its means and methods,

365
00:18:29,240 --> 00:18:33,110
that it's acceptable
by other citizens,

366
00:18:33,110 --> 00:18:34,880
and it's acceptable
by the government.

367
00:18:34,880 --> 00:18:35,790
How do they do that?

368
00:18:35,790 --> 00:18:38,270
They say, well, we'll
take it for US taxes.

369
00:18:38,270 --> 00:18:40,820
We'll take it for
Bahranian taxes.

370
00:18:40,820 --> 00:18:43,820
And in most economies,
the governments

371
00:18:43,820 --> 00:18:45,890
are anywhere from
a quarter to a half

372
00:18:45,890 --> 00:18:48,890
of the economy in some
way, so they will accept it

373
00:18:48,890 --> 00:18:50,690
for a government.

374
00:18:50,690 --> 00:18:53,420
They'll ensure that other
people accept it through what's

375
00:18:53,420 --> 00:18:55,130
called legal tender laws.

376
00:18:55,130 --> 00:18:59,930
Through the coercive power
of the state, they will say,

377
00:18:59,930 --> 00:19:02,100
others must accept it.

378
00:19:02,100 --> 00:19:03,760
And this is not a new thing.

379
00:19:03,760 --> 00:19:06,590
Genghis Khan was
doing this in China,

380
00:19:06,590 --> 00:19:08,000
and it was pretty coercive.

381
00:19:08,000 --> 00:19:10,880
It was kind of [CLICKS TONGUE]
the coercive power

382
00:19:10,880 --> 00:19:14,360
of the state, you must
accept the official currency.

383
00:19:14,360 --> 00:19:17,640
So acceptability can be
accepted by the government.

384
00:19:17,640 --> 00:19:19,670
It could be
acceptability that others

385
00:19:19,670 --> 00:19:23,910
must accept it for all
debts, public and private.

386
00:19:23,910 --> 00:19:27,290
And they can work on stability
and form central banks

387
00:19:27,290 --> 00:19:30,490
to ensure that-- now, what
does it mean by stability?

388
00:19:30,490 --> 00:19:35,150
It means addressing the
official sector to the supply

389
00:19:35,150 --> 00:19:37,070
and pricing of money.

390
00:19:37,070 --> 00:19:39,920
Supply and pricing--
the supply we

391
00:19:39,920 --> 00:19:42,740
talk about the monetary
supply, the pricing

392
00:19:42,740 --> 00:19:44,620
is through interest rates.

393
00:19:44,620 --> 00:19:46,470
But can you go into
the US Central Bank,

394
00:19:46,470 --> 00:19:49,380
can you go into Bahrain
and actually get gold?

395
00:19:49,380 --> 00:19:49,880
No.

396
00:19:49,880 --> 00:19:51,860
You can go in and
get a $100 bill,

397
00:19:51,860 --> 00:19:54,260
and they might
give you five 20's.

398
00:19:54,260 --> 00:19:57,800
If you really want,
they'll give you 100 1's.

399
00:19:57,800 --> 00:20:00,110
But you still have
just a physical piece

400
00:20:00,110 --> 00:20:03,350
of paper or a digital
representation

401
00:20:03,350 --> 00:20:05,210
that I would contend--

402
00:20:05,210 --> 00:20:06,770
I'm sort of with Plato--

403
00:20:06,770 --> 00:20:08,330
it's just a symbol.

404
00:20:08,330 --> 00:20:11,780
It's a symbol that
our society, no matter

405
00:20:11,780 --> 00:20:15,020
whether it's small or
big, has come together.

406
00:20:15,020 --> 00:20:18,110
And it represents
a store of value.

407
00:20:18,110 --> 00:20:21,710
It represents a
means of exchange.

408
00:20:21,710 --> 00:20:26,450
But it frankly doesn't have
intrinsic value the way

409
00:20:26,450 --> 00:20:27,920
Aristotle talked about it.

410
00:20:27,920 --> 00:20:33,540
It has only value because we
humans place a value on it.

411
00:20:33,540 --> 00:20:37,410
But Hassan, are you on
still on the other side?

412
00:20:37,410 --> 00:20:41,360
You feel gold has
intrinsic value.

413
00:20:41,360 --> 00:20:42,350
AUDIENCE: Yes.

414
00:20:42,350 --> 00:20:46,160
I think because
it's a scarce metal.

415
00:20:46,160 --> 00:20:50,480
And I know that prices
could go up and down,

416
00:20:50,480 --> 00:20:53,380
but still I know that
I could sell it one day

417
00:20:53,380 --> 00:20:55,020
and get money or get--

418
00:20:55,020 --> 00:20:59,920
GARY GENSLER: So gold is
what we now call an element.

419
00:20:59,920 --> 00:21:03,670
It's on the periodic table.

420
00:21:03,670 --> 00:21:07,240
It's got great attributes
because it's scarce.

421
00:21:07,240 --> 00:21:09,310
It takes a lot of
human resources

422
00:21:09,310 --> 00:21:11,480
to get it out of the ground.

423
00:21:11,480 --> 00:21:15,240
The other thing about gold,
it's divisible, it's portable,

424
00:21:15,240 --> 00:21:15,850
it's uniform.

425
00:21:15,850 --> 00:21:19,620
It doesn't oxidize, so it's
a really good base sort

426
00:21:19,620 --> 00:21:22,790
of element in that way as well.

427
00:21:22,790 --> 00:21:26,140
And now we have, give
or take, 10,000 years

428
00:21:26,140 --> 00:21:30,580
of acceptability, that it's
a human shared narrative.

429
00:21:30,580 --> 00:21:33,190
Some of it not good,
some of it about war,

430
00:21:33,190 --> 00:21:38,060
and slavery, and all sorts of
challenges in human history.

431
00:21:38,060 --> 00:21:41,080
But gold, and to a
lesser extent silver,

432
00:21:41,080 --> 00:21:44,290
were very acceptable and stable.

433
00:21:44,290 --> 00:21:46,000
But think about
this for a moment.

434
00:21:46,000 --> 00:21:49,780
All the world's gold
that's ever been mined,

435
00:21:49,780 --> 00:21:52,870
if you take all of
that gold, it can fit

436
00:21:52,870 --> 00:21:56,090
in four Olympic-sized pools.

437
00:21:56,090 --> 00:21:59,300
Four Olympic-sized pools,
you. could put all that gold

438
00:21:59,300 --> 00:22:01,130
into one space.

439
00:22:01,130 --> 00:22:03,730
Now, it's spread
around the world

440
00:22:03,730 --> 00:22:06,500
in jewelry and secure vaults.

441
00:22:06,500 --> 00:22:09,500
But it's only four
Olympic-sized pools.

442
00:22:09,500 --> 00:22:13,620
I would kind of contend
that's just a symbol.

443
00:22:13,620 --> 00:22:19,630
Again, it has some kind of
features that make it durable,

444
00:22:19,630 --> 00:22:23,560
and it's got 10,000
years of human narrative

445
00:22:23,560 --> 00:22:25,360
and acceptability.

446
00:22:25,360 --> 00:22:29,950
And I can assure
you that those who

447
00:22:29,950 --> 00:22:32,980
are really in times of
trouble would probably

448
00:22:32,980 --> 00:22:34,780
take a piece of gold--

449
00:22:34,780 --> 00:22:38,830
if it was really in
times of war and despair,

450
00:22:38,830 --> 00:22:42,253
take a piece of
gold over Bitcoin.

451
00:22:42,253 --> 00:22:43,670
But on the other
hand, we're going

452
00:22:43,670 --> 00:22:45,550
to get into what
Bitcoin is and how

453
00:22:45,550 --> 00:22:49,610
it creates some digital
scarce store of value.

454
00:22:49,610 --> 00:22:52,810
So Hassan, we could keep
going with a lively debate,

455
00:22:52,810 --> 00:22:56,990
but I hope that helps at least
frame the sides of this thing.

456
00:22:56,990 --> 00:22:59,620
AUDIENCE: Yeah, I just
have one thing to say.

457
00:22:59,620 --> 00:23:05,230
Now, I mean, if the US
for some reason collapsed,

458
00:23:05,230 --> 00:23:08,140
what would happen to the
whole monetary system?

459
00:23:08,140 --> 00:23:11,860
I mean, it's very dangerous,
if that makes sense.

460
00:23:11,860 --> 00:23:12,460
Because--

461
00:23:12,460 --> 00:23:14,710
GARY GENSLER: You're asking
what happens if a nation's

462
00:23:14,710 --> 00:23:15,970
currency collapses.

463
00:23:15,970 --> 00:23:18,380
And we have history of that.

464
00:23:18,380 --> 00:23:20,950
We don't have
recent history when

465
00:23:20,950 --> 00:23:23,770
a world's dominant
currency collapses,

466
00:23:23,770 --> 00:23:26,440
but we've certainly a
history of many countries'

467
00:23:26,440 --> 00:23:27,490
currencies collapsing.

468
00:23:27,490 --> 00:23:31,780
In fact, right now Venezuela's
currency basically collapses.

469
00:23:31,780 --> 00:23:35,410
And what happens in countries
that where the currencies enter

470
00:23:35,410 --> 00:23:37,960
hyperinflation and
start to collapse,

471
00:23:37,960 --> 00:23:42,910
you start to see communities
reach out to another symbol,

472
00:23:42,910 --> 00:23:48,580
some other symbol that is
acceptable and has stability.

473
00:23:48,580 --> 00:23:51,790
It might be in the common
time, in the current time,

474
00:23:51,790 --> 00:23:54,980
that those people will
reach out to the US dollar.

475
00:23:54,980 --> 00:23:57,130
And your question is, what
if the dollar collapses?

476
00:23:57,130 --> 00:24:00,850
But in monetary history
serves that usually

477
00:24:00,850 --> 00:24:04,920
that when a currency goes
bad, people reach out

478
00:24:04,920 --> 00:24:06,820
to the better currency.

479
00:24:06,820 --> 00:24:09,900
And it could be a
neighboring country.

480
00:24:09,900 --> 00:24:12,990
It could be a different
metal, like when

481
00:24:12,990 --> 00:24:16,980
we had challenges between
different base metals,

482
00:24:16,980 --> 00:24:20,220
or even earlier
times, when we had

483
00:24:20,220 --> 00:24:23,310
money that looked a little
different than we currently

484
00:24:23,310 --> 00:24:26,250
looked like.

485
00:24:26,250 --> 00:24:29,160
Let me hold that about what
happens to the US dollar

486
00:24:29,160 --> 00:24:31,140
for a moment and
just say, the role

487
00:24:31,140 --> 00:24:33,090
of money, because
we will lose time,

488
00:24:33,090 --> 00:24:35,500
and I want to get going
as to what cryptocurrency

489
00:24:35,500 --> 00:24:37,660
and blockchain technology is.

490
00:24:37,660 --> 00:24:40,080
So the role of money
is three things--

491
00:24:40,080 --> 00:24:42,630
a medium of exchange,
as Plato and Aristotle

492
00:24:42,630 --> 00:24:46,380
talked about; a store of
value, that Aristotle basically

493
00:24:46,380 --> 00:24:49,830
said that I can hold it today
for something tomorrow-- that's

494
00:24:49,830 --> 00:24:55,200
a store of value; and it also
then becomes a unit of account.

495
00:24:55,200 --> 00:24:58,140
The US dollar is a unit
of account in the US,

496
00:24:58,140 --> 00:25:04,170
the yen in Japan, the euro
in Europe, a unit of account.

497
00:25:04,170 --> 00:25:06,840
These three roles of money.

498
00:25:06,840 --> 00:25:08,880
And it's looked very
different over time.

499
00:25:08,880 --> 00:25:11,430
Cowrie shells in Greece.

500
00:25:11,430 --> 00:25:15,860
But today, I put here
an Alipay mobile wallet.

501
00:25:15,860 --> 00:25:21,760
That's sort of what we use
dominantly around the world.

502
00:25:21,760 --> 00:25:24,390
We talked a little bit
about fiat currency

503
00:25:24,390 --> 00:25:27,570
when Hassan and I were
going back and forth.

504
00:25:27,570 --> 00:25:31,350
A fiat currency is
a representation

505
00:25:31,350 --> 00:25:35,340
of some central bank liability.

506
00:25:35,340 --> 00:25:39,630
Central banks, an invention
of the late 17th century

507
00:25:39,630 --> 00:25:42,810
both in England and
in Sweden, just about

508
00:25:42,810 --> 00:25:46,410
the same decade in
the late 17th century,

509
00:25:46,410 --> 00:25:47,880
was a check on the sovereign.

510
00:25:47,880 --> 00:25:50,100
You see the king,
the king in England--

511
00:25:50,100 --> 00:25:51,990
using that story for a moment--

512
00:25:51,990 --> 00:25:55,440
the king was at yet
another war with France

513
00:25:55,440 --> 00:25:58,920
and wanted to borrow money.

514
00:25:58,920 --> 00:26:00,750
And when the king
wanted to borrow money,

515
00:26:00,750 --> 00:26:02,880
going to the noble
lords, the noble lords

516
00:26:02,880 --> 00:26:06,450
said, enough already,
king, and said, we

517
00:26:06,450 --> 00:26:12,490
need some mechanism to control
how much you can borrow.

518
00:26:12,490 --> 00:26:15,010
And how much you can
borrow is, in essence,

519
00:26:15,010 --> 00:26:17,260
a representation of money.

520
00:26:17,260 --> 00:26:20,300
And they set up the
Bank of England.

521
00:26:20,300 --> 00:26:23,117
And in Sweden it was a
check also on the sovereign

522
00:26:23,117 --> 00:26:24,950
for a little bit different
political reasons

523
00:26:24,950 --> 00:26:27,150
than a war with France.

524
00:26:27,150 --> 00:26:30,500
And there we had the initial
sort of central banks.

525
00:26:30,500 --> 00:26:33,320
Here in the US we
went about it--

526
00:26:33,320 --> 00:26:35,960
Alexander Hamilton thought
we should have something.

527
00:26:35,960 --> 00:26:41,600
That was during the 1790s.

528
00:26:41,600 --> 00:26:44,300
By the 1830s,
Andrew Jackson said,

529
00:26:44,300 --> 00:26:47,000
enough with this sort
of centralized banking.

530
00:26:47,000 --> 00:26:51,620
And then we went for nearly
80 years-- about 75 years,

531
00:26:51,620 --> 00:26:54,170
from the 1830s to the 19-teens--

532
00:26:54,170 --> 00:26:56,720
with no central bank.

533
00:26:56,720 --> 00:27:00,050
We had crisis after
crisis, and we formed one

534
00:27:00,050 --> 00:27:03,200
during President
Wilson's time, one

535
00:27:03,200 --> 00:27:09,380
of the great progressive
movements of the day and just

536
00:27:09,380 --> 00:27:11,390
about a hundred years ago.

537
00:27:11,390 --> 00:27:15,310
But fiat currencies are
representations of liabilities.

538
00:27:15,310 --> 00:27:17,060
And Hassan would say,
well, but don't they

539
00:27:17,060 --> 00:27:19,490
have something behind it?

540
00:27:19,490 --> 00:27:23,420
What they have behind it
is the government's ability

541
00:27:23,420 --> 00:27:26,810
to, of course, tax, the
government's ability

542
00:27:26,810 --> 00:27:30,530
to be trusted to keep
its promises to keep

543
00:27:30,530 --> 00:27:32,390
that currency stable.

544
00:27:32,390 --> 00:27:35,510
But again, just like when
that English king was

545
00:27:35,510 --> 00:27:38,300
at war with France, sometimes--

546
00:27:38,300 --> 00:27:41,270
sometimes-- they
overprint the money.

547
00:27:41,270 --> 00:27:46,520
Sometimes it gets out of control
and central banks lose control.

548
00:27:46,520 --> 00:27:51,020
But it has very big network
effects that we talked about.

549
00:27:51,020 --> 00:27:54,830
The acceptance for
taxes for legal tender,

550
00:27:54,830 --> 00:27:58,490
it's accepted through
what Mundell would say

551
00:27:58,490 --> 00:28:00,950
was an optimum currency area.

552
00:28:00,950 --> 00:28:04,310
Now, we have 180 currencies
around the globe.

553
00:28:04,310 --> 00:28:07,610
And some work well and
some don't work so well,

554
00:28:07,610 --> 00:28:10,510
like Venezuela right now.

555
00:28:10,510 --> 00:28:12,660
And so in the midst
of all of that,

556
00:28:12,660 --> 00:28:14,900
the question is, and
this a little humorous,

557
00:28:14,900 --> 00:28:16,960
is, what's money's future?

558
00:28:16,960 --> 00:28:18,670
Is it digital currencies?

559
00:28:18,670 --> 00:28:23,650
Or is it like in kind of
the fun movie Star Wars,

560
00:28:23,650 --> 00:28:28,900
is it these types of things,
credit chips and the like?

561
00:28:28,900 --> 00:28:30,610
Now, I would say if
you're a Star Trek

562
00:28:30,610 --> 00:28:33,550
fan, in Star Trek Gene
Roddenberry didn't

563
00:28:33,550 --> 00:28:34,660
have any currency.

564
00:28:34,660 --> 00:28:37,030
If you go through
all the original Star

565
00:28:37,030 --> 00:28:40,210
Treks and everything, they
actually didn't have any money.

566
00:28:40,210 --> 00:28:43,940
That was Gene
Roddenberry's future.

567
00:28:43,940 --> 00:28:48,120
So he sort of dispensed with
all this Plato and Aristotle--

568
00:28:48,120 --> 00:28:50,350
Let's now sort of go a
little bit more serious

569
00:28:50,350 --> 00:28:52,560
and then talk about
Satoshi Nakamoto.

570
00:28:52,560 --> 00:28:56,440
But Romain, any questions?

571
00:28:56,440 --> 00:28:57,370
AUDIENCE: None so far.

572
00:28:57,370 --> 00:28:58,537
Let's give it a few seconds.

573
00:29:04,250 --> 00:29:05,610
No, I think we're good to go.

574
00:29:05,610 --> 00:29:07,193
GARY GENSLER: So
with that foundation,

575
00:29:07,193 --> 00:29:09,770
let's go back to
the payments riddle.

576
00:29:09,770 --> 00:29:11,900
So we get through the 1990s.

577
00:29:11,900 --> 00:29:16,790
The internet is taking off, we
figure out how to secure it,

578
00:29:16,790 --> 00:29:21,830
and the credit card companies
find a way to move money.

579
00:29:21,830 --> 00:29:23,290
Some startups happen.

580
00:29:23,290 --> 00:29:26,150
PayPal and the like
start up in this area,

581
00:29:26,150 --> 00:29:28,820
the fintech of the late 1990s.

582
00:29:28,820 --> 00:29:31,640
Mobile payments
start by the noughts.

583
00:29:31,640 --> 00:29:39,310
We already have Alipay
and M-Pesa in Africa.

584
00:29:39,310 --> 00:29:41,260
But this payment
riddle is still there.

585
00:29:41,260 --> 00:29:44,770
And that cypherpunk mailing
list is still there.

586
00:29:44,770 --> 00:29:50,000
And on Halloween night in
2008, an eight-page paper

587
00:29:50,000 --> 00:29:54,330
is written and is put up on
the internet on this cypherpunk

588
00:29:54,330 --> 00:29:57,400
punk mailing list-- there
might only be a couple people.

589
00:29:57,400 --> 00:30:00,940
"I've been working on a new
electronic cash system."

590
00:30:00,940 --> 00:30:05,520
Peer-to-peer, no trusted third
party, no central authority.

591
00:30:05,520 --> 00:30:10,060
And what Satoshi Nakamoto wrote
in that eight-page paper, what

592
00:30:10,060 --> 00:30:16,600
Nakamoto-san wrote was
Bitcoin white paper.

593
00:30:16,600 --> 00:30:18,970
Had never used the word
"blockchain technology."

594
00:30:18,970 --> 00:30:21,490
We've come to call it
blockchain technology.

595
00:30:21,490 --> 00:30:24,460
So, what is the
blockchain technology?

596
00:30:24,460 --> 00:30:28,840
fundamentally, it's a
shared accounting system--

597
00:30:28,840 --> 00:30:33,110
a shared accounting system
or a shared database system.

598
00:30:33,110 --> 00:30:37,690
So Satoshi Nakamoto had
timestamped ledgers.

599
00:30:37,690 --> 00:30:43,380
And a timestamped ledger with
cryptography to secure it

600
00:30:43,380 --> 00:30:44,700
was not new.

601
00:30:44,700 --> 00:30:49,780
A timestamped ledger-- my
little illustration here,

602
00:30:49,780 --> 00:30:52,920
Neha Narula and I use this,
so I want to give her credit

603
00:30:52,920 --> 00:30:55,200
as well--

604
00:30:55,200 --> 00:30:57,600
represents blocks of data.

605
00:30:57,600 --> 00:31:00,840
Blocks of data, and between
these blocks of data

606
00:31:00,840 --> 00:31:03,030
a cryptographic hash function.

607
00:31:03,030 --> 00:31:04,710
And a cryptographic
hash function

608
00:31:04,710 --> 00:31:07,470
we use every day
of our lives, just

609
00:31:07,470 --> 00:31:10,920
we don't know we're using
it, somewhere on the internet

610
00:31:10,920 --> 00:31:13,190
to commit to data.

611
00:31:13,190 --> 00:31:18,540
This technology, this idea
of taking a block of data

612
00:31:18,540 --> 00:31:20,670
and adding another
block of data and having

613
00:31:20,670 --> 00:31:23,970
a hash function in
between, was an innovation

614
00:31:23,970 --> 00:31:26,380
of the late 1980s.

615
00:31:26,380 --> 00:31:29,700
Two Bell Labs scientists,
Haber and Stornetta,

616
00:31:29,700 --> 00:31:32,760
wrote a paper about it,
even started a company

617
00:31:32,760 --> 00:31:37,170
to notarize legal
documents by 1995,

618
00:31:37,170 --> 00:31:40,200
a little startup called Surety.

619
00:31:40,200 --> 00:31:41,940
That existed.

620
00:31:41,940 --> 00:31:45,030
That existed, but what
Nakamoto-san figured out

621
00:31:45,030 --> 00:31:48,300
was how to have
multiple parties.

622
00:31:48,300 --> 00:31:51,680
Nakamoto-san solved
the consensus riddle,

623
00:31:51,680 --> 00:31:55,860
or what some people call
Byzantine general's problem.

624
00:31:55,860 --> 00:32:00,880
The problem is, what if I don't
know the other people keeping

625
00:32:00,880 --> 00:32:01,950
a ledger?

626
00:32:01,950 --> 00:32:05,250
Again, the Byzantine
general's problem was not new.

627
00:32:05,250 --> 00:32:06,420
It wasn't even about money.

628
00:32:06,420 --> 00:32:08,460
The Byzantine general's
problem had been written

629
00:32:08,460 --> 00:32:10,200
about in the early 1980s.

630
00:32:10,200 --> 00:32:13,080
It was a computer
systems problem.

631
00:32:13,080 --> 00:32:16,770
If you tie various computers
together, what if one of them

632
00:32:16,770 --> 00:32:17,370
fails?

633
00:32:17,370 --> 00:32:20,850
Or even in an airplane, what
if one of the engines fails?

634
00:32:20,850 --> 00:32:23,540
It's the question
of fault tolerance.

635
00:32:23,540 --> 00:32:27,120
But what Satoshi Nakamoto
did was solved it

636
00:32:27,120 --> 00:32:29,480
through something
called proof of work.

637
00:32:29,480 --> 00:32:33,240
And we don't have the time
to go through that, but what

638
00:32:33,240 --> 00:32:38,280
this provided together was
a decentralized, auditable

639
00:32:38,280 --> 00:32:39,450
database.

640
00:32:39,450 --> 00:32:42,630
Now, in the case of
Bitcoin 10,000 computers

641
00:32:42,630 --> 00:32:47,040
around the globe maintain
this auditable database.

642
00:32:47,040 --> 00:32:49,620
And this audible
database builds a block

643
00:32:49,620 --> 00:32:53,640
of data on top of a block of
data on top of a block of data,

644
00:32:53,640 --> 00:32:59,550
but its shared accounting
system maintains it.

645
00:32:59,550 --> 00:33:03,090
There was one other thing that
went on in this period time.

646
00:33:03,090 --> 00:33:08,550
In the late 1990s, a
computer scientist Nick Szabo

647
00:33:08,550 --> 00:33:12,180
wrote a paper and coined the
phrase "smart contracts."

648
00:33:12,180 --> 00:33:13,950
Again, not an original idea.

649
00:33:13,950 --> 00:33:16,110
But what Nick Szabo
said, what if we

650
00:33:16,110 --> 00:33:21,760
could take a set of promises,
put them in digital form,

651
00:33:21,760 --> 00:33:24,600
and then the parties can
perform against them?

652
00:33:24,600 --> 00:33:29,200
In essence, what if we
automate in computer

653
00:33:29,200 --> 00:33:32,050
code the movement
of a property right?

654
00:33:32,050 --> 00:33:34,030
Now, I grew up in
Baltimore, Maryland.

655
00:33:34,030 --> 00:33:36,040
My dad had a vending
machine business.

656
00:33:36,040 --> 00:33:43,600
You know, cigarette machines
and candy machines and the like.

657
00:33:43,600 --> 00:33:46,430
A vending machine
is a smart contract.

658
00:33:46,430 --> 00:33:48,890
It's a conditional movement
of property rights.

659
00:33:48,890 --> 00:33:53,030
It's a pack of gum if you put
some money in the machine.

660
00:33:53,030 --> 00:33:55,040
So you can think
of a smart contract

661
00:33:55,040 --> 00:33:58,940
as digitizing, basically,
a vending machine.

662
00:33:58,940 --> 00:34:01,400
They're not necessarily
smart, they're not necessarily

663
00:34:01,400 --> 00:34:02,350
legal contracts.

664
00:34:02,350 --> 00:34:04,680
So I'd be cautious about that.

665
00:34:04,680 --> 00:34:08,480
But these two concepts came
together-- smart contracts,

666
00:34:08,480 --> 00:34:12,760
meaning, can I digitize the
movement of a property right?

667
00:34:12,760 --> 00:34:17,940
And then this accounting
system of a shared ledger,

668
00:34:17,940 --> 00:34:21,100
that multiple parties
can share a ledger

669
00:34:21,100 --> 00:34:23,860
with no central controller.

670
00:34:23,860 --> 00:34:28,120
That's kind of the
conceptual frame where

671
00:34:28,120 --> 00:34:30,040
I want to pause for
a second, Romain,

672
00:34:30,040 --> 00:34:36,340
and take questions
on what I usually

673
00:34:36,340 --> 00:34:38,739
cover in a lot more time
than the few minutes

674
00:34:38,739 --> 00:34:39,670
that I just did.

675
00:34:41,830 --> 00:34:43,580
AUDIENCE: Any questions
from the students?

676
00:34:48,179 --> 00:34:49,929
GARY GENSLER: This
must be because we just

677
00:34:49,929 --> 00:34:56,658
went through holiday time and
we had our Zoom Easters and Zoom

678
00:34:56,658 --> 00:34:57,158
seders.

679
00:35:00,365 --> 00:35:02,032
AUDIENCE: There are
no hands raised now.

680
00:35:02,032 --> 00:35:04,710
Ah, we do have one
question from Celi.

681
00:35:04,710 --> 00:35:07,063
GARY GENSLER: Please.

682
00:35:07,063 --> 00:35:08,480
AUDIENCE: So I was
just wondering,

683
00:35:08,480 --> 00:35:12,410
can you explain a
little more the issues

684
00:35:12,410 --> 00:35:15,920
of the decentralized
audible database?

685
00:35:15,920 --> 00:35:19,640
You mentioned it very briefly
that it first came out

686
00:35:19,640 --> 00:35:21,610
and how [INAUDIBLE] were solved.

687
00:35:21,610 --> 00:35:25,310
But can you-- just to understand
what issues they are solving.

688
00:35:25,310 --> 00:35:26,685
Can you kind of
explain a little?

689
00:35:26,685 --> 00:35:29,660
GARY GENSLER: So if I
understand the question,

690
00:35:29,660 --> 00:35:31,790
what Nakamoto-san
was trying to solve

691
00:35:31,790 --> 00:35:37,280
was what has been come to
called double spending.

692
00:35:37,280 --> 00:35:44,750
Can you in a digital way move
a representation of value,

693
00:35:44,750 --> 00:35:46,820
in a digital way move
that, without having

694
00:35:46,820 --> 00:35:48,890
a central authority?

695
00:35:48,890 --> 00:35:53,210
We move digitally representation
of values every day.

696
00:35:53,210 --> 00:35:56,330
When you go online and buy
something-- you go to Expedia,

697
00:35:56,330 --> 00:36:01,970
you go to Amazon,
you go to Alibaba--

698
00:36:01,970 --> 00:36:05,330
we move digitally
representation of values.

699
00:36:05,330 --> 00:36:09,585
We no longer have much of
our economy on physical cash.

700
00:36:09,585 --> 00:36:14,030
But we always have some
central authority-- a bank,

701
00:36:14,030 --> 00:36:18,650
a payments company that
we'll talk about in class 6--

702
00:36:18,650 --> 00:36:20,900
some central
authority controlling

703
00:36:20,900 --> 00:36:24,380
that to ensure that
you actually have

704
00:36:24,380 --> 00:36:27,620
that value, to
authenticate and authorize

705
00:36:27,620 --> 00:36:29,690
the movement of that money.

706
00:36:29,690 --> 00:36:31,820
So what Satoshi
Nakamoto was solving

707
00:36:31,820 --> 00:36:35,210
for is, what if there
was no central authority?

708
00:36:35,210 --> 00:36:39,470
And it was a shared
database or ledger,

709
00:36:39,470 --> 00:36:42,050
or what I call a shared
accounting system.

710
00:36:42,050 --> 00:36:45,170
That would be the core thing.

711
00:36:45,170 --> 00:36:48,380
This kind of riddle
from the 1990s,

712
00:36:48,380 --> 00:36:50,690
we send packets of data
around the internet

713
00:36:50,690 --> 00:36:53,260
with this out-of-central
authority,

714
00:36:53,260 --> 00:36:54,500
maybe you could do that.

715
00:36:54,500 --> 00:36:56,480
And I don't think it's
a surprise this happened

716
00:36:56,480 --> 00:36:59,050
in the middle of a
financial crisis, Halloween

717
00:36:59,050 --> 00:37:00,550
in the middle of a
financial crisis,

718
00:37:00,550 --> 00:37:04,100
when trust in central
authorities was quite low,

719
00:37:04,100 --> 00:37:07,220
and especially trust in
Wall Street and banking,

720
00:37:07,220 --> 00:37:09,830
and banks in Europe
was quite low.

721
00:37:12,470 --> 00:37:16,600
This burst of innovation
came at that time.

722
00:37:16,600 --> 00:37:17,890
I hope that helps.

723
00:37:17,890 --> 00:37:20,260
And I think as we're going
to chat through today

724
00:37:20,260 --> 00:37:21,730
and in other
classes, the question

725
00:37:21,730 --> 00:37:24,065
is, are there
other applications?

726
00:37:24,065 --> 00:37:26,050
See, this goes to
the heart of finance.

727
00:37:26,050 --> 00:37:27,820
It goes to the heart
of the plumbing.

728
00:37:27,820 --> 00:37:32,755
Satoshi Nakamoto's innovation
still survives 12 years later.

729
00:37:32,755 --> 00:37:38,570
In this adversarial sort
of off-the-grid way,

730
00:37:38,570 --> 00:37:42,400
Bitcoins still survives
12 years later.

731
00:37:42,400 --> 00:37:45,850
But are there other
applications in finance,

732
00:37:45,850 --> 00:37:51,820
where a shared database system,
a shared accounting system

733
00:37:51,820 --> 00:37:53,720
is the best way to go?

734
00:37:53,720 --> 00:37:56,200
And we've had
inventions like this,

735
00:37:56,200 --> 00:38:00,610
infrastructure technologies that
have radically changed finance.

736
00:38:00,610 --> 00:38:02,610
And one of them from
several hundred years ago

737
00:38:02,610 --> 00:38:04,900
was the joint stock company.

738
00:38:04,900 --> 00:38:07,300
When I talk about
a technology stack,

739
00:38:07,300 --> 00:38:10,540
one from several
centuries ago was,

740
00:38:10,540 --> 00:38:15,220
can we have a shared
ownership of a company?

741
00:38:15,220 --> 00:38:17,550
And when that was
sort of invented,

742
00:38:17,550 --> 00:38:20,490
I guess some people would have
said, what do we need that for?

743
00:38:20,490 --> 00:38:24,990
This, instead of a shared
company, is a shared database.

744
00:38:24,990 --> 00:38:26,580
And so that's the debate.

745
00:38:26,580 --> 00:38:28,530
Is it really needed?

746
00:38:28,530 --> 00:38:30,900
Will it be useful in the future?

747
00:38:30,900 --> 00:38:34,830
It has led to a crypto
market, about $200 billion

748
00:38:34,830 --> 00:38:42,310
as of yesterday, 2/3 of which
is Bitcoin, highly volatile.

749
00:38:42,310 --> 00:38:45,360
Hassan would say, but
what's the intrinsic value?

750
00:38:45,360 --> 00:38:49,470
It is a digital
scarce store of value.

751
00:38:49,470 --> 00:38:52,470
And it only has value because
somebody else will move it.

752
00:38:52,470 --> 00:38:55,560
When Bitcoin was
rolled out in 2009,

753
00:38:55,560 --> 00:38:57,540
nobody saw that it had value.

754
00:38:57,540 --> 00:39:02,490
It was just a kind of
interesting project.

755
00:39:02,490 --> 00:39:07,050
But by 2010, one person
who was in the community

756
00:39:07,050 --> 00:39:09,840
said, let's see if I could
get anybody to give me

757
00:39:09,840 --> 00:39:12,450
something commercially.

758
00:39:12,450 --> 00:39:14,560
And it was actually pizza.

759
00:39:14,560 --> 00:39:18,720
It wasn't Pizza Net,
the Sandra Bullock

760
00:39:18,720 --> 00:39:21,330
movie we started with in 1995.

761
00:39:21,330 --> 00:39:27,960
But 15 years later in 2010, a
crypto enthusiast in Florida

762
00:39:27,960 --> 00:39:32,760
put out-- on an email asked,
I will give you 10,000 bitcoin

763
00:39:32,760 --> 00:39:34,710
if you send me two pizzas.

764
00:39:34,710 --> 00:39:39,270
Two pizzas, 1,000
bitcoin in May of 2010.

765
00:39:39,270 --> 00:39:41,730
It took about a week
before anybody responded.

766
00:39:41,730 --> 00:39:43,980
But two pizzas showed
up at his door,

767
00:39:43,980 --> 00:39:49,620
and sure enough this crypto
enthusiast in Florida

768
00:39:49,620 --> 00:39:51,190
sent the 10,000 bitcoin.

769
00:39:51,190 --> 00:39:55,123
Now, at the time, there
wasn't a crypto market.

770
00:39:55,123 --> 00:39:56,790
At the time, it was
thought that the two

771
00:39:56,790 --> 00:40:02,130
pizzas were worth about $42 that
he had paid 10,000 bitcoin for.

772
00:40:02,130 --> 00:40:07,780
That 10,000 bitcoin today would
be valued at about $65 million.

773
00:40:07,780 --> 00:40:10,906
So 10 years later,
you kind of go, well,

774
00:40:10,906 --> 00:40:15,060
that was kind of an
interesting time to do that.

775
00:40:15,060 --> 00:40:17,760
It's led to different sectors.

776
00:40:17,760 --> 00:40:19,770
There's thousands
of these coins.

777
00:40:19,770 --> 00:40:21,960
The payment or store
of value tokens

778
00:40:21,960 --> 00:40:25,500
are the dominant, about
3/4 of the market.

779
00:40:25,500 --> 00:40:27,330
Some of you may have
heard of Ethereum.

780
00:40:27,330 --> 00:40:29,630
But platform tokens were--

781
00:40:29,630 --> 00:40:33,720
Vitalik Buterin rolled out
this thing called Ethereum.

782
00:40:33,720 --> 00:40:41,170
And Ethereum is conceptually
a worldwide shared computer.

783
00:40:41,170 --> 00:40:48,040
It has many attributes
of operating system.

784
00:40:48,040 --> 00:40:50,170
I wouldn't compare
it and contrasted

785
00:40:50,170 --> 00:40:54,430
with iOS and Android, but it
does have attributes similar

786
00:40:54,430 --> 00:40:59,050
to a worldwide platform
layer operating system,

787
00:40:59,050 --> 00:41:02,410
upon which distributed
applications or dApps can

788
00:41:02,410 --> 00:41:04,950
be put on top.

789
00:41:04,950 --> 00:41:06,870
So this is this ecosystem.

790
00:41:06,870 --> 00:41:10,770
There's a few dozen payment
or store value tokens.

791
00:41:10,770 --> 00:41:12,960
There's dozens of
platform tokens.

792
00:41:12,960 --> 00:41:18,220
There's 1,000 to 2,000
applications placed on top.

793
00:41:18,220 --> 00:41:21,540
The conceptual framework
in these applications

794
00:41:21,540 --> 00:41:24,420
is they're decentralized.

795
00:41:24,420 --> 00:41:28,050
Will anybody use them--
different questions

796
00:41:28,050 --> 00:41:30,070
along the way.

797
00:41:30,070 --> 00:41:31,800
So, what has this led to?

798
00:41:31,800 --> 00:41:37,310
It's led to blockchain use cases
around speculative investing.

799
00:41:37,310 --> 00:41:40,090
Crowdfunding through
initial coin offerings--

800
00:41:40,090 --> 00:41:45,310
from 2017 to 2019,
nearly $30 billion

801
00:41:45,310 --> 00:41:50,780
was raised by basically
selling a token

802
00:41:50,780 --> 00:41:53,750
before you had a business.

803
00:41:53,750 --> 00:41:55,940
You might have a
good idea, you might

804
00:41:55,940 --> 00:42:00,380
have the legitimate players, and
you raised money off of this.

805
00:42:00,380 --> 00:42:03,440
You weren't selling equity,
you were not selling debt,

806
00:42:03,440 --> 00:42:06,080
you were selling a
token that could be used

807
00:42:06,080 --> 00:42:08,400
on some site in the future.

808
00:42:08,400 --> 00:42:11,680
Now, those tokens
have largely been--

809
00:42:11,680 --> 00:42:13,520
in 2020 this is--

810
00:42:13,520 --> 00:42:17,630
those tokens are largely
for crypto exchanges,

811
00:42:17,630 --> 00:42:20,000
for gaming, for
gambling, for something

812
00:42:20,000 --> 00:42:24,090
called decentralized
finance, and file sharing.

813
00:42:24,090 --> 00:42:26,250
Now, there's something
that's consistent

814
00:42:26,250 --> 00:42:29,010
about the first three--
crypto exchanges, gaming,

815
00:42:29,010 --> 00:42:30,180
and gambling.

816
00:42:30,180 --> 00:42:34,100
Some of the users of these
gaming/gambling exchange sites

817
00:42:34,100 --> 00:42:38,220
want a sort of a basis
of staying off the grid.

818
00:42:38,220 --> 00:42:41,190
They want censorship resistance.

819
00:42:41,190 --> 00:42:43,650
So the thing about
cryptocurrencies,

820
00:42:43,650 --> 00:42:47,920
the good and the bad sometimes,
is the official sector,

821
00:42:47,920 --> 00:42:50,670
though they can track some of
it, they can't track all of it.

822
00:42:50,670 --> 00:42:54,660
That it's some way sometimes
to stay off the grid.

823
00:42:54,660 --> 00:42:56,010
I'm not advising this.

824
00:42:56,010 --> 00:42:59,100
I'm just saying the economics
of it, some of that,

825
00:42:59,100 --> 00:43:01,560
is about censorship-resistant.

826
00:43:01,560 --> 00:43:07,910
All of the other uses has been
around blockchain technology.

827
00:43:07,910 --> 00:43:10,580
And the uses really
are potential uses.

828
00:43:10,580 --> 00:43:11,600
They haven't taken off.

829
00:43:11,600 --> 00:43:13,160
Can we use it in
payment systems?

830
00:43:13,160 --> 00:43:14,750
Can we use it in trade finance?

831
00:43:14,750 --> 00:43:17,420
Can we use it in clearing
settling and processing?

832
00:43:17,420 --> 00:43:20,330
And there are
hundreds of projects

833
00:43:20,330 --> 00:43:25,610
that have been in proof of
concept or pilot stages, none

834
00:43:25,610 --> 00:43:28,230
that have truly broken out yet.

835
00:43:28,230 --> 00:43:32,850
And this is why I say it hasn't
come into the technology stack.

836
00:43:32,850 --> 00:43:34,960
You can, by the way,
get your MIT diploma

837
00:43:34,960 --> 00:43:36,710
on blockchain technology.

838
00:43:36,710 --> 00:43:42,770
I'm saying that if you
do, you can decide also

839
00:43:42,770 --> 00:43:44,780
to get it in paper form.

840
00:43:44,780 --> 00:43:48,050
I thought-- Romain, actually we
had a poll just to see how many

841
00:43:48,050 --> 00:43:48,740
people--

842
00:43:48,740 --> 00:43:52,490
there's a poll on use of
cryptocurrency or something,

843
00:43:52,490 --> 00:43:55,530
the first of those two polls.

844
00:43:55,530 --> 00:44:00,050
If folks don't mind just
giving a little flavor for,

845
00:44:00,050 --> 00:44:03,215
have you ever owned
crypto, and so forth.

846
00:44:03,215 --> 00:44:08,780
So it looks like a third have
owned Bitcoin or Ethereum

847
00:44:08,780 --> 00:44:11,060
or AUT Coins.

848
00:44:11,060 --> 00:44:13,790
And we have-- does
Bitcoin exhibit

849
00:44:13,790 --> 00:44:17,510
the three roles of money?

850
00:44:17,510 --> 00:44:22,400
A little over half yes, and
a little less than a half no.

851
00:44:22,400 --> 00:44:25,340
I'm going to ask if somebody--
one person on the yes side, one

852
00:44:25,340 --> 00:44:27,050
person on the no
side-- just points

853
00:44:27,050 --> 00:44:31,100
to articulate why
it does not exhibit

854
00:44:31,100 --> 00:44:33,440
the three roles of money--
the store of value,

855
00:44:33,440 --> 00:44:35,660
medium of exchange,
unit of account.

856
00:44:39,070 --> 00:44:41,100
And for this Romain,
we'll cold call.

857
00:44:41,100 --> 00:44:47,002
So if somebody wants to take
the lead on either side.

858
00:44:47,002 --> 00:44:48,950
AUDIENCE: Any volunteers?

859
00:44:48,950 --> 00:44:49,831
Camilo.

860
00:44:52,390 --> 00:44:53,890
GARY GENSLER: And
if you can declare

861
00:44:53,890 --> 00:44:56,860
which side you're on so somebody
can volunteer on the other side

862
00:44:56,860 --> 00:44:58,370
as well.

863
00:44:58,370 --> 00:45:00,490
AUDIENCE: Yeah, I
am on the no side.

864
00:45:00,490 --> 00:45:00,990
I mean, I--

865
00:45:00,990 --> 00:45:01,990
GARY GENSLER: All right.

866
00:45:01,990 --> 00:45:04,270
So just for a moment, so
if somebody on the optimist

867
00:45:04,270 --> 00:45:05,980
positive side please volunteer.

868
00:45:05,980 --> 00:45:07,588
But Camilo.

869
00:45:07,588 --> 00:45:08,380
AUDIENCE: Yeah, no.

870
00:45:08,380 --> 00:45:13,160
I mean, I think that still
as a medium of exchange,

871
00:45:13,160 --> 00:45:16,460
Bitcoin and the rest
of the cryptocurrencies

872
00:45:16,460 --> 00:45:18,430
are really limited.

873
00:45:18,430 --> 00:45:20,870
If I want to go to, I
don't know, the public

874
00:45:20,870 --> 00:45:24,840
and buy something with
Bitcoin, it would be so hard.

875
00:45:24,840 --> 00:45:26,570
I'll have to find an
app that translates

876
00:45:26,570 --> 00:45:29,960
my Bitcoin to real money
and then try to pay.

877
00:45:29,960 --> 00:45:34,580
And there is also a questionable
thing about the store of value.

878
00:45:34,580 --> 00:45:38,480
You know, Bitcoin at least-- and
Ethereum I think is also true--

879
00:45:38,480 --> 00:45:42,920
had been fluctuating
so much that you never

880
00:45:42,920 --> 00:45:46,340
know how much value are you're
getting for a bitcoin day

881
00:45:46,340 --> 00:45:46,870
to day.

882
00:45:46,870 --> 00:45:50,330
So I think there is still a
long way before fulfilling

883
00:45:50,330 --> 00:45:52,330
the essentials of money.

884
00:45:52,330 --> 00:45:53,330
GARY GENSLER: All right.

885
00:45:53,330 --> 00:45:57,620
So I think Camilo is saying,
I can't go to Publix,

886
00:45:57,620 --> 00:46:00,890
not a medium of exchange
where I want to go.

887
00:46:00,890 --> 00:46:06,420
And it's kind of this
volatile store of value.

888
00:46:06,420 --> 00:46:08,630
And you didn't address
a unit of account.

889
00:46:08,630 --> 00:46:10,220
But let's see if
there's somebody

890
00:46:10,220 --> 00:46:13,220
on the other side who just
wants to kind of articulate

891
00:46:13,220 --> 00:46:15,120
the other side of this.

892
00:46:15,120 --> 00:46:16,403
AUDIENCE: We have Devin.

893
00:46:16,403 --> 00:46:17,570
GARY GENSLER: Devin, please.

894
00:46:17,570 --> 00:46:18,500
AUDIENCE: Oof.

895
00:46:18,500 --> 00:46:22,310
I can give the counter,
at least in my opinion.

896
00:46:22,310 --> 00:46:24,980
I don't think that the
idea of a store of value

897
00:46:24,980 --> 00:46:28,190
and the medium exchange are
shortcomings of the currency.

898
00:46:28,190 --> 00:46:30,440
I think they're shortcomings
of the market in which it

899
00:46:30,440 --> 00:46:32,400
operates.

900
00:46:32,400 --> 00:46:34,583
So you can use it
to exchange value.

901
00:46:34,583 --> 00:46:36,000
If the infrastructure
isn't there,

902
00:46:36,000 --> 00:46:37,937
that's not the
currencies fault, that's

903
00:46:37,937 --> 00:46:39,270
sort of the market participants.

904
00:46:39,270 --> 00:46:42,630
And then with the store of
value, it does store a value.

905
00:46:42,630 --> 00:46:44,550
That value does
fluctuate, that's true.

906
00:46:44,550 --> 00:46:47,070
But again, I think that's
because of the market it's in

907
00:46:47,070 --> 00:46:52,020
and speculation going on
around these currencies.

908
00:46:52,020 --> 00:46:53,810
GARY GENSLER: Camilo
do you want to--

909
00:46:53,810 --> 00:46:55,180
you both are unmuted.

910
00:46:55,180 --> 00:46:59,200
You can cross-- and Devin
can stay unmuted, too.

911
00:46:59,200 --> 00:47:02,615
Any reply just for 30 seconds?

912
00:47:02,615 --> 00:47:03,490
AUDIENCE: No, no, no.

913
00:47:03,490 --> 00:47:05,800
I just want to say that,
although it's true that

914
00:47:05,800 --> 00:47:09,010
the value of the Bitcoin, it
fluctuates with the market,

915
00:47:09,010 --> 00:47:14,110
the point is that if you want
a worldwide accepted medium

916
00:47:14,110 --> 00:47:18,070
of exchange, it cannot
fluctuate as much as a Bitcoin.

917
00:47:18,070 --> 00:47:19,720
Otherwise, the
financial system--

918
00:47:19,720 --> 00:47:24,100
and even people who have savings
wouldn't have their savings

919
00:47:24,100 --> 00:47:24,790
in Bitcoin.

920
00:47:24,790 --> 00:47:26,970
I mean, you are not going
to put your funding,

921
00:47:26,970 --> 00:47:29,590
your savings account
into Bitcoin,

922
00:47:29,590 --> 00:47:33,160
because you might get
losses overnight, so.

923
00:47:33,160 --> 00:47:35,470
GARY GENSLER: And [Devin.

924
00:47:35,470 --> 00:47:38,127
AUDIENCE: I agree that
it does fluctuate.

925
00:47:38,127 --> 00:47:39,460
I wouldn't put my savings in it.

926
00:47:39,460 --> 00:47:42,140
I never have, I never will.

927
00:47:42,140 --> 00:47:43,750
But I do think it
kind of comes down

928
00:47:43,750 --> 00:47:46,540
to what is the exact definition
of the question you're

929
00:47:46,540 --> 00:47:47,300
trying to answer.

930
00:47:47,300 --> 00:47:48,460
Can you store value in it?

931
00:47:48,460 --> 00:47:49,090
Yes.

932
00:47:49,090 --> 00:47:51,070
Is the value going to
be the same tomorrow?

933
00:47:51,070 --> 00:47:52,570
Maybe not.

934
00:47:52,570 --> 00:47:55,220
And that's something that
might stabilize over time as--

935
00:47:55,220 --> 00:47:58,030
like, if it gets used more
for day-to-day interactions

936
00:47:58,030 --> 00:48:00,170
like going to the
shop, and it's not

937
00:48:00,170 --> 00:48:02,650
kind of speculation and
sort of hype around it,

938
00:48:02,650 --> 00:48:05,140
then maybe we can kind
of converge to a point

939
00:48:05,140 --> 00:48:07,900
where it does satisfy
everything fully.

940
00:48:07,900 --> 00:48:10,690
GARY GENSLER: And this
debate that Devin and Camilo

941
00:48:10,690 --> 00:48:14,440
are helping frame is debate
that's a worthy debate.

942
00:48:14,440 --> 00:48:18,280
I will tell you that I'm
not a Bitcoin maximalist,

943
00:48:18,280 --> 00:48:19,780
but I actually--

944
00:48:19,780 --> 00:48:22,420
I'm probably a little
closer to Devin than Camilo

945
00:48:22,420 --> 00:48:27,490
on this in terms of, it is a
digital scarce store of value.

946
00:48:27,490 --> 00:48:29,950
Will it be worth something
10 years from now?

947
00:48:29,950 --> 00:48:31,960
Maybe not, maybe not.

948
00:48:31,960 --> 00:48:35,260
But it has survived
kind of in this swamp,

949
00:48:35,260 --> 00:48:39,290
it's this uncertain sort
of world, for 12 years.

950
00:48:39,290 --> 00:48:45,360
And it has some
value to some folks.

951
00:48:45,360 --> 00:48:48,990
Hassan earlier would say, but
it doesn't have intrinsic value.

952
00:48:48,990 --> 00:48:52,730
And I would say, well, it's
just a symbol in any regard.

953
00:48:52,730 --> 00:48:56,850
It can be a medium of
exchange in certain places.

954
00:48:56,850 --> 00:48:58,250
But it needs an infrastructure.

955
00:48:58,250 --> 00:49:01,130
Camilo is absolutely right.

956
00:49:01,130 --> 00:49:06,430
The state treasurer of Ohio
in late 2018 had announced--

957
00:49:06,430 --> 00:49:09,260
a state controller, I
think it might have been,

958
00:49:09,260 --> 00:49:11,150
in Ohio, an elected office--

959
00:49:11,150 --> 00:49:15,050
that the state of Ohio would
accept Bitcoin for taxes.

960
00:49:15,050 --> 00:49:18,080
Was it just for
political reasons

961
00:49:18,080 --> 00:49:20,960
that this gentleman
announced it,

962
00:49:20,960 --> 00:49:23,150
that he thought he was
associating himself

963
00:49:23,150 --> 00:49:25,820
with a new innovation
in the economy?

964
00:49:25,820 --> 00:49:27,230
But they needed
an infrastructure

965
00:49:27,230 --> 00:49:28,850
to accept the Bitcoin.

966
00:49:28,850 --> 00:49:35,510
They had to convert it for a
1% fee to US dollars for sure.

967
00:49:35,510 --> 00:49:37,430
It's not much of
a unit of account.

968
00:49:37,430 --> 00:49:41,030
But sometimes it becomes
a unit of account inside

969
00:49:41,030 --> 00:49:45,770
of these other decentralized
apps inside the ICO space.

970
00:49:45,770 --> 00:49:49,700
So it sort of probably exhibits
one out of the three mostly.

971
00:49:49,700 --> 00:49:52,280
It's a speculative
store of value.

972
00:49:52,280 --> 00:49:54,110
It can be a medium of exchange.

973
00:49:54,110 --> 00:49:56,330
It can be a unit of account.

974
00:49:56,330 --> 00:49:58,400
But it hasn't adopted this.

975
00:49:58,400 --> 00:50:04,100
A number of years ago, the
Financial Stability Board,

976
00:50:04,100 --> 00:50:08,540
a worldwide organization of
20-- the G20 finance ministers

977
00:50:08,540 --> 00:50:12,710
and central bankers, decided
that they would no longer call

978
00:50:12,710 --> 00:50:14,720
Bitcoin and others
cryptocurrencies,

979
00:50:14,720 --> 00:50:16,860
and they'd call
them crypto assets.

980
00:50:16,860 --> 00:50:19,370
So they were associating
more with Camilo's side.

981
00:50:19,370 --> 00:50:20,745
They were saying,
we're not going

982
00:50:20,745 --> 00:50:24,800
to give this the kind of
word to call it a currency.

983
00:50:24,800 --> 00:50:27,650
And yet, the US
Department of Treasury

984
00:50:27,650 --> 00:50:30,530
some seven years ago
had to address itself

985
00:50:30,530 --> 00:50:32,840
to the question
of whether Bitcoin

986
00:50:32,840 --> 00:50:38,780
and other similar digital assets
were currency under US Bank

987
00:50:38,780 --> 00:50:43,710
Secrecy Act laws, against
money laundering and the like.

988
00:50:43,710 --> 00:50:46,760
And for that purpose,
they said that Bitcoin

989
00:50:46,760 --> 00:50:48,740
was a virtual currency.

990
00:50:48,740 --> 00:50:52,820
So there's the US Department of
Treasury fitting it into a box.

991
00:50:52,820 --> 00:50:56,690
Now, I dare say they
needed to somehow address

992
00:50:56,690 --> 00:50:58,880
this public policy
issue as to whether it

993
00:50:58,880 --> 00:51:01,970
was going to be regulated
under the Bank Secrecy Act.

994
00:51:01,970 --> 00:51:04,400
So somehow they had
to call it a currency,

995
00:51:04,400 --> 00:51:06,440
call it a virtual currency.

996
00:51:06,440 --> 00:51:08,060
Another part of
the US Department

997
00:51:08,060 --> 00:51:10,370
of Treasury about
the same time said

998
00:51:10,370 --> 00:51:14,010
it was going to be treated
as property for tax purposes.

999
00:51:14,010 --> 00:51:17,930
So inside the US
Treasury Department,

1000
00:51:17,930 --> 00:51:20,600
clearly for purposes
of trying to decide

1001
00:51:20,600 --> 00:51:23,540
how it's going to be taxed,
how it's going to be treated

1002
00:51:23,540 --> 00:51:27,410
for anti-money laundering
laws, one part of the Treasury

1003
00:51:27,410 --> 00:51:29,450
called a virtual
currency, another part

1004
00:51:29,450 --> 00:51:35,510
of the US Treasury called it
property rather than currency.

1005
00:51:35,510 --> 00:51:37,440
And that fit into that.

1006
00:51:37,440 --> 00:51:40,070
So I think I'll move
on a little bit.

1007
00:51:40,070 --> 00:51:44,030
But we can take down
the poll, I think.

1008
00:51:44,030 --> 00:51:46,300
Or do I do that?

1009
00:51:46,300 --> 00:51:46,800
You--

1010
00:51:46,800 --> 00:51:50,330
AUDIENCE: So every
person should be

1011
00:51:50,330 --> 00:51:52,520
able to close that
little polling window.

1012
00:51:52,520 --> 00:51:54,400
I do not have control over it.

1013
00:51:54,400 --> 00:51:55,850
GARY GENSLER: OK.

1014
00:51:55,850 --> 00:51:59,120
Then I need to do that here
for a second so that it closes.

1015
00:51:59,120 --> 00:51:59,990
OK.

1016
00:51:59,990 --> 00:52:03,570
So there's a lot of challenges
of this shared accounting

1017
00:52:03,570 --> 00:52:04,070
system.

1018
00:52:04,070 --> 00:52:06,680
Scalability,
performance-- you can

1019
00:52:06,680 --> 00:52:10,730
move about 7 or 10 transactions
on Bitcoin per second.

1020
00:52:10,730 --> 00:52:14,490
You can move 10 to 20
transactions a second

1021
00:52:14,490 --> 00:52:17,070
on Ethereum.

1022
00:52:17,070 --> 00:52:20,480
That's kind of not the shot
that we need to this system.

1023
00:52:20,480 --> 00:52:25,850
Our shared, centralized
equity-clearing system here

1024
00:52:25,850 --> 00:52:33,093
in the US, the Depository
Trust, DTCC, needs to move--

1025
00:52:33,093 --> 00:52:35,260
the Securities and Exchange
Commission sort of said,

1026
00:52:35,260 --> 00:52:38,380
you need to be able to move
about 100 million transactions

1027
00:52:38,380 --> 00:52:39,742
a day.

1028
00:52:39,742 --> 00:52:40,450
Well, guess what?

1029
00:52:40,450 --> 00:52:44,230
In the middle of one of the
most volatile time in February,

1030
00:52:44,230 --> 00:52:48,237
DTCC was moving 350
million transactions.

1031
00:52:48,237 --> 00:52:50,820
And when I say transactions, it
could be for a hundred shares,

1032
00:52:50,820 --> 00:52:53,500
it could be a thousand shares
or if the volumes in shares

1033
00:52:53,500 --> 00:52:54,110
was higher.

1034
00:52:54,110 --> 00:52:56,920
But I'm talking about how
many transactions were

1035
00:52:56,920 --> 00:52:58,840
moving through that system.

1036
00:52:58,840 --> 00:53:01,240
Blockchain technology
by and large

1037
00:53:01,240 --> 00:53:04,630
has a bunch of issues
still to sort through,

1038
00:53:04,630 --> 00:53:08,320
is the point, from public policy
issues, commercial use cases,

1039
00:53:08,320 --> 00:53:09,470
and the like.

1040
00:53:09,470 --> 00:53:11,650
And the question
is for the 2020,

1041
00:53:11,650 --> 00:53:13,660
as these scalability,
performance,

1042
00:53:13,660 --> 00:53:16,810
and efficiency issues,
as privacy and security,

1043
00:53:16,810 --> 00:53:20,020
as some of these
are worked through,

1044
00:53:20,020 --> 00:53:23,680
is a shared accounting system,
a shared ledger system something

1045
00:53:23,680 --> 00:53:25,420
that's going to take off?

1046
00:53:25,420 --> 00:53:30,640
And I go back to economic
work from the 1930s by Coase.

1047
00:53:30,640 --> 00:53:33,700
And i just sort of capture
it in a little slide here

1048
00:53:33,700 --> 00:53:37,960
the trade-offs of centralization
and decentralization,

1049
00:53:37,960 --> 00:53:39,370
and these as a cost curve.

1050
00:53:39,370 --> 00:53:42,020
But centralization
does lead to cost,

1051
00:53:42,020 --> 00:53:46,360
about a single point of
failure, about economic rents,

1052
00:53:46,360 --> 00:53:51,170
and about capture.

1053
00:53:51,170 --> 00:53:54,140
We all know that we
pay more for something

1054
00:53:54,140 --> 00:53:55,460
that's highly centralized.

1055
00:53:55,460 --> 00:54:01,620
If you want to build an app
on top of iOS or on top--

1056
00:54:01,620 --> 00:54:05,630
Apple's iOS or an app on
top of Google's Android,

1057
00:54:05,630 --> 00:54:07,850
you're going to pay a
fee, because they're

1058
00:54:07,850 --> 00:54:10,850
the two dominant
pipes if you need

1059
00:54:10,850 --> 00:54:15,080
to deal with certain
centralized financial systems,

1060
00:54:15,080 --> 00:54:16,670
there's more economic rents.

1061
00:54:16,670 --> 00:54:20,010
And in fact, the
financial sector in the US

1062
00:54:20,010 --> 00:54:23,070
takes about 7 and
1/2% of our economy.

1063
00:54:23,070 --> 00:54:27,040
That's double what
it took in the 1960s.

1064
00:54:27,040 --> 00:54:30,990
Now, it's a bigger economy,
it's a bigger financial sector.

1065
00:54:30,990 --> 00:54:34,630
But does it necessarily need to
take 7 and 1/2% of our economy?

1066
00:54:34,630 --> 00:54:36,330
So some would say,
those are some

1067
00:54:36,330 --> 00:54:39,570
of the costs of centralization.

1068
00:54:39,570 --> 00:54:42,870
And then there's also
cost of decentralization--

1069
00:54:42,870 --> 00:54:45,530
coordination, governance,
security, scalability.

1070
00:54:45,530 --> 00:54:48,600
Now, Coase was
writing in the 1930s

1071
00:54:48,600 --> 00:54:51,810
why do you bring together
certain attributes inside

1072
00:54:51,810 --> 00:54:52,500
of a firm.

1073
00:54:52,500 --> 00:54:54,300
It was about the
theory of the firm

1074
00:54:54,300 --> 00:54:57,660
and why some things
are inside a firm.

1075
00:54:57,660 --> 00:55:00,690
And it was the cost
of information,

1076
00:55:00,690 --> 00:55:04,320
the cost of coordination, that
you bring some things inside,

1077
00:55:04,320 --> 00:55:06,060
some things are left out.

1078
00:55:06,060 --> 00:55:10,000
The question is, will this
change this balance somehow?

1079
00:55:10,000 --> 00:55:13,200
Vitalik Buterin talked
about a trilemma

1080
00:55:13,200 --> 00:55:17,140
and said it's hard to
get all three of these,

1081
00:55:17,140 --> 00:55:19,330
to get security,
decentralization,

1082
00:55:19,330 --> 00:55:20,430
and scalability.

1083
00:55:20,430 --> 00:55:24,910
So Buterin is the innovator,
at 19, of the Ethereum network.

1084
00:55:24,910 --> 00:55:28,870
He's now 25, maybe.

1085
00:55:28,870 --> 00:55:31,690
But Vitalik Buterin
said, look, you

1086
00:55:31,690 --> 00:55:35,170
can get decentralization like
in Bitcoin and secure it.

1087
00:55:35,170 --> 00:55:38,320
It's reasonably secure,
but it's not scalable.

1088
00:55:38,320 --> 00:55:40,900
You maybe can get
towards scalability,

1089
00:55:40,900 --> 00:55:42,310
but you're probably
going to tend

1090
00:55:42,310 --> 00:55:44,890
towards more centralization.

1091
00:55:44,890 --> 00:55:49,070
Now, one of MIT's award-winning
computer scientists,

1092
00:55:49,070 --> 00:55:52,220
Silvio Micali, says,
no, he disagrees.

1093
00:55:52,220 --> 00:55:54,580
He says you can
actually solve for this.

1094
00:55:54,580 --> 00:55:57,490
Silvio won the Turing Award.

1095
00:55:57,490 --> 00:56:00,273
He's sort of the father--

1096
00:56:00,273 --> 00:56:01,690
considered the
father of something

1097
00:56:01,690 --> 00:56:03,658
called zero-knowledge
proofs, and said, no, you

1098
00:56:03,658 --> 00:56:04,450
can solve for this.

1099
00:56:04,450 --> 00:56:07,150
And Silvio actually
took a sabbatical

1100
00:56:07,150 --> 00:56:11,920
leave to create a cryptocurrency
and a company around Algorand.

1101
00:56:11,920 --> 00:56:14,230
And I'm not sort of
marketing for him,

1102
00:56:14,230 --> 00:56:17,200
but I'm just commenting,
there's this debate.

1103
00:56:17,200 --> 00:56:21,650
Can you solve, basically,
what Satoshi Nakamoto wanted--

1104
00:56:21,650 --> 00:56:27,830
decentralization in a scalable
way and have it be secure?

1105
00:56:27,830 --> 00:56:29,770
So how does one
assess use cases?

1106
00:56:29,770 --> 00:56:31,540
Because this class
is ultimately about

1107
00:56:31,540 --> 00:56:32,973
sort of sorting through this.

1108
00:56:32,973 --> 00:56:34,390
Well, first he
asked the question,

1109
00:56:34,390 --> 00:56:38,650
is the project a project that
actually uses cryptocurrency,

1110
00:56:38,650 --> 00:56:39,810
or it services it?

1111
00:56:39,810 --> 00:56:42,890
And I give examples
of companies that

1112
00:56:42,890 --> 00:56:46,730
are in custody, in software, in
exchange operation, finances,

1113
00:56:46,730 --> 00:56:49,060
the crypto exchange.

1114
00:56:49,060 --> 00:56:51,610
Coinbase is both an
exchange and custody.

1115
00:56:51,610 --> 00:56:54,730
Fidelity, one of the world's
largest asset managers,

1116
00:56:54,730 --> 00:56:59,340
said, we'll take custody and
hold your cryptocurrencies.

1117
00:56:59,340 --> 00:57:02,370
So you could be on one
side of the divide and say,

1118
00:57:02,370 --> 00:57:05,910
we're going to be even like
a hardware company BitMain

1119
00:57:05,910 --> 00:57:10,330
and create the
hardware in this space.

1120
00:57:10,330 --> 00:57:15,970
Those are kind of used
classic strategy analysis

1121
00:57:15,970 --> 00:57:17,250
to think about those.

1122
00:57:17,250 --> 00:57:20,500
The sort of rougher
side of this is,

1123
00:57:20,500 --> 00:57:23,020
how do you consider what
are the strategic questions

1124
00:57:23,020 --> 00:57:27,010
about actually using
blockchain technology?

1125
00:57:27,010 --> 00:57:29,710
What are the value
creation propositions?

1126
00:57:29,710 --> 00:57:31,720
And I think it's
embedded in this--

1127
00:57:31,720 --> 00:57:34,630
is it worthwhile to have
decentralized computing

1128
00:57:34,630 --> 00:57:37,260
versus centralized computing?

1129
00:57:37,260 --> 00:57:39,850
Is there an area
that you think has

1130
00:57:39,850 --> 00:57:44,620
such high economic rents that
a decentralized competitor can

1131
00:57:44,620 --> 00:57:46,300
come in?

1132
00:57:46,300 --> 00:57:49,810
You could create the case that
if Uber and Lyft didn't exist

1133
00:57:49,810 --> 00:57:52,270
today, that Uber and
Lyft, you could say,

1134
00:57:52,270 --> 00:57:57,270
could be created on a
decentralized ledger system.

1135
00:57:57,270 --> 00:58:00,180
But nobody truly had control
of the ledger system,

1136
00:58:00,180 --> 00:58:06,750
and all the ride sharing could
be with drivers and users

1137
00:58:06,750 --> 00:58:08,940
using that decentralized app.

1138
00:58:08,940 --> 00:58:13,910
But then again, who would
have actually gone into city

1139
00:58:13,910 --> 00:58:16,610
after city, airport
after airport,

1140
00:58:16,610 --> 00:58:19,370
and should have done what
Uber and Lyft and others have

1141
00:58:19,370 --> 00:58:22,790
done to get into the system?

1142
00:58:22,790 --> 00:58:26,350
So I think the basic value
question is centralization

1143
00:58:26,350 --> 00:58:29,290
versus decentralization,
and secondly,

1144
00:58:29,290 --> 00:58:33,400
are you filling a gap in
the fiat currency system?

1145
00:58:33,400 --> 00:58:36,680
Fiat currencies
work pretty well.

1146
00:58:36,680 --> 00:58:39,610
Now, we're going to talk in
the next class about the pain

1147
00:58:39,610 --> 00:58:40,450
points.

1148
00:58:40,450 --> 00:58:44,130
And there are a lot of pain
points in the payment system

1149
00:58:44,130 --> 00:58:48,130
that take considerable
challenges

1150
00:58:48,130 --> 00:58:51,250
and costs to overcome.

1151
00:58:51,250 --> 00:58:53,560
Clearly, strategically what
are the competitors doing--

1152
00:58:53,560 --> 00:58:56,590
traditional competitors,
those using blockchain.

1153
00:58:56,590 --> 00:59:00,100
Why use append-only
logs, this invention

1154
00:59:00,100 --> 00:59:01,330
of this ledger system?

1155
00:59:01,330 --> 00:59:03,580
Why have multiple-party
consensus?

1156
00:59:03,580 --> 00:59:08,060
Multiple-party
consensus is a cost.

1157
00:59:08,060 --> 00:59:11,540
So if you're going to
use it for trade finance,

1158
00:59:11,540 --> 00:59:13,540
you're going to try to
solve something and trade

1159
00:59:13,540 --> 00:59:18,670
finance for instance, what is
it solving, what are the costs?

1160
00:59:18,670 --> 00:59:22,040
It can lower verification
and networking cost.

1161
00:59:22,040 --> 00:59:24,730
That's the core
of its economics.

1162
00:59:24,730 --> 00:59:27,490
But it comes with some cost.

1163
00:59:27,490 --> 00:59:30,490
There are also a series of
tactical considerations--

1164
00:59:30,490 --> 00:59:32,910
literally, what data
is going to be put in?

1165
00:59:32,910 --> 00:59:35,920
Who is the multiple
stakeholders?

1166
00:59:35,920 --> 00:59:38,050
What are the trade-offs?

1167
00:59:38,050 --> 00:59:40,570
And I think what we've
found by and large

1168
00:59:40,570 --> 00:59:45,100
is there are not that many
projects that have taken off.

1169
00:59:45,100 --> 00:59:47,180
I have here a little
bit deeper dive.

1170
00:59:47,180 --> 00:59:50,020
If you get so close to a project
that you think, all right,

1171
00:59:50,020 --> 00:59:51,580
now let's think about it--

1172
00:59:51,580 --> 00:59:54,730
I come back to this question
about multiple-party shared

1173
00:59:54,730 --> 00:59:56,620
ledgers.

1174
00:59:56,620 --> 01:00:00,250
In Bitcoin, the multiple-party
shared ledger has worked

1175
01:00:00,250 --> 01:00:03,550
in part because there
was a desire to have

1176
01:00:03,550 --> 01:00:05,770
a censorship-resistant token--

1177
01:00:05,770 --> 01:00:09,940
a token that could be global,
truly move around the globe,

1178
01:00:09,940 --> 01:00:14,170
at times away from what the
official sector might ban,

1179
01:00:14,170 --> 01:00:19,450
away from certain money
laundering anti-terrorism laws,

1180
01:00:19,450 --> 01:00:20,990
that's part of it--

1181
01:00:20,990 --> 01:00:23,770
but also that it was,
at least initially,

1182
01:00:23,770 --> 01:00:26,110
hard to track and trace.

1183
01:00:26,110 --> 01:00:30,680
It's actually gotten easier
to track and trace over time.

1184
01:00:30,680 --> 01:00:32,380
But really the
question is, if you're

1185
01:00:32,380 --> 01:00:35,110
going to think about using
blockchain technology,

1186
01:00:35,110 --> 01:00:38,770
what verification cost
are you really lowering,

1187
01:00:38,770 --> 01:00:42,550
and why have this multiple-party
distributed ledger?

1188
01:00:42,550 --> 01:00:45,220
A little bit like a
shared stock company

1189
01:00:45,220 --> 01:00:47,530
still has a lot
of centralization.

1190
01:00:47,530 --> 01:00:50,770
You have thousands of people
that control a shared stock

1191
01:00:50,770 --> 01:00:53,990
company, this invention
of several centuries ago,

1192
01:00:53,990 --> 01:00:57,160
but you still have
the management team

1193
01:00:57,160 --> 01:00:58,480
that controls it.

1194
01:00:58,480 --> 01:01:00,800
How do you deal with that here?

1195
01:01:00,800 --> 01:01:02,660
So, what have we found?

1196
01:01:02,660 --> 01:01:06,790
We found that the incumbents,
big finance, by and large,

1197
01:01:06,790 --> 01:01:10,350
have stayed over to the
left-hand side of this screen.

1198
01:01:10,350 --> 01:01:13,570
They've stayed towards
traditional databases.

1199
01:01:13,570 --> 01:01:16,500
They haven't gone to
the cryptocurrency sort

1200
01:01:16,500 --> 01:01:17,870
of side of this screen--

1201
01:01:17,870 --> 01:01:21,250
permissionless open protocols.

1202
01:01:21,250 --> 01:01:23,780
They're exploring a little
bit the middle, what's

1203
01:01:23,780 --> 01:01:28,120
called private blockchain,
"private blockchain" saying,

1204
01:01:28,120 --> 01:01:30,610
20 or 50 companies get together.

1205
01:01:30,610 --> 01:01:37,570
Maybe-- like in Australia,
there was much fanfare in 2016

1206
01:01:37,570 --> 01:01:41,170
into, actually, 2017,
there was much fanfare

1207
01:01:41,170 --> 01:01:43,180
that the Australian
Stock Exchange

1208
01:01:43,180 --> 01:01:48,070
would use a permissioned
blockchain technology to update

1209
01:01:48,070 --> 01:01:50,440
their central clearing.

1210
01:01:50,440 --> 01:01:52,690
Now, many people
would tell you by 2020

1211
01:01:52,690 --> 01:01:55,570
that what the
Australians have done

1212
01:01:55,570 --> 01:01:58,400
was inspired by
blockchain technology,

1213
01:01:58,400 --> 01:02:00,850
but it no longer looks
like blockchain technology.

1214
01:02:00,850 --> 01:02:04,940
It's a decentralized,
distributed database.

1215
01:02:04,940 --> 01:02:07,540
But what the Australian
regulator said is,

1216
01:02:07,540 --> 01:02:09,610
we need somebody
to control this.

1217
01:02:09,610 --> 01:02:13,420
We need a central controller--
the complete opposite

1218
01:02:13,420 --> 01:02:15,850
of what Satoshi Nakamoto
was talking about.

1219
01:02:15,850 --> 01:02:18,490
Nakamoto was saying
no central authority.

1220
01:02:18,490 --> 01:02:20,170
But the Australians
said, well this

1221
01:02:20,170 --> 01:02:23,590
is the central clearing,
sort of the plumbing,

1222
01:02:23,590 --> 01:02:26,820
the central plumbing, of
the Australian stock market.

1223
01:02:26,820 --> 01:02:31,840
No, we need somebody who
has kind of the overall--

1224
01:02:31,840 --> 01:02:36,680
plays the overall referee
role, so to speak.

1225
01:02:36,680 --> 01:02:41,880
So incumbents by and large are
using traditional databases.

1226
01:02:41,880 --> 01:02:44,700
They're exploring some of
these permissioned databases.

1227
01:02:44,700 --> 01:02:48,322
They're not really
off to the side.

1228
01:02:48,322 --> 01:02:51,483
Romain, any questions?

1229
01:02:51,483 --> 01:02:52,400
AUDIENCE: None so far.

1230
01:02:52,400 --> 01:02:54,070
We have 12 minutes left.

1231
01:02:54,070 --> 01:02:55,070
GARY GENSLER: All right.

1232
01:02:55,070 --> 01:02:59,180
So let me just say something
about central bank initiatives.

1233
01:02:59,180 --> 01:03:02,600
Central banks-- and we'll chat
about this a little bit more

1234
01:03:02,600 --> 01:03:05,780
when we do payments-- central
banks have taken note of this.

1235
01:03:05,780 --> 01:03:10,470
And they've thought both, can
I use the blockchain technology

1236
01:03:10,470 --> 01:03:11,910
for our payment systems--

1237
01:03:11,910 --> 01:03:14,130
because central banks
in most countries

1238
01:03:14,130 --> 01:03:17,500
control those payment systems--

1239
01:03:17,500 --> 01:03:20,740
or can we actually create
a digital currency?

1240
01:03:20,740 --> 01:03:23,500
At first, I mean,
Bitcoin was not

1241
01:03:23,500 --> 01:03:26,080
really on the radar
of central bankers.

1242
01:03:26,080 --> 01:03:31,120
By 2018, it became on the
radar because the market had

1243
01:03:31,120 --> 01:03:33,910
taken off and it was,
for a brief moment,

1244
01:03:33,910 --> 01:03:36,170
worth almost $1 trillion.

1245
01:03:36,170 --> 01:03:40,750
It's back down to $200 billion,
now but they took note.

1246
01:03:40,750 --> 01:03:42,670
And in some countries
like Sweden,

1247
01:03:42,670 --> 01:03:46,360
they really said, maybe we
should be doing something here.

1248
01:03:46,360 --> 01:03:52,630
We should be creating a crypto
equivalent, a digital currency.

1249
01:03:52,630 --> 01:03:55,720
And one of the readings
was a Bank of International

1250
01:03:55,720 --> 01:03:58,750
Settlement reading, which
showed three different ways

1251
01:03:58,750 --> 01:04:01,120
that a central bank could
do a digital currency.

1252
01:04:01,120 --> 01:04:02,620
And this is just
for your reference

1253
01:04:02,620 --> 01:04:06,520
to remind you that it
was in the reading.

1254
01:04:06,520 --> 01:04:10,660
But going back to these
projects a little bit,

1255
01:04:10,660 --> 01:04:15,880
some of the projects
are just papers.

1256
01:04:15,880 --> 01:04:18,510
Ecuador tried to do
a project, actually--

1257
01:04:18,510 --> 01:04:23,080
a dollar-denominated
cryptocurrency.

1258
01:04:23,080 --> 01:04:27,310
And it failed because nobody
in Ecuador wanted to use it.

1259
01:04:27,310 --> 01:04:29,950
Ecuador was already dollarized.

1260
01:04:29,950 --> 01:04:33,700
But the one to watch
most closely, China,

1261
01:04:33,700 --> 01:04:36,520
which might be a hybrid--
and I'll go back to the chart

1262
01:04:36,520 --> 01:04:37,600
in a second--

1263
01:04:37,600 --> 01:04:40,900
China has announced they're
doing a digital currency

1264
01:04:40,900 --> 01:04:42,610
electronic payment.

1265
01:04:42,610 --> 01:04:46,120
It will be fully backed
by the central bank.

1266
01:04:46,120 --> 01:04:50,600
It will be fully a
renminbi or digital block.

1267
01:04:50,600 --> 01:04:56,210
And in a sense, it may be as
much a reaction to Bitcoin

1268
01:04:56,210 --> 01:04:59,540
as it's a reaction
to Alipay and WeChat

1269
01:04:59,540 --> 01:05:04,630
Pay being dominant in the
retail payment system in China.

1270
01:05:04,630 --> 01:05:06,930
And it's also a
reaction to Facebook

1271
01:05:06,930 --> 01:05:10,970
that was starting something
called the Libra project.

1272
01:05:10,970 --> 01:05:14,420
So this, again,
is a central tenet

1273
01:05:14,420 --> 01:05:18,920
where I am, where I think of
this as that the central banks

1274
01:05:18,920 --> 01:05:25,150
are reacting in part because
big tech has been reacting

1275
01:05:25,150 --> 01:05:27,130
and startups are there.

1276
01:05:27,130 --> 01:05:30,190
And they're saying, maybe
we can do something better.

1277
01:05:30,190 --> 01:05:33,500
The opportunities that they
see, the opportunities is

1278
01:05:33,500 --> 01:05:34,900
that they say,
well, maybe we can

1279
01:05:34,900 --> 01:05:36,550
stay in the means of payment.

1280
01:05:36,550 --> 01:05:39,100
We can promote
greater competition,

1281
01:05:39,100 --> 01:05:41,540
and we can address
some pain points.

1282
01:05:41,540 --> 01:05:44,890
But on the other side,
they're really worried.

1283
01:05:44,890 --> 01:05:47,650
They're deeply
worried that if they

1284
01:05:47,650 --> 01:05:54,570
offer the public a digital
representation of central bank

1285
01:05:54,570 --> 01:05:58,320
money, that they
might disintermediate

1286
01:05:58,320 --> 01:06:00,800
the commercial banks.

1287
01:06:00,800 --> 01:06:03,840
The central strategic
question for central banks

1288
01:06:03,840 --> 01:06:08,250
is, can we offer the public
a digital representation

1289
01:06:08,250 --> 01:06:11,380
of that which is paper?

1290
01:06:11,380 --> 01:06:15,462
So I've covered central bank
digital currencies too quickly.

1291
01:06:15,462 --> 01:06:17,170
I'm going to come back
to it when we talk

1292
01:06:17,170 --> 01:06:20,680
about payment systems as well.

1293
01:06:20,680 --> 01:06:22,920
But Romain, we only
have a few minutes

1294
01:06:22,920 --> 01:06:26,120
so I'm going to take questions.

1295
01:06:26,120 --> 01:06:29,020
AUDIENCE: Yeah, we have
a question from Victor.

1296
01:06:29,020 --> 01:06:30,570
AUDIENCE: Hi, professor.

1297
01:06:30,570 --> 01:06:33,860
I want to come back to this
point about handling databases

1298
01:06:33,860 --> 01:06:36,083
through a private
blockchain network,

1299
01:06:36,083 --> 01:06:38,250
because I didn't fully
understand how it would work.

1300
01:06:38,250 --> 01:06:41,460
Could you give me some
more guidance on it?

1301
01:06:41,460 --> 01:06:45,330
GARY GENSLER: So Satoshi
Nakamoto's concept

1302
01:06:45,330 --> 01:06:49,860
is that you could have
hundreds or thousands of folks'

1303
01:06:49,860 --> 01:06:52,920
computers sharing a
database, and it's

1304
01:06:52,920 --> 01:06:57,840
an open database, and
that that database can

1305
01:06:57,840 --> 01:07:03,230
secure the ledger through this
concept of a log structure--

1306
01:07:03,230 --> 01:07:05,220
block of data,
block of data, block

1307
01:07:05,220 --> 01:07:08,610
of data with cryptography.

1308
01:07:08,610 --> 01:07:11,790
The commercial banks
and the financial firms

1309
01:07:11,790 --> 01:07:16,620
said, we're not comfortable of
having hundreds or thousands

1310
01:07:16,620 --> 01:07:18,790
of people share a database.

1311
01:07:18,790 --> 01:07:19,650
In fact, we can't.

1312
01:07:19,650 --> 01:07:25,320
Under various guidelines of
privacy, of data protection,

1313
01:07:25,320 --> 01:07:28,530
we can't have hundreds of
people share that database.

1314
01:07:28,530 --> 01:07:32,010
But they're looking
at, maybe we can

1315
01:07:32,010 --> 01:07:36,120
have a shared form
of cooperation,

1316
01:07:36,120 --> 01:07:38,790
or what somebody might
call coopetition.

1317
01:07:38,790 --> 01:07:44,100
We'll cooperate around the
trade finance platform,

1318
01:07:44,100 --> 01:07:45,870
and then we'll
compete on top of it

1319
01:07:45,870 --> 01:07:52,090
for the provision of lines of
credit, and trade financing,

1320
01:07:52,090 --> 01:07:54,160
and so on.

1321
01:07:54,160 --> 01:07:55,780
So they've come
together and said,

1322
01:07:55,780 --> 01:07:59,050
maybe we can have a
shared closed system

1323
01:07:59,050 --> 01:08:03,190
amongst 20 banks, 16 banks,
30 banks, and the like.

1324
01:08:03,190 --> 01:08:05,440
And so there's five
or six big consortiums

1325
01:08:05,440 --> 01:08:10,650
trying to put together a trade
finance private shared ledger.

1326
01:08:10,650 --> 01:08:14,080
Now, once you have
that, once you say,

1327
01:08:14,080 --> 01:08:18,300
it's only these 18
firms will share it--

1328
01:08:18,300 --> 01:08:21,779
this form of cooperating
on a shared database

1329
01:08:21,779 --> 01:08:25,830
but competing on top of it,
that form of coopetition--

1330
01:08:25,830 --> 01:08:28,029
you don't necessarily
need a token.

1331
01:08:28,029 --> 01:08:31,229
So there's no cryptocurrency,
it's just a shared blockchain

1332
01:08:31,229 --> 01:08:33,149
technology database.

1333
01:08:33,149 --> 01:08:38,750
Some call it a Digital
Ledger Technology, DTP,

1334
01:08:38,750 --> 01:08:41,865
to contrast it with
cryptocurrencies.

1335
01:08:41,865 --> 01:08:45,540
I'm a little bit looser in
the vocabulary, admittedly.

1336
01:08:45,540 --> 01:08:49,680
But that's how-- that's the
conceptual framework for it,

1337
01:08:49,680 --> 01:08:50,970
if that helps.

1338
01:08:50,970 --> 01:08:52,087
AUDIENCE: Yeah, thank you.

1339
01:08:52,087 --> 01:08:53,670
GARY GENSLER: Let
me just say a couple

1340
01:08:53,670 --> 01:08:56,520
of ground truths in close.

1341
01:08:56,520 --> 01:08:58,229
I really do think--

1342
01:08:58,229 --> 01:09:00,390
and I don't know which
side to end up on,

1343
01:09:00,390 --> 01:09:04,090
Devin or Camilo's side,
in terms of, is it money?

1344
01:09:04,090 --> 01:09:06,899
But I think Nakamoto
solved the payment riddle--

1345
01:09:06,899 --> 01:09:08,220
avoiding double spending.

1346
01:09:08,220 --> 01:09:10,800
It's lasted 12 years.

1347
01:09:10,800 --> 01:09:15,359
Whether you like it, whether
you love it, hate it, two is--

1348
01:09:15,359 --> 01:09:17,430
I'm sorry, Hassan--
I'm kind of--

1349
01:09:17,430 --> 01:09:20,430
money is but a social
and economic construct.

1350
01:09:20,430 --> 01:09:23,939
I'm deeply with
Plato on that one.

1351
01:09:23,939 --> 01:09:26,939
But I respect those
that believe otherwise.

1352
01:09:26,939 --> 01:09:28,500
I mean, there's a
good debate that's

1353
01:09:28,500 --> 01:09:30,720
gone on a couple
of thousand years.

1354
01:09:30,720 --> 01:09:33,420
We already live in an
age of digital money.

1355
01:09:33,420 --> 01:09:38,335
And in fact, the corona
crisis will accelerate that.

1356
01:09:38,335 --> 01:09:40,990
We will still have
physical paper money,

1357
01:09:40,990 --> 01:09:44,240
but we'll use it less
and less in transaction.

1358
01:09:44,240 --> 01:09:49,359
And physical paper money is more
and more just a store of value.

1359
01:09:49,359 --> 01:09:51,340
We're not using
physical paper money

1360
01:09:51,340 --> 01:09:55,070
much as a medium of
exchange right now.

1361
01:09:55,070 --> 01:09:57,490
Append-only logs and
multi-party consensus

1362
01:09:57,490 --> 01:09:59,860
actually does provide
an alternative,

1363
01:09:59,860 --> 01:10:02,260
but it doesn't mean it's
everybody's alternative.

1364
01:10:02,260 --> 01:10:05,260
It can address
verification costs,

1365
01:10:05,260 --> 01:10:08,060
but it doesn't make sense to
adopt it unless there's really

1366
01:10:08,060 --> 01:10:11,990
some viability and a value
proposition of that shared

1367
01:10:11,990 --> 01:10:14,250
ledger system.

1368
01:10:14,250 --> 01:10:17,390
We didn't talk much about it,
but I will say one ground truth

1369
01:10:17,390 --> 01:10:21,390
is that the crypto markets--
that $200 billion market--

1370
01:10:21,390 --> 01:10:23,730
it's ripe with scams and frauds.

1371
01:10:23,730 --> 01:10:25,960
It just is.

1372
01:10:25,960 --> 01:10:29,400
And so what's happened by
2020 is cryptocurrencies

1373
01:10:29,400 --> 01:10:32,880
have evolved to be a speculative
asset class, generally

1374
01:10:32,880 --> 01:10:35,700
not that correlated
with equities and bonds.

1375
01:10:35,700 --> 01:10:37,230
And I'll give you one statistic.

1376
01:10:37,230 --> 01:10:39,190
The worldwide stock
of gold, that gold

1377
01:10:39,190 --> 01:10:43,360
that could be in four
Olympic-sized pools,

1378
01:10:43,360 --> 01:10:45,850
collectively is worth
$9 or $10 trillion,

1379
01:10:45,850 --> 01:10:48,560
roughly, collectively.

1380
01:10:48,560 --> 01:10:51,100
So some people would say a
speculative store of value

1381
01:10:51,100 --> 01:10:55,240
that's only worth 2%
of that, $200 billion,

1382
01:10:55,240 --> 01:10:59,710
might be worthwhile in a
big portfolio of a family

1383
01:10:59,710 --> 01:11:02,900
office or a hedge fund.

1384
01:11:02,900 --> 01:11:07,060
The ICO boom and bust
raised about $30 billion.

1385
01:11:07,060 --> 01:11:09,020
Not much is being
raised there now,

1386
01:11:09,020 --> 01:11:12,060
but it's worthwhile
to take note of.

1387
01:11:12,060 --> 01:11:14,250
Most of this is
lightly regulated,

1388
01:11:14,250 --> 01:11:17,790
and so retail investors are
not getting much protection.

1389
01:11:17,790 --> 01:11:20,730
I think that's unfortunate.

1390
01:11:20,730 --> 01:11:22,550
But I still come back
to the last point.

1391
01:11:22,550 --> 01:11:24,660
I think it's been a
catalyst for change.

1392
01:11:24,660 --> 01:11:27,310
I think it might be one of
these technologies we look back

1393
01:11:27,310 --> 01:11:31,760
in decades and say, it was a
remarkable catalyst for change

1394
01:11:31,760 --> 01:11:34,490
for central bankers,
and to think through

1395
01:11:34,490 --> 01:11:37,370
whether it's trade finance
or other areas in finance,

1396
01:11:37,370 --> 01:11:40,760
was their way to
form some cooperation

1397
01:11:40,760 --> 01:11:44,780
and compete on top of
it-- so coopetition?

1398
01:11:44,780 --> 01:11:48,140
But just like we didn't
know that the internet

1399
01:11:48,140 --> 01:11:54,890
and geolocation devices would
lead to disruption in rides--

1400
01:11:54,890 --> 01:11:59,210
you know, Uber and Lyft, we
couldn't predict in the 1990s

1401
01:11:59,210 --> 01:12:01,190
that the taxicab
business in New York

1402
01:12:01,190 --> 01:12:04,190
was going to be
completely disrupted.

1403
01:12:04,190 --> 01:12:08,090
We don't know what blockchain
technology and cryptocurrencies

1404
01:12:08,090 --> 01:12:12,920
will disrupt later in the
2020s or in the 2030s.

1405
01:12:12,920 --> 01:12:16,220
So that's kind of my wrap on it.

1406
01:12:16,220 --> 01:12:18,830
You can sort of
get a sense of why

1407
01:12:18,830 --> 01:12:23,120
I'm not going to say I'm
a maximalist in this area.

1408
01:12:23,120 --> 01:12:25,330
But I'm also not all
the way a minimalist.

1409
01:12:25,330 --> 01:12:28,310
The minimalist would say, no,
none of these ground truths

1410
01:12:28,310 --> 01:12:29,270
matter.

1411
01:12:29,270 --> 01:12:32,540
I think it's a really important
technology, if nothing else,

1412
01:12:32,540 --> 01:12:35,390
because it's been a
remarkable catalyst for change

1413
01:12:35,390 --> 01:12:39,170
on how central banks and others
think about payment systems,

1414
01:12:39,170 --> 01:12:42,130
which we'll take up in our next