WEBVTT 00:00:01.485 --> 00:00:02.970 [SQUEAKING] 00:00:02.970 --> 00:00:04.455 [RUSTLING] 00:00:04.455 --> 00:00:10.700 [CLICKING] 00:00:10.700 --> 00:00:12.450 GARY GENSLER: So we've got a lot to cover, 00:00:12.450 --> 00:00:15.520 but I'm going to start with a little background about 00:00:15.520 --> 00:00:19.490 the internet and the payment riddle; something about money, 00:00:19.490 --> 00:00:23.680 which is at the core, really, of all classes on finance but we 00:00:23.680 --> 00:00:26.950 usually take for granted; and then Satoshi 00:00:26.950 --> 00:00:30.280 Nakamoto's innovation-- who was Satoshi Nakamoto, 00:00:30.280 --> 00:00:33.340 what is that innovation; a bit about crypto markets; 00:00:33.340 --> 00:00:35.950 the blockchain technology use cases-- 00:00:35.950 --> 00:00:38.140 and then the core really is, how to think 00:00:38.140 --> 00:00:40.840 about viability of those use cases; 00:00:40.840 --> 00:00:43.180 a little touch on central bank digital currencies; 00:00:43.180 --> 00:00:43.930 and ground truths. 00:00:43.930 --> 00:00:45.550 So, a lot to cover. 00:00:45.550 --> 00:00:47.260 If we don't get through it all, we 00:00:47.260 --> 00:00:49.330 will talk about this again when we 00:00:49.330 --> 00:00:54.110 talk about payments in class 6. 00:00:54.110 --> 00:00:55.910 In terms of some of the readings, 00:00:55.910 --> 00:01:01.250 I shared with you two write-ups that were done for a class 00:01:01.250 --> 00:01:04.760 that Neha Narula and I teach, an online class 00:01:04.760 --> 00:01:09.410 called Cryptocurrency, which is available through MIT. 00:01:09.410 --> 00:01:11.810 And those two write-ups, the "Economics of Money 00:01:11.810 --> 00:01:14.120 and Technology"-- 00:01:14.120 --> 00:01:16.390 I'm sorry, and the "Responses of Big Finance" 00:01:16.390 --> 00:01:19.070 sort of give you some of the challenges 00:01:19.070 --> 00:01:24.530 and how to think through these technologies. 00:01:24.530 --> 00:01:26.930 Also, the Bank of International Settlement 00:01:26.930 --> 00:01:30.860 did a review just earlier in 2020 00:01:30.860 --> 00:01:33.200 about the central bank digital currency 00:01:33.200 --> 00:01:35.600 space, because so much is going on there. 00:01:35.600 --> 00:01:39.500 And particularly after Facebook announced their Libra project 00:01:39.500 --> 00:01:45.140 in June of 2019, many central banks took note and said, wait, 00:01:45.140 --> 00:01:46.790 maybe there's something going on here 00:01:46.790 --> 00:01:49.010 that we too need to do more. 00:01:49.010 --> 00:01:51.380 Now, before Facebook Libra, there 00:01:51.380 --> 00:01:55.130 were many projects the bank-- 00:01:55.130 --> 00:01:57.290 one of the world's largest central banks, 00:01:57.290 --> 00:01:59.840 the Riksbank in Sweden, was already 00:01:59.840 --> 00:02:01.490 looking at an e-krona project. 00:02:01.490 --> 00:02:02.990 There were other projects. 00:02:02.990 --> 00:02:05.690 But all of a sudden, that Facebook Libra project kicked 00:02:05.690 --> 00:02:08.630 into high gear central bankers around the globe, 00:02:08.630 --> 00:02:12.140 and particularly China's look and review 00:02:12.140 --> 00:02:15.080 and announcements around the Digital Currency Electronic 00:02:15.080 --> 00:02:19.280 Payments Project also got kicked into gear. 00:02:19.280 --> 00:02:21.200 So regardless of where you come out, 00:02:21.200 --> 00:02:24.680 whether blockchain technology, cryptocurrencies, are getting 00:02:24.680 --> 00:02:28.720 rolled into the stack, rolled into the technology stack 00:02:28.720 --> 00:02:30.290 of big finance. 00:02:30.290 --> 00:02:35.450 What we can say as of 2020, what's really the case, 00:02:35.450 --> 00:02:38.420 is that cryptocurrencies and blockchain technology 00:02:38.420 --> 00:02:41.150 have at least been a catalyst for change, 00:02:41.150 --> 00:02:45.410 an important catalyst for change pushing upon big finance, 00:02:45.410 --> 00:02:48.320 pushing upon central banks to reconsider 00:02:48.320 --> 00:02:52.210 how they do payments, how they do the basics of money. 00:02:54.850 --> 00:02:57.160 And I laid out a few questions. 00:02:57.160 --> 00:02:59.255 Again, Romain will look for some hands. 00:02:59.255 --> 00:03:01.630 We're going to keep this a little shorter than we usually 00:03:01.630 --> 00:03:03.820 do, just because we have so much to cover, but, 00:03:03.820 --> 00:03:06.800 how does Bitcoin fit into the history of money? 00:03:06.800 --> 00:03:09.910 What are the strategic and tactical considerations 00:03:09.910 --> 00:03:13.540 assessing viability and value propositions? 00:03:13.540 --> 00:03:15.220 And how are these central banks thinking 00:03:15.220 --> 00:03:16.450 about what they're doing? 00:03:16.450 --> 00:03:19.660 And Romain, if we can just see if we could get one or two 00:03:19.660 --> 00:03:23.368 people in kind of each of these three questions-- 00:03:23.368 --> 00:03:24.910 and these are the essential questions 00:03:24.910 --> 00:03:27.458 I'm going to try to cover in the next hour or so. 00:03:27.458 --> 00:03:28.000 AUDIENCE: OK. 00:03:28.000 --> 00:03:28.725 Sounds good. 00:03:28.725 --> 00:03:30.100 Who would like to get us started? 00:03:34.740 --> 00:03:36.290 I'm watching for your blue hands. 00:03:39.300 --> 00:03:40.550 GARY GENSLER: Quiet day today. 00:03:43.890 --> 00:03:46.410 AUDIENCE: If you wish, Gary, I'm also happy to cold call. 00:03:46.410 --> 00:03:47.410 GARY GENSLER: All right. 00:03:47.410 --> 00:03:48.570 Well, I'm going to start. 00:03:48.570 --> 00:03:50.280 I'm going to kind of just go. 00:03:50.280 --> 00:03:52.980 But I hoped that everyone would come in. 00:03:52.980 --> 00:03:54.880 I start with this scene-- 00:03:54.880 --> 00:03:57.680 and I don't know anyone who wants to raise a blue hand 00:03:57.680 --> 00:04:01.840 and tell me what movie this is from and the era. 00:04:01.840 --> 00:04:08.250 But this is the opening scene of a movie from the mid 1990s, 00:04:08.250 --> 00:04:13.040 The Net, 1995, Sandra Bullock. 00:04:13.040 --> 00:04:18.029 Now, I start with this, because Pizza Net was actually real. 00:04:18.029 --> 00:04:24.050 Now, this cyber security sort of spy thriller 00:04:24.050 --> 00:04:27.680 with Sandra Bullock sort of cracking through the computer 00:04:27.680 --> 00:04:28.280 network-- 00:04:28.280 --> 00:04:29.990 remember, let's place this. 00:04:29.990 --> 00:04:32.540 Mid 1990s. 00:04:32.540 --> 00:04:38.420 It was only the early 1990s that Tim Berners-Lee, associated 00:04:38.420 --> 00:04:43.430 with MIT, actually came up with the protocols that 00:04:43.430 --> 00:04:44.930 connects the world wide web. 00:04:44.930 --> 00:04:47.930 The internet had been around for some time, 00:04:47.930 --> 00:04:50.270 coming out of DARPA and the Department of Defense 00:04:50.270 --> 00:04:52.800 in the US and academic institutions. 00:04:52.800 --> 00:04:55.340 But by the early '90s, it was actually 00:04:55.340 --> 00:04:57.200 something that those of us in the public 00:04:57.200 --> 00:05:00.110 could use beyond universities, beyond the defense 00:05:00.110 --> 00:05:02.030 establishment and the like. 00:05:02.030 --> 00:05:04.610 But what hadn't been solved, what 00:05:04.610 --> 00:05:07.700 hadn't been solved by 1995, was how 00:05:07.700 --> 00:05:10.150 to move money on the internet. 00:05:10.150 --> 00:05:14.720 And Pizza Hut founded something called Pizza Net, which 00:05:14.720 --> 00:05:18.290 is thought to be the first commercial use where 00:05:18.290 --> 00:05:20.630 you could actually order something online-- 00:05:20.630 --> 00:05:22.880 just 25 years ago-- order something 00:05:22.880 --> 00:05:25.050 online through Pizza Net. 00:05:25.050 --> 00:05:27.720 There was only sort of one problem. 00:05:27.720 --> 00:05:30.360 You ordered the pizza, and guess what? 00:05:30.360 --> 00:05:32.130 You couldn't pay online. 00:05:32.130 --> 00:05:35.760 Nobody had figured out how to pay online. 00:05:35.760 --> 00:05:38.670 You had to have the pizza delivery at your door, 00:05:38.670 --> 00:05:39.270 and you paid. 00:05:39.270 --> 00:05:40.200 So just think. 00:05:40.200 --> 00:05:42.720 It's in the middle of the corona lockdown, 00:05:42.720 --> 00:05:44.850 we're sheltering at home. 00:05:44.850 --> 00:05:47.730 And if it weren't for these inventions of 25 years ago 00:05:47.730 --> 00:05:51.540 we're about to discuss, you would be paying for that pizza 00:05:51.540 --> 00:05:54.600 at the door when the delivery truck arrived, 00:05:54.600 --> 00:05:58.620 or for your groceries, or for any other household 00:05:58.620 --> 00:06:00.370 goods that you have. 00:06:00.370 --> 00:06:05.280 So this riddle, what I call the payments riddle, what others 00:06:05.280 --> 00:06:08.940 call the payments riddle, was at the core 00:06:08.940 --> 00:06:12.130 of this new technology, the internet. 00:06:12.130 --> 00:06:15.240 Now, the internet has been fully adopted into the technology 00:06:15.240 --> 00:06:16.810 stack of finance by now. 00:06:16.810 --> 00:06:22.390 But in the mid 1990s, it was, in essence, fintech. 00:06:22.390 --> 00:06:24.970 But the question is how to move value on the internet, 00:06:24.970 --> 00:06:30.370 to do it securely, efficiently, and really importantly, 00:06:30.370 --> 00:06:35.270 similar to the packets of data that move on the internet 00:06:35.270 --> 00:06:38.410 as packets of data, and thus peer-to-peer. 00:06:38.410 --> 00:06:41.690 So the internet doesn't really have central control. 00:06:41.690 --> 00:06:44.240 All the data that we're live streaming right now 00:06:44.240 --> 00:06:50.240 between and amongst us, between 78 participants on this Zoom 00:06:50.240 --> 00:06:53.930 meeting right now, is through packets 00:06:53.930 --> 00:06:56.420 of data that's not through one central control, 00:06:56.420 --> 00:07:00.920 even though we think, well, Zoom might be controlling all this. 00:07:00.920 --> 00:07:03.080 But the challenge really was, how could you 00:07:03.080 --> 00:07:04.340 prohibit double spending? 00:07:04.340 --> 00:07:07.310 How could you send a packet of data to one person 00:07:07.310 --> 00:07:09.980 and ensure that that packet of data 00:07:09.980 --> 00:07:14.390 wasn't also sent to another, in essence, double spending? 00:07:14.390 --> 00:07:16.790 Having some data like an email that we 00:07:16.790 --> 00:07:18.470 might send to two people-- 00:07:18.470 --> 00:07:20.750 they were both reading the same email, 00:07:20.750 --> 00:07:23.750 they don't know that each are reading the same email. 00:07:23.750 --> 00:07:25.730 So that was this payments riddle-- 00:07:25.730 --> 00:07:28.440 secure, efficient packets of data, 00:07:28.440 --> 00:07:30.350 but avoiding double spending. 00:07:30.350 --> 00:07:33.470 Lots of challenges, lots of attempts. 00:07:33.470 --> 00:07:35.390 And there were dozens of attempts. 00:07:35.390 --> 00:07:37.970 Somebody even went to go in to get patents 00:07:37.970 --> 00:07:41.040 and started businesses, raised money. 00:07:41.040 --> 00:07:44.270 Some of them through the earlier days of venture capital 00:07:44.270 --> 00:07:47.030 were backed like CyberCash and DigiCash, 00:07:47.030 --> 00:07:51.860 and E-gold, B-Money, all of these failed. 00:07:51.860 --> 00:07:54.770 All of them, and dozens more beyond what 00:07:54.770 --> 00:07:59.000 I list here in the 1990s, and the hurdles were, well, 00:07:59.000 --> 00:08:01.520 of course the same hurdles that any startup would 00:08:01.520 --> 00:08:05.150 have around merchant adoption-- 00:08:05.150 --> 00:08:09.320 would the stores actually adopt it-- 00:08:09.320 --> 00:08:11.900 but this issue of double spending. 00:08:11.900 --> 00:08:14.600 And the only sort of solution to double spending 00:08:14.600 --> 00:08:16.340 was using centralization. 00:08:16.340 --> 00:08:20.810 There was one central computer, one central controller, 00:08:20.810 --> 00:08:23.090 to avoid the double spending. 00:08:23.090 --> 00:08:26.270 Or the other side of it, how did you form consensus? 00:08:26.270 --> 00:08:29.870 If you didn't have a central controller, 00:08:29.870 --> 00:08:33.530 how to form consensus on the say of who had the money 00:08:33.530 --> 00:08:35.190 and who didn't have the money. 00:08:35.190 --> 00:08:38.809 So this sort of central payments riddle, 00:08:38.809 --> 00:08:42.110 a big issue in the 1990s, attracted 00:08:42.110 --> 00:08:45.800 the interest of a cryptography group 00:08:45.800 --> 00:08:48.110 called the cypherpunk community. 00:08:48.110 --> 00:08:51.140 I kid you not, it's called cypherpunk community. 00:08:51.140 --> 00:08:54.170 It was an email list that had started in the late 1980s 00:08:54.170 --> 00:08:56.460 and had gone on for some time. 00:08:56.460 --> 00:09:02.210 And so there were early digital solutions that 00:09:02.210 --> 00:09:03.710 were a little bit different. 00:09:03.710 --> 00:09:06.470 And some of the cryptography that was brought to it 00:09:06.470 --> 00:09:10.020 was not brought from the cypherpunk community, 00:09:10.020 --> 00:09:13.800 it was brought to bear from great cryptographers, some 00:09:13.800 --> 00:09:16.830 of them at MIT, some elsewhere, that came together 00:09:16.830 --> 00:09:19.150 by 1996 with a solution. 00:09:19.150 --> 00:09:23.430 It's this updated today the same solution we use now-- 00:09:23.430 --> 00:09:27.360 secure socket layer and transport layer security. 00:09:27.360 --> 00:09:32.610 These two protocols, on hop of Tim Berners-Lee protocols 00:09:32.610 --> 00:09:36.450 about the world wide web from four or five years earlier. 00:09:36.450 --> 00:09:38.610 These are the main protocols-- 00:09:38.610 --> 00:09:40.770 there are many others that were added. 00:09:40.770 --> 00:09:43.050 But these are the main protocols that allowed 00:09:43.050 --> 00:09:44.850 us to secure the internet. 00:09:44.850 --> 00:09:47.150 It's how we do it right now-- 00:09:47.150 --> 00:09:50.340 a transfer of data that's secured 00:09:50.340 --> 00:09:52.800 by the use of cryptography. 00:09:52.800 --> 00:09:55.890 And what did that lead to? 00:09:55.890 --> 00:09:58.110 That led to a lot of things where 00:09:58.110 --> 00:10:02.700 we could accept Visas and MasterCard, American Express, 00:10:02.700 --> 00:10:05.550 by the mid 1990s. 00:10:05.550 --> 00:10:09.750 Amazon, eBay were both formed in 1995. 00:10:09.750 --> 00:10:13.410 It's a founder's dream to get formed right when 00:10:13.410 --> 00:10:15.110 a technology is transitioning. 00:10:15.110 --> 00:10:18.450 If Amazon, if Jeff Bezos had been formed in 1992, 00:10:18.450 --> 00:10:21.720 would it still have been around by 1996 00:10:21.720 --> 00:10:25.770 when the secure socket layer and the cryptography 00:10:25.770 --> 00:10:28.170 was there for him to get going? 00:10:28.170 --> 00:10:32.430 If Jeff Bezos had decided to form it in 1998 or '99, 00:10:32.430 --> 00:10:33.930 it might have been too late. 00:10:33.930 --> 00:10:35.870 Now, there's a lot of things that Amazon 00:10:35.870 --> 00:10:37.460 got right and Visa's got right. 00:10:37.460 --> 00:10:40.650 But I'm saying timing was one that was remarkable. 00:10:40.650 --> 00:10:43.750 PayPal came along in 1998. 00:10:43.750 --> 00:10:46.740 And interestingly, the first mobile payments 00:10:46.740 --> 00:10:51.420 was actually Ericsson teaming up with Telenor in 1999. 00:10:51.420 --> 00:10:54.062 Now, that product is not around today-- 00:10:54.062 --> 00:10:55.770 or maybe somebody will correct me and say 00:10:55.770 --> 00:10:57.250 there's still a little bit. 00:10:57.250 --> 00:10:59.190 But one of the early ones that really took off 00:10:59.190 --> 00:11:03.510 was Alipay and then M-Pesa in Kenya. 00:11:03.510 --> 00:11:08.640 Now, All of this still left the payments riddle. 00:11:08.640 --> 00:11:11.510 That payments riddle was still there 00:11:11.510 --> 00:11:15.130 to some in that cypherpunk community. 00:11:15.130 --> 00:11:16.980 Now, the internet could get commercialized, 00:11:16.980 --> 00:11:18.750 the internet could move on. 00:11:18.750 --> 00:11:21.660 We had this way through cryptography 00:11:21.660 --> 00:11:23.670 to secure payments. 00:11:23.670 --> 00:11:26.410 But there was still this question. 00:11:26.410 --> 00:11:30.100 And it goes to the heart of, what is money? 00:11:30.100 --> 00:11:33.310 And so I'm going to turn a little bit to chat about money, 00:11:33.310 --> 00:11:37.258 but just see if Romain has any questions so far. 00:11:37.258 --> 00:11:38.550 AUDIENCE: Nobody at the moment. 00:11:38.550 --> 00:11:39.390 GARY GENSLER: OK. 00:11:39.390 --> 00:11:41.250 So I'd like to go back in time. 00:11:41.250 --> 00:11:47.697 I'd like to go back 2,300, 2,400 years in talking about money. 00:11:47.697 --> 00:11:49.530 It's not the first time money was discussed, 00:11:49.530 --> 00:11:51.270 because money was really an invention 00:11:51.270 --> 00:11:54.210 of humankind thousands of years before that. 00:11:54.210 --> 00:11:57.510 But I'd like to go back to Plato and Aristotle. 00:11:57.510 --> 00:11:59.880 Plato did not write extensively on money. 00:11:59.880 --> 00:12:03.510 But what he did write is interesting. 00:12:03.510 --> 00:12:05.730 It's that money is a symbol devised 00:12:05.730 --> 00:12:07.290 for the purpose of exchanges. 00:12:07.290 --> 00:12:09.720 To think, you and I were going to exchange something-- 00:12:09.720 --> 00:12:13.050 at the time, maybe it was a goat for wheat, 00:12:13.050 --> 00:12:16.890 maybe I needed the goat today, you needed the wheat tomorrow-- 00:12:16.890 --> 00:12:20.790 but we can use this symbol, as Plato wrote, 00:12:20.790 --> 00:12:23.160 as a purpose of that exchange. 00:12:23.160 --> 00:12:26.700 And interestingly, separately Plato wrote-- 00:12:26.700 --> 00:12:30.540 Plato wasn't in for using gold and silver for money. 00:12:30.540 --> 00:12:32.430 Now, this is interesting in contrast 00:12:32.430 --> 00:12:34.550 to Plato's student, Aristotle. 00:12:34.550 --> 00:12:37.420 Now, Aristotle wrote extensively about money. 00:12:37.420 --> 00:12:41.220 It seemed like Aristotle wrote extensively about many things, 00:12:41.220 --> 00:12:43.650 but one of them was money. 00:12:43.650 --> 00:12:45.960 And Aristotle wrote that it solves 00:12:45.960 --> 00:12:47.780 the problem of commensurability-- 00:12:47.780 --> 00:12:50.950 the same sort of issue that Plato was grappling with, 00:12:50.950 --> 00:12:53.040 commensurability. 00:12:53.040 --> 00:12:57.060 You need rice, you need grains, I need goats. 00:12:57.060 --> 00:13:00.584 How do we have some commensurability between that? 00:13:00.584 --> 00:13:03.960 Or the second point here, money is a guarantee 00:13:03.960 --> 00:13:07.150 that we have what we want in the future. 00:13:07.150 --> 00:13:09.900 So this is sort of a time commensurability. 00:13:09.900 --> 00:13:13.210 I need something today, you need something tomorrow. 00:13:13.210 --> 00:13:19.620 So these two forms of marrying up needs and wants and values-- 00:13:19.620 --> 00:13:24.690 Aristotle talked also as a philosopher about, 00:13:24.690 --> 00:13:27.000 what is values? 00:13:27.000 --> 00:13:30.660 And then talked about four absolute values. 00:13:30.660 --> 00:13:32.940 Now, I hate to disagree with Aristotle. 00:13:32.940 --> 00:13:35.940 But, you know, over time, there are 00:13:35.940 --> 00:13:38.460 many of Aristotle's great writings that 00:13:38.460 --> 00:13:40.890 have been challenged-- about the Earth and about 00:13:40.890 --> 00:13:45.060 the solar system, about the heavens, the skies, the bodies. 00:13:45.060 --> 00:13:48.090 So why not say that maybe Aristotle didn't quite 00:13:48.090 --> 00:13:49.320 have it right about money? 00:13:49.320 --> 00:13:53.740 He talked about durability, portability, divisibility. 00:13:53.740 --> 00:13:54.910 I still sort of agree. 00:13:54.910 --> 00:13:58.360 And most monetary economists would agree on that. 00:13:58.360 --> 00:14:01.510 It's this fourth point-- did it have intrinsic value? 00:14:01.510 --> 00:14:04.135 I find myself more associated with Plato, who 00:14:04.135 --> 00:14:06.730 had said it was just a symbol. 00:14:06.730 --> 00:14:08.740 It's but a symbol. 00:14:08.740 --> 00:14:11.770 And so today when we think about money, 00:14:11.770 --> 00:14:14.810 we often think of six key characteristics. 00:14:14.810 --> 00:14:16.840 Is it durable, portable, divisible? 00:14:16.840 --> 00:14:20.050 These were-- Aristotle seemed to-- 00:14:20.050 --> 00:14:23.320 2,300 years later people still tend to agree. 00:14:23.320 --> 00:14:28.600 But rather than intrinsic value, that it's uniform, acceptable, 00:14:28.600 --> 00:14:31.930 and stable we'll talk a little bit more 00:14:31.930 --> 00:14:35.830 about that when we get to the economics of cryptocurrencies. 00:14:35.830 --> 00:14:38.440 But remember, instead of intrinsic value, 00:14:38.440 --> 00:14:41.890 that it's uniform; that it's the same unit of account 00:14:41.890 --> 00:14:46.150 within some local or national economy; 00:14:46.150 --> 00:14:49.430 that others accept it, because if others don't accept it, 00:14:49.430 --> 00:14:56.270 how can I know that that which I take today I can use tomorrow?; 00:14:56.270 --> 00:14:59.000 and then its value is stable. 00:14:59.000 --> 00:15:02.380 And we think over the last 300-plus years 00:15:02.380 --> 00:15:05.920 about institutions that help ensure 00:15:05.920 --> 00:15:10.940 that currency value is stable, we call them central banks. 00:15:10.940 --> 00:15:12.940 So instead of an intrinsic value, that we 00:15:12.940 --> 00:15:16.990 humans create some form of acceptability, uniformity, 00:15:16.990 --> 00:15:18.940 and stability. 00:15:18.940 --> 00:15:21.570 Questions? 00:15:21.570 --> 00:15:24.380 AUDIENCE: None so far, but I'll give our students a few seconds 00:15:24.380 --> 00:15:26.570 to raise their hand if they want to. 00:15:26.570 --> 00:15:28.720 Yes, we have a question from Hassan. 00:15:28.720 --> 00:15:30.410 GARY GENSLER: Please, Hassan. 00:15:33.635 --> 00:15:34.760 AUDIENCE: Hello, professor. 00:15:34.760 --> 00:15:40.100 Yeah, my question is, when you said 00:15:40.100 --> 00:15:46.440 that people could exchange things for other things 00:15:46.440 --> 00:15:46.940 as a mean. 00:15:46.940 --> 00:15:51.880 So I mean, how could the cryptocurrency 00:15:51.880 --> 00:15:55.210 survive if there is no intrinsic value in it 00:15:55.210 --> 00:15:57.190 and it's so volatile? 00:15:57.190 --> 00:15:59.770 And when you said that central banks make 00:15:59.770 --> 00:16:04.500 sure that these currencies are stable, it's because-- 00:16:04.500 --> 00:16:07.960 like for instance, in my country the central bank 00:16:07.960 --> 00:16:11.680 has to have gold and other currencies 00:16:11.680 --> 00:16:19.340 to support our currency, our local currency. 00:16:19.340 --> 00:16:25.030 So I'm just baffled to see like someone speak about, well, you 00:16:25.030 --> 00:16:27.340 know what, it's only a symbol. 00:16:27.340 --> 00:16:30.190 OK, I know that it is a symbol, but it 00:16:30.190 --> 00:16:32.250 has to have some value in it. 00:16:32.250 --> 00:16:34.210 Otherwise, the other party would not 00:16:34.210 --> 00:16:38.390 accept it as a means of exchange, if that makes sense. 00:16:38.390 --> 00:16:41.330 GARY GENSLER: So Hassan is associating himself 00:16:41.330 --> 00:16:43.310 more with Aristotle than Plato, and I 00:16:43.310 --> 00:16:47.250 find myself more associated with Plato than Aristotle. 00:16:47.250 --> 00:16:48.740 So this is a worthy debate that's 00:16:48.740 --> 00:16:52.700 gone on for well over a couple of thousand years. 00:16:52.700 --> 00:16:56.330 But when I say that it doesn't have intrinsic value, 00:16:56.330 --> 00:16:59.400 and it's more about uniformity, acceptability, instability, 00:16:59.400 --> 00:17:00.800 think about-- 00:17:00.800 --> 00:17:02.420 I'll take the US dollar. 00:17:02.420 --> 00:17:05.910 I don't know-- what you're country? 00:17:05.910 --> 00:17:07.839 AUDIENCE: I'm from Bahrain. 00:17:07.839 --> 00:17:09.339 GARY GENSLER: So I'm not as familiar 00:17:09.339 --> 00:17:11.079 with your central bank. 00:17:11.079 --> 00:17:15.520 But let's take the US dollar instead of Bahraini. 00:17:15.520 --> 00:17:17.980 If you walk into the Federal Reserve, 00:17:17.980 --> 00:17:22.480 the US Federal Reserve, and you have $100 bill-- you know, 00:17:22.480 --> 00:17:25.470 paper currency, $100-- 00:17:25.470 --> 00:17:26.963 what will they give you? 00:17:26.963 --> 00:17:29.130 I mean, other than that they would probably send you 00:17:29.130 --> 00:17:31.980 on your way and the security guard would say, 00:17:31.980 --> 00:17:34.170 we're in this coronavirus period, 00:17:34.170 --> 00:17:35.580 nobody's allowed in the building. 00:17:35.580 --> 00:17:39.060 But what would they do if you showed up 00:17:39.060 --> 00:17:43.500 at the New York Federal Reserve or the Richmond Federal 00:17:43.500 --> 00:17:48.630 Reserve, and you said, I want something for this $100? 00:17:48.630 --> 00:17:52.490 AUDIENCE: I suppose that a few years ago 00:17:52.490 --> 00:17:55.152 that they would give you like gold, if that makes sense. 00:17:55.152 --> 00:17:55.860 GARY GENSLER: OK. 00:17:55.860 --> 00:17:58.900 So we got rid of that in 1933. 00:17:58.900 --> 00:18:01.830 So "a few years ago" would be like at the beginning 00:18:01.830 --> 00:18:05.460 of the Great Depression under President Roosevelt. What 00:18:05.460 --> 00:18:08.130 would they give you in 2020? 00:18:08.130 --> 00:18:13.080 AUDIENCE: They would give me, I think, the government's-- 00:18:15.800 --> 00:18:19.350 that the government basically would support 00:18:19.350 --> 00:18:22.918 this piece of paper, I assume. 00:18:22.918 --> 00:18:25.210 GARY GENSLER: So you're getting at the government which 00:18:25.210 --> 00:18:29.240 sort of insure, through its means and methods, 00:18:29.240 --> 00:18:33.110 that it's acceptable by other citizens, 00:18:33.110 --> 00:18:34.880 and it's acceptable by the government. 00:18:34.880 --> 00:18:35.790 How do they do that? 00:18:35.790 --> 00:18:38.270 They say, well, we'll take it for US taxes. 00:18:38.270 --> 00:18:40.820 We'll take it for Bahranian taxes. 00:18:40.820 --> 00:18:43.820 And in most economies, the governments 00:18:43.820 --> 00:18:45.890 are anywhere from a quarter to a half 00:18:45.890 --> 00:18:48.890 of the economy in some way, so they will accept it 00:18:48.890 --> 00:18:50.690 for a government. 00:18:50.690 --> 00:18:53.420 They'll ensure that other people accept it through what's 00:18:53.420 --> 00:18:55.130 called legal tender laws. 00:18:55.130 --> 00:18:59.930 Through the coercive power of the state, they will say, 00:18:59.930 --> 00:19:02.100 others must accept it. 00:19:02.100 --> 00:19:03.760 And this is not a new thing. 00:19:03.760 --> 00:19:06.590 Genghis Khan was doing this in China, 00:19:06.590 --> 00:19:08.000 and it was pretty coercive. 00:19:08.000 --> 00:19:10.880 It was kind of [CLICKS TONGUE] the coercive power 00:19:10.880 --> 00:19:14.360 of the state, you must accept the official currency. 00:19:14.360 --> 00:19:17.640 So acceptability can be accepted by the government. 00:19:17.640 --> 00:19:19.670 It could be acceptability that others 00:19:19.670 --> 00:19:23.910 must accept it for all debts, public and private. 00:19:23.910 --> 00:19:27.290 And they can work on stability and form central banks 00:19:27.290 --> 00:19:30.490 to ensure that-- now, what does it mean by stability? 00:19:30.490 --> 00:19:35.150 It means addressing the official sector to the supply 00:19:35.150 --> 00:19:37.070 and pricing of money. 00:19:37.070 --> 00:19:39.920 Supply and pricing-- the supply we 00:19:39.920 --> 00:19:42.740 talk about the monetary supply, the pricing 00:19:42.740 --> 00:19:44.620 is through interest rates. 00:19:44.620 --> 00:19:46.470 But can you go into the US Central Bank, 00:19:46.470 --> 00:19:49.380 can you go into Bahrain and actually get gold? 00:19:49.380 --> 00:19:49.880 No. 00:19:49.880 --> 00:19:51.860 You can go in and get a $100 bill, 00:19:51.860 --> 00:19:54.260 and they might give you five 20's. 00:19:54.260 --> 00:19:57.800 If you really want, they'll give you 100 1's. 00:19:57.800 --> 00:20:00.110 But you still have just a physical piece 00:20:00.110 --> 00:20:03.350 of paper or a digital representation 00:20:03.350 --> 00:20:05.210 that I would contend-- 00:20:05.210 --> 00:20:06.770 I'm sort of with Plato-- 00:20:06.770 --> 00:20:08.330 it's just a symbol. 00:20:08.330 --> 00:20:11.780 It's a symbol that our society, no matter 00:20:11.780 --> 00:20:15.020 whether it's small or big, has come together. 00:20:15.020 --> 00:20:18.110 And it represents a store of value. 00:20:18.110 --> 00:20:21.710 It represents a means of exchange. 00:20:21.710 --> 00:20:26.450 But it frankly doesn't have intrinsic value the way 00:20:26.450 --> 00:20:27.920 Aristotle talked about it. 00:20:27.920 --> 00:20:33.540 It has only value because we humans place a value on it. 00:20:33.540 --> 00:20:37.410 But Hassan, are you on still on the other side? 00:20:37.410 --> 00:20:41.360 You feel gold has intrinsic value. 00:20:41.360 --> 00:20:42.350 AUDIENCE: Yes. 00:20:42.350 --> 00:20:46.160 I think because it's a scarce metal. 00:20:46.160 --> 00:20:50.480 And I know that prices could go up and down, 00:20:50.480 --> 00:20:53.380 but still I know that I could sell it one day 00:20:53.380 --> 00:20:55.020 and get money or get-- 00:20:55.020 --> 00:20:59.920 GARY GENSLER: So gold is what we now call an element. 00:20:59.920 --> 00:21:03.670 It's on the periodic table. 00:21:03.670 --> 00:21:07.240 It's got great attributes because it's scarce. 00:21:07.240 --> 00:21:09.310 It takes a lot of human resources 00:21:09.310 --> 00:21:11.480 to get it out of the ground. 00:21:11.480 --> 00:21:15.240 The other thing about gold, it's divisible, it's portable, 00:21:15.240 --> 00:21:15.850 it's uniform. 00:21:15.850 --> 00:21:19.620 It doesn't oxidize, so it's a really good base sort 00:21:19.620 --> 00:21:22.790 of element in that way as well. 00:21:22.790 --> 00:21:26.140 And now we have, give or take, 10,000 years 00:21:26.140 --> 00:21:30.580 of acceptability, that it's a human shared narrative. 00:21:30.580 --> 00:21:33.190 Some of it not good, some of it about war, 00:21:33.190 --> 00:21:38.060 and slavery, and all sorts of challenges in human history. 00:21:38.060 --> 00:21:41.080 But gold, and to a lesser extent silver, 00:21:41.080 --> 00:21:44.290 were very acceptable and stable. 00:21:44.290 --> 00:21:46.000 But think about this for a moment. 00:21:46.000 --> 00:21:49.780 All the world's gold that's ever been mined, 00:21:49.780 --> 00:21:52.870 if you take all of that gold, it can fit 00:21:52.870 --> 00:21:56.090 in four Olympic-sized pools. 00:21:56.090 --> 00:21:59.300 Four Olympic-sized pools, you. could put all that gold 00:21:59.300 --> 00:22:01.130 into one space. 00:22:01.130 --> 00:22:03.730 Now, it's spread around the world 00:22:03.730 --> 00:22:06.500 in jewelry and secure vaults. 00:22:06.500 --> 00:22:09.500 But it's only four Olympic-sized pools. 00:22:09.500 --> 00:22:13.620 I would kind of contend that's just a symbol. 00:22:13.620 --> 00:22:19.630 Again, it has some kind of features that make it durable, 00:22:19.630 --> 00:22:23.560 and it's got 10,000 years of human narrative 00:22:23.560 --> 00:22:25.360 and acceptability. 00:22:25.360 --> 00:22:29.950 And I can assure you that those who 00:22:29.950 --> 00:22:32.980 are really in times of trouble would probably 00:22:32.980 --> 00:22:34.780 take a piece of gold-- 00:22:34.780 --> 00:22:38.830 if it was really in times of war and despair, 00:22:38.830 --> 00:22:42.253 take a piece of gold over Bitcoin. 00:22:42.253 --> 00:22:43.670 But on the other hand, we're going 00:22:43.670 --> 00:22:45.550 to get into what Bitcoin is and how 00:22:45.550 --> 00:22:49.610 it creates some digital scarce store of value. 00:22:49.610 --> 00:22:52.810 So Hassan, we could keep going with a lively debate, 00:22:52.810 --> 00:22:56.990 but I hope that helps at least frame the sides of this thing. 00:22:56.990 --> 00:22:59.620 AUDIENCE: Yeah, I just have one thing to say. 00:22:59.620 --> 00:23:05.230 Now, I mean, if the US for some reason collapsed, 00:23:05.230 --> 00:23:08.140 what would happen to the whole monetary system? 00:23:08.140 --> 00:23:11.860 I mean, it's very dangerous, if that makes sense. 00:23:11.860 --> 00:23:12.460 Because-- 00:23:12.460 --> 00:23:14.710 GARY GENSLER: You're asking what happens if a nation's 00:23:14.710 --> 00:23:15.970 currency collapses. 00:23:15.970 --> 00:23:18.380 And we have history of that. 00:23:18.380 --> 00:23:20.950 We don't have recent history when 00:23:20.950 --> 00:23:23.770 a world's dominant currency collapses, 00:23:23.770 --> 00:23:26.440 but we've certainly a history of many countries' 00:23:26.440 --> 00:23:27.490 currencies collapsing. 00:23:27.490 --> 00:23:31.780 In fact, right now Venezuela's currency basically collapses. 00:23:31.780 --> 00:23:35.410 And what happens in countries that where the currencies enter 00:23:35.410 --> 00:23:37.960 hyperinflation and start to collapse, 00:23:37.960 --> 00:23:42.910 you start to see communities reach out to another symbol, 00:23:42.910 --> 00:23:48.580 some other symbol that is acceptable and has stability. 00:23:48.580 --> 00:23:51.790 It might be in the common time, in the current time, 00:23:51.790 --> 00:23:54.980 that those people will reach out to the US dollar. 00:23:54.980 --> 00:23:57.130 And your question is, what if the dollar collapses? 00:23:57.130 --> 00:24:00.850 But in monetary history serves that usually 00:24:00.850 --> 00:24:04.920 that when a currency goes bad, people reach out 00:24:04.920 --> 00:24:06.820 to the better currency. 00:24:06.820 --> 00:24:09.900 And it could be a neighboring country. 00:24:09.900 --> 00:24:12.990 It could be a different metal, like when 00:24:12.990 --> 00:24:16.980 we had challenges between different base metals, 00:24:16.980 --> 00:24:20.220 or even earlier times, when we had 00:24:20.220 --> 00:24:23.310 money that looked a little different than we currently 00:24:23.310 --> 00:24:26.250 looked like. 00:24:26.250 --> 00:24:29.160 Let me hold that about what happens to the US dollar 00:24:29.160 --> 00:24:31.140 for a moment and just say, the role 00:24:31.140 --> 00:24:33.090 of money, because we will lose time, 00:24:33.090 --> 00:24:35.500 and I want to get going as to what cryptocurrency 00:24:35.500 --> 00:24:37.660 and blockchain technology is. 00:24:37.660 --> 00:24:40.080 So the role of money is three things-- 00:24:40.080 --> 00:24:42.630 a medium of exchange, as Plato and Aristotle 00:24:42.630 --> 00:24:46.380 talked about; a store of value, that Aristotle basically 00:24:46.380 --> 00:24:49.830 said that I can hold it today for something tomorrow-- that's 00:24:49.830 --> 00:24:55.200 a store of value; and it also then becomes a unit of account. 00:24:55.200 --> 00:24:58.140 The US dollar is a unit of account in the US, 00:24:58.140 --> 00:25:04.170 the yen in Japan, the euro in Europe, a unit of account. 00:25:04.170 --> 00:25:06.840 These three roles of money. 00:25:06.840 --> 00:25:08.880 And it's looked very different over time. 00:25:08.880 --> 00:25:11.430 Cowrie shells in Greece. 00:25:11.430 --> 00:25:15.860 But today, I put here an Alipay mobile wallet. 00:25:15.860 --> 00:25:21.760 That's sort of what we use dominantly around the world. 00:25:21.760 --> 00:25:24.390 We talked a little bit about fiat currency 00:25:24.390 --> 00:25:27.570 when Hassan and I were going back and forth. 00:25:27.570 --> 00:25:31.350 A fiat currency is a representation 00:25:31.350 --> 00:25:35.340 of some central bank liability. 00:25:35.340 --> 00:25:39.630 Central banks, an invention of the late 17th century 00:25:39.630 --> 00:25:42.810 both in England and in Sweden, just about 00:25:42.810 --> 00:25:46.410 the same decade in the late 17th century, 00:25:46.410 --> 00:25:47.880 was a check on the sovereign. 00:25:47.880 --> 00:25:50.100 You see the king, the king in England-- 00:25:50.100 --> 00:25:51.990 using that story for a moment-- 00:25:51.990 --> 00:25:55.440 the king was at yet another war with France 00:25:55.440 --> 00:25:58.920 and wanted to borrow money. 00:25:58.920 --> 00:26:00.750 And when the king wanted to borrow money, 00:26:00.750 --> 00:26:02.880 going to the noble lords, the noble lords 00:26:02.880 --> 00:26:06.450 said, enough already, king, and said, we 00:26:06.450 --> 00:26:12.490 need some mechanism to control how much you can borrow. 00:26:12.490 --> 00:26:15.010 And how much you can borrow is, in essence, 00:26:15.010 --> 00:26:17.260 a representation of money. 00:26:17.260 --> 00:26:20.300 And they set up the Bank of England. 00:26:20.300 --> 00:26:23.117 And in Sweden it was a check also on the sovereign 00:26:23.117 --> 00:26:24.950 for a little bit different political reasons 00:26:24.950 --> 00:26:27.150 than a war with France. 00:26:27.150 --> 00:26:30.500 And there we had the initial sort of central banks. 00:26:30.500 --> 00:26:33.320 Here in the US we went about it-- 00:26:33.320 --> 00:26:35.960 Alexander Hamilton thought we should have something. 00:26:35.960 --> 00:26:41.600 That was during the 1790s. 00:26:41.600 --> 00:26:44.300 By the 1830s, Andrew Jackson said, 00:26:44.300 --> 00:26:47.000 enough with this sort of centralized banking. 00:26:47.000 --> 00:26:51.620 And then we went for nearly 80 years-- about 75 years, 00:26:51.620 --> 00:26:54.170 from the 1830s to the 19-teens-- 00:26:54.170 --> 00:26:56.720 with no central bank. 00:26:56.720 --> 00:27:00.050 We had crisis after crisis, and we formed one 00:27:00.050 --> 00:27:03.200 during President Wilson's time, one 00:27:03.200 --> 00:27:09.380 of the great progressive movements of the day and just 00:27:09.380 --> 00:27:11.390 about a hundred years ago. 00:27:11.390 --> 00:27:15.310 But fiat currencies are representations of liabilities. 00:27:15.310 --> 00:27:17.060 And Hassan would say, well, but don't they 00:27:17.060 --> 00:27:19.490 have something behind it? 00:27:19.490 --> 00:27:23.420 What they have behind it is the government's ability 00:27:23.420 --> 00:27:26.810 to, of course, tax, the government's ability 00:27:26.810 --> 00:27:30.530 to be trusted to keep its promises to keep 00:27:30.530 --> 00:27:32.390 that currency stable. 00:27:32.390 --> 00:27:35.510 But again, just like when that English king was 00:27:35.510 --> 00:27:38.300 at war with France, sometimes-- 00:27:38.300 --> 00:27:41.270 sometimes-- they overprint the money. 00:27:41.270 --> 00:27:46.520 Sometimes it gets out of control and central banks lose control. 00:27:46.520 --> 00:27:51.020 But it has very big network effects that we talked about. 00:27:51.020 --> 00:27:54.830 The acceptance for taxes for legal tender, 00:27:54.830 --> 00:27:58.490 it's accepted through what Mundell would say 00:27:58.490 --> 00:28:00.950 was an optimum currency area. 00:28:00.950 --> 00:28:04.310 Now, we have 180 currencies around the globe. 00:28:04.310 --> 00:28:07.610 And some work well and some don't work so well, 00:28:07.610 --> 00:28:10.510 like Venezuela right now. 00:28:10.510 --> 00:28:12.660 And so in the midst of all of that, 00:28:12.660 --> 00:28:14.900 the question is, and this a little humorous, 00:28:14.900 --> 00:28:16.960 is, what's money's future? 00:28:16.960 --> 00:28:18.670 Is it digital currencies? 00:28:18.670 --> 00:28:23.650 Or is it like in kind of the fun movie Star Wars, 00:28:23.650 --> 00:28:28.900 is it these types of things, credit chips and the like? 00:28:28.900 --> 00:28:30.610 Now, I would say if you're a Star Trek 00:28:30.610 --> 00:28:33.550 fan, in Star Trek Gene Roddenberry didn't 00:28:33.550 --> 00:28:34.660 have any currency. 00:28:34.660 --> 00:28:37.030 If you go through all the original Star 00:28:37.030 --> 00:28:40.210 Treks and everything, they actually didn't have any money. 00:28:40.210 --> 00:28:43.940 That was Gene Roddenberry's future. 00:28:43.940 --> 00:28:48.120 So he sort of dispensed with all this Plato and Aristotle-- 00:28:48.120 --> 00:28:50.350 Let's now sort of go a little bit more serious 00:28:50.350 --> 00:28:52.560 and then talk about Satoshi Nakamoto. 00:28:52.560 --> 00:28:56.440 But Romain, any questions? 00:28:56.440 --> 00:28:57.370 AUDIENCE: None so far. 00:28:57.370 --> 00:28:58.537 Let's give it a few seconds. 00:29:04.250 --> 00:29:05.610 No, I think we're good to go. 00:29:05.610 --> 00:29:07.193 GARY GENSLER: So with that foundation, 00:29:07.193 --> 00:29:09.770 let's go back to the payments riddle. 00:29:09.770 --> 00:29:11.900 So we get through the 1990s. 00:29:11.900 --> 00:29:16.790 The internet is taking off, we figure out how to secure it, 00:29:16.790 --> 00:29:21.830 and the credit card companies find a way to move money. 00:29:21.830 --> 00:29:23.290 Some startups happen. 00:29:23.290 --> 00:29:26.150 PayPal and the like start up in this area, 00:29:26.150 --> 00:29:28.820 the fintech of the late 1990s. 00:29:28.820 --> 00:29:31.640 Mobile payments start by the noughts. 00:29:31.640 --> 00:29:39.310 We already have Alipay and M-Pesa in Africa. 00:29:39.310 --> 00:29:41.260 But this payment riddle is still there. 00:29:41.260 --> 00:29:44.770 And that cypherpunk mailing list is still there. 00:29:44.770 --> 00:29:50.000 And on Halloween night in 2008, an eight-page paper 00:29:50.000 --> 00:29:54.330 is written and is put up on the internet on this cypherpunk 00:29:54.330 --> 00:29:57.400 punk mailing list-- there might only be a couple people. 00:29:57.400 --> 00:30:00.940 "I've been working on a new electronic cash system." 00:30:00.940 --> 00:30:05.520 Peer-to-peer, no trusted third party, no central authority. 00:30:05.520 --> 00:30:10.060 And what Satoshi Nakamoto wrote in that eight-page paper, what 00:30:10.060 --> 00:30:16.600 Nakamoto-san wrote was Bitcoin white paper. 00:30:16.600 --> 00:30:18.970 Had never used the word "blockchain technology." 00:30:18.970 --> 00:30:21.490 We've come to call it blockchain technology. 00:30:21.490 --> 00:30:24.460 So, what is the blockchain technology? 00:30:24.460 --> 00:30:28.840 fundamentally, it's a shared accounting system-- 00:30:28.840 --> 00:30:33.110 a shared accounting system or a shared database system. 00:30:33.110 --> 00:30:37.690 So Satoshi Nakamoto had timestamped ledgers. 00:30:37.690 --> 00:30:43.380 And a timestamped ledger with cryptography to secure it 00:30:43.380 --> 00:30:44.700 was not new. 00:30:44.700 --> 00:30:49.780 A timestamped ledger-- my little illustration here, 00:30:49.780 --> 00:30:52.920 Neha Narula and I use this, so I want to give her credit 00:30:52.920 --> 00:30:55.200 as well-- 00:30:55.200 --> 00:30:57.600 represents blocks of data. 00:30:57.600 --> 00:31:00.840 Blocks of data, and between these blocks of data 00:31:00.840 --> 00:31:03.030 a cryptographic hash function. 00:31:03.030 --> 00:31:04.710 And a cryptographic hash function 00:31:04.710 --> 00:31:07.470 we use every day of our lives, just 00:31:07.470 --> 00:31:10.920 we don't know we're using it, somewhere on the internet 00:31:10.920 --> 00:31:13.190 to commit to data. 00:31:13.190 --> 00:31:18.540 This technology, this idea of taking a block of data 00:31:18.540 --> 00:31:20.670 and adding another block of data and having 00:31:20.670 --> 00:31:23.970 a hash function in between, was an innovation 00:31:23.970 --> 00:31:26.380 of the late 1980s. 00:31:26.380 --> 00:31:29.700 Two Bell Labs scientists, Haber and Stornetta, 00:31:29.700 --> 00:31:32.760 wrote a paper about it, even started a company 00:31:32.760 --> 00:31:37.170 to notarize legal documents by 1995, 00:31:37.170 --> 00:31:40.200 a little startup called Surety. 00:31:40.200 --> 00:31:41.940 That existed. 00:31:41.940 --> 00:31:45.030 That existed, but what Nakamoto-san figured out 00:31:45.030 --> 00:31:48.300 was how to have multiple parties. 00:31:48.300 --> 00:31:51.680 Nakamoto-san solved the consensus riddle, 00:31:51.680 --> 00:31:55.860 or what some people call Byzantine general's problem. 00:31:55.860 --> 00:32:00.880 The problem is, what if I don't know the other people keeping 00:32:00.880 --> 00:32:01.950 a ledger? 00:32:01.950 --> 00:32:05.250 Again, the Byzantine general's problem was not new. 00:32:05.250 --> 00:32:06.420 It wasn't even about money. 00:32:06.420 --> 00:32:08.460 The Byzantine general's problem had been written 00:32:08.460 --> 00:32:10.200 about in the early 1980s. 00:32:10.200 --> 00:32:13.080 It was a computer systems problem. 00:32:13.080 --> 00:32:16.770 If you tie various computers together, what if one of them 00:32:16.770 --> 00:32:17.370 fails? 00:32:17.370 --> 00:32:20.850 Or even in an airplane, what if one of the engines fails? 00:32:20.850 --> 00:32:23.540 It's the question of fault tolerance. 00:32:23.540 --> 00:32:27.120 But what Satoshi Nakamoto did was solved it 00:32:27.120 --> 00:32:29.480 through something called proof of work. 00:32:29.480 --> 00:32:33.240 And we don't have the time to go through that, but what 00:32:33.240 --> 00:32:38.280 this provided together was a decentralized, auditable 00:32:38.280 --> 00:32:39.450 database. 00:32:39.450 --> 00:32:42.630 Now, in the case of Bitcoin 10,000 computers 00:32:42.630 --> 00:32:47.040 around the globe maintain this auditable database. 00:32:47.040 --> 00:32:49.620 And this audible database builds a block 00:32:49.620 --> 00:32:53.640 of data on top of a block of data on top of a block of data, 00:32:53.640 --> 00:32:59.550 but its shared accounting system maintains it. 00:32:59.550 --> 00:33:03.090 There was one other thing that went on in this period time. 00:33:03.090 --> 00:33:08.550 In the late 1990s, a computer scientist Nick Szabo 00:33:08.550 --> 00:33:12.180 wrote a paper and coined the phrase "smart contracts." 00:33:12.180 --> 00:33:13.950 Again, not an original idea. 00:33:13.950 --> 00:33:16.110 But what Nick Szabo said, what if we 00:33:16.110 --> 00:33:21.760 could take a set of promises, put them in digital form, 00:33:21.760 --> 00:33:24.600 and then the parties can perform against them? 00:33:24.600 --> 00:33:29.200 In essence, what if we automate in computer 00:33:29.200 --> 00:33:32.050 code the movement of a property right? 00:33:32.050 --> 00:33:34.030 Now, I grew up in Baltimore, Maryland. 00:33:34.030 --> 00:33:36.040 My dad had a vending machine business. 00:33:36.040 --> 00:33:43.600 You know, cigarette machines and candy machines and the like. 00:33:43.600 --> 00:33:46.430 A vending machine is a smart contract. 00:33:46.430 --> 00:33:48.890 It's a conditional movement of property rights. 00:33:48.890 --> 00:33:53.030 It's a pack of gum if you put some money in the machine. 00:33:53.030 --> 00:33:55.040 So you can think of a smart contract 00:33:55.040 --> 00:33:58.940 as digitizing, basically, a vending machine. 00:33:58.940 --> 00:34:01.400 They're not necessarily smart, they're not necessarily 00:34:01.400 --> 00:34:02.350 legal contracts. 00:34:02.350 --> 00:34:04.680 So I'd be cautious about that. 00:34:04.680 --> 00:34:08.480 But these two concepts came together-- smart contracts, 00:34:08.480 --> 00:34:12.760 meaning, can I digitize the movement of a property right? 00:34:12.760 --> 00:34:17.940 And then this accounting system of a shared ledger, 00:34:17.940 --> 00:34:21.100 that multiple parties can share a ledger 00:34:21.100 --> 00:34:23.860 with no central controller. 00:34:23.860 --> 00:34:28.120 That's kind of the conceptual frame where 00:34:28.120 --> 00:34:30.040 I want to pause for a second, Romain, 00:34:30.040 --> 00:34:36.340 and take questions on what I usually 00:34:36.340 --> 00:34:38.739 cover in a lot more time than the few minutes 00:34:38.739 --> 00:34:39.670 that I just did. 00:34:41.830 --> 00:34:43.580 AUDIENCE: Any questions from the students? 00:34:48.179 --> 00:34:49.929 GARY GENSLER: This must be because we just 00:34:49.929 --> 00:34:56.658 went through holiday time and we had our Zoom Easters and Zoom 00:34:56.658 --> 00:34:57.158 seders. 00:35:00.365 --> 00:35:02.032 AUDIENCE: There are no hands raised now. 00:35:02.032 --> 00:35:04.710 Ah, we do have one question from Celi. 00:35:04.710 --> 00:35:07.063 GARY GENSLER: Please. 00:35:07.063 --> 00:35:08.480 AUDIENCE: So I was just wondering, 00:35:08.480 --> 00:35:12.410 can you explain a little more the issues 00:35:12.410 --> 00:35:15.920 of the decentralized audible database? 00:35:15.920 --> 00:35:19.640 You mentioned it very briefly that it first came out 00:35:19.640 --> 00:35:21.610 and how [INAUDIBLE] were solved. 00:35:21.610 --> 00:35:25.310 But can you-- just to understand what issues they are solving. 00:35:25.310 --> 00:35:26.685 Can you kind of explain a little? 00:35:26.685 --> 00:35:29.660 GARY GENSLER: So if I understand the question, 00:35:29.660 --> 00:35:31.790 what Nakamoto-san was trying to solve 00:35:31.790 --> 00:35:37.280 was what has been come to called double spending. 00:35:37.280 --> 00:35:44.750 Can you in a digital way move a representation of value, 00:35:44.750 --> 00:35:46.820 in a digital way move that, without having 00:35:46.820 --> 00:35:48.890 a central authority? 00:35:48.890 --> 00:35:53.210 We move digitally representation of values every day. 00:35:53.210 --> 00:35:56.330 When you go online and buy something-- you go to Expedia, 00:35:56.330 --> 00:36:01.970 you go to Amazon, you go to Alibaba-- 00:36:01.970 --> 00:36:05.330 we move digitally representation of values. 00:36:05.330 --> 00:36:09.585 We no longer have much of our economy on physical cash. 00:36:09.585 --> 00:36:14.030 But we always have some central authority-- a bank, 00:36:14.030 --> 00:36:18.650 a payments company that we'll talk about in class 6-- 00:36:18.650 --> 00:36:20.900 some central authority controlling 00:36:20.900 --> 00:36:24.380 that to ensure that you actually have 00:36:24.380 --> 00:36:27.620 that value, to authenticate and authorize 00:36:27.620 --> 00:36:29.690 the movement of that money. 00:36:29.690 --> 00:36:31.820 So what Satoshi Nakamoto was solving 00:36:31.820 --> 00:36:35.210 for is, what if there was no central authority? 00:36:35.210 --> 00:36:39.470 And it was a shared database or ledger, 00:36:39.470 --> 00:36:42.050 or what I call a shared accounting system. 00:36:42.050 --> 00:36:45.170 That would be the core thing. 00:36:45.170 --> 00:36:48.380 This kind of riddle from the 1990s, 00:36:48.380 --> 00:36:50.690 we send packets of data around the internet 00:36:50.690 --> 00:36:53.260 with this out-of-central authority, 00:36:53.260 --> 00:36:54.500 maybe you could do that. 00:36:54.500 --> 00:36:56.480 And I don't think it's a surprise this happened 00:36:56.480 --> 00:36:59.050 in the middle of a financial crisis, Halloween 00:36:59.050 --> 00:37:00.550 in the middle of a financial crisis, 00:37:00.550 --> 00:37:04.100 when trust in central authorities was quite low, 00:37:04.100 --> 00:37:07.220 and especially trust in Wall Street and banking, 00:37:07.220 --> 00:37:09.830 and banks in Europe was quite low. 00:37:12.470 --> 00:37:16.600 This burst of innovation came at that time. 00:37:16.600 --> 00:37:17.890 I hope that helps. 00:37:17.890 --> 00:37:20.260 And I think as we're going to chat through today 00:37:20.260 --> 00:37:21.730 and in other classes, the question 00:37:21.730 --> 00:37:24.065 is, are there other applications? 00:37:24.065 --> 00:37:26.050 See, this goes to the heart of finance. 00:37:26.050 --> 00:37:27.820 It goes to the heart of the plumbing. 00:37:27.820 --> 00:37:32.755 Satoshi Nakamoto's innovation still survives 12 years later. 00:37:32.755 --> 00:37:38.570 In this adversarial sort of off-the-grid way, 00:37:38.570 --> 00:37:42.400 Bitcoins still survives 12 years later. 00:37:42.400 --> 00:37:45.850 But are there other applications in finance, 00:37:45.850 --> 00:37:51.820 where a shared database system, a shared accounting system 00:37:51.820 --> 00:37:53.720 is the best way to go? 00:37:53.720 --> 00:37:56.200 And we've had inventions like this, 00:37:56.200 --> 00:38:00.610 infrastructure technologies that have radically changed finance. 00:38:00.610 --> 00:38:02.610 And one of them from several hundred years ago 00:38:02.610 --> 00:38:04.900 was the joint stock company. 00:38:04.900 --> 00:38:07.300 When I talk about a technology stack, 00:38:07.300 --> 00:38:10.540 one from several centuries ago was, 00:38:10.540 --> 00:38:15.220 can we have a shared ownership of a company? 00:38:15.220 --> 00:38:17.550 And when that was sort of invented, 00:38:17.550 --> 00:38:20.490 I guess some people would have said, what do we need that for? 00:38:20.490 --> 00:38:24.990 This, instead of a shared company, is a shared database. 00:38:24.990 --> 00:38:26.580 And so that's the debate. 00:38:26.580 --> 00:38:28.530 Is it really needed? 00:38:28.530 --> 00:38:30.900 Will it be useful in the future? 00:38:30.900 --> 00:38:34.830 It has led to a crypto market, about $200 billion 00:38:34.830 --> 00:38:42.310 as of yesterday, 2/3 of which is Bitcoin, highly volatile. 00:38:42.310 --> 00:38:45.360 Hassan would say, but what's the intrinsic value? 00:38:45.360 --> 00:38:49.470 It is a digital scarce store of value. 00:38:49.470 --> 00:38:52.470 And it only has value because somebody else will move it. 00:38:52.470 --> 00:38:55.560 When Bitcoin was rolled out in 2009, 00:38:55.560 --> 00:38:57.540 nobody saw that it had value. 00:38:57.540 --> 00:39:02.490 It was just a kind of interesting project. 00:39:02.490 --> 00:39:07.050 But by 2010, one person who was in the community 00:39:07.050 --> 00:39:09.840 said, let's see if I could get anybody to give me 00:39:09.840 --> 00:39:12.450 something commercially. 00:39:12.450 --> 00:39:14.560 And it was actually pizza. 00:39:14.560 --> 00:39:18.720 It wasn't Pizza Net, the Sandra Bullock 00:39:18.720 --> 00:39:21.330 movie we started with in 1995. 00:39:21.330 --> 00:39:27.960 But 15 years later in 2010, a crypto enthusiast in Florida 00:39:27.960 --> 00:39:32.760 put out-- on an email asked, I will give you 10,000 bitcoin 00:39:32.760 --> 00:39:34.710 if you send me two pizzas. 00:39:34.710 --> 00:39:39.270 Two pizzas, 1,000 bitcoin in May of 2010. 00:39:39.270 --> 00:39:41.730 It took about a week before anybody responded. 00:39:41.730 --> 00:39:43.980 But two pizzas showed up at his door, 00:39:43.980 --> 00:39:49.620 and sure enough this crypto enthusiast in Florida 00:39:49.620 --> 00:39:51.190 sent the 10,000 bitcoin. 00:39:51.190 --> 00:39:55.123 Now, at the time, there wasn't a crypto market. 00:39:55.123 --> 00:39:56.790 At the time, it was thought that the two 00:39:56.790 --> 00:40:02.130 pizzas were worth about $42 that he had paid 10,000 bitcoin for. 00:40:02.130 --> 00:40:07.780 That 10,000 bitcoin today would be valued at about $65 million. 00:40:07.780 --> 00:40:10.906 So 10 years later, you kind of go, well, 00:40:10.906 --> 00:40:15.060 that was kind of an interesting time to do that. 00:40:15.060 --> 00:40:17.760 It's led to different sectors. 00:40:17.760 --> 00:40:19.770 There's thousands of these coins. 00:40:19.770 --> 00:40:21.960 The payment or store of value tokens 00:40:21.960 --> 00:40:25.500 are the dominant, about 3/4 of the market. 00:40:25.500 --> 00:40:27.330 Some of you may have heard of Ethereum. 00:40:27.330 --> 00:40:29.630 But platform tokens were-- 00:40:29.630 --> 00:40:33.720 Vitalik Buterin rolled out this thing called Ethereum. 00:40:33.720 --> 00:40:41.170 And Ethereum is conceptually a worldwide shared computer. 00:40:41.170 --> 00:40:48.040 It has many attributes of operating system. 00:40:48.040 --> 00:40:50.170 I wouldn't compare it and contrasted 00:40:50.170 --> 00:40:54.430 with iOS and Android, but it does have attributes similar 00:40:54.430 --> 00:40:59.050 to a worldwide platform layer operating system, 00:40:59.050 --> 00:41:02.410 upon which distributed applications or dApps can 00:41:02.410 --> 00:41:04.950 be put on top. 00:41:04.950 --> 00:41:06.870 So this is this ecosystem. 00:41:06.870 --> 00:41:10.770 There's a few dozen payment or store value tokens. 00:41:10.770 --> 00:41:12.960 There's dozens of platform tokens. 00:41:12.960 --> 00:41:18.220 There's 1,000 to 2,000 applications placed on top. 00:41:18.220 --> 00:41:21.540 The conceptual framework in these applications 00:41:21.540 --> 00:41:24.420 is they're decentralized. 00:41:24.420 --> 00:41:28.050 Will anybody use them-- different questions 00:41:28.050 --> 00:41:30.070 along the way. 00:41:30.070 --> 00:41:31.800 So, what has this led to? 00:41:31.800 --> 00:41:37.310 It's led to blockchain use cases around speculative investing. 00:41:37.310 --> 00:41:40.090 Crowdfunding through initial coin offerings-- 00:41:40.090 --> 00:41:45.310 from 2017 to 2019, nearly $30 billion 00:41:45.310 --> 00:41:50.780 was raised by basically selling a token 00:41:50.780 --> 00:41:53.750 before you had a business. 00:41:53.750 --> 00:41:55.940 You might have a good idea, you might 00:41:55.940 --> 00:42:00.380 have the legitimate players, and you raised money off of this. 00:42:00.380 --> 00:42:03.440 You weren't selling equity, you were not selling debt, 00:42:03.440 --> 00:42:06.080 you were selling a token that could be used 00:42:06.080 --> 00:42:08.400 on some site in the future. 00:42:08.400 --> 00:42:11.680 Now, those tokens have largely been-- 00:42:11.680 --> 00:42:13.520 in 2020 this is-- 00:42:13.520 --> 00:42:17.630 those tokens are largely for crypto exchanges, 00:42:17.630 --> 00:42:20.000 for gaming, for gambling, for something 00:42:20.000 --> 00:42:24.090 called decentralized finance, and file sharing. 00:42:24.090 --> 00:42:26.250 Now, there's something that's consistent 00:42:26.250 --> 00:42:29.010 about the first three-- crypto exchanges, gaming, 00:42:29.010 --> 00:42:30.180 and gambling. 00:42:30.180 --> 00:42:34.100 Some of the users of these gaming/gambling exchange sites 00:42:34.100 --> 00:42:38.220 want a sort of a basis of staying off the grid. 00:42:38.220 --> 00:42:41.190 They want censorship resistance. 00:42:41.190 --> 00:42:43.650 So the thing about cryptocurrencies, 00:42:43.650 --> 00:42:47.920 the good and the bad sometimes, is the official sector, 00:42:47.920 --> 00:42:50.670 though they can track some of it, they can't track all of it. 00:42:50.670 --> 00:42:54.660 That it's some way sometimes to stay off the grid. 00:42:54.660 --> 00:42:56.010 I'm not advising this. 00:42:56.010 --> 00:42:59.100 I'm just saying the economics of it, some of that, 00:42:59.100 --> 00:43:01.560 is about censorship-resistant. 00:43:01.560 --> 00:43:07.910 All of the other uses has been around blockchain technology. 00:43:07.910 --> 00:43:10.580 And the uses really are potential uses. 00:43:10.580 --> 00:43:11.600 They haven't taken off. 00:43:11.600 --> 00:43:13.160 Can we use it in payment systems? 00:43:13.160 --> 00:43:14.750 Can we use it in trade finance? 00:43:14.750 --> 00:43:17.420 Can we use it in clearing settling and processing? 00:43:17.420 --> 00:43:20.330 And there are hundreds of projects 00:43:20.330 --> 00:43:25.610 that have been in proof of concept or pilot stages, none 00:43:25.610 --> 00:43:28.230 that have truly broken out yet. 00:43:28.230 --> 00:43:32.850 And this is why I say it hasn't come into the technology stack. 00:43:32.850 --> 00:43:34.960 You can, by the way, get your MIT diploma 00:43:34.960 --> 00:43:36.710 on blockchain technology. 00:43:36.710 --> 00:43:42.770 I'm saying that if you do, you can decide also 00:43:42.770 --> 00:43:44.780 to get it in paper form. 00:43:44.780 --> 00:43:48.050 I thought-- Romain, actually we had a poll just to see how many 00:43:48.050 --> 00:43:48.740 people-- 00:43:48.740 --> 00:43:52.490 there's a poll on use of cryptocurrency or something, 00:43:52.490 --> 00:43:55.530 the first of those two polls. 00:43:55.530 --> 00:44:00.050 If folks don't mind just giving a little flavor for, 00:44:00.050 --> 00:44:03.215 have you ever owned crypto, and so forth. 00:44:03.215 --> 00:44:08.780 So it looks like a third have owned Bitcoin or Ethereum 00:44:08.780 --> 00:44:11.060 or AUT Coins. 00:44:11.060 --> 00:44:13.790 And we have-- does Bitcoin exhibit 00:44:13.790 --> 00:44:17.510 the three roles of money? 00:44:17.510 --> 00:44:22.400 A little over half yes, and a little less than a half no. 00:44:22.400 --> 00:44:25.340 I'm going to ask if somebody-- one person on the yes side, one 00:44:25.340 --> 00:44:27.050 person on the no side-- just points 00:44:27.050 --> 00:44:31.100 to articulate why it does not exhibit 00:44:31.100 --> 00:44:33.440 the three roles of money-- the store of value, 00:44:33.440 --> 00:44:35.660 medium of exchange, unit of account. 00:44:39.070 --> 00:44:41.100 And for this Romain, we'll cold call. 00:44:41.100 --> 00:44:47.002 So if somebody wants to take the lead on either side. 00:44:47.002 --> 00:44:48.950 AUDIENCE: Any volunteers? 00:44:48.950 --> 00:44:49.831 Camilo. 00:44:52.390 --> 00:44:53.890 GARY GENSLER: And if you can declare 00:44:53.890 --> 00:44:56.860 which side you're on so somebody can volunteer on the other side 00:44:56.860 --> 00:44:58.370 as well. 00:44:58.370 --> 00:45:00.490 AUDIENCE: Yeah, I am on the no side. 00:45:00.490 --> 00:45:00.990 I mean, I-- 00:45:00.990 --> 00:45:01.990 GARY GENSLER: All right. 00:45:01.990 --> 00:45:04.270 So just for a moment, so if somebody on the optimist 00:45:04.270 --> 00:45:05.980 positive side please volunteer. 00:45:05.980 --> 00:45:07.588 But Camilo. 00:45:07.588 --> 00:45:08.380 AUDIENCE: Yeah, no. 00:45:08.380 --> 00:45:13.160 I mean, I think that still as a medium of exchange, 00:45:13.160 --> 00:45:16.460 Bitcoin and the rest of the cryptocurrencies 00:45:16.460 --> 00:45:18.430 are really limited. 00:45:18.430 --> 00:45:20.870 If I want to go to, I don't know, the public 00:45:20.870 --> 00:45:24.840 and buy something with Bitcoin, it would be so hard. 00:45:24.840 --> 00:45:26.570 I'll have to find an app that translates 00:45:26.570 --> 00:45:29.960 my Bitcoin to real money and then try to pay. 00:45:29.960 --> 00:45:34.580 And there is also a questionable thing about the store of value. 00:45:34.580 --> 00:45:38.480 You know, Bitcoin at least-- and Ethereum I think is also true-- 00:45:38.480 --> 00:45:42.920 had been fluctuating so much that you never 00:45:42.920 --> 00:45:46.340 know how much value are you're getting for a bitcoin day 00:45:46.340 --> 00:45:46.870 to day. 00:45:46.870 --> 00:45:50.330 So I think there is still a long way before fulfilling 00:45:50.330 --> 00:45:52.330 the essentials of money. 00:45:52.330 --> 00:45:53.330 GARY GENSLER: All right. 00:45:53.330 --> 00:45:57.620 So I think Camilo is saying, I can't go to Publix, 00:45:57.620 --> 00:46:00.890 not a medium of exchange where I want to go. 00:46:00.890 --> 00:46:06.420 And it's kind of this volatile store of value. 00:46:06.420 --> 00:46:08.630 And you didn't address a unit of account. 00:46:08.630 --> 00:46:10.220 But let's see if there's somebody 00:46:10.220 --> 00:46:13.220 on the other side who just wants to kind of articulate 00:46:13.220 --> 00:46:15.120 the other side of this. 00:46:15.120 --> 00:46:16.403 AUDIENCE: We have Devin. 00:46:16.403 --> 00:46:17.570 GARY GENSLER: Devin, please. 00:46:17.570 --> 00:46:18.500 AUDIENCE: Oof. 00:46:18.500 --> 00:46:22.310 I can give the counter, at least in my opinion. 00:46:22.310 --> 00:46:24.980 I don't think that the idea of a store of value 00:46:24.980 --> 00:46:28.190 and the medium exchange are shortcomings of the currency. 00:46:28.190 --> 00:46:30.440 I think they're shortcomings of the market in which it 00:46:30.440 --> 00:46:32.400 operates. 00:46:32.400 --> 00:46:34.583 So you can use it to exchange value. 00:46:34.583 --> 00:46:36.000 If the infrastructure isn't there, 00:46:36.000 --> 00:46:37.937 that's not the currencies fault, that's 00:46:37.937 --> 00:46:39.270 sort of the market participants. 00:46:39.270 --> 00:46:42.630 And then with the store of value, it does store a value. 00:46:42.630 --> 00:46:44.550 That value does fluctuate, that's true. 00:46:44.550 --> 00:46:47.070 But again, I think that's because of the market it's in 00:46:47.070 --> 00:46:52.020 and speculation going on around these currencies. 00:46:52.020 --> 00:46:53.810 GARY GENSLER: Camilo do you want to-- 00:46:53.810 --> 00:46:55.180 you both are unmuted. 00:46:55.180 --> 00:46:59.200 You can cross-- and Devin can stay unmuted, too. 00:46:59.200 --> 00:47:02.615 Any reply just for 30 seconds? 00:47:02.615 --> 00:47:03.490 AUDIENCE: No, no, no. 00:47:03.490 --> 00:47:05.800 I just want to say that, although it's true that 00:47:05.800 --> 00:47:09.010 the value of the Bitcoin, it fluctuates with the market, 00:47:09.010 --> 00:47:14.110 the point is that if you want a worldwide accepted medium 00:47:14.110 --> 00:47:18.070 of exchange, it cannot fluctuate as much as a Bitcoin. 00:47:18.070 --> 00:47:19.720 Otherwise, the financial system-- 00:47:19.720 --> 00:47:24.100 and even people who have savings wouldn't have their savings 00:47:24.100 --> 00:47:24.790 in Bitcoin. 00:47:24.790 --> 00:47:26.970 I mean, you are not going to put your funding, 00:47:26.970 --> 00:47:29.590 your savings account into Bitcoin, 00:47:29.590 --> 00:47:33.160 because you might get losses overnight, so. 00:47:33.160 --> 00:47:35.470 GARY GENSLER: And [Devin. 00:47:35.470 --> 00:47:38.127 AUDIENCE: I agree that it does fluctuate. 00:47:38.127 --> 00:47:39.460 I wouldn't put my savings in it. 00:47:39.460 --> 00:47:42.140 I never have, I never will. 00:47:42.140 --> 00:47:43.750 But I do think it kind of comes down 00:47:43.750 --> 00:47:46.540 to what is the exact definition of the question you're 00:47:46.540 --> 00:47:47.300 trying to answer. 00:47:47.300 --> 00:47:48.460 Can you store value in it? 00:47:48.460 --> 00:47:49.090 Yes. 00:47:49.090 --> 00:47:51.070 Is the value going to be the same tomorrow? 00:47:51.070 --> 00:47:52.570 Maybe not. 00:47:52.570 --> 00:47:55.220 And that's something that might stabilize over time as-- 00:47:55.220 --> 00:47:58.030 like, if it gets used more for day-to-day interactions 00:47:58.030 --> 00:48:00.170 like going to the shop, and it's not 00:48:00.170 --> 00:48:02.650 kind of speculation and sort of hype around it, 00:48:02.650 --> 00:48:05.140 then maybe we can kind of converge to a point 00:48:05.140 --> 00:48:07.900 where it does satisfy everything fully. 00:48:07.900 --> 00:48:10.690 GARY GENSLER: And this debate that Devin and Camilo 00:48:10.690 --> 00:48:14.440 are helping frame is debate that's a worthy debate. 00:48:14.440 --> 00:48:18.280 I will tell you that I'm not a Bitcoin maximalist, 00:48:18.280 --> 00:48:19.780 but I actually-- 00:48:19.780 --> 00:48:22.420 I'm probably a little closer to Devin than Camilo 00:48:22.420 --> 00:48:27.490 on this in terms of, it is a digital scarce store of value. 00:48:27.490 --> 00:48:29.950 Will it be worth something 10 years from now? 00:48:29.950 --> 00:48:31.960 Maybe not, maybe not. 00:48:31.960 --> 00:48:35.260 But it has survived kind of in this swamp, 00:48:35.260 --> 00:48:39.290 it's this uncertain sort of world, for 12 years. 00:48:39.290 --> 00:48:45.360 And it has some value to some folks. 00:48:45.360 --> 00:48:48.990 Hassan earlier would say, but it doesn't have intrinsic value. 00:48:48.990 --> 00:48:52.730 And I would say, well, it's just a symbol in any regard. 00:48:52.730 --> 00:48:56.850 It can be a medium of exchange in certain places. 00:48:56.850 --> 00:48:58.250 But it needs an infrastructure. 00:48:58.250 --> 00:49:01.130 Camilo is absolutely right. 00:49:01.130 --> 00:49:06.430 The state treasurer of Ohio in late 2018 had announced-- 00:49:06.430 --> 00:49:09.260 a state controller, I think it might have been, 00:49:09.260 --> 00:49:11.150 in Ohio, an elected office-- 00:49:11.150 --> 00:49:15.050 that the state of Ohio would accept Bitcoin for taxes. 00:49:15.050 --> 00:49:18.080 Was it just for political reasons 00:49:18.080 --> 00:49:20.960 that this gentleman announced it, 00:49:20.960 --> 00:49:23.150 that he thought he was associating himself 00:49:23.150 --> 00:49:25.820 with a new innovation in the economy? 00:49:25.820 --> 00:49:27.230 But they needed an infrastructure 00:49:27.230 --> 00:49:28.850 to accept the Bitcoin. 00:49:28.850 --> 00:49:35.510 They had to convert it for a 1% fee to US dollars for sure. 00:49:35.510 --> 00:49:37.430 It's not much of a unit of account. 00:49:37.430 --> 00:49:41.030 But sometimes it becomes a unit of account inside 00:49:41.030 --> 00:49:45.770 of these other decentralized apps inside the ICO space. 00:49:45.770 --> 00:49:49.700 So it sort of probably exhibits one out of the three mostly. 00:49:49.700 --> 00:49:52.280 It's a speculative store of value. 00:49:52.280 --> 00:49:54.110 It can be a medium of exchange. 00:49:54.110 --> 00:49:56.330 It can be a unit of account. 00:49:56.330 --> 00:49:58.400 But it hasn't adopted this. 00:49:58.400 --> 00:50:04.100 A number of years ago, the Financial Stability Board, 00:50:04.100 --> 00:50:08.540 a worldwide organization of 20-- the G20 finance ministers 00:50:08.540 --> 00:50:12.710 and central bankers, decided that they would no longer call 00:50:12.710 --> 00:50:14.720 Bitcoin and others cryptocurrencies, 00:50:14.720 --> 00:50:16.860 and they'd call them crypto assets. 00:50:16.860 --> 00:50:19.370 So they were associating more with Camilo's side. 00:50:19.370 --> 00:50:20.745 They were saying, we're not going 00:50:20.745 --> 00:50:24.800 to give this the kind of word to call it a currency. 00:50:24.800 --> 00:50:27.650 And yet, the US Department of Treasury 00:50:27.650 --> 00:50:30.530 some seven years ago had to address itself 00:50:30.530 --> 00:50:32.840 to the question of whether Bitcoin 00:50:32.840 --> 00:50:38.780 and other similar digital assets were currency under US Bank 00:50:38.780 --> 00:50:43.710 Secrecy Act laws, against money laundering and the like. 00:50:43.710 --> 00:50:46.760 And for that purpose, they said that Bitcoin 00:50:46.760 --> 00:50:48.740 was a virtual currency. 00:50:48.740 --> 00:50:52.820 So there's the US Department of Treasury fitting it into a box. 00:50:52.820 --> 00:50:56.690 Now, I dare say they needed to somehow address 00:50:56.690 --> 00:50:58.880 this public policy issue as to whether it 00:50:58.880 --> 00:51:01.970 was going to be regulated under the Bank Secrecy Act. 00:51:01.970 --> 00:51:04.400 So somehow they had to call it a currency, 00:51:04.400 --> 00:51:06.440 call it a virtual currency. 00:51:06.440 --> 00:51:08.060 Another part of the US Department 00:51:08.060 --> 00:51:10.370 of Treasury about the same time said 00:51:10.370 --> 00:51:14.010 it was going to be treated as property for tax purposes. 00:51:14.010 --> 00:51:17.930 So inside the US Treasury Department, 00:51:17.930 --> 00:51:20.600 clearly for purposes of trying to decide 00:51:20.600 --> 00:51:23.540 how it's going to be taxed, how it's going to be treated 00:51:23.540 --> 00:51:27.410 for anti-money laundering laws, one part of the Treasury 00:51:27.410 --> 00:51:29.450 called a virtual currency, another part 00:51:29.450 --> 00:51:35.510 of the US Treasury called it property rather than currency. 00:51:35.510 --> 00:51:37.440 And that fit into that. 00:51:37.440 --> 00:51:40.070 So I think I'll move on a little bit. 00:51:40.070 --> 00:51:44.030 But we can take down the poll, I think. 00:51:44.030 --> 00:51:46.300 Or do I do that? 00:51:46.300 --> 00:51:46.800 You-- 00:51:46.800 --> 00:51:50.330 AUDIENCE: So every person should be 00:51:50.330 --> 00:51:52.520 able to close that little polling window. 00:51:52.520 --> 00:51:54.400 I do not have control over it. 00:51:54.400 --> 00:51:55.850 GARY GENSLER: OK. 00:51:55.850 --> 00:51:59.120 Then I need to do that here for a second so that it closes. 00:51:59.120 --> 00:51:59.990 OK. 00:51:59.990 --> 00:52:03.570 So there's a lot of challenges of this shared accounting 00:52:03.570 --> 00:52:04.070 system. 00:52:04.070 --> 00:52:06.680 Scalability, performance-- you can 00:52:06.680 --> 00:52:10.730 move about 7 or 10 transactions on Bitcoin per second. 00:52:10.730 --> 00:52:14.490 You can move 10 to 20 transactions a second 00:52:14.490 --> 00:52:17.070 on Ethereum. 00:52:17.070 --> 00:52:20.480 That's kind of not the shot that we need to this system. 00:52:20.480 --> 00:52:25.850 Our shared, centralized equity-clearing system here 00:52:25.850 --> 00:52:33.093 in the US, the Depository Trust, DTCC, needs to move-- 00:52:33.093 --> 00:52:35.260 the Securities and Exchange Commission sort of said, 00:52:35.260 --> 00:52:38.380 you need to be able to move about 100 million transactions 00:52:38.380 --> 00:52:39.742 a day. 00:52:39.742 --> 00:52:40.450 Well, guess what? 00:52:40.450 --> 00:52:44.230 In the middle of one of the most volatile time in February, 00:52:44.230 --> 00:52:48.237 DTCC was moving 350 million transactions. 00:52:48.237 --> 00:52:50.820 And when I say transactions, it could be for a hundred shares, 00:52:50.820 --> 00:52:53.500 it could be a thousand shares or if the volumes in shares 00:52:53.500 --> 00:52:54.110 was higher. 00:52:54.110 --> 00:52:56.920 But I'm talking about how many transactions were 00:52:56.920 --> 00:52:58.840 moving through that system. 00:52:58.840 --> 00:53:01.240 Blockchain technology by and large 00:53:01.240 --> 00:53:04.630 has a bunch of issues still to sort through, 00:53:04.630 --> 00:53:08.320 is the point, from public policy issues, commercial use cases, 00:53:08.320 --> 00:53:09.470 and the like. 00:53:09.470 --> 00:53:11.650 And the question is for the 2020, 00:53:11.650 --> 00:53:13.660 as these scalability, performance, 00:53:13.660 --> 00:53:16.810 and efficiency issues, as privacy and security, 00:53:16.810 --> 00:53:20.020 as some of these are worked through, 00:53:20.020 --> 00:53:23.680 is a shared accounting system, a shared ledger system something 00:53:23.680 --> 00:53:25.420 that's going to take off? 00:53:25.420 --> 00:53:30.640 And I go back to economic work from the 1930s by Coase. 00:53:30.640 --> 00:53:33.700 And i just sort of capture it in a little slide here 00:53:33.700 --> 00:53:37.960 the trade-offs of centralization and decentralization, 00:53:37.960 --> 00:53:39.370 and these as a cost curve. 00:53:39.370 --> 00:53:42.020 But centralization does lead to cost, 00:53:42.020 --> 00:53:46.360 about a single point of failure, about economic rents, 00:53:46.360 --> 00:53:51.170 and about capture. 00:53:51.170 --> 00:53:54.140 We all know that we pay more for something 00:53:54.140 --> 00:53:55.460 that's highly centralized. 00:53:55.460 --> 00:54:01.620 If you want to build an app on top of iOS or on top-- 00:54:01.620 --> 00:54:05.630 Apple's iOS or an app on top of Google's Android, 00:54:05.630 --> 00:54:07.850 you're going to pay a fee, because they're 00:54:07.850 --> 00:54:10.850 the two dominant pipes if you need 00:54:10.850 --> 00:54:15.080 to deal with certain centralized financial systems, 00:54:15.080 --> 00:54:16.670 there's more economic rents. 00:54:16.670 --> 00:54:20.010 And in fact, the financial sector in the US 00:54:20.010 --> 00:54:23.070 takes about 7 and 1/2% of our economy. 00:54:23.070 --> 00:54:27.040 That's double what it took in the 1960s. 00:54:27.040 --> 00:54:30.990 Now, it's a bigger economy, it's a bigger financial sector. 00:54:30.990 --> 00:54:34.630 But does it necessarily need to take 7 and 1/2% of our economy? 00:54:34.630 --> 00:54:36.330 So some would say, those are some 00:54:36.330 --> 00:54:39.570 of the costs of centralization. 00:54:39.570 --> 00:54:42.870 And then there's also cost of decentralization-- 00:54:42.870 --> 00:54:45.530 coordination, governance, security, scalability. 00:54:45.530 --> 00:54:48.600 Now, Coase was writing in the 1930s 00:54:48.600 --> 00:54:51.810 why do you bring together certain attributes inside 00:54:51.810 --> 00:54:52.500 of a firm. 00:54:52.500 --> 00:54:54.300 It was about the theory of the firm 00:54:54.300 --> 00:54:57.660 and why some things are inside a firm. 00:54:57.660 --> 00:55:00.690 And it was the cost of information, 00:55:00.690 --> 00:55:04.320 the cost of coordination, that you bring some things inside, 00:55:04.320 --> 00:55:06.060 some things are left out. 00:55:06.060 --> 00:55:10.000 The question is, will this change this balance somehow? 00:55:10.000 --> 00:55:13.200 Vitalik Buterin talked about a trilemma 00:55:13.200 --> 00:55:17.140 and said it's hard to get all three of these, 00:55:17.140 --> 00:55:19.330 to get security, decentralization, 00:55:19.330 --> 00:55:20.430 and scalability. 00:55:20.430 --> 00:55:24.910 So Buterin is the innovator, at 19, of the Ethereum network. 00:55:24.910 --> 00:55:28.870 He's now 25, maybe. 00:55:28.870 --> 00:55:31.690 But Vitalik Buterin said, look, you 00:55:31.690 --> 00:55:35.170 can get decentralization like in Bitcoin and secure it. 00:55:35.170 --> 00:55:38.320 It's reasonably secure, but it's not scalable. 00:55:38.320 --> 00:55:40.900 You maybe can get towards scalability, 00:55:40.900 --> 00:55:42.310 but you're probably going to tend 00:55:42.310 --> 00:55:44.890 towards more centralization. 00:55:44.890 --> 00:55:49.070 Now, one of MIT's award-winning computer scientists, 00:55:49.070 --> 00:55:52.220 Silvio Micali, says, no, he disagrees. 00:55:52.220 --> 00:55:54.580 He says you can actually solve for this. 00:55:54.580 --> 00:55:57.490 Silvio won the Turing Award. 00:55:57.490 --> 00:56:00.273 He's sort of the father-- 00:56:00.273 --> 00:56:01.690 considered the father of something 00:56:01.690 --> 00:56:03.658 called zero-knowledge proofs, and said, no, you 00:56:03.658 --> 00:56:04.450 can solve for this. 00:56:04.450 --> 00:56:07.150 And Silvio actually took a sabbatical 00:56:07.150 --> 00:56:11.920 leave to create a cryptocurrency and a company around Algorand. 00:56:11.920 --> 00:56:14.230 And I'm not sort of marketing for him, 00:56:14.230 --> 00:56:17.200 but I'm just commenting, there's this debate. 00:56:17.200 --> 00:56:21.650 Can you solve, basically, what Satoshi Nakamoto wanted-- 00:56:21.650 --> 00:56:27.830 decentralization in a scalable way and have it be secure? 00:56:27.830 --> 00:56:29.770 So how does one assess use cases? 00:56:29.770 --> 00:56:31.540 Because this class is ultimately about 00:56:31.540 --> 00:56:32.973 sort of sorting through this. 00:56:32.973 --> 00:56:34.390 Well, first he asked the question, 00:56:34.390 --> 00:56:38.650 is the project a project that actually uses cryptocurrency, 00:56:38.650 --> 00:56:39.810 or it services it? 00:56:39.810 --> 00:56:42.890 And I give examples of companies that 00:56:42.890 --> 00:56:46.730 are in custody, in software, in exchange operation, finances, 00:56:46.730 --> 00:56:49.060 the crypto exchange. 00:56:49.060 --> 00:56:51.610 Coinbase is both an exchange and custody. 00:56:51.610 --> 00:56:54.730 Fidelity, one of the world's largest asset managers, 00:56:54.730 --> 00:56:59.340 said, we'll take custody and hold your cryptocurrencies. 00:56:59.340 --> 00:57:02.370 So you could be on one side of the divide and say, 00:57:02.370 --> 00:57:05.910 we're going to be even like a hardware company BitMain 00:57:05.910 --> 00:57:10.330 and create the hardware in this space. 00:57:10.330 --> 00:57:15.970 Those are kind of used classic strategy analysis 00:57:15.970 --> 00:57:17.250 to think about those. 00:57:17.250 --> 00:57:20.500 The sort of rougher side of this is, 00:57:20.500 --> 00:57:23.020 how do you consider what are the strategic questions 00:57:23.020 --> 00:57:27.010 about actually using blockchain technology? 00:57:27.010 --> 00:57:29.710 What are the value creation propositions? 00:57:29.710 --> 00:57:31.720 And I think it's embedded in this-- 00:57:31.720 --> 00:57:34.630 is it worthwhile to have decentralized computing 00:57:34.630 --> 00:57:37.260 versus centralized computing? 00:57:37.260 --> 00:57:39.850 Is there an area that you think has 00:57:39.850 --> 00:57:44.620 such high economic rents that a decentralized competitor can 00:57:44.620 --> 00:57:46.300 come in? 00:57:46.300 --> 00:57:49.810 You could create the case that if Uber and Lyft didn't exist 00:57:49.810 --> 00:57:52.270 today, that Uber and Lyft, you could say, 00:57:52.270 --> 00:57:57.270 could be created on a decentralized ledger system. 00:57:57.270 --> 00:58:00.180 But nobody truly had control of the ledger system, 00:58:00.180 --> 00:58:06.750 and all the ride sharing could be with drivers and users 00:58:06.750 --> 00:58:08.940 using that decentralized app. 00:58:08.940 --> 00:58:13.910 But then again, who would have actually gone into city 00:58:13.910 --> 00:58:16.610 after city, airport after airport, 00:58:16.610 --> 00:58:19.370 and should have done what Uber and Lyft and others have 00:58:19.370 --> 00:58:22.790 done to get into the system? 00:58:22.790 --> 00:58:26.350 So I think the basic value question is centralization 00:58:26.350 --> 00:58:29.290 versus decentralization, and secondly, 00:58:29.290 --> 00:58:33.400 are you filling a gap in the fiat currency system? 00:58:33.400 --> 00:58:36.680 Fiat currencies work pretty well. 00:58:36.680 --> 00:58:39.610 Now, we're going to talk in the next class about the pain 00:58:39.610 --> 00:58:40.450 points. 00:58:40.450 --> 00:58:44.130 And there are a lot of pain points in the payment system 00:58:44.130 --> 00:58:48.130 that take considerable challenges 00:58:48.130 --> 00:58:51.250 and costs to overcome. 00:58:51.250 --> 00:58:53.560 Clearly, strategically what are the competitors doing-- 00:58:53.560 --> 00:58:56.590 traditional competitors, those using blockchain. 00:58:56.590 --> 00:59:00.100 Why use append-only logs, this invention 00:59:00.100 --> 00:59:01.330 of this ledger system? 00:59:01.330 --> 00:59:03.580 Why have multiple-party consensus? 00:59:03.580 --> 00:59:08.060 Multiple-party consensus is a cost. 00:59:08.060 --> 00:59:11.540 So if you're going to use it for trade finance, 00:59:11.540 --> 00:59:13.540 you're going to try to solve something and trade 00:59:13.540 --> 00:59:18.670 finance for instance, what is it solving, what are the costs? 00:59:18.670 --> 00:59:22.040 It can lower verification and networking cost. 00:59:22.040 --> 00:59:24.730 That's the core of its economics. 00:59:24.730 --> 00:59:27.490 But it comes with some cost. 00:59:27.490 --> 00:59:30.490 There are also a series of tactical considerations-- 00:59:30.490 --> 00:59:32.910 literally, what data is going to be put in? 00:59:32.910 --> 00:59:35.920 Who is the multiple stakeholders? 00:59:35.920 --> 00:59:38.050 What are the trade-offs? 00:59:38.050 --> 00:59:40.570 And I think what we've found by and large 00:59:40.570 --> 00:59:45.100 is there are not that many projects that have taken off. 00:59:45.100 --> 00:59:47.180 I have here a little bit deeper dive. 00:59:47.180 --> 00:59:50.020 If you get so close to a project that you think, all right, 00:59:50.020 --> 00:59:51.580 now let's think about it-- 00:59:51.580 --> 00:59:54.730 I come back to this question about multiple-party shared 00:59:54.730 --> 00:59:56.620 ledgers. 00:59:56.620 --> 01:00:00.250 In Bitcoin, the multiple-party shared ledger has worked 01:00:00.250 --> 01:00:03.550 in part because there was a desire to have 01:00:03.550 --> 01:00:05.770 a censorship-resistant token-- 01:00:05.770 --> 01:00:09.940 a token that could be global, truly move around the globe, 01:00:09.940 --> 01:00:14.170 at times away from what the official sector might ban, 01:00:14.170 --> 01:00:19.450 away from certain money laundering anti-terrorism laws, 01:00:19.450 --> 01:00:20.990 that's part of it-- 01:00:20.990 --> 01:00:23.770 but also that it was, at least initially, 01:00:23.770 --> 01:00:26.110 hard to track and trace. 01:00:26.110 --> 01:00:30.680 It's actually gotten easier to track and trace over time. 01:00:30.680 --> 01:00:32.380 But really the question is, if you're 01:00:32.380 --> 01:00:35.110 going to think about using blockchain technology, 01:00:35.110 --> 01:00:38.770 what verification cost are you really lowering, 01:00:38.770 --> 01:00:42.550 and why have this multiple-party distributed ledger? 01:00:42.550 --> 01:00:45.220 A little bit like a shared stock company 01:00:45.220 --> 01:00:47.530 still has a lot of centralization. 01:00:47.530 --> 01:00:50.770 You have thousands of people that control a shared stock 01:00:50.770 --> 01:00:53.990 company, this invention of several centuries ago, 01:00:53.990 --> 01:00:57.160 but you still have the management team 01:00:57.160 --> 01:00:58.480 that controls it. 01:00:58.480 --> 01:01:00.800 How do you deal with that here? 01:01:00.800 --> 01:01:02.660 So, what have we found? 01:01:02.660 --> 01:01:06.790 We found that the incumbents, big finance, by and large, 01:01:06.790 --> 01:01:10.350 have stayed over to the left-hand side of this screen. 01:01:10.350 --> 01:01:13.570 They've stayed towards traditional databases. 01:01:13.570 --> 01:01:16.500 They haven't gone to the cryptocurrency sort 01:01:16.500 --> 01:01:17.870 of side of this screen-- 01:01:17.870 --> 01:01:21.250 permissionless open protocols. 01:01:21.250 --> 01:01:23.780 They're exploring a little bit the middle, what's 01:01:23.780 --> 01:01:28.120 called private blockchain, "private blockchain" saying, 01:01:28.120 --> 01:01:30.610 20 or 50 companies get together. 01:01:30.610 --> 01:01:37.570 Maybe-- like in Australia, there was much fanfare in 2016 01:01:37.570 --> 01:01:41.170 into, actually, 2017, there was much fanfare 01:01:41.170 --> 01:01:43.180 that the Australian Stock Exchange 01:01:43.180 --> 01:01:48.070 would use a permissioned blockchain technology to update 01:01:48.070 --> 01:01:50.440 their central clearing. 01:01:50.440 --> 01:01:52.690 Now, many people would tell you by 2020 01:01:52.690 --> 01:01:55.570 that what the Australians have done 01:01:55.570 --> 01:01:58.400 was inspired by blockchain technology, 01:01:58.400 --> 01:02:00.850 but it no longer looks like blockchain technology. 01:02:00.850 --> 01:02:04.940 It's a decentralized, distributed database. 01:02:04.940 --> 01:02:07.540 But what the Australian regulator said is, 01:02:07.540 --> 01:02:09.610 we need somebody to control this. 01:02:09.610 --> 01:02:13.420 We need a central controller-- the complete opposite 01:02:13.420 --> 01:02:15.850 of what Satoshi Nakamoto was talking about. 01:02:15.850 --> 01:02:18.490 Nakamoto was saying no central authority. 01:02:18.490 --> 01:02:20.170 But the Australians said, well this 01:02:20.170 --> 01:02:23.590 is the central clearing, sort of the plumbing, 01:02:23.590 --> 01:02:26.820 the central plumbing, of the Australian stock market. 01:02:26.820 --> 01:02:31.840 No, we need somebody who has kind of the overall-- 01:02:31.840 --> 01:02:36.680 plays the overall referee role, so to speak. 01:02:36.680 --> 01:02:41.880 So incumbents by and large are using traditional databases. 01:02:41.880 --> 01:02:44.700 They're exploring some of these permissioned databases. 01:02:44.700 --> 01:02:48.322 They're not really off to the side. 01:02:48.322 --> 01:02:51.483 Romain, any questions? 01:02:51.483 --> 01:02:52.400 AUDIENCE: None so far. 01:02:52.400 --> 01:02:54.070 We have 12 minutes left. 01:02:54.070 --> 01:02:55.070 GARY GENSLER: All right. 01:02:55.070 --> 01:02:59.180 So let me just say something about central bank initiatives. 01:02:59.180 --> 01:03:02.600 Central banks-- and we'll chat about this a little bit more 01:03:02.600 --> 01:03:05.780 when we do payments-- central banks have taken note of this. 01:03:05.780 --> 01:03:10.470 And they've thought both, can I use the blockchain technology 01:03:10.470 --> 01:03:11.910 for our payment systems-- 01:03:11.910 --> 01:03:14.130 because central banks in most countries 01:03:14.130 --> 01:03:17.500 control those payment systems-- 01:03:17.500 --> 01:03:20.740 or can we actually create a digital currency? 01:03:20.740 --> 01:03:23.500 At first, I mean, Bitcoin was not 01:03:23.500 --> 01:03:26.080 really on the radar of central bankers. 01:03:26.080 --> 01:03:31.120 By 2018, it became on the radar because the market had 01:03:31.120 --> 01:03:33.910 taken off and it was, for a brief moment, 01:03:33.910 --> 01:03:36.170 worth almost $1 trillion. 01:03:36.170 --> 01:03:40.750 It's back down to $200 billion, now but they took note. 01:03:40.750 --> 01:03:42.670 And in some countries like Sweden, 01:03:42.670 --> 01:03:46.360 they really said, maybe we should be doing something here. 01:03:46.360 --> 01:03:52.630 We should be creating a crypto equivalent, a digital currency. 01:03:52.630 --> 01:03:55.720 And one of the readings was a Bank of International 01:03:55.720 --> 01:03:58.750 Settlement reading, which showed three different ways 01:03:58.750 --> 01:04:01.120 that a central bank could do a digital currency. 01:04:01.120 --> 01:04:02.620 And this is just for your reference 01:04:02.620 --> 01:04:06.520 to remind you that it was in the reading. 01:04:06.520 --> 01:04:10.660 But going back to these projects a little bit, 01:04:10.660 --> 01:04:15.880 some of the projects are just papers. 01:04:15.880 --> 01:04:18.510 Ecuador tried to do a project, actually-- 01:04:18.510 --> 01:04:23.080 a dollar-denominated cryptocurrency. 01:04:23.080 --> 01:04:27.310 And it failed because nobody in Ecuador wanted to use it. 01:04:27.310 --> 01:04:29.950 Ecuador was already dollarized. 01:04:29.950 --> 01:04:33.700 But the one to watch most closely, China, 01:04:33.700 --> 01:04:36.520 which might be a hybrid-- and I'll go back to the chart 01:04:36.520 --> 01:04:37.600 in a second-- 01:04:37.600 --> 01:04:40.900 China has announced they're doing a digital currency 01:04:40.900 --> 01:04:42.610 electronic payment. 01:04:42.610 --> 01:04:46.120 It will be fully backed by the central bank. 01:04:46.120 --> 01:04:50.600 It will be fully a renminbi or digital block. 01:04:50.600 --> 01:04:56.210 And in a sense, it may be as much a reaction to Bitcoin 01:04:56.210 --> 01:04:59.540 as it's a reaction to Alipay and WeChat 01:04:59.540 --> 01:05:04.630 Pay being dominant in the retail payment system in China. 01:05:04.630 --> 01:05:06.930 And it's also a reaction to Facebook 01:05:06.930 --> 01:05:10.970 that was starting something called the Libra project. 01:05:10.970 --> 01:05:14.420 So this, again, is a central tenet 01:05:14.420 --> 01:05:18.920 where I am, where I think of this as that the central banks 01:05:18.920 --> 01:05:25.150 are reacting in part because big tech has been reacting 01:05:25.150 --> 01:05:27.130 and startups are there. 01:05:27.130 --> 01:05:30.190 And they're saying, maybe we can do something better. 01:05:30.190 --> 01:05:33.500 The opportunities that they see, the opportunities is 01:05:33.500 --> 01:05:34.900 that they say, well, maybe we can 01:05:34.900 --> 01:05:36.550 stay in the means of payment. 01:05:36.550 --> 01:05:39.100 We can promote greater competition, 01:05:39.100 --> 01:05:41.540 and we can address some pain points. 01:05:41.540 --> 01:05:44.890 But on the other side, they're really worried. 01:05:44.890 --> 01:05:47.650 They're deeply worried that if they 01:05:47.650 --> 01:05:54.570 offer the public a digital representation of central bank 01:05:54.570 --> 01:05:58.320 money, that they might disintermediate 01:05:58.320 --> 01:06:00.800 the commercial banks. 01:06:00.800 --> 01:06:03.840 The central strategic question for central banks 01:06:03.840 --> 01:06:08.250 is, can we offer the public a digital representation 01:06:08.250 --> 01:06:11.380 of that which is paper? 01:06:11.380 --> 01:06:15.462 So I've covered central bank digital currencies too quickly. 01:06:15.462 --> 01:06:17.170 I'm going to come back to it when we talk 01:06:17.170 --> 01:06:20.680 about payment systems as well. 01:06:20.680 --> 01:06:22.920 But Romain, we only have a few minutes 01:06:22.920 --> 01:06:26.120 so I'm going to take questions. 01:06:26.120 --> 01:06:29.020 AUDIENCE: Yeah, we have a question from Victor. 01:06:29.020 --> 01:06:30.570 AUDIENCE: Hi, professor. 01:06:30.570 --> 01:06:33.860 I want to come back to this point about handling databases 01:06:33.860 --> 01:06:36.083 through a private blockchain network, 01:06:36.083 --> 01:06:38.250 because I didn't fully understand how it would work. 01:06:38.250 --> 01:06:41.460 Could you give me some more guidance on it? 01:06:41.460 --> 01:06:45.330 GARY GENSLER: So Satoshi Nakamoto's concept 01:06:45.330 --> 01:06:49.860 is that you could have hundreds or thousands of folks' 01:06:49.860 --> 01:06:52.920 computers sharing a database, and it's 01:06:52.920 --> 01:06:57.840 an open database, and that that database can 01:06:57.840 --> 01:07:03.230 secure the ledger through this concept of a log structure-- 01:07:03.230 --> 01:07:05.220 block of data, block of data, block 01:07:05.220 --> 01:07:08.610 of data with cryptography. 01:07:08.610 --> 01:07:11.790 The commercial banks and the financial firms 01:07:11.790 --> 01:07:16.620 said, we're not comfortable of having hundreds or thousands 01:07:16.620 --> 01:07:18.790 of people share a database. 01:07:18.790 --> 01:07:19.650 In fact, we can't. 01:07:19.650 --> 01:07:25.320 Under various guidelines of privacy, of data protection, 01:07:25.320 --> 01:07:28.530 we can't have hundreds of people share that database. 01:07:28.530 --> 01:07:32.010 But they're looking at, maybe we can 01:07:32.010 --> 01:07:36.120 have a shared form of cooperation, 01:07:36.120 --> 01:07:38.790 or what somebody might call coopetition. 01:07:38.790 --> 01:07:44.100 We'll cooperate around the trade finance platform, 01:07:44.100 --> 01:07:45.870 and then we'll compete on top of it 01:07:45.870 --> 01:07:52.090 for the provision of lines of credit, and trade financing, 01:07:52.090 --> 01:07:54.160 and so on. 01:07:54.160 --> 01:07:55.780 So they've come together and said, 01:07:55.780 --> 01:07:59.050 maybe we can have a shared closed system 01:07:59.050 --> 01:08:03.190 amongst 20 banks, 16 banks, 30 banks, and the like. 01:08:03.190 --> 01:08:05.440 And so there's five or six big consortiums 01:08:05.440 --> 01:08:10.650 trying to put together a trade finance private shared ledger. 01:08:10.650 --> 01:08:14.080 Now, once you have that, once you say, 01:08:14.080 --> 01:08:18.300 it's only these 18 firms will share it-- 01:08:18.300 --> 01:08:21.779 this form of cooperating on a shared database 01:08:21.779 --> 01:08:25.830 but competing on top of it, that form of coopetition-- 01:08:25.830 --> 01:08:28.029 you don't necessarily need a token. 01:08:28.029 --> 01:08:31.229 So there's no cryptocurrency, it's just a shared blockchain 01:08:31.229 --> 01:08:33.149 technology database. 01:08:33.149 --> 01:08:38.750 Some call it a Digital Ledger Technology, DTP, 01:08:38.750 --> 01:08:41.865 to contrast it with cryptocurrencies. 01:08:41.865 --> 01:08:45.540 I'm a little bit looser in the vocabulary, admittedly. 01:08:45.540 --> 01:08:49.680 But that's how-- that's the conceptual framework for it, 01:08:49.680 --> 01:08:50.970 if that helps. 01:08:50.970 --> 01:08:52.087 AUDIENCE: Yeah, thank you. 01:08:52.087 --> 01:08:53.670 GARY GENSLER: Let me just say a couple 01:08:53.670 --> 01:08:56.520 of ground truths in close. 01:08:56.520 --> 01:08:58.229 I really do think-- 01:08:58.229 --> 01:09:00.390 and I don't know which side to end up on, 01:09:00.390 --> 01:09:04.090 Devin or Camilo's side, in terms of, is it money? 01:09:04.090 --> 01:09:06.899 But I think Nakamoto solved the payment riddle-- 01:09:06.899 --> 01:09:08.220 avoiding double spending. 01:09:08.220 --> 01:09:10.800 It's lasted 12 years. 01:09:10.800 --> 01:09:15.359 Whether you like it, whether you love it, hate it, two is-- 01:09:15.359 --> 01:09:17.430 I'm sorry, Hassan-- I'm kind of-- 01:09:17.430 --> 01:09:20.430 money is but a social and economic construct. 01:09:20.430 --> 01:09:23.939 I'm deeply with Plato on that one. 01:09:23.939 --> 01:09:26.939 But I respect those that believe otherwise. 01:09:26.939 --> 01:09:28.500 I mean, there's a good debate that's 01:09:28.500 --> 01:09:30.720 gone on a couple of thousand years. 01:09:30.720 --> 01:09:33.420 We already live in an age of digital money. 01:09:33.420 --> 01:09:38.335 And in fact, the corona crisis will accelerate that. 01:09:38.335 --> 01:09:40.990 We will still have physical paper money, 01:09:40.990 --> 01:09:44.240 but we'll use it less and less in transaction. 01:09:44.240 --> 01:09:49.359 And physical paper money is more and more just a store of value. 01:09:49.359 --> 01:09:51.340 We're not using physical paper money 01:09:51.340 --> 01:09:55.070 much as a medium of exchange right now. 01:09:55.070 --> 01:09:57.490 Append-only logs and multi-party consensus 01:09:57.490 --> 01:09:59.860 actually does provide an alternative, 01:09:59.860 --> 01:10:02.260 but it doesn't mean it's everybody's alternative. 01:10:02.260 --> 01:10:05.260 It can address verification costs, 01:10:05.260 --> 01:10:08.060 but it doesn't make sense to adopt it unless there's really 01:10:08.060 --> 01:10:11.990 some viability and a value proposition of that shared 01:10:11.990 --> 01:10:14.250 ledger system. 01:10:14.250 --> 01:10:17.390 We didn't talk much about it, but I will say one ground truth 01:10:17.390 --> 01:10:21.390 is that the crypto markets-- that $200 billion market-- 01:10:21.390 --> 01:10:23.730 it's ripe with scams and frauds. 01:10:23.730 --> 01:10:25.960 It just is. 01:10:25.960 --> 01:10:29.400 And so what's happened by 2020 is cryptocurrencies 01:10:29.400 --> 01:10:32.880 have evolved to be a speculative asset class, generally 01:10:32.880 --> 01:10:35.700 not that correlated with equities and bonds. 01:10:35.700 --> 01:10:37.230 And I'll give you one statistic. 01:10:37.230 --> 01:10:39.190 The worldwide stock of gold, that gold 01:10:39.190 --> 01:10:43.360 that could be in four Olympic-sized pools, 01:10:43.360 --> 01:10:45.850 collectively is worth $9 or $10 trillion, 01:10:45.850 --> 01:10:48.560 roughly, collectively. 01:10:48.560 --> 01:10:51.100 So some people would say a speculative store of value 01:10:51.100 --> 01:10:55.240 that's only worth 2% of that, $200 billion, 01:10:55.240 --> 01:10:59.710 might be worthwhile in a big portfolio of a family 01:10:59.710 --> 01:11:02.900 office or a hedge fund. 01:11:02.900 --> 01:11:07.060 The ICO boom and bust raised about $30 billion. 01:11:07.060 --> 01:11:09.020 Not much is being raised there now, 01:11:09.020 --> 01:11:12.060 but it's worthwhile to take note of. 01:11:12.060 --> 01:11:14.250 Most of this is lightly regulated, 01:11:14.250 --> 01:11:17.790 and so retail investors are not getting much protection. 01:11:17.790 --> 01:11:20.730 I think that's unfortunate. 01:11:20.730 --> 01:11:22.550 But I still come back to the last point. 01:11:22.550 --> 01:11:24.660 I think it's been a catalyst for change. 01:11:24.660 --> 01:11:27.310 I think it might be one of these technologies we look back 01:11:27.310 --> 01:11:31.760 in decades and say, it was a remarkable catalyst for change 01:11:31.760 --> 01:11:34.490 for central bankers, and to think through 01:11:34.490 --> 01:11:37.370 whether it's trade finance or other areas in finance, 01:11:37.370 --> 01:11:40.760 was their way to form some cooperation 01:11:40.760 --> 01:11:44.780 and compete on top of it-- so coopetition? 01:11:44.780 --> 01:11:48.140 But just like we didn't know that the internet 01:11:48.140 --> 01:11:54.890 and geolocation devices would lead to disruption in rides-- 01:11:54.890 --> 01:11:59.210 you know, Uber and Lyft, we couldn't predict in the 1990s 01:11:59.210 --> 01:12:01.190 that the taxicab business in New York 01:12:01.190 --> 01:12:04.190 was going to be completely disrupted. 01:12:04.190 --> 01:12:08.090 We don't know what blockchain technology and cryptocurrencies 01:12:08.090 --> 01:12:12.920 will disrupt later in the 2020s or in the 2030s. 01:12:12.920 --> 01:12:16.220 So that's kind of my wrap on it. 01:12:16.220 --> 01:12:18.830 You can sort of get a sense of why 01:12:18.830 --> 01:12:23.120 I'm not going to say I'm a maximalist in this area. 01:12:23.120 --> 01:12:25.330 But I'm also not all the way a minimalist. 01:12:25.330 --> 01:12:28.310 The minimalist would say, no, none of these ground truths 01:12:28.310 --> 01:12:29.270 matter. 01:12:29.270 --> 01:12:32.540 I think it's a really important technology, if nothing else, 01:12:32.540 --> 01:12:35.390 because it's been a remarkable catalyst for change 01:12:35.390 --> 01:12:39.170 on how central banks and others think about payment systems, 01:12:39.170 --> 01:12:42.130 which we'll take up in our next