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GARY GENSLER: Welcome, welcome.

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If you have a desire to learn
a little bit about blockchain

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and its intersection with the
world of finance and money

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and you're looking for 15.S12,
you're in the right place.

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If you're here to
not do that and just

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hang out and have a good time,
I guess you still hopefully

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are in the right
place, because we're

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going to have a good
time this semester.

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My name is Gary Gensler.

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I'm a Senior Lecturer
here at MIT Sloan.

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I'm also an advisor over
at the MIT Media Lab.

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And I've spent a lifetime
around the world of finance,

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and money, and public policy.

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And I've been at MIT
this last eight months.

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And we're going to
learn a lot together

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about blockchain and money.

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We're going to have
a little bit of fun

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here and see what
we're going to do.

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So we're talking about
blockchain and money.

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That's where we are.

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By the way, I do cold call.

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I do call on you-- so if
you want to leave now,

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I understand--

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because I want to have an
interaction a little bit

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about it.

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So my first question
for the class,

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for everyone, whether registered
or not, how many of you

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have ever owned
a cryptocurrency?

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Wait, wait, let's see.

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It seems like it's
about 45% of you or so.

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All right, so it gives me--

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Alin you want to keep
your hand up long?

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And how many of you
have ever worked

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on any blockchain-related
projects,

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in an entrepreneurial setting,
a corporate setting, anywhere?

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All right, good, so about
a third in the room.

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All right, so you all know
probably more than I do,

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but I'm going to give it a shot.

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I'm going to always start every
week with what are the study

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questions for the week.

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How many of you actually
got the syllabus?

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This is not going to
be graded assignment.

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I just have to
have a sense of who

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actually got this syllabus--
so a good many of you.

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And how many of you actually
did the two readings?

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It's not graded.

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I've just got to
gauge the class.

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Oh, thank you, thank you.

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Write those grades
down, by the way--

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[LAUGHTER]

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--no, no.

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All right, so the
two main questions

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for this week's lecture
really is, what is blockchain?

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And why might it be a catalyst?

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And I emphasize the word "might"
it be a catalyst for change

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in the world of finance.

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We could talk a lot
about things outside

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of the world of finance.

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And blockchain may indeed have
a lot of applications outside

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of finance, but
I've chosen to try

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to just narrow the scope a bit.

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So this semester is really
about blockchain and money

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or blockchain and finance.

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And secondly, you
will see index cards

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on every one of
these round tables.

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One assignment, by
the end of the class--

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you could do it now or later--

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I would like each of
you to anonymously write

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on the card what you want
to achieve in this semester.

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It could be anything
from this class,

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from learning about blockchain,
from making money on Bitcoin,

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from--

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I don't care if you tell me
it's meeting your future spouse.

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Like, what do you want
to achieve in this class?

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I can't help you
on the third, but I

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will try to help you on the
things I can help you on.

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And Sabrina and Talida
will collect them later.

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And next Tuesday, we'll
tell you the results.

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What is it that you want
to achieve in this class?

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And then we'll see at
the end of the semester

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if we've done that.

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So it's just a way to
help guide me help you.

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So that's what
we're trying to do.

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And so what were
the two readings?

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One was a little thing I did.

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And one was a thing I did
with some of my colleagues.

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And Tom, since I know
you, what did you

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take out of the readings?

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AUDIENCE: That blockchain
is essential to improved

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profitability [INAUDIBLE].

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GARY GENSLER: Did you
have a good summer?

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AUDIENCE: Mhm.

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GARY GENSLER: Did
you raise your hand?

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Did you own Bitcoin?

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No.

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Who in the class
read the readings

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and took something
different than Tom?

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He said there was potential.

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And your first name?

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AUDIENCE: Alin.

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GARY GENSLER: Alin.

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AUDIENCE: Well, I'm coming
from the technical side.

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So from the technical side,
all I see is a bunch of hype.

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And 10 years have passed
since the launch of Bitcoin

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with very little to show
for it other than hype.

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[INAUDIBLE]

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GARY GENSLER: OK, how
many agreed with Alin?

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This isn't a vote.

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No, just two or three.

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How many agreed with Tom?

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There is more.

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And how many of you are
too shy on the first day

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to put your hands up?

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Most.

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So I'm going to start and
go back-- the internet.

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How do I sort of--

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I've come about this and
of thought about, well,

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what is blockchain?

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What is it really about?

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Well, the internet started many
decades ago, before most of you

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were born, but 1974-ish.

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I mean, there is
some predecessors

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even from the late '60s, the
ethernet, which is really

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how two computers communicate.

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And then you had
TCP/IP, which was really

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the internet protocol of
multiple computers compute--

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talking to each other.

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And then later on in 1990,
how do we move forward?

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Does anybody know what HTTP is?

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We're at MIT.

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Your first name
would be helpful.

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AUDIENCE: Eric.

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GARY GENSLER: Eric.

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AUDIENCE: It's a protocol
for communicate web content.

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GARY GENSLER: Web content.

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AUDIENCE: It's Hypertext
Transport Protocol.

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GARY GENSLER: Right,
do You know who is

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associated with the invention?

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AUDIENCE: I don't
remember right now.

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GARY GENSLER: Anybody else?

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Anybody know who-- it's not
in the readings, or anything,

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Tim Berners-Lee?

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Anybody know who is
associated with TCP/IP?

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AUDIENCE: Was the company
initiated by MIT faculty,

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I think, [INAUDIBLE]
or something?

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GARY GENSLER: I don't know if
it was a company associated

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with MIT, but Vint Cerf may have
had some association with MIT.

00:06:52.310 --> 00:06:54.010
So these are the
first three layers.

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And then there were companies,
commercialization, 3Com

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and Cisco.

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And of course, Amazon
is still around today.

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But there was something
else going on.

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How do we commercialize
the internet?

00:07:04.690 --> 00:07:07.067
Does anybody know what
this scene is from?

00:07:07.067 --> 00:07:09.150
AUDIENCE: This is the first
pizza sold by Bitcoin.

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GARY GENSLER: Good
thought, good thought,

00:07:15.650 --> 00:07:20.492
first pizza sold
by Bitcoin, but no.

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AUDIENCE: Is it from that
movie Hackers or something?

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GARY GENSLER: All
right, movie Hackers.

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AUDIENCE: I think it's from Net.

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GARY GENSLER: The Net?

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Have you ever seen the movie?

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It's not a good movie.

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So this is the opening
scene of The Net.

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And yes, that's Sandra Bullock.

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And the year is 1995.

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It's a cyber thriller.

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You know, a
president's involved.

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The Defense Department's
involved, and so forth.

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But actually, Pizza
Hut is associated

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with the very first sale, online
sale anywhere in the world.

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They started something
called PizzaNet.

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This was the screen, by the way.

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If you wanted to go on,
you could order your pizza.

00:08:05.590 --> 00:08:06.910
But there was one problem.

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Does anybody know what the
problem was with PizzaNet?

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I mean, maybe there
were multiple problems.

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No, Alin I've called on you.

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AUDIENCE: You
couldn't pay online.

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GARY GENSLER: You
couldn't pay online.

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Nobody had figured out
how to move money online.

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You had to pay when you
showed up with the pizza.

00:08:24.550 --> 00:08:26.930
So now I'm going to talk a
little bit about cryptography.

00:08:26.930 --> 00:08:29.055
We're going to spend a lot
of time on cryptography.

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It's cryptocurrencies
and the like.

00:08:33.471 --> 00:08:34.179
What's your name?

00:08:34.179 --> 00:08:34.872
AUDIENCE: Jihee.

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GARY GENSLER: Gigi?

00:08:35.664 --> 00:08:36.116
AUDIENCE: Jihee.

00:08:36.116 --> 00:08:36.949
GARY GENSLER: Jihee.

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Jihee, what's cryptography?

00:08:40.161 --> 00:08:44.768
AUDIENCE: I would assume that
that's something cryptic?

00:08:44.768 --> 00:08:46.810
GARY GENSLER: Cryptic,
all right, no, you got it.

00:08:46.810 --> 00:08:48.370
You've got a start there.

00:08:48.370 --> 00:08:50.230
Anybody want to help Jihee out?

00:08:50.230 --> 00:08:52.800
Does anybody want
to help Jihee out?

00:08:52.800 --> 00:08:54.812
Yeah, tell me your first name.

00:08:54.812 --> 00:08:56.770
We're going to figure
out how to have everybody

00:08:56.770 --> 00:09:00.100
have nameplates by next week,
but we'll work with Ryan

00:09:00.100 --> 00:09:00.950
and do it that way.

00:09:00.950 --> 00:09:01.730
AUDIENCE: Addy

00:09:01.730 --> 00:09:02.480
GARY GENSLER: Addy

00:09:02.480 --> 00:09:05.200
AUDIENCE: Yeah-- it's the
technology or the science

00:09:05.200 --> 00:09:09.160
behind encryption and decryption
for fortification, so how do

00:09:09.160 --> 00:09:11.170
you encrypt a
particular text such

00:09:11.170 --> 00:09:13.082
that it's not readable
by someone else

00:09:13.082 --> 00:09:14.540
without having the
decryption code.

00:09:14.540 --> 00:09:18.040
GARY GENSLER: OK, so it's
how do you encrypt something

00:09:18.040 --> 00:09:20.920
so it's not
detectable by others.

00:09:20.920 --> 00:09:23.440
Or in essence,
it's communications

00:09:23.440 --> 00:09:26.690
in the presence of adversaries.

00:09:26.690 --> 00:09:29.630
You have an adversary who
wants the communication.

00:09:29.630 --> 00:09:32.750
You want to communicate and
not let your adversaries

00:09:32.750 --> 00:09:34.640
know that communication.

00:09:34.640 --> 00:09:38.700
And this is true
for ancient times.

00:09:38.700 --> 00:09:41.822
So in ancient times, there was
something called the cipher.

00:09:41.822 --> 00:09:44.030
And this was a way that
you'd take a piece of leather

00:09:44.030 --> 00:09:47.960
or a piece of cloth and
have a lot of letters.

00:09:47.960 --> 00:09:52.360
And both sides, you'd
encrypt and decrypt,

00:09:52.360 --> 00:09:56.830
because they were different
measurements of the cylinder.

00:09:56.830 --> 00:10:00.075
Has anybody seen the
movie Imitation Games?

00:10:00.075 --> 00:10:02.150
AUDIENCE: Mhm.

00:10:02.150 --> 00:10:05.770
GARY GENSLER: All, right
the Enigma machine--

00:10:05.770 --> 00:10:07.690
now the movie was
wonderful, because it

00:10:07.690 --> 00:10:09.380
said Turing cracked it.

00:10:09.380 --> 00:10:11.950
And he did help crack
it in an automated way,

00:10:11.950 --> 00:10:14.110
but actually, the
Polish government

00:10:14.110 --> 00:10:17.550
had cracked it in
the 1930s before they

00:10:17.550 --> 00:10:19.890
fell to the Germans.

00:10:19.890 --> 00:10:24.090
And Turing built on all of
that and cracked it further.

00:10:24.090 --> 00:10:26.280
And then in the 1970s--

00:10:26.280 --> 00:10:29.150
and this was here at
MIT, to some extent--

00:10:29.150 --> 00:10:31.980
there is private-key
public-key cryptography,

00:10:31.980 --> 00:10:34.740
which I'm not going
to dive into today,

00:10:34.740 --> 00:10:38.790
but it's the heart of
Bitcoin and blockchain.

00:10:38.790 --> 00:10:41.700
It's at the heart
of the internet.

00:10:41.700 --> 00:10:44.340
But it's about--
the key thing is

00:10:44.340 --> 00:10:47.490
communications and the
presence of adversaries.

00:10:47.490 --> 00:10:50.600
How do you keep a secret
when everybody wants in

00:10:50.600 --> 00:10:52.960
and get that information?

00:10:52.960 --> 00:10:55.050
And there is a long history.

00:10:55.050 --> 00:10:58.710
And MIT is at the
center of a lot of that.

00:10:58.710 --> 00:11:02.810
A lot of early cryptography
failed on the internet.

00:11:02.810 --> 00:11:06.060
In the early '90s and late
'80s, David Chaum and others

00:11:06.060 --> 00:11:06.980
tried to do things.

00:11:06.980 --> 00:11:08.730
And we're not going
to debate these today,

00:11:08.730 --> 00:11:10.350
but you will have one reading--

00:11:10.350 --> 00:11:13.080
I think it's either next week--

00:11:13.080 --> 00:11:14.880
which will give
you that history.

00:11:14.880 --> 00:11:19.390
And it's worthwhile knowing
about the history of failure.

00:11:19.390 --> 00:11:22.810
But cryptography is the reason
why the internet works today.

00:11:22.810 --> 00:11:27.862
Does anybody want to tell
me what SSL and TLS is?

00:11:27.862 --> 00:11:29.790
Do we have any
computer scientists?

00:11:29.790 --> 00:11:31.200
And remind me your first name?

00:11:31.200 --> 00:11:31.825
AUDIENCE: Eric.

00:11:31.825 --> 00:11:33.480
GARY GENSLER: Eric.

00:11:33.480 --> 00:11:35.970
AUDIENCE: That's
the protocol that

00:11:35.970 --> 00:11:38.040
mounts on top of
the TCP/IP stack

00:11:38.040 --> 00:11:40.980
to provide encryption using
asymmetric case, which

00:11:40.980 --> 00:11:43.990
is public-infrastructure
cryptography.

00:11:43.990 --> 00:11:45.800
It's secure socket
layer [INAUDIBLE]..

00:11:45.800 --> 00:11:47.730
GARY GENSLER: Right,
so it basically

00:11:47.730 --> 00:11:50.700
uses asymmetric
cryptography, which we're

00:11:50.700 --> 00:11:54.760
going to talk about
two lectures from now,

00:11:54.760 --> 00:11:56.430
but it secures the
whole internet.

00:11:59.890 --> 00:12:02.290
So all of a sudden you
could deliver the pizza

00:12:02.290 --> 00:12:04.370
and get a pass code.

00:12:04.370 --> 00:12:06.520
And I have to tell you,
I never knew how this

00:12:06.520 --> 00:12:09.310
worked before I was at MIT.

00:12:09.310 --> 00:12:13.540
So PayPal came along in 1998.

00:12:13.540 --> 00:12:14.650
I mentioned this.

00:12:14.650 --> 00:12:16.940
A whole bunch of other
digital currencies

00:12:16.940 --> 00:12:23.140
then failed, but some of these
people who we'll read later--

00:12:23.140 --> 00:12:26.920
like, we'll read Nick Szabo's
is a piece on smart contracts

00:12:26.920 --> 00:12:30.910
later, Adam Back who
created Hashcash.

00:12:30.910 --> 00:12:35.210
Some of these innovations were
what Satoshi Nakamoto later

00:12:35.210 --> 00:12:35.710
used.

00:12:38.250 --> 00:12:41.880
Some innovations which were
really helpful and worked

00:12:41.880 --> 00:12:43.940
were Alipay and M-Pesa.

00:12:43.940 --> 00:12:45.315
Does anybody know
what M-Pesa is?

00:12:48.053 --> 00:12:49.970
AUDIENCE: I think it's
used in Kenya as, like,

00:12:49.970 --> 00:12:52.220
mobile cellular-enabled cash.

00:12:52.220 --> 00:12:53.720
GARY GENSLER: Right.

00:12:53.720 --> 00:12:57.620
In essence, they
found out in Kenya--

00:12:57.620 --> 00:13:00.110
this was 10, 12 years
ago-- that people

00:13:00.110 --> 00:13:02.450
were trading mobile minutes.

00:13:02.450 --> 00:13:05.900
They were unbanked, but
they had cellular phones.

00:13:05.900 --> 00:13:09.170
And they were trading their
minutes as a form of currency.

00:13:09.170 --> 00:13:11.440
And Safaricom realized
that and said, wait,

00:13:11.440 --> 00:13:16.190
we could help people be
part of the digital economy,

00:13:16.190 --> 00:13:18.130
even if they're unbanked.

00:13:18.130 --> 00:13:22.850
And in Africa today, a half
of the adult population,

00:13:22.850 --> 00:13:26.330
according to World Bank
figures, is still unbanked,

00:13:26.330 --> 00:13:30.045
but half of that half
has mobile phones.

00:13:32.740 --> 00:13:36.610
M-Pesa has 20 million
customers in Kenya right now.

00:13:36.610 --> 00:13:38.830
So it's a form of
money that's kind

00:13:38.830 --> 00:13:42.970
of swapping mobile minutes.

00:13:42.970 --> 00:13:46.210
But the riddle remained, how do
you move money on the internet?

00:13:46.210 --> 00:13:48.250
Or in essence how,
do you move value

00:13:48.250 --> 00:13:51.700
peer to peer without a
centralized intermediary?

00:13:51.700 --> 00:13:57.700
And that's the core of
blockchain technology.

00:13:57.700 --> 00:14:00.350
So who solved the riddle?

00:14:00.350 --> 00:14:03.790
Is anybody going to tell
me who solved the riddle?

00:14:03.790 --> 00:14:06.325
Who solved this riddle?

00:14:06.325 --> 00:14:09.690
No, [INAUDIBLE].

00:14:09.690 --> 00:14:12.540
You're wearing a t-shirt
that says Quentin Tarantino.

00:14:12.540 --> 00:14:13.905
So I think Quentin Tarantino--

00:14:13.905 --> 00:14:14.220
AUDIENCE: [INAUDIBLE]

00:14:14.220 --> 00:14:15.803
GARY GENSLER: --should
solve a riddle.

00:14:15.803 --> 00:14:16.470
What's that?

00:14:16.470 --> 00:14:17.443
What's your name?

00:14:17.443 --> 00:14:18.110
AUDIENCE: Rufus.

00:14:18.110 --> 00:14:19.880
GARY GENSLER: Rufus-- and
who solved this riddle?

00:14:19.880 --> 00:14:21.005
AUDIENCE: Satoshi Nakamoto.

00:14:21.005 --> 00:14:22.930
GARY GENSLER: Yeah.

00:14:22.930 --> 00:14:24.630
So a peer-to-peer cash--

00:14:24.630 --> 00:14:26.760
this is the actual
doc top of an email

00:14:26.760 --> 00:14:35.860
that was sent out on Halloween
2008 by Satoshi Nakamoto.

00:14:35.860 --> 00:14:39.550
We don't actually know
who Satoshi Nakamoto is,

00:14:39.550 --> 00:14:41.890
but it's a study question
a few lectures from now

00:14:41.890 --> 00:14:45.700
to ask you to tell me who you
think Satoshi Nakamoto is.

00:14:45.700 --> 00:14:48.720
So I won't ask that now.

00:14:48.720 --> 00:14:52.830
And he started with a very
simple sentence in his email.

00:14:52.830 --> 00:14:55.170
"I've been working on
a new electronic cash

00:14:55.170 --> 00:15:01.030
system that's fully peer-to-peer
with no trusted third party.

00:15:01.030 --> 00:15:05.310
It's kind of a modest statement.

00:15:05.310 --> 00:15:10.440
And so the question is, is
this another internet layer?

00:15:10.440 --> 00:15:13.350
We're going to explore
that this whole semester.

00:15:13.350 --> 00:15:14.740
I don't really have the answer.

00:15:14.740 --> 00:15:20.460
I don't think the best minds at
MIT could really yet tell you.

00:15:20.460 --> 00:15:22.290
There are some
who are maximalist

00:15:22.290 --> 00:15:25.420
and say, yes, it will be.

00:15:25.420 --> 00:15:27.730
And there are others who
will say, no, no, no.

00:15:27.730 --> 00:15:30.730
And in this course, we're
going to review the minimalist

00:15:30.730 --> 00:15:32.440
and the maximalist.

00:15:32.440 --> 00:15:34.840
We're not going to try to
center it in one place.

00:15:34.840 --> 00:15:37.890
But that's the key
kind of question.

00:15:37.890 --> 00:15:39.930
So what is a blockchain?

00:15:39.930 --> 00:15:42.450
We're going to do this
and a lot of lectures,

00:15:42.450 --> 00:15:45.540
but I'm going to try to
do it in a short version.

00:15:45.540 --> 00:15:48.570
So it's time-stamped
append logs,

00:15:48.570 --> 00:15:53.660
meaning you can add a little
bit of information to this.

00:15:53.660 --> 00:15:55.400
And it's time-stamped.

00:15:55.400 --> 00:15:59.700
So these are these
blocks being added.

00:15:59.700 --> 00:16:04.086
Satoshi did not
invent blockchain.

00:16:04.086 --> 00:16:06.520
It was way earlier.

00:16:06.520 --> 00:16:08.442
Does anybody want to
guess when it was?

00:16:08.442 --> 00:16:10.150
You're going to have
a reading about this

00:16:10.150 --> 00:16:16.190
later, but early 1990s.

00:16:16.190 --> 00:16:17.823
AUDIENCE: Stuart Haber.

00:16:17.823 --> 00:16:19.240
GARY GENSLER:
What's that, Madars?

00:16:19.240 --> 00:16:20.440
AUDIENCE: Stuart Haber.

00:16:20.440 --> 00:16:23.020
GARY GENSLER: Stuart
Haber, Stuart Haber--

00:16:23.020 --> 00:16:25.550
worked for Bell Labs, right?

00:16:25.550 --> 00:16:27.110
So one of your
assignments-- it's

00:16:27.110 --> 00:16:28.610
not going to be a
graded assignment.

00:16:28.610 --> 00:16:30.710
It's just going to
be a fun assignment.

00:16:30.710 --> 00:16:34.010
Could any of you, I'm going
to say by next Thursday,

00:16:34.010 --> 00:16:37.870
just because, have some
fun, find the longest,

00:16:37.870 --> 00:16:41.300
and time wise,
longest-running blockchain.

00:16:41.300 --> 00:16:44.210
It's not Bitcoin.

00:16:44.210 --> 00:16:47.000
And it's been running
since the mid '90s.

00:16:47.000 --> 00:16:51.600
And your clue is
The New York Times.

00:16:51.600 --> 00:16:55.340
And we'll discuss
it next Thursday.

00:16:55.340 --> 00:17:02.940
But this time-stamped block,
block, block, block of data

00:17:02.940 --> 00:17:06.400
creates a database,
an auditable database.

00:17:06.400 --> 00:17:08.827
And we'll talk about ledgers,
particularly next week,

00:17:08.827 --> 00:17:11.160
but we'll talk about ledgers
all throughout this course,

00:17:11.160 --> 00:17:13.859
and how it changes
the world of finance.

00:17:13.859 --> 00:17:15.660
Now, it's secured
by cryptography,

00:17:15.660 --> 00:17:18.240
because cryptography,
remember, is communications

00:17:18.240 --> 00:17:21.280
and making sure adversaries
can't pick you off.

00:17:21.280 --> 00:17:23.730
We're going to learn
about hash functions.

00:17:23.730 --> 00:17:27.790
And hash functions are a really
important part of cryptography,

00:17:27.790 --> 00:17:31.620
and initially for databases,
and how to search and store

00:17:31.620 --> 00:17:35.430
information in databases,
but in this circumstance,

00:17:35.430 --> 00:17:42.360
hash functions were the way to
not only append the next block

00:17:42.360 --> 00:17:48.150
to the prior blocks, but really
importantly, to compress data,

00:17:48.150 --> 00:17:52.110
to make it more manipulable,
and to verify it,

00:17:52.110 --> 00:17:56.490
and as I've written here, tamper
resistance and the integrity.

00:17:56.490 --> 00:17:58.410
Digital signatures,
which has to do

00:17:58.410 --> 00:18:01.213
the public-key
private-key cryptography--

00:18:01.213 --> 00:18:02.880
there is no prerequisite
to this course.

00:18:02.880 --> 00:18:05.760
You do not had to have
taken computer science,

00:18:05.760 --> 00:18:08.610
cryptography, algorithms.

00:18:08.610 --> 00:18:11.790
If I can learn a little
bit about hash functions

00:18:11.790 --> 00:18:18.360
and asymmetric cryptography,
these are the two key important

00:18:18.360 --> 00:18:19.350
sides.

00:18:19.350 --> 00:18:21.670
And we have enough
computer scientists

00:18:21.670 --> 00:18:26.980
in this room that can sort us
out if I say the wrong thing.

00:18:26.980 --> 00:18:28.456
Right, Madars?

00:18:28.456 --> 00:18:30.330
Hopefully.

00:18:30.330 --> 00:18:33.330
And then consensus-- so there
is a really important part

00:18:33.330 --> 00:18:36.630
of blockchain is,
how do you decide

00:18:36.630 --> 00:18:39.030
who appends that next block?

00:18:39.030 --> 00:18:41.910
Because when I went back here,
there is block and block.

00:18:41.910 --> 00:18:45.030
Each of these blocks, somebody
has to decide who appends,

00:18:45.030 --> 00:18:47.580
who gets to pick the next block.

00:18:47.580 --> 00:18:49.920
And that's what's called
consensus protocol.

00:18:49.920 --> 00:18:53.520
And there is wide debates
about consensus protocol.

00:18:53.520 --> 00:18:56.640
And we'll talk a lot
about consensus protocol.

00:18:56.640 --> 00:18:58.710
But in essence, it
addresses something,

00:18:58.710 --> 00:19:00.420
a term called the cost of trust.

00:19:00.420 --> 00:19:03.060
And we'll talk about
Byzantine Generals problems,

00:19:03.060 --> 00:19:04.740
which is another reading.

00:19:04.740 --> 00:19:06.840
The Byzantine Generals
problem was laid out

00:19:06.840 --> 00:19:09.420
as a sort of
mathematical game theory

00:19:09.420 --> 00:19:12.600
issue some 30-ish years ago.

00:19:15.630 --> 00:19:17.760
That's what Satoshi
Nakamoto solved

00:19:17.760 --> 00:19:23.100
was this last part, the
Byzantine Generals problem.

00:19:23.100 --> 00:19:30.580
Pizza for Bitcoins-- a year and
a half after Satoshi Nakamoto

00:19:30.580 --> 00:19:36.430
laid out blockchain and
Bitcoin, somebody sent an email.

00:19:36.430 --> 00:19:37.880
And you'll get these slides.

00:19:37.880 --> 00:19:39.370
But this is the
real, live email.

00:19:39.370 --> 00:19:43.370
I'll pay you 10,000 Bitcoins
for a couple of pizzas.

00:19:43.370 --> 00:19:45.650
I just want some pizzas.

00:19:45.650 --> 00:19:48.590
The guy who sent this, he
says, I like onions, peppers,

00:19:48.590 --> 00:19:50.600
sausage, mushrooms--

00:19:50.600 --> 00:19:52.570
Laszlo.

00:19:52.570 --> 00:19:53.440
Now, catch the date.

00:19:53.440 --> 00:19:54.700
This is May 18.

00:19:54.700 --> 00:20:00.700
And he's offering
10,000 Bitcoins of 2010.

00:20:00.700 --> 00:20:03.460
But the key line
is, what I'm aiming

00:20:03.460 --> 00:20:06.670
for is getting food delivered
in exchange for Bitcoins.

00:20:06.670 --> 00:20:10.420
Nobody had used Bitcoins
as a medium of exchange.

00:20:10.420 --> 00:20:13.060
16 months into its
existence, nobody

00:20:13.060 --> 00:20:15.430
had used it to buy something.

00:20:15.430 --> 00:20:18.010
And Laszlo is a computer
scientist in Florida

00:20:18.010 --> 00:20:19.540
who was just kind of interested.

00:20:19.540 --> 00:20:24.850
And he put this ad
on an email list.

00:20:24.850 --> 00:20:28.600
Three days later, he still
doesn't have his two pizzas.

00:20:28.600 --> 00:20:30.390
So nobody wants
to buy me a pizza?

00:20:30.390 --> 00:20:35.150
Is the Bitcoin amount
I'm offering too low?

00:20:35.150 --> 00:20:36.740
Another day goes by.

00:20:36.740 --> 00:20:38.570
He gets his pizzas.

00:20:38.570 --> 00:20:41.200
And he posts pictures.

00:20:41.200 --> 00:20:44.020
So here is a picture
of his child reaching

00:20:44.020 --> 00:20:45.310
for those Papa John's pizzas.

00:20:48.810 --> 00:20:52.290
Anybody know what those 10,000
Bitcoins were worth back in--

00:20:52.290 --> 00:20:53.280
back then?

00:20:53.280 --> 00:20:54.010
Chicago.

00:20:54.010 --> 00:20:56.700
AUDIENCE: I know what
they're worth now.

00:20:56.700 --> 00:20:59.034
GARY GENSLER: Anybody
want to say back then?

00:20:59.034 --> 00:21:00.030
AUDIENCE: [INAUDIBLE]

00:21:00.030 --> 00:21:01.113
GARY GENSLER: What's that?

00:21:01.113 --> 00:21:02.040
AUDIENCE: [INAUDIBLE]

00:21:02.040 --> 00:21:04.290
GARY GENSLER: $41.

00:21:04.290 --> 00:21:05.940
And Laszlo was
saying, two pizzas

00:21:05.940 --> 00:21:09.340
are probably worth $25 to $30,
because there was a whole email

00:21:09.340 --> 00:21:09.840
thread.

00:21:09.840 --> 00:21:12.090
He kept saying, why won't
anybody get me my pizzas?

00:21:12.090 --> 00:21:15.200
You can make money on this.

00:21:15.200 --> 00:21:22.160
Today or earlier, late
last night, $66 million.

00:21:22.160 --> 00:21:26.560
Yeah, so it's kind
of a cute story.

00:21:26.560 --> 00:21:31.210
May 22 every year is called
Pizza Day or Bitcoin Pizza

00:21:31.210 --> 00:21:33.370
Day or something.

00:21:33.370 --> 00:21:35.080
So what is blockchain
technology?

00:21:35.080 --> 00:21:37.090
These are my words but
they're sort of picked

00:21:37.090 --> 00:21:39.550
from the literature
and so forth.

00:21:39.550 --> 00:21:43.030
It verifiably moves data
on a decentralized network.

00:21:43.030 --> 00:21:45.570
And the economics of
blockchain technology

00:21:45.570 --> 00:21:48.220
are really around
that, verification,

00:21:48.220 --> 00:21:51.570
and the economics
of verification,

00:21:51.570 --> 00:21:54.460
and the economics of networking.

00:21:54.460 --> 00:21:58.420
And in many ways, blockchain
adds certain costs

00:21:58.420 --> 00:22:02.320
to the verification through
this consensus protocol

00:22:02.320 --> 00:22:06.760
that we'll be studying, but
it lowers some other costs

00:22:06.760 --> 00:22:08.800
of verification, because
you're not relying

00:22:08.800 --> 00:22:10.600
on a centralized authority.

00:22:10.600 --> 00:22:13.960
So it's really a trade off
of cost to verification.

00:22:13.960 --> 00:22:14.920
I don't think it's--

00:22:14.920 --> 00:22:17.290
I'm not a purist that
says it's better or worse,

00:22:17.290 --> 00:22:20.320
but it's a trade off of
cost and verification

00:22:20.320 --> 00:22:24.140
through decentralized networks.

00:22:24.140 --> 00:22:25.790
The data can be value.

00:22:25.790 --> 00:22:28.910
Like, Bitcoin was
a money system.

00:22:28.910 --> 00:22:32.530
Or the data can be
actually computer code.

00:22:32.530 --> 00:22:35.600
And we'll learn a lot
about smart contracts.

00:22:35.600 --> 00:22:38.120
And you could have the
data being verified

00:22:38.120 --> 00:22:43.000
computer code and algorithms.

00:22:43.000 --> 00:22:45.700
My world, finance,
this directly goes

00:22:45.700 --> 00:22:48.040
to the plumbing of
finance, because finance

00:22:48.040 --> 00:22:52.180
is fundamentally about
moving money and risk

00:22:52.180 --> 00:22:53.710
through a network.

00:22:53.710 --> 00:22:56.050
And that network is
the 7 billion people

00:22:56.050 --> 00:22:58.300
that live in this world.

00:22:58.300 --> 00:23:01.300
It's moving money and risk.

00:23:01.300 --> 00:23:03.480
And you've all taken
finance courses.

00:23:03.480 --> 00:23:05.110
Or many of you have.

00:23:05.110 --> 00:23:08.530
And it's the intermediation
of money and risk

00:23:08.530 --> 00:23:12.410
throughout our economy.

00:23:12.410 --> 00:23:14.820
But there is a whole
host of challenges.

00:23:14.820 --> 00:23:16.670
And over the course
of this semester,

00:23:16.670 --> 00:23:18.560
we'll talk about those
challenges, technical,

00:23:18.560 --> 00:23:21.290
commercial, and
public policy hurdles.

00:23:21.290 --> 00:23:23.000
Will they be solved?

00:23:23.000 --> 00:23:25.180
Will they not be solved?

00:23:25.180 --> 00:23:28.500
But it could be a catalyst--

00:23:28.500 --> 00:23:31.160
but we're not sure yet--

00:23:31.160 --> 00:23:34.520
for a change in the world
of money and finance.

00:23:34.520 --> 00:23:38.180
So does anybody want to tell
me that the role of money

00:23:38.180 --> 00:23:38.765
in society?

00:23:43.140 --> 00:23:44.390
And tell me your first name.

00:23:44.390 --> 00:23:45.100
AUDIENCE: Thomas.

00:23:45.100 --> 00:23:45.975
GARY GENSLER: Thomas.

00:23:45.975 --> 00:23:49.730
AUDIENCE: Basically it's a way
exchange things and services

00:23:49.730 --> 00:23:50.930
between people--

00:23:50.930 --> 00:23:53.987
GARY GENSLER: All right, medium
of exchange, got that one.

00:23:53.987 --> 00:23:55.820
AUDIENCE: --without
doing bartering, I mean.

00:23:55.820 --> 00:23:56.695
Exchange [INAUDIBLE].

00:23:56.695 --> 00:23:58.280
GARY GENSLER: So a
medium of exchange.

00:23:58.280 --> 00:23:59.810
Somebody give me a second--

00:23:59.810 --> 00:24:00.610
yellow shirt.

00:24:00.610 --> 00:24:02.934
AUDIENCE: Yeah,
medium of savings.

00:24:02.934 --> 00:24:04.610
GARY GENSLER:
Savings, all right,

00:24:04.610 --> 00:24:06.330
so that would be
a store of value.

00:24:06.330 --> 00:24:07.155
AUDIENCE: Yeah.

00:24:07.155 --> 00:24:08.030
GARY GENSLER: Third--

00:24:08.030 --> 00:24:09.840
I'm sorry, the gentleman here.

00:24:09.840 --> 00:24:11.460
AUDIENCE: Unit of account.

00:24:11.460 --> 00:24:12.920
GARY GENSLER: Unit of account--

00:24:12.920 --> 00:24:16.760
wow, all right, there we go.

00:24:16.760 --> 00:24:17.453
There we go.

00:24:17.453 --> 00:24:19.370
So we're going to spend
some time next Tuesday

00:24:19.370 --> 00:24:21.740
talking more about money,
and the role of money,

00:24:21.740 --> 00:24:25.490
in the history of money,
which I think it sort of lays

00:24:25.490 --> 00:24:28.410
a foundational piece of this.

00:24:28.410 --> 00:24:29.780
What about the role of finance?

00:24:29.780 --> 00:24:34.832
I've already sort of said
a few things about that.

00:24:34.832 --> 00:24:36.050
And I'm sorry.

00:24:36.050 --> 00:24:39.310
I don't know your name, but
right here, the woman, yeah--

00:24:39.310 --> 00:24:39.990
role of finance?

00:24:44.930 --> 00:24:47.560
It's all right, I'm not going
to tell any financial finance

00:24:47.560 --> 00:24:50.040
professor what your answer is.

00:24:50.040 --> 00:24:51.400
AUDIENCE: To raise money.

00:24:51.400 --> 00:24:53.410
GARY GENSLER: To raise money--

00:24:53.410 --> 00:24:56.950
so keep going.

00:24:56.950 --> 00:24:59.350
Anybody else want to--

00:24:59.350 --> 00:25:01.370
AUDIENCE: Connect
savers and borrowers.

00:25:01.370 --> 00:25:03.640
GARY GENSLER: Connect
savers and borrowers--

00:25:03.640 --> 00:25:08.800
so connecting is sort
of moving money, moving.

00:25:08.800 --> 00:25:10.150
AUDIENCE: The valuations.

00:25:10.150 --> 00:25:12.430
GARY GENSLER: Valuations--
so that's the pieces of it.

00:25:12.430 --> 00:25:14.960
So there is moving,
making valuations.

00:25:14.960 --> 00:25:18.280
I use the words, moving,
allocating, and pricing.

00:25:18.280 --> 00:25:23.580
Pricing is the
valuations of money.

00:25:23.580 --> 00:25:25.590
But let's not forget,
it's also about risk.

00:25:25.590 --> 00:25:29.100
When you buy insurance,
that's a transference of risk.

00:25:29.100 --> 00:25:33.180
When you buy an equity stock,
that's a transference of risk.

00:25:33.180 --> 00:25:36.780
If you enter into a complex
credit default swap,

00:25:36.780 --> 00:25:38.860
that's a transference of risk.

00:25:38.860 --> 00:25:41.370
So finance is not just
the movement of money.

00:25:41.370 --> 00:25:48.110
It's the movement of risk as
well, throughout the economy.

00:25:48.110 --> 00:25:51.900
And I always think,
finance, I always--

00:25:51.900 --> 00:25:54.810
I've thought this when I was
at Goldman Sachs for 18 years--

00:25:54.810 --> 00:25:58.830
that finance sits at the
neck of an hourglass.

00:25:58.830 --> 00:26:03.330
And it's why it collects so much
economic rents from society,

00:26:03.330 --> 00:26:07.800
because when you sit at the neck
of an hourglass and billions,

00:26:07.800 --> 00:26:11.730
literally trillions of
grains of sand go by,

00:26:11.730 --> 00:26:16.050
if you collect some of
those grains of sand,

00:26:16.050 --> 00:26:19.130
you get uber wealth.

00:26:19.130 --> 00:26:21.960
And that's-- those
are for other classes.

00:26:21.960 --> 00:26:26.160
But finance can collect
a lot of economic rents.

00:26:26.160 --> 00:26:28.590
The financial sector, though,
has a bunch of challenges.

00:26:28.590 --> 00:26:30.600
We'll have one lecture
later in the semester

00:26:30.600 --> 00:26:32.213
about some of those challenges.

00:26:32.213 --> 00:26:33.130
And we have a reading.

00:26:33.130 --> 00:26:35.415
I think Sheila Bair
wrote something recently

00:26:35.415 --> 00:26:37.540
that I asked you all to
read later in the semester.

00:26:37.540 --> 00:26:40.230
But we will talk about the
financial crisis and some

00:26:40.230 --> 00:26:41.470
of the problems.

00:26:41.470 --> 00:26:43.110
But it's had a lot of crises.

00:26:43.110 --> 00:26:47.010
Fiat currencies have a lot
of instabilities, of course.

00:26:47.010 --> 00:26:51.330
We have centralized
intermediaries, as I laid out.

00:26:51.330 --> 00:26:55.290
And we'll talk about collect
a lot of economic rents.

00:26:55.290 --> 00:26:56.850
So there is opportunity.

00:26:56.850 --> 00:27:00.180
Blockchain has real
opportunity to kind of come

00:27:00.180 --> 00:27:04.260
under this world of finance and
maybe do some things better.

00:27:04.260 --> 00:27:06.030
Central banking, I
also have a bunch

00:27:06.030 --> 00:27:08.100
of legacy payment systems.

00:27:08.100 --> 00:27:11.670
And those legacy payment
systems are slowly adapting,

00:27:11.670 --> 00:27:14.270
but it's slow.

00:27:14.270 --> 00:27:18.590
And why did Alipay do so well
in China is part of this story,

00:27:18.590 --> 00:27:20.450
because there were so
many unbanked, just

00:27:20.450 --> 00:27:22.880
like M-Pesa in Kenya.

00:27:22.880 --> 00:27:26.270
But here in the US, we
still pay 2.5% to 3%

00:27:26.270 --> 00:27:32.510
for our interchange charges for
Visa, MasterCard, and the like.

00:27:32.510 --> 00:27:34.070
And a lot of clearing
and settlement

00:27:34.070 --> 00:27:36.470
still has a lot of
counterparty risk.

00:27:36.470 --> 00:27:38.840
And one that I
care deeply about,

00:27:38.840 --> 00:27:41.600
financial inclusion-- there
is still 1.7 billion people

00:27:41.600 --> 00:27:44.920
in this world who are unbanked.

00:27:44.920 --> 00:27:47.320
And so we don't think of
it as much in the developed

00:27:47.320 --> 00:27:51.370
countries, but it's certainly
true in many products

00:27:51.370 --> 00:27:54.810
even here in the US.

00:27:54.810 --> 00:27:57.450
And these are, to me,
the opportunities.

00:27:57.450 --> 00:28:00.240
Finance is 7.5%
of the US economy.

00:28:00.240 --> 00:28:03.120
That's $1.5 trillion
of revenues.

00:28:03.120 --> 00:28:04.980
So any of you that
are thinking about

00:28:04.980 --> 00:28:08.980
entrepreneurial opportunities,
the payment system

00:28:08.980 --> 00:28:12.430
just here in the US is a
0.5% to 1% of our economy.

00:28:12.430 --> 00:28:15.970
That's $100 billion to
$200 billion of revenues.

00:28:15.970 --> 00:28:19.060
I think Visa is
about $18 billion.

00:28:19.060 --> 00:28:22.570
But you know, when you add
up the whole payment system,

00:28:22.570 --> 00:28:26.060
that's $100 billion to $200
billion in payment revenues.

00:28:26.060 --> 00:28:27.640
So that's kind of
the opportunity.

00:28:27.640 --> 00:28:30.400
Can blockchain
technology come in?

00:28:30.400 --> 00:28:31.300
It's got problems.

00:28:31.300 --> 00:28:32.080
It's slow.

00:28:32.080 --> 00:28:34.720
It has performance issues still.

00:28:34.720 --> 00:28:37.505
But can it compete with that?

00:28:37.505 --> 00:28:39.630
Here are some of the
problems, the financial sector

00:28:39.630 --> 00:28:41.280
would say, with blockchain.

00:28:41.280 --> 00:28:43.500
These are real, live
things that we're going

00:28:43.500 --> 00:28:45.600
to study later in the semester.

00:28:45.600 --> 00:28:48.790
They say, it doesn't have
the performance, scalability.

00:28:48.790 --> 00:28:50.670
A modern payment
system, you need

00:28:50.670 --> 00:28:53.890
to be able to move about
100,000 payments a second.

00:28:53.890 --> 00:28:58.770
A modern securities clearing,
the Depository Trust

00:28:58.770 --> 00:29:01.800
Corporation, the Securities
and Exchange Commission

00:29:01.800 --> 00:29:05.430
says, you do about 30,000
transactions a second,

00:29:05.430 --> 00:29:06.515
but we need you to scale.

00:29:06.515 --> 00:29:07.890
And your computers
and everything

00:29:07.890 --> 00:29:13.250
have to be resilient to
100,000 transactions a second.

00:29:13.250 --> 00:29:17.690
Bitcoin, you can do about
seven transactions a second.

00:29:17.690 --> 00:29:20.930
Visa currently-- it
depends on the second--

00:29:20.930 --> 00:29:25.100
does anywhere from 20,000
to 70,000 a second.

00:29:25.100 --> 00:29:28.760
So it's just a sense of
scalability and performance.

00:29:28.760 --> 00:29:29.660
We might get there.

00:29:29.660 --> 00:29:32.180
It might be three
to seven years away.

00:29:32.180 --> 00:29:33.920
I'm optimistic,
but there is still

00:29:33.920 --> 00:29:36.860
a bunch of performance
and scalability issues.

00:29:36.860 --> 00:29:40.280
Privacy and security--
blockchains, by their nature,

00:29:40.280 --> 00:29:42.490
are public.

00:29:42.490 --> 00:29:45.370
So they're not fully
censorship-resistant,

00:29:45.370 --> 00:29:49.390
but there is a lot of innovation
about making them more private.

00:29:49.390 --> 00:29:54.130
But then that makes the public
sector a little nervous.

00:29:54.130 --> 00:29:55.990
Interoperability--
they don't necessarily

00:29:55.990 --> 00:30:00.880
work yet with other legacy
systems or with each other.

00:30:00.880 --> 00:30:03.620
The internet, one of the great
innovations of the internet,

00:30:03.620 --> 00:30:08.020
it became interoperable, that
all of these different websites

00:30:08.020 --> 00:30:11.590
could kind of speak
with each other.

00:30:11.590 --> 00:30:14.657
Governance is a very big
issue we'll talk about.

00:30:14.657 --> 00:30:16.240
And one of the things
about governance

00:30:16.240 --> 00:30:21.820
is, it's hard to update the
software of a blockchain,

00:30:21.820 --> 00:30:24.160
because if you create
a decentralized where

00:30:24.160 --> 00:30:28.150
no one's in control, no one
can collect economic rents,

00:30:28.150 --> 00:30:32.140
you also don't have sort of
somebody with the ability

00:30:32.140 --> 00:30:35.020
to necessarily
update the software.

00:30:35.020 --> 00:30:39.250
And we'll talk later about how
Bitcoin updates its software,

00:30:39.250 --> 00:30:42.670
and what Bitcoin core
developers are, and so forth.

00:30:42.670 --> 00:30:47.380
But Facebook, you do know
one thing-- though they're

00:30:47.380 --> 00:30:50.200
a company that collects
a lot of profits

00:30:50.200 --> 00:30:54.470
and economic rents off of
their two billion members,

00:30:54.470 --> 00:30:56.095
they know how to
update their software.

00:30:59.250 --> 00:31:04.152
It's a governance issue
that's a real, live challenge.

00:31:04.152 --> 00:31:05.860
And that's why the
financial sector says,

00:31:05.860 --> 00:31:09.870
I'm not sure this works,
this is ready yet for me.

00:31:09.870 --> 00:31:12.510
And then thus, what are
the commercial use cases?

00:31:12.510 --> 00:31:15.340
And what are the
public policy issues?

00:31:15.340 --> 00:31:17.010
So right now, the
financial sector

00:31:17.010 --> 00:31:21.900
favors permissioned blockchains
versus permissionless.

00:31:21.900 --> 00:31:23.820
About four weeks
from now, we'll kind

00:31:23.820 --> 00:31:25.410
go through these
two differences,

00:31:25.410 --> 00:31:28.710
but I want to just
frame this briefly.

00:31:28.710 --> 00:31:32.190
Permissioned blockchains
have a known group of people

00:31:32.190 --> 00:31:35.800
who actually participate.

00:31:35.800 --> 00:31:37.910
The half of you that said
you've owned Bitcoin,

00:31:37.910 --> 00:31:39.500
you know it to be
something where

00:31:39.500 --> 00:31:42.170
anybody can update the ledger.

00:31:42.170 --> 00:31:46.790
Permissioned blockchains, you
can't do that, in essence.

00:31:46.790 --> 00:31:48.950
You pick the 3 or 20.

00:31:48.950 --> 00:31:51.710
The Australian Stock Exchange
is updating their clearing

00:31:51.710 --> 00:31:52.880
and settling.

00:31:52.880 --> 00:31:55.040
They announced they're
doing a blockchain project.

00:31:55.040 --> 00:31:58.070
They're doing it
with digital assets.

00:31:58.070 --> 00:32:01.010
And they're using the
Hyperledger blockchain,

00:32:01.010 --> 00:32:05.940
which is an IBM software,
open-source software.

00:32:05.940 --> 00:32:07.500
But the Australian
Stock Exchange

00:32:07.500 --> 00:32:09.960
is going to put it on
three computers, which

00:32:09.960 --> 00:32:15.110
is called three nodes, that
they control all three of them.

00:32:15.110 --> 00:32:17.690
The Depository
Trust Corporation is

00:32:17.690 --> 00:32:20.360
looking at blockchain-inspired
solutions for some

00:32:20.360 --> 00:32:23.100
of their data warehouses,
but they, too,

00:32:23.100 --> 00:32:25.187
are going to control the nodes.

00:32:25.187 --> 00:32:27.395
I'm just giving you-- that's
permissioned blockchain.

00:32:27.395 --> 00:32:29.090
So there is nothing
wrong with that.

00:32:29.090 --> 00:32:32.510
That's just how they
are looking at this.

00:32:32.510 --> 00:32:34.100
Permissionless
blockchains are like

00:32:34.100 --> 00:32:36.500
Bitcoin, unknown
participants, securities

00:32:36.500 --> 00:32:40.220
based on incentives, a
cryptocurrency, and crypto

00:32:40.220 --> 00:32:42.900
economics.

00:32:42.900 --> 00:32:45.000
Crypto finance is
about $200 billion.

00:32:45.000 --> 00:32:47.400
But you know, you have to
update these slides daily.

00:32:47.400 --> 00:32:52.020
Two days ago, it
was $230 billion.

00:32:52.020 --> 00:32:58.350
And this little pie chart is--
a little over half is Bitcoin.

00:32:58.350 --> 00:33:00.660
The next slice is something
called Ethereum, and then

00:33:00.660 --> 00:33:02.400
Ripple, and down the line.

00:33:02.400 --> 00:33:05.740
We're not going to spend a
lot of time in this semester--

00:33:05.740 --> 00:33:09.030
if your goal is to
how can you profit,

00:33:09.030 --> 00:33:13.995
and day trade Bitcoin, and
day trade Ether, god bless.

00:33:13.995 --> 00:33:15.270
Go prosper.

00:33:15.270 --> 00:33:16.950
You can stay in the class.

00:33:16.950 --> 00:33:20.070
I just won't give you
much advice on it.

00:33:20.070 --> 00:33:23.700
This is not a
crypto-investing-centered

00:33:23.700 --> 00:33:25.530
class.

00:33:25.530 --> 00:33:28.220
But I'm OK if that's
what you're doing.

00:33:28.220 --> 00:33:30.690
Does anybody know what the
worldwide capital market

00:33:30.690 --> 00:33:33.280
size is?

00:33:33.280 --> 00:33:35.140
Does anybody want to guess?

00:33:35.140 --> 00:33:37.200
You know, this is $200 billion.

00:33:37.200 --> 00:33:38.160
What's it look like?

00:33:38.160 --> 00:33:40.310
I've already said it's modest.

00:33:40.310 --> 00:33:42.090
AUDIENCE: Hundreds of trillions.

00:33:42.090 --> 00:33:44.430
GARY GENSLER: Hundreds of
trillions-- global equity,

00:33:44.430 --> 00:33:47.800
about $80 trillion,
global bond and debt

00:33:47.800 --> 00:33:54.250
markets, $250 trillion,
so it's still quite modest

00:33:54.250 --> 00:33:58.895
compared to that broad
breadth of capital formation.

00:33:58.895 --> 00:33:59.395
And gold?

00:34:02.270 --> 00:34:06.410
If Bitcoin is digital gold,
what's the value of gold?

00:34:06.410 --> 00:34:07.760
All the gold that's ever been--

00:34:07.760 --> 00:34:08.260
Tom?

00:34:08.260 --> 00:34:09.677
AUDIENCE: About
$6 or $7 trillion.

00:34:09.677 --> 00:34:13.290
GARY GENSLER:
Yeah, $7 trillion--

00:34:13.290 --> 00:34:16.185
so just to give you
a sense of scale.

00:34:16.185 --> 00:34:18.060
So there is also something
that's interesting

00:34:18.060 --> 00:34:22.830
about this space, is that it's
outsized public attention,

00:34:22.830 --> 00:34:27.630
even as evidenced by the
hundred of you in this room,

00:34:27.630 --> 00:34:33.739
versus the size it is relative
to the capital markets today.

00:34:33.739 --> 00:34:36.239
There is a bunch of
public policy issues.

00:34:36.239 --> 00:34:37.480
We'll have a lecture.

00:34:37.480 --> 00:34:38.790
I'm a former regulator.

00:34:38.790 --> 00:34:42.000
I ran the Commodity
Futures Trading Commission.

00:34:42.000 --> 00:34:44.139
But this course is
not about regulation,

00:34:44.139 --> 00:34:46.500
though we have to always
come back to regulation.

00:34:46.500 --> 00:34:49.530
We always have to
infuse what we're

00:34:49.530 --> 00:34:51.656
doing with the regulation.

00:34:51.656 --> 00:34:53.489
But let me just give
you a little framework.

00:34:53.489 --> 00:34:57.130
And then you'll have to be
bored in a handful of weeks

00:34:57.130 --> 00:34:57.630
and read--

00:34:57.630 --> 00:34:59.790
I gave some congressional
testimony on it.

00:34:59.790 --> 00:35:03.930
Yes, it will be
required reading, sorry.

00:35:03.930 --> 00:35:07.530
But it's guarding
against illicit activity.

00:35:07.530 --> 00:35:11.460
A lot of Bitcoin
and cryptocurrencies

00:35:11.460 --> 00:35:15.150
started out in the
cyber punk sort

00:35:15.150 --> 00:35:19.570
of movement and libertarian
movement, so forth.

00:35:19.570 --> 00:35:20.250
And it is true.

00:35:20.250 --> 00:35:23.730
You can use this for illicit
activity, absolutely.

00:35:23.730 --> 00:35:26.130
But I would say,
crime is not new,

00:35:26.130 --> 00:35:29.010
just the mechanisms
and means are new.

00:35:29.010 --> 00:35:33.360
And so the criminals,
yes, will use this

00:35:33.360 --> 00:35:35.580
and have used it for
illicit activity.

00:35:35.580 --> 00:35:38.790
Financial stability-- central
bankers around the globe,

00:35:38.790 --> 00:35:42.090
sort of will this shake finance?

00:35:42.090 --> 00:35:44.400
Well, it's only $200 billion.

00:35:44.400 --> 00:35:46.860
The financial markets
are $300 trillion plus--

00:35:46.860 --> 00:35:49.590
not yet, is generally
what they're saying.

00:35:49.590 --> 00:35:52.260
But for some
countries, it's a way

00:35:52.260 --> 00:35:54.390
to get around capital controls.

00:35:54.390 --> 00:35:57.180
And so for those countries
worried about capital controls,

00:35:57.180 --> 00:36:00.610
it's a very real and
live set of issues.

00:36:00.610 --> 00:36:03.960
And then protecting
the investing public--

00:36:03.960 --> 00:36:05.940
and when we do this
in a few weeks,

00:36:05.940 --> 00:36:08.490
I'll go through each of
these, the investor protection

00:36:08.490 --> 00:36:12.900
issues, and yes, the SEC,
how we test, and the like.

00:36:12.900 --> 00:36:16.680
For those who wish to do their
own initial coin offering,

00:36:16.680 --> 00:36:21.840
I'll give some broad
sense of what the SEC is

00:36:21.840 --> 00:36:24.480
trying to accomplish.

00:36:24.480 --> 00:36:25.630
But it's a moving target.

00:36:25.630 --> 00:36:27.130
So this is a very
interesting thing.

00:36:27.130 --> 00:36:29.100
As opposed to many of
your Sloan classes,

00:36:29.100 --> 00:36:32.130
or your C cell classes,
or Media Lab classes,

00:36:32.130 --> 00:36:36.490
this is a very unsettled
area of public policy.

00:36:36.490 --> 00:36:38.160
So it makes it interesting.

00:36:38.160 --> 00:36:41.570
And if you all go off
and form companies,

00:36:41.570 --> 00:36:43.140
you will actually
be helping sort

00:36:43.140 --> 00:36:47.400
of set the edge of that
public policy debate.

00:36:47.400 --> 00:36:50.040
I would always say,
just remember poet

00:36:50.040 --> 00:36:51.415
Riley, the duck test.

00:36:51.415 --> 00:36:53.820
This is a poet,
Indiana poet-- so those

00:36:53.820 --> 00:36:56.460
that aren't from the US
might not know the duck test.

00:36:56.460 --> 00:36:58.355
But basically, if it
quacks like a duck

00:36:58.355 --> 00:37:00.300
and it walks like a
duck, it's a duck.

00:37:00.300 --> 00:37:04.250
So whenever you're thinking
about public policy, folks

00:37:04.250 --> 00:37:07.280
like myself who once
was a regulator,

00:37:07.280 --> 00:37:10.040
we think in the duck test.

00:37:10.040 --> 00:37:13.460
And then we secondarily
think about the actual words

00:37:13.460 --> 00:37:17.390
in the congressional act.

00:37:17.390 --> 00:37:18.770
Where is the common sense?

00:37:18.770 --> 00:37:21.060
And if it quacks and
walks like a duck,

00:37:21.060 --> 00:37:23.960
it's probably a security.

00:37:23.960 --> 00:37:27.420
Or it's probably this or that.

00:37:27.420 --> 00:37:29.850
The incumbents, like this
lioness in the corner,

00:37:29.850 --> 00:37:34.020
are eyeing this space, because
there is a lot of volatility.

00:37:34.020 --> 00:37:36.550
And Wall Street makes
money on volatility.

00:37:36.550 --> 00:37:39.300
Volatility is the
friend of Wall Street.

00:37:39.300 --> 00:37:40.985
It may not be the
friend of investors,

00:37:40.985 --> 00:37:42.360
but it's a friend
of Wall Street.

00:37:42.360 --> 00:37:46.260
And they also like the trading
volumes and the spreads.

00:37:46.260 --> 00:37:49.530
Coinbase, the largest crypto
exchange here in the US,

00:37:49.530 --> 00:37:52.500
has 20 million accounts.

00:37:52.500 --> 00:37:54.330
They might not all
be active, but that's

00:37:54.330 --> 00:37:56.730
the size of Fidelity's
membership or account

00:37:56.730 --> 00:37:59.820
list and twice DE Shaw.

00:37:59.820 --> 00:38:02.160
And Robin Hood-- how many
of you have ever used

00:38:02.160 --> 00:38:04.410
Robinhood as a trading app?

00:38:04.410 --> 00:38:06.210
Wow, half of you.

00:38:06.210 --> 00:38:10.740
So you know, free trading,
five million members--

00:38:10.740 --> 00:38:13.530
for those who don't know,
you can download Robinhood.

00:38:13.530 --> 00:38:19.086
And you can trade stocks
for free, no commission.

00:38:19.086 --> 00:38:21.065
And if anybody is
interested, show up

00:38:21.065 --> 00:38:25.130
and I'll do office hours on
how Robinhood commercializes--

00:38:25.130 --> 00:38:28.910
they commercialize
your order flow.

00:38:28.910 --> 00:38:32.090
And they make money without
charging you commissions.

00:38:32.090 --> 00:38:34.190
But it's a sort
of wonderful app.

00:38:34.190 --> 00:38:38.180
Millennials love it, 5
million members already.

00:38:38.180 --> 00:38:40.670
So you better believe DE
Shaw and the incumbents

00:38:40.670 --> 00:38:43.100
are worried about
things like that.

00:38:43.100 --> 00:38:46.220
The startups are also more
willing to beg for forgiveness

00:38:46.220 --> 00:38:47.280
from regulators.

00:38:47.280 --> 00:38:50.270
They're willing to sort of take
risks and beg for forgiveness,

00:38:50.270 --> 00:38:54.200
whereas incumbents tend to
have to ask for permission.

00:38:54.200 --> 00:38:57.470
So there is an unlevel
field, that always, it's

00:38:57.470 --> 00:39:03.350
asymmetric business set of
risk about regulatory risk--

00:39:03.350 --> 00:39:04.790
not always.

00:39:04.790 --> 00:39:06.695
I'm not crying for JP Morgan.

00:39:09.800 --> 00:39:11.840
I mean, the big incumbents
have also-- they

00:39:11.840 --> 00:39:13.910
have their advantages.

00:39:13.910 --> 00:39:16.490
And Coinbase is becoming
an incumbent rather than

00:39:16.490 --> 00:39:19.920
just a startup, in a sense.

00:39:19.920 --> 00:39:21.860
And we'll talk
during the semester

00:39:21.860 --> 00:39:24.530
about some of the incumbents.

00:39:24.530 --> 00:39:27.677
We're probably going to get Jeff
Sprechers here in mid-November.

00:39:27.677 --> 00:39:30.260
He's going to talk to you about
what Intercontinental Exchange

00:39:30.260 --> 00:39:32.593
and the New York Stock Exchange
is doing with Starbucks,

00:39:32.593 --> 00:39:34.550
and Microsoft, and the like.

00:39:34.550 --> 00:39:35.923
The financial sector use cases--

00:39:35.923 --> 00:39:37.340
I'm not going to
go through these,

00:39:37.340 --> 00:39:39.490
but this is the second half
of the course, is going

00:39:39.490 --> 00:39:41.120
to go through each of these.

00:39:41.120 --> 00:39:44.540
And we'll do one to two sessions
on each, payment systems,

00:39:44.540 --> 00:39:49.750
central bank digital currency,
secondary market trading.

00:39:49.750 --> 00:39:52.500
The venture capital and
initial coin offering space,

00:39:52.500 --> 00:39:57.450
we'll do two course on
that, and move through.

00:39:57.450 --> 00:39:59.840
So what are we going to
do in this whole course?

00:39:59.840 --> 00:40:03.410
Basically, our goal is to
learn the fundamentals--

00:40:03.410 --> 00:40:06.620
that's about roughly the
first half of the course--

00:40:06.620 --> 00:40:09.035
pivot to two sessions
on the economics.

00:40:09.035 --> 00:40:10.910
We're going to be talking
about the economics

00:40:10.910 --> 00:40:12.860
throughout the
whole course, but I

00:40:12.860 --> 00:40:15.870
want to really just focus,
drill down on the economics,

00:40:15.870 --> 00:40:19.160
on two of the discussions.

00:40:19.160 --> 00:40:22.070
And then riff through
the financial space

00:40:22.070 --> 00:40:23.468
for the second half--

00:40:23.468 --> 00:40:24.635
that's our journey together.

00:40:27.310 --> 00:40:29.550
To me, it's for anybody
who wants to gain

00:40:29.550 --> 00:40:31.170
critical reasoning skills.

00:40:31.170 --> 00:40:34.770
This is not just
kind of a, hey, this

00:40:34.770 --> 00:40:40.080
is going to change the world and
revolutionize everything class.

00:40:40.080 --> 00:40:44.220
And so I basically think of
an old Defense Department

00:40:44.220 --> 00:40:46.470
term called ground truths.

00:40:46.470 --> 00:40:49.170
It's when the general doesn't
really know what's going on

00:40:49.170 --> 00:40:54.450
but needs to figure it out and
needs to talk to that corporal

00:40:54.450 --> 00:40:57.550
on the ground who has
got dirt all over him

00:40:57.550 --> 00:41:00.805
and has been shot up and says,
here is the real ground truth.

00:41:00.805 --> 00:41:05.520
We're going to try to talk about
ground truths in this class

00:41:05.520 --> 00:41:08.880
and separate the mere
assertion from the hype.

00:41:08.880 --> 00:41:12.750
And some of your readings
will be some real Bitcoin

00:41:12.750 --> 00:41:17.040
and blockchain minimalists,
from Nouriel Roubini that

00:41:17.040 --> 00:41:19.110
uses words I'm not
supposed to repeat

00:41:19.110 --> 00:41:24.090
on a recording about this
stuff, to Paul Krugman who--

00:41:24.090 --> 00:41:27.990
and Joe Stiglitz, and other
Nobel laureates who say,

00:41:27.990 --> 00:41:33.150
no, it's not going to work, or
Warren Buffett, to maximalists.

00:41:33.150 --> 00:41:36.270
We're going to try
to cover both sides.

00:41:36.270 --> 00:41:38.400
Larry Lessig is
honoring me because he's

00:41:38.400 --> 00:41:40.320
in the back of the class--

00:41:40.320 --> 00:41:44.700
who is an enormously esteemed
professor from Harvard.

00:41:44.700 --> 00:41:46.620
I didn't know Larry
was going to be here.

00:41:46.620 --> 00:41:47.940
And I did this slide before.

00:41:47.940 --> 00:41:51.762
But in 1999, I think, you
wrote this book, Larry.

00:41:51.762 --> 00:41:52.680
Is that right?

00:41:52.680 --> 00:41:54.410
AUDIENCE: [INAUDIBLE]

00:41:54.410 --> 00:41:56.580
GARY GENSLER: Code and
Other Laws of Cyberspace,

00:41:56.580 --> 00:41:57.410
I put you in the--

00:41:57.410 --> 00:42:02.870
but I think it's worthwhile to
think about Larry's four bits

00:42:02.870 --> 00:42:03.470
here.

00:42:03.470 --> 00:42:05.678
And I don't know, Larry, if
you want to say anything,

00:42:05.678 --> 00:42:09.110
but I'm going to try to infuse
this course in just how you

00:42:09.110 --> 00:42:10.450
think about this.

00:42:10.450 --> 00:42:12.303
The tech-- we're at MIT.

00:42:12.303 --> 00:42:14.970
The technology-- and we're going
to get you a lot of technology.

00:42:14.970 --> 00:42:19.400
If you want more than I can
give you as a former finance

00:42:19.400 --> 00:42:23.255
sort of type my
whole life, there

00:42:23.255 --> 00:42:25.490
is going to be a bunch
of computer science

00:42:25.490 --> 00:42:26.670
people in the class.

00:42:26.670 --> 00:42:29.360
We're going to hook
you up together

00:42:29.360 --> 00:42:32.280
with the folks from the
Media Lab and C cell

00:42:32.280 --> 00:42:35.480
and try to connect you
to the technology side

00:42:35.480 --> 00:42:38.240
if you want to swim
deeper in that pond.

00:42:38.240 --> 00:42:42.375
But the technology
really, really matters.

00:42:42.375 --> 00:42:44.750
And that's why we are going
to go through hash functions,

00:42:44.750 --> 00:42:48.350
and go through asymmetric
cryptography, and so forth.

00:42:48.350 --> 00:42:52.260
From a business
perspective, markets matter.

00:42:52.260 --> 00:42:55.820
Why is it that incumbents
or startups are or are not

00:42:55.820 --> 00:42:56.720
doing this and that?

00:42:56.720 --> 00:42:58.700
Why is it 10 years
in and nobody has

00:42:58.700 --> 00:43:02.390
got an enterprise-wide
solution yet to payments

00:43:02.390 --> 00:43:04.460
that use blockchain?

00:43:04.460 --> 00:43:05.440
The law matters.

00:43:05.440 --> 00:43:08.860
The public policy side matters.

00:43:08.860 --> 00:43:13.930
And the fourth of Larry's
layout, social norms--

00:43:13.930 --> 00:43:16.060
that's a little harder
for me to teach.

00:43:16.060 --> 00:43:17.860
That's not what
this class is about.

00:43:17.860 --> 00:43:19.840
But it is also a flex all this.

00:43:19.840 --> 00:43:23.390
It's not just the technology,
and the markets, and the law.

00:43:23.390 --> 00:43:25.005
So it's not just a
three-legged stool.

00:43:25.005 --> 00:43:26.380
It's kind of a
four-legged stool.

00:43:26.380 --> 00:43:27.330
How did I do Larry?

00:43:27.330 --> 00:43:29.713
AUDIENCE: Excellent, all right.

00:43:29.713 --> 00:43:31.130
GARY GENSLER: I
really didn't know

00:43:31.130 --> 00:43:33.680
Larry was going to be here.

00:43:33.680 --> 00:43:38.620
But I wanted to give you a
framework for how your faculty

00:43:38.620 --> 00:43:40.090
member thinks.

00:43:40.090 --> 00:43:43.660
And we'll be on this
journey together.

00:43:43.660 --> 00:43:45.320
Range of perspectives--
we're not

00:43:45.320 --> 00:43:48.640
going to be a Bitcoin
minimalist or maximalist.

00:43:48.640 --> 00:43:51.950
I'm probably, to be
self-disclosed here,

00:43:51.950 --> 00:43:56.680
a little bit center
minimalist on Bitcoin.

00:43:56.680 --> 00:43:59.560
Smart contract
minimalist, maximalist,

00:43:59.560 --> 00:44:01.960
I'm probably pretty center.

00:44:01.960 --> 00:44:05.303
Larry is probably a little
bit center maximalist,

00:44:05.303 --> 00:44:05.845
I'm guessing.

00:44:09.772 --> 00:44:11.730
AUDIENCE: I'm hoping I
can be, but you're going

00:44:11.730 --> 00:44:13.930
to teach me whether I can.

00:44:13.930 --> 00:44:16.910
GARY GENSLER: Oh, so you're
still center or center

00:44:16.910 --> 00:44:21.940
minimalist on smart contracts?

00:44:21.940 --> 00:44:25.660
And then blockchain
maximalist or minimalist--

00:44:25.660 --> 00:44:29.170
I'd say a few weeks ago, I
was kind of center maximalist.

00:44:29.170 --> 00:44:31.390
And I'm sort of skipping
back to the middle.

00:44:34.840 --> 00:44:39.060
Permissioned blockchain,
I'm a little bit more--

00:44:39.060 --> 00:44:40.160
and there is some in here.

00:44:40.160 --> 00:44:44.470
Alin who is one of
your Sloan cohort

00:44:44.470 --> 00:44:47.440
that you might know, six
months ago when we met

00:44:47.440 --> 00:44:50.700
was working on a
permissionless system.

00:44:50.700 --> 00:44:53.310
And now you're working
on a permissioned system.

00:44:53.310 --> 00:44:54.120
You have a startup.

00:44:54.120 --> 00:44:55.440
AUDIENCE: That is correct.

00:44:55.440 --> 00:44:57.540
GARY GENSLER: Yeah,
because you bounce up

00:44:57.540 --> 00:44:59.790
into the market realities.

00:44:59.790 --> 00:45:01.770
And we're going to talk
a lot in this course

00:45:01.770 --> 00:45:04.320
about critical
thinking, about when

00:45:04.320 --> 00:45:08.280
do you really need the advantage
of a decentralized peer-to-peer

00:45:08.280 --> 00:45:13.620
system where the costs of
trust are such that that's

00:45:13.620 --> 00:45:16.320
the right way to go.

00:45:16.320 --> 00:45:19.200
But I am one who thinks
that there is also so much

00:45:19.200 --> 00:45:24.210
economic rents in the financial
system that $1.5 of revenues,

00:45:24.210 --> 00:45:27.870
or 7.5% of our economy,
or just $200 billion

00:45:27.870 --> 00:45:29.880
in the payment
systems, for instance,

00:45:29.880 --> 00:45:32.310
that there may be times
that you don't really

00:45:32.310 --> 00:45:35.400
need a decentralized
system, but it just

00:45:35.400 --> 00:45:37.260
might be your
opportunity to tuck

00:45:37.260 --> 00:45:40.530
in underneath all of those
economic rents and all

00:45:40.530 --> 00:45:42.460
those revenues.

00:45:42.460 --> 00:45:45.340
Now, incumbents will react.

00:45:45.340 --> 00:45:50.010
You poke an incumbent,
commercially poke them, I mean,

00:45:50.010 --> 00:45:51.280
and they're going to react.

00:45:51.280 --> 00:45:53.030
And that's why I think
blockchain may well

00:45:53.030 --> 00:45:56.450
be a catalyst for change,
even if incumbents then

00:45:56.450 --> 00:46:00.260
adopt a lot of that inside.

00:46:00.260 --> 00:46:02.090
The requirements of the course--

00:46:02.090 --> 00:46:03.950
class participation
is a hard thing

00:46:03.950 --> 00:46:08.030
to judge as a faculty member
when I have this many people.

00:46:08.030 --> 00:46:10.325
But I always think class
participation matters.

00:46:12.860 --> 00:46:18.950
We made it 30%, which
if you have any advice

00:46:18.950 --> 00:46:21.280
on this next semester--

00:46:21.280 --> 00:46:25.290
30% two individual write
ups, one in the first half,

00:46:25.290 --> 00:46:28.670
which is up to, I think,
lecture 10, which is basically

00:46:28.670 --> 00:46:30.500
the blockchain fundamentals.

00:46:30.500 --> 00:46:31.580
You pick a topic.

00:46:31.580 --> 00:46:35.600
I don't care which one, but
you'll get a much better grade

00:46:35.600 --> 00:46:37.910
if it's about
critical reasoning,

00:46:37.910 --> 00:46:42.090
if it's really taking whatever
those sets of writings are

00:46:42.090 --> 00:46:48.770
and not just repeating that
which is in the readings,

00:46:48.770 --> 00:46:50.720
but really going the
next step and saying,

00:46:50.720 --> 00:46:52.970
here is what's going on.

00:46:52.970 --> 00:46:54.300
And this isn't business school.

00:46:54.300 --> 00:46:59.510
You don't have to convince me
that something about computer

00:46:59.510 --> 00:47:00.180
science.

00:47:00.180 --> 00:47:03.110
It's like critical
reasoning about the economic

00:47:03.110 --> 00:47:06.000
opportunities, the
strengths, the weaknesses,

00:47:06.000 --> 00:47:08.670
the opportunities, the threats,
that old business school sort

00:47:08.670 --> 00:47:13.200
saying of swats with
regard to that week's--

00:47:13.200 --> 00:47:15.890
whether it's about hash
functions early on,

00:47:15.890 --> 00:47:17.990
cryptography, or
you sort of wait

00:47:17.990 --> 00:47:20.420
during the foundational
period to permissioned

00:47:20.420 --> 00:47:22.040
versus permissionless.

00:47:22.040 --> 00:47:27.530
You pick-- but to please hand it
in before that class' lecture,

00:47:27.530 --> 00:47:29.967
because I might during the
lecture say, who wrote today?

00:47:29.967 --> 00:47:31.550
Do you want to tell
us what you think?

00:47:31.550 --> 00:47:35.180
And it might help spur
the class participation--

00:47:35.180 --> 00:47:37.640
and then a second write
up in the second half

00:47:37.640 --> 00:47:41.510
when we're riffing
through the use cases,

00:47:41.510 --> 00:47:43.520
again, critical reasoning.

00:47:43.520 --> 00:47:46.940
And then lastly,
the usual approach

00:47:46.940 --> 00:47:50.060
of teams of up to four--

00:47:50.060 --> 00:47:54.740
no, I don't want teams of
five, to handle that right now,

00:47:54.740 --> 00:47:57.140
three or four.

00:47:57.140 --> 00:48:00.980
And somewhere in the second
half of this semester,

00:48:00.980 --> 00:48:03.260
we'll talk about
more of the content.

00:48:03.260 --> 00:48:05.090
And there is a
couple of you in here

00:48:05.090 --> 00:48:09.680
that worked with me last
semester in a smaller group.

00:48:09.680 --> 00:48:12.980
You know, I want you to do well
so I'm going to sort of give

00:48:12.980 --> 00:48:15.470
you a sense of what do we want
to do, but it's basically,

00:48:15.470 --> 00:48:18.350
the idea is, you're
an entrepreneur

00:48:18.350 --> 00:48:19.970
or you're an incumbent.

00:48:19.970 --> 00:48:23.490
And what sort of use case
are you going to pick?

00:48:23.490 --> 00:48:26.510
And whether it's permissioned
or permissionless,

00:48:26.510 --> 00:48:28.760
sort of make a proposal.

00:48:28.760 --> 00:48:30.140
Do a use case.

00:48:30.140 --> 00:48:33.890
Use your critical reasoning
around this new technology

00:48:33.890 --> 00:48:38.240
somewhere in the broad
world of finance.

00:48:38.240 --> 00:48:42.245
I mean, you know, and I'm glad
to define finance really broad.

00:48:42.245 --> 00:48:44.660
You'll pick.

00:48:44.660 --> 00:48:47.450
So that's kind of the piece.

00:48:47.450 --> 00:48:50.480
Act one are the fundamentals.

00:48:50.480 --> 00:48:52.850
I won't go through each of
the pieces, but you know,

00:48:52.850 --> 00:48:55.700
that's in the
syllabus, of course.

00:48:55.700 --> 00:48:59.800
Act two is the pivot
of the economics,

00:48:59.800 --> 00:49:04.940
and act three, our
financial sector use cases.

00:49:04.940 --> 00:49:10.380
And hopefully throughout,
we'll have a lot of fun.

00:49:10.380 --> 00:49:14.700
So the study questions for
next Tuesday, real quick,

00:49:14.700 --> 00:49:16.820
what are the roles and
characteristics of money?

00:49:16.820 --> 00:49:19.610
So I really want to sort
of dig behind money.

00:49:19.610 --> 00:49:25.210
Money is but a social construct
or a social convention,

00:49:25.210 --> 00:49:30.160
medium of exchange, a store
of value, unit of account.

00:49:30.160 --> 00:49:32.560
There is some readings
about the debate,

00:49:32.560 --> 00:49:37.510
whether money first came
from the barter system,

00:49:37.510 --> 00:49:40.840
or a really good set
of anthropologists

00:49:40.840 --> 00:49:43.030
and archaeologists
and everything

00:49:43.030 --> 00:49:45.760
say, no, it actually
came as a ledger system.

00:49:45.760 --> 00:49:48.340
And no one knows for sure
10,000 and 15,000 years

00:49:48.340 --> 00:49:50.560
ago whether money
came from the--

00:49:50.560 --> 00:49:54.280
out of the barter system or
more as a unit of account,

00:49:54.280 --> 00:49:56.903
keeping account of
credits and ledger.

00:49:56.903 --> 00:49:59.320
But I'd say, when you read
through some of those readings,

00:49:59.320 --> 00:50:03.410
you start to think, well, this
is just a societal construct.

00:50:03.410 --> 00:50:05.800
And so we'll get behind that.

00:50:05.800 --> 00:50:07.512
What is fiat currency?

00:50:07.512 --> 00:50:09.720
Fiat currency, which is an
invention, really, only of

00:50:09.720 --> 00:50:12.920
the last few hundreds years
that we take for granted now.

00:50:12.920 --> 00:50:15.910
But how does that fit
into that whole history?

00:50:15.910 --> 00:50:18.910
And importantly,
how do ledgers--

00:50:18.910 --> 00:50:22.390
accounting ledgers,
I know, boring stuff,

00:50:22.390 --> 00:50:24.160
but it's probably
why we came out

00:50:24.160 --> 00:50:27.220
of the dark ages about
500 or 600 years ago

00:50:27.220 --> 00:50:30.232
with double-entry bookkeeping.

00:50:30.232 --> 00:50:32.095
Sorry, I like ledgers.

00:50:34.720 --> 00:50:36.460
We'll talk a little
bit about ledgers

00:50:36.460 --> 00:50:39.200
and how that fits into
money, and securities,

00:50:39.200 --> 00:50:43.060
and so forth, and then
layering in how Bitcoin

00:50:43.060 --> 00:50:45.430
fits on top of that history.

00:50:45.430 --> 00:50:48.400
Next Tuesday is not
deeply about Bitcoin.

00:50:48.400 --> 00:50:51.730
It's just a little
dollop on that.

00:50:51.730 --> 00:50:53.590
There will be five
or six readings.

00:50:53.590 --> 00:50:57.160
One of them is a three-minute
video, the third one.

00:50:57.160 --> 00:50:58.120
It's fun.

00:50:58.120 --> 00:50:58.700
Watch.

00:50:58.700 --> 00:51:03.240
It's just a funny little
video on what money is.

00:51:03.240 --> 00:51:05.940
There is no need to read
Nakamoto's full paper.

00:51:05.940 --> 00:51:09.200
When I said the email, I
mean just the cover email.

00:51:09.200 --> 00:51:11.040
It's one paragraph.

00:51:11.040 --> 00:51:13.450
My goal in the readings
each week was not--

00:51:13.450 --> 00:51:15.660
and each session
was, by and large,

00:51:15.660 --> 00:51:17.450
try to keep less than 50 pages.

00:51:17.450 --> 00:51:19.700
You say, you're going to
look sometimes and you'll go,

00:51:19.700 --> 00:51:20.700
it looks like it's more.

00:51:20.700 --> 00:51:22.470
And maybe it is.

00:51:22.470 --> 00:51:24.180
I figure you're all
going to figure out

00:51:24.180 --> 00:51:28.740
for yourself how to sort through
the depth of your knowledge.

00:51:28.740 --> 00:51:32.040
But I will predict that some of
you, maybe as much as a quarter

00:51:32.040 --> 00:51:35.280
or a third of you, are going to
go down a rabbit hole one day.

00:51:35.280 --> 00:51:38.680
And you're going to be doing
blockchain for the next 48

00:51:38.680 --> 00:51:39.180
hours.

00:51:39.180 --> 00:51:41.280
And you won't know
where the time went,

00:51:41.280 --> 00:51:44.820
because it is an addiction at
some point that some of you

00:51:44.820 --> 00:51:48.810
will get, because there
is this curious notion.

00:51:48.810 --> 00:51:51.630
I'm not predicting that
infirmity for all of you.

00:51:51.630 --> 00:51:54.570
I'm just saying some of you
will have that happen to you.

00:51:54.570 --> 00:51:56.610
So occasionally I
have readings just--

00:51:56.610 --> 00:51:58.790
what, Alin it's happened to you?

00:51:58.790 --> 00:52:00.683
AUDIENCE: I think so.

00:52:00.683 --> 00:52:02.100
GARY GENSLER: Let
me just conclude

00:52:02.100 --> 00:52:04.350
and then take any other
questions and lay it up there.

00:52:04.350 --> 00:52:10.723
Blockchain I think does provide
a peer-to-peer alternative.

00:52:10.723 --> 00:52:12.390
I hope, Larry, I'll
be able to convince.

00:52:12.390 --> 00:52:16.600
It does provide-- and that
peer-to-peer alternative

00:52:16.600 --> 00:52:18.130
addresses cost of trust.

00:52:18.130 --> 00:52:20.620
It doesn't mean it's the only
way to address cost of trust,

00:52:20.620 --> 00:52:23.500
but it addresses cost of trust.

00:52:23.500 --> 00:52:27.040
The financial sector
does have challenges,

00:52:27.040 --> 00:52:30.490
not just that it has 7.5%
of our economy in the US

00:52:30.490 --> 00:52:34.690
and similar ratios
around the globe,

00:52:34.690 --> 00:52:37.720
but resilience, how
it survives shocks.

00:52:37.720 --> 00:52:42.100
The financial crisis and
things like that are real.

00:52:42.100 --> 00:52:46.240
And inclusion-- 1.7 billion
people unbanked, but then

00:52:46.240 --> 00:52:50.020
if you look at other products,
who has access to credit cards,

00:52:50.020 --> 00:52:52.090
and mortgages, and the like?

00:52:52.090 --> 00:52:55.570
And then fiat currencies,
Ken Rogoff and others

00:52:55.570 --> 00:52:57.760
have written a lot
about the instabilities

00:52:57.760 --> 00:52:59.772
that come with fiat currencies.

00:52:59.772 --> 00:53:01.480
And we'll talk about
some of the history,

00:53:01.480 --> 00:53:06.490
and why central banks exist,
and how they came about.

00:53:06.490 --> 00:53:08.770
The next key point
is, we already

00:53:08.770 --> 00:53:10.240
live in an electronic age.

00:53:10.240 --> 00:53:15.175
Satoshi Nakamoto and Bitcoin
didn't create electronic cash.

00:53:17.920 --> 00:53:21.940
I mean, Sandra Bullock
couldn't pay electronically.

00:53:21.940 --> 00:53:23.920
That was 1995.

00:53:23.920 --> 00:53:27.700
They did a sort of B-rated
movie about it all.

00:53:27.700 --> 00:53:33.040
But by today, you pay
your tuition online.

00:53:33.040 --> 00:53:35.920
Those of you who
work get paid online.

00:53:35.920 --> 00:53:39.170
You pay your auto loans online.

00:53:39.170 --> 00:53:46.470
Most of our lives are
electronic cash, not 100%,

00:53:46.470 --> 00:53:48.650
but in some countries
like Sweden,

00:53:48.650 --> 00:53:50.892
it's getting very close to 100%.

00:53:53.610 --> 00:53:55.410
We'll learn together
and discover

00:53:55.410 --> 00:53:58.890
that money is but a social
and economic consensus.

00:54:01.590 --> 00:54:03.780
Blockchain technology
along with crypto finance

00:54:03.780 --> 00:54:06.230
might be a catalyst for change.

00:54:06.230 --> 00:54:10.040
And then much
masquerades as fact,

00:54:10.040 --> 00:54:11.810
but is only mere assertion.

00:54:11.810 --> 00:54:14.900
We're going to try
to sort through that,

00:54:14.900 --> 00:54:16.520
those differences.

00:54:16.520 --> 00:54:18.370
That doesn't mean
that all of you

00:54:18.370 --> 00:54:20.960
are going to walk out agreeing
with Paul Krugman, a Nobel

00:54:20.960 --> 00:54:25.070
laureate, or Nouriel
Roubini, that this is just

00:54:25.070 --> 00:54:27.710
a bunch of nonsense.

00:54:27.710 --> 00:54:30.120
Some of you might, by the way.

00:54:30.120 --> 00:54:34.440
But I think you'll come out with
real critical thinking skills.

00:54:34.440 --> 00:54:36.560
And I hope that some
of you will say,

00:54:36.560 --> 00:54:38.190
I've figured out
actually where there

00:54:38.190 --> 00:54:41.790
is a real opportunity
in the world of finance

00:54:41.790 --> 00:54:45.570
to use blockchain technology,
and make it a better

00:54:45.570 --> 00:54:51.660
financial sector, democratizing
finance, or somehow providing

00:54:51.660 --> 00:54:56.160
a service at a lower cost,
a better service throughout.

00:54:56.160 --> 00:54:58.860
I hope throughout that
we'll learn together

00:54:58.860 --> 00:55:00.860
and we'll have a bit
of fun along the way.

00:55:00.860 --> 00:55:03.180
So that's kind of my thoughts.

00:55:03.180 --> 00:55:04.380
Questions?

00:55:04.380 --> 00:55:08.045
We have exactly-- what?

00:55:08.045 --> 00:55:08.815
AUDIENCE: 18.

00:55:08.815 --> 00:55:10.440
GARY GENSLER: 18
minutes, there you go,

00:55:10.440 --> 00:55:12.060
but we can cut it short, too.

00:55:12.060 --> 00:55:14.850
I don't care.

00:55:14.850 --> 00:55:15.423
There we go.

00:55:15.423 --> 00:55:16.590
Could you tell me your name?

00:55:16.590 --> 00:55:17.882
And we're going to do placards.

00:55:17.882 --> 00:55:20.605
Ryan's going to work to
figure out how to do placards,

00:55:20.605 --> 00:55:21.575
because--

00:55:21.575 --> 00:55:22.950
AUDIENCE: It's
[? Younghere. ?] I

00:55:22.950 --> 00:55:27.140
wonder how are the teams
formed, the final project.

00:55:27.140 --> 00:55:30.065
GARY GENSLER: How
the teams form?

00:55:30.065 --> 00:55:34.720
Traditionally-- anybody at
Sloan can speak to this too--

00:55:34.720 --> 00:55:36.420
but students do it their own.

00:55:36.420 --> 00:55:38.610
So the faculty
doesn't sort of try

00:55:38.610 --> 00:55:40.860
to insert themselves
to help you,

00:55:40.860 --> 00:55:44.800
but we tend towards the
latter half and say, well,

00:55:44.800 --> 00:55:48.240
who is formed up in groups?

00:55:48.240 --> 00:55:50.772
If it's a smaller group, it's
like, well anybody who is not

00:55:50.772 --> 00:55:52.230
yet formed in a
team, why don't you

00:55:52.230 --> 00:55:54.772
move to the left-hand side of
the room and just get together.

00:55:54.772 --> 00:55:57.000
But we could do that
electronically too.

00:55:57.000 --> 00:56:01.350
And you know, whether
Talida and Sabrina who

00:56:01.350 --> 00:56:05.070
could help in trying to
basically have a social network

00:56:05.070 --> 00:56:08.708
to help form the teams,
because this is a big group,

00:56:08.708 --> 00:56:09.250
you're right.

00:56:09.250 --> 00:56:11.440
But that's traditionally,
people-- students

00:56:11.440 --> 00:56:14.430
do it on their own.

00:56:14.430 --> 00:56:16.656
Other questions?

00:56:16.656 --> 00:56:19.230
Is anybody going to go out
and sell their Bitcoin now?

00:56:22.390 --> 00:56:24.300
Larry, why are you here?

00:56:28.836 --> 00:56:29.880
No, no, let--

00:56:29.880 --> 00:56:33.275
AUDIENCE: Other than the
payments you talked about or--

00:56:33.275 --> 00:56:36.210
no, I am here because
I think you're

00:56:36.210 --> 00:56:40.890
going to bring a critical
skepticism to the whole field.

00:56:40.890 --> 00:56:44.060
And you're incredibly informed
about the finance side.

00:56:44.060 --> 00:56:45.810
So I want to see the
combination of those,

00:56:45.810 --> 00:56:49.320
and whether at the end I'm
still there is a there there.

00:56:49.320 --> 00:56:51.360
I am convinced there
is a there there.

00:56:51.360 --> 00:56:53.620
As we've spoken,
because I really think

00:56:53.620 --> 00:56:57.700
it could radically change the
cost of trust around the world.

00:56:57.700 --> 00:57:01.152
That will benefit the developing
nations substantially.

00:57:01.152 --> 00:57:03.360
But I think there is a lot
of questions I still have.

00:57:03.360 --> 00:57:06.120
And I'm eager to see how
this conversation helps it

00:57:06.120 --> 00:57:06.924
[INAUDIBLE].

00:57:06.924 --> 00:57:08.850
GARY GENSLER: Well, I
thank you for coming.

00:57:08.850 --> 00:57:11.640
And any week you could be
here, any day, we benefit.

00:57:11.640 --> 00:57:13.260
And I hope it's really--

00:57:13.260 --> 00:57:14.910
this is meant to
be a conversation.

00:57:14.910 --> 00:57:16.920
I'm not that far ahead of you.

00:57:16.920 --> 00:57:19.170
Simon Johnson approached
me last October

00:57:19.170 --> 00:57:22.240
and said, what do you think
about coming up to MIT?

00:57:22.240 --> 00:57:23.680
And Tom knows this story.

00:57:23.680 --> 00:57:27.623
And we were sitting
down for lunch in DC.

00:57:27.623 --> 00:57:29.040
And it was a good
time in my life.

00:57:29.040 --> 00:57:30.810
My three girls-- I
have three daughters.

00:57:30.810 --> 00:57:32.560
And I'm a single dad.

00:57:32.560 --> 00:57:35.788
And they were-- two
are in grad school

00:57:35.788 --> 00:57:36.830
and one are in undergrad.

00:57:36.830 --> 00:57:38.080
It was a good time in my life.

00:57:38.080 --> 00:57:40.650
I said, why not
come up here and get

00:57:40.650 --> 00:57:43.620
engaged in this digital
currency initiative

00:57:43.620 --> 00:57:45.902
over at the Media Lab?

00:57:45.902 --> 00:57:46.860
And I've spent a life--

00:57:46.860 --> 00:57:50.977
I was 18 years at Goldman Sachs
on the investment banking side,

00:57:50.977 --> 00:57:52.560
helping people buy
and sell companies.

00:57:52.560 --> 00:57:54.760
We call it mergers
and acquisitions.

00:57:54.760 --> 00:57:57.020
And then I went to the
trading side, fixed income,

00:57:57.020 --> 00:57:59.720
and went off to Asia,
and did a bunch of--

00:57:59.720 --> 00:58:01.590
I ran the fixed
income, and currency,

00:58:01.590 --> 00:58:03.600
and swap trading in Asia.

00:58:03.600 --> 00:58:07.380
And then my last job was
the co-finance officer.

00:58:07.380 --> 00:58:09.780
So we were about a quarter
of a trillion dollar balance

00:58:09.780 --> 00:58:11.190
sheet at that time--

00:58:11.190 --> 00:58:13.070
Goldman Sachs, this is.

00:58:13.070 --> 00:58:16.020
We were still private, which
meant if we lost money,

00:58:16.020 --> 00:58:17.280
we were personally--

00:58:17.280 --> 00:58:18.750
I was a general partner--

00:58:18.750 --> 00:58:20.700
was kaput.

00:58:20.700 --> 00:58:24.060
That's a technical word.

00:58:24.060 --> 00:58:29.670
But we had 700 legal entities
and 1,000 people who could

00:58:29.670 --> 00:58:31.770
commit the capital of the firm.

00:58:31.770 --> 00:58:36.470
Those are people we
generally call traders.

00:58:36.470 --> 00:58:38.940
But you know, it was a
fascinating period of time.

00:58:38.940 --> 00:58:41.540
I then went on to
public service,

00:58:41.540 --> 00:58:45.320
because Bob Rubin knew that
I'd be a soft touch to service.

00:58:45.320 --> 00:58:46.970
He was the Treasury Secretary.

00:58:46.970 --> 00:58:49.520
I was a former partner
at Goldman Sachs.

00:58:49.520 --> 00:58:51.050
And I went off to
the US Treasury

00:58:51.050 --> 00:58:53.428
as a assistant secretary,
an undersecretary

00:58:53.428 --> 00:58:55.220
in the late '90s-- a
little different times

00:58:55.220 --> 00:58:58.710
than we have now
for many reasons.

00:58:58.710 --> 00:59:00.470
But we were paying
down the debt.

00:59:00.470 --> 00:59:03.890
We were dealing with the Asian
debt crisis, long-term capital

00:59:03.890 --> 00:59:06.310
management, the
Russian debt crisis.

00:59:06.310 --> 00:59:09.590
It was sort of a
fascinating period of time.

00:59:09.590 --> 00:59:12.980
I worked on a bill
with John McCain--

00:59:12.980 --> 00:59:15.710
I didn't get to know
Senator McCain that well,

00:59:15.710 --> 00:59:17.390
but he was just
remarkable to work

00:59:17.390 --> 00:59:20.690
with even for a short period
of time-- called E-Signature.

00:59:20.690 --> 00:59:22.130
It was a bill that
basically said,

00:59:22.130 --> 00:59:24.560
you can sign everything
electronically.

00:59:24.560 --> 00:59:26.905
And he was the Chair of the
Senate Commerce Committee

00:59:26.905 --> 00:59:27.405
at the time.

00:59:27.405 --> 00:59:30.530
It was a wonderful little--
sometimes in government,

00:59:30.530 --> 00:59:32.270
you can work on small things.

00:59:32.270 --> 00:59:34.940
I worked on the redesign
of the currency.

00:59:34.940 --> 00:59:36.620
And I could tell you
stories about why

00:59:36.620 --> 00:59:38.162
it looks the way it
does, and how you

00:59:38.162 --> 00:59:41.360
can redesign paper currency.

00:59:41.360 --> 00:59:43.730
And for a future
lecture, I'll tell you

00:59:43.730 --> 00:59:47.620
the one design feature that
I-- is still in the currency.

00:59:47.620 --> 00:59:50.200
And you can visually see it.

00:59:50.200 --> 00:59:52.188
And when I asked
for it, the fellow

00:59:52.188 --> 00:59:53.980
that ran the Bureau of
Engraving said, why?

00:59:53.980 --> 00:59:55.610
And I said, because
it looks better.

00:59:55.610 --> 00:59:57.320
And I'm the guy
that's approving it.

00:59:57.320 --> 00:59:59.150
And maybe can we get it done?

00:59:59.150 --> 01:00:00.700
Can we work this out?

01:00:00.700 --> 01:00:02.030
And it did look better.

01:00:02.030 --> 01:00:02.960
And he loved it.

01:00:02.960 --> 01:00:05.700
He was worried about the
political risk of doing it.

01:00:05.700 --> 01:00:07.070
It was a better design.

01:00:07.070 --> 01:00:07.760
He just was--

01:00:07.760 --> 01:00:09.290
I said, I'll cover
you politically.

01:00:09.290 --> 01:00:11.690
Let's do it.

01:00:11.690 --> 01:00:13.190
But then I worked
with Paul Sarbanes

01:00:13.190 --> 01:00:15.600
in what became Sarbanes-Oxley.

01:00:15.600 --> 01:00:17.390
I was his senior advisor.

01:00:17.390 --> 01:00:19.880
I worked and kicked around
some political campaigns.

01:00:19.880 --> 01:00:21.590
We lost two of them.

01:00:21.590 --> 01:00:24.470
That would be the '08 Hillary
campaign and the '16 Hillary

01:00:24.470 --> 01:00:24.980
campaign.

01:00:24.980 --> 01:00:27.230
I was her Chief
Financial Officer.

01:00:27.230 --> 01:00:29.600
I was an OA to a
senior advisor doing

01:00:29.600 --> 01:00:33.720
economic policy, and outreach,
and handholding, and--

01:00:33.720 --> 01:00:34.845
oh, gosh.

01:00:39.120 --> 01:00:41.450
And then in the middle
of those two campaigns,

01:00:41.450 --> 01:00:43.617
I ran something called the
Commodity Futures Trading

01:00:43.617 --> 01:00:47.090
Commission, which was
post-crisis, what do we do?

01:00:47.090 --> 01:00:51.700
This is a real public
policy shortcoming.

01:00:51.700 --> 01:00:54.560
And I looked at it as an
opportunity to, as I said,

01:00:54.560 --> 01:00:58.020
democratize finance
a bit and lower risk.

01:00:58.020 --> 01:01:00.950
And so we tried to bring
transparency to a $300 or $400

01:01:00.950 --> 01:01:04.450
trillion dollar
market called swaps,

01:01:04.450 --> 01:01:08.720
which are just contracts
for transference of risk.

01:01:08.720 --> 01:01:10.630
And they are a form
of a derivative

01:01:10.630 --> 01:01:12.123
that were unregulated.

01:01:12.123 --> 01:01:14.540
And we were trying to bring
transparency to that and lower

01:01:14.540 --> 01:01:17.770
risk through central clearing.

01:01:17.770 --> 01:01:20.260
So that's sort of my
professional life.

01:01:20.260 --> 01:01:22.390
And as I said, I've
got three daughters.

01:01:22.390 --> 01:01:23.810
And they're well-situated.

01:01:23.810 --> 01:01:26.010
So when Simon said come
on up, I said great.

01:01:26.010 --> 01:01:26.770
And I love him.

01:01:26.770 --> 01:01:29.520
I'd say, it's just terrific.

01:01:29.520 --> 01:01:32.500
And you all are great.

01:01:32.500 --> 01:01:35.500
Unless there is other questions,
I'm going to let you go early.

01:01:35.500 --> 01:01:37.750
I don't--

01:01:37.750 --> 01:01:41.100
[APPLAUSE]