WEBVTT 00:00:01.090 --> 00:00:03.460 The following content is provided under a Creative 00:00:03.460 --> 00:00:04.850 Commons license. 00:00:04.850 --> 00:00:07.060 Your support will help MIT OpenCourseWare 00:00:07.060 --> 00:00:11.150 continue to offer high quality educational resources for free. 00:00:11.150 --> 00:00:13.690 To make a donation or to view additional materials 00:00:13.690 --> 00:00:17.650 from hundreds of MIT courses, visit MIT OpenCourseWare 00:00:17.650 --> 00:00:19.090 at ocw.mit.edu. 00:00:22.600 --> 00:00:26.350 GARY GENSLER: Today we get to explore one of the use cases 00:00:26.350 --> 00:00:31.270 where there's actually a lot of activity going on in blockchain 00:00:31.270 --> 00:00:34.210 technology, trade finance. 00:00:34.210 --> 00:00:37.390 We also have, I think, at least two 00:00:37.390 --> 00:00:40.030 of the groups for final projects are doing things 00:00:40.030 --> 00:00:41.560 on trade finance. 00:00:41.560 --> 00:00:45.580 There might be some that haven't disclosed that to me 00:00:45.580 --> 00:00:47.260 or after today might shift to it. 00:00:47.260 --> 00:00:49.450 You never know. 00:00:49.450 --> 00:00:54.700 And I think 8 or 10 of you actually wrote 00:00:54.700 --> 00:00:56.110 your individual pieces today. 00:00:56.110 --> 00:00:59.020 So it's 15 or 20 of you that have been spending 00:00:59.020 --> 00:01:01.210 a lot of time on trade finance. 00:01:01.210 --> 00:01:05.650 And I think the reason is that there's a lot of application 00:01:05.650 --> 00:01:07.520 of the underlying technology. 00:01:07.520 --> 00:01:12.730 And that's what I'm going to try to do today and then 00:01:12.730 --> 00:01:15.730 hopefully get the help from the two groups 00:01:15.730 --> 00:01:22.180 that have some final projects in this regard and so many 00:01:22.180 --> 00:01:24.840 of you that wrote on this today. 00:01:24.840 --> 00:01:28.720 I'm going to go through readings and study 00:01:28.720 --> 00:01:31.660 guide, what is trade finance. 00:01:31.660 --> 00:01:32.920 So we're going to run through. 00:01:32.920 --> 00:01:35.462 I'm going to give you a little sense of what trade finance is 00:01:35.462 --> 00:01:38.300 from my perspective. 00:01:38.300 --> 00:01:41.410 And then we're going to just go into the blockchain 00:01:41.410 --> 00:01:43.300 projects themselves. 00:01:43.300 --> 00:01:46.900 So we'll skip through these because we're 00:01:46.900 --> 00:01:48.940 going to be chatting about what attributes 00:01:48.940 --> 00:01:50.800 that trade finance really has. 00:01:50.800 --> 00:01:52.070 Well, Alpha you have a group. 00:01:52.070 --> 00:01:53.830 What attributes is trade finance? 00:01:53.830 --> 00:01:57.520 What attracted you to this? 00:01:57.520 --> 00:01:59.350 AUDIENCE: Multiple stakeholders that 00:01:59.350 --> 00:02:03.125 are changing, transferring data and information. 00:02:03.125 --> 00:02:04.750 GARY GENSLER: So two things that I just 00:02:04.750 --> 00:02:09.160 heard multiple stakeholders transferring a lot of data. 00:02:09.160 --> 00:02:11.580 Anybody else, what other attributes are there? 00:02:11.580 --> 00:02:13.080 AUDIENCE: There's a lot of paperwork 00:02:13.080 --> 00:02:16.500 that is being transferred between the importer, exporter, 00:02:16.500 --> 00:02:19.348 and the banks, issuing banks and beneficiary banks. 00:02:19.348 --> 00:02:20.890 GARY GENSLER: So not only is it data, 00:02:20.890 --> 00:02:23.320 but it's still actually a lot of paperwork. 00:02:23.320 --> 00:02:27.820 And actually often times actual physical paperwork. 00:02:27.820 --> 00:02:30.060 There are still companies, I mean, 00:02:30.060 --> 00:02:32.800 they're not as persistent now as they were years ago called 00:02:32.800 --> 00:02:36.880 document couriers that literally brought 00:02:36.880 --> 00:02:38.783 the documents around the globe. 00:02:38.783 --> 00:02:40.450 AUDIENCE: You have different regulations 00:02:40.450 --> 00:02:42.790 in different countries. 00:02:42.790 --> 00:02:47.360 It's hard to see and trust one central authority 00:02:47.360 --> 00:02:51.070 that it's going to give you all you need done on the charge. 00:02:51.070 --> 00:02:54.110 GARY GENSLER: So a lot of different regulatory regimes. 00:02:54.110 --> 00:02:56.500 But also different countries. 00:02:56.500 --> 00:02:59.470 So you have some information asymmetries. 00:02:59.470 --> 00:03:04.580 And thus those issues of trust across those jurisdictions. 00:03:04.580 --> 00:03:07.460 AUDIENCE: Along the lines of the issues of trust, 00:03:07.460 --> 00:03:09.945 there's also a lot of fraud with it as well, 00:03:09.945 --> 00:03:13.500 a lot of double spend and financing issues that 00:03:13.500 --> 00:03:14.770 come with this space. 00:03:14.770 --> 00:03:19.090 GARY GENSLER: So a lot of fraud and double spend. 00:03:19.090 --> 00:03:21.805 Or in trade finance, it has another term, actually. 00:03:21.805 --> 00:03:24.012 Anybody? 00:03:24.012 --> 00:03:27.510 It's double financing. 00:03:27.510 --> 00:03:30.030 But it's basically the same conceptual framework 00:03:30.030 --> 00:03:32.520 as a double spend. 00:03:32.520 --> 00:03:36.420 Can I finance one set of goods, one cargo being 00:03:36.420 --> 00:03:39.540 shipped across the Atlantic or Pacific, can I fund it twice? 00:03:42.640 --> 00:03:45.857 And so that's a bit of the fraud. 00:03:45.857 --> 00:03:47.690 AUDIENCE: And also because of the high cost, 00:03:47.690 --> 00:03:50.570 and also all the due diligence, like small and medium 00:03:50.570 --> 00:03:53.380 enterprises have a very hard time getting it, 00:03:53.380 --> 00:03:55.130 like because of the financial crisis 00:03:55.130 --> 00:03:56.995 and also all the terrorist attacks. 00:03:56.995 --> 00:03:59.120 GARY GENSLER: So do you think that small and medium 00:03:59.120 --> 00:04:02.023 sized enterprises have a difficulty for the reasons you 00:04:02.023 --> 00:04:04.190 just said, because of terrorist attacks and so forth 00:04:04.190 --> 00:04:07.100 or is there something more broadly that's going on, 00:04:07.100 --> 00:04:09.520 maybe even for centuries? 00:04:09.520 --> 00:04:11.660 New hand here. 00:04:11.660 --> 00:04:14.450 AUDIENCE: I know it's more of a problem like small financing 00:04:14.450 --> 00:04:18.958 that they don't have access to the find the things they need 00:04:18.958 --> 00:04:20.750 that are required, their business requires, 00:04:20.750 --> 00:04:21.872 the essential things. 00:04:21.872 --> 00:04:24.080 GARY GENSLER: And I can't tell whether it's a hand up 00:04:24.080 --> 00:04:25.934 or you were fixing your hair. 00:04:25.934 --> 00:04:26.762 AUDIENCE: Um, both. 00:04:26.762 --> 00:04:28.730 GARY GENSLER: Both, OK. 00:04:28.730 --> 00:04:31.190 AUDIENCE: So I guess I was going to say, 00:04:31.190 --> 00:04:34.160 so small businesses often don't have the resources 00:04:34.160 --> 00:04:36.850 administratively to deal with paperwork. 00:04:36.850 --> 00:04:41.670 So often the operational burden becomes so costly for them, 00:04:41.670 --> 00:04:46.680 that it is no longer actually profitable for them to trade. 00:04:46.680 --> 00:04:49.200 GARY GENSLER: And also small businesses-- you want to add? 00:04:49.200 --> 00:04:51.260 AUDIENCE: They just don't have a credit history. 00:04:51.260 --> 00:04:54.290 So banks tend to not want to finance them. 00:04:54.290 --> 00:04:56.217 They just don't trust them. 00:04:56.217 --> 00:04:57.050 GARY GENSLER: Right. 00:04:57.050 --> 00:04:58.670 AUDIENCE: I just want to put some numbers to make 00:04:58.670 --> 00:04:59.587 it clear to everybody. 00:04:59.587 --> 00:05:03.290 I was looking at a study for the Asian Development Bank 00:05:03.290 --> 00:05:06.770 saying that small and medium sized enterprises are 00:05:06.770 --> 00:05:08.210 the most credit constrained. 00:05:08.210 --> 00:05:10.760 Around 50% of their demands are being 00:05:10.760 --> 00:05:15.560 rejected by banks for trade finance, whereas 7% 00:05:15.560 --> 00:05:18.690 to multinational corporations. 00:05:18.690 --> 00:05:20.600 GARY GENSLER: So this small and medium 00:05:20.600 --> 00:05:23.150 sized enterprises also are smaller. 00:05:23.150 --> 00:05:24.980 They're not as well known. 00:05:24.980 --> 00:05:30.220 And trade finance, just by definition, is cross border. 00:05:30.220 --> 00:05:32.880 It's cross jurisdiction, cross country. 00:05:32.880 --> 00:05:36.530 How does somebody in the US know a small business in Kenya? 00:05:36.530 --> 00:05:39.620 Or pick your countries-- 00:05:39.620 --> 00:05:42.780 China and Mexico. 00:05:42.780 --> 00:05:46.425 So there is a lot of information challenges. 00:05:46.425 --> 00:05:48.800 That's been the history of this business for a long time. 00:05:52.340 --> 00:05:54.410 We'll hold off on the ongoing projects. 00:05:54.410 --> 00:05:56.100 But we'll come back to that. 00:05:56.100 --> 00:05:58.130 So we had a bunch of readings. 00:05:58.130 --> 00:06:03.830 I updated this because it's ever changing. 00:06:03.830 --> 00:06:06.020 And I hope that if you had a chance 00:06:06.020 --> 00:06:10.730 to dig in to the Bain review. 00:06:10.730 --> 00:06:13.860 I thought as these writings go, it was probably 00:06:13.860 --> 00:06:15.110 a little better than some of-- 00:06:15.110 --> 00:06:18.860 I'm sorry for any of you going into consultancy, Tom. 00:06:18.860 --> 00:06:22.130 But as these things go, I thought it was better than some 00:06:22.130 --> 00:06:24.770 of the Deloitte papers and PwC papers 00:06:24.770 --> 00:06:27.110 that are still quite helpful. 00:06:27.110 --> 00:06:31.370 But I thought this was a little bit more detailed. 00:06:31.370 --> 00:06:35.160 So what is the background, the economic background? 00:06:35.160 --> 00:06:36.350 This is just from-- 00:06:36.350 --> 00:06:39.020 I think I pulled this from some World Bank figures. 00:06:41.960 --> 00:06:47.600 Worldwide exports of goods are $17 trillion. 00:06:47.600 --> 00:06:49.880 Services are 5 or 6 trillion. 00:06:49.880 --> 00:06:52.610 But trade finance is really around the exporting 00:06:52.610 --> 00:06:55.130 of goods more than services. 00:06:55.130 --> 00:06:59.840 I'm not really familiar with it in the service context. 00:06:59.840 --> 00:07:03.380 And manufacturer's $12 trillion. 00:07:03.380 --> 00:07:06.710 Fuels, agriculture, you can see that. 00:07:06.710 --> 00:07:11.090 So that's basically the body of it. 00:07:11.090 --> 00:07:14.240 And the financing, international finance-- 00:07:14.240 --> 00:07:16.730 and I purposely use words. 00:07:16.730 --> 00:07:19.400 This is the financing of international trade. 00:07:19.400 --> 00:07:22.590 It can come in two different ways. 00:07:22.590 --> 00:07:25.700 One is if the bank is guaranteeing something 00:07:25.700 --> 00:07:28.970 or the bank is supporting it through the documents. 00:07:28.970 --> 00:07:33.710 This is the traditional definition of trade finance. 00:07:33.710 --> 00:07:36.820 It is letters of credits and documentary collection. 00:07:36.820 --> 00:07:38.570 Anybody want to tell me what a letter of-- 00:07:38.570 --> 00:07:41.212 what the difference of two things are? 00:07:41.212 --> 00:07:42.920 Since we've got a whole bunch of people-- 00:07:42.920 --> 00:07:45.550 I see a hand up. 00:07:45.550 --> 00:07:47.970 AUDIENCE: A letter of credit is a formal letter 00:07:47.970 --> 00:07:52.020 from a bank just laying out the terms of credit extended 00:07:52.020 --> 00:07:54.540 to let's say the next year. 00:07:54.540 --> 00:07:56.910 GARY GENSLER: OK, so it's a formal letter laying out 00:07:56.910 --> 00:07:58.020 the terms. 00:07:58.020 --> 00:08:01.130 But critically, what is it doing? 00:08:01.130 --> 00:08:02.750 AUDIENCE: Removes counterparty risk. 00:08:02.750 --> 00:08:05.910 Removes the counterparty risk away from your buyer 00:08:05.910 --> 00:08:06.423 to the bank. 00:08:06.423 --> 00:08:08.340 GARY GENSLER: So it removes counterparty risk. 00:08:08.340 --> 00:08:11.230 It's guaranteeing payment. 00:08:11.230 --> 00:08:13.420 But there is a second form that banks 00:08:13.420 --> 00:08:15.625 support this market in a very big way 00:08:15.625 --> 00:08:18.670 is documentary collection. 00:08:18.670 --> 00:08:22.640 Anybody familiar with DCs? 00:08:22.640 --> 00:08:25.760 It's basically the banks are moving 00:08:25.760 --> 00:08:28.880 the paperwork, this incredible paperwork around the globe. 00:08:28.880 --> 00:08:31.550 And we'll dive into this a little bit. 00:08:31.550 --> 00:08:35.450 And they're not-- they're not taking counterparty risk. 00:08:35.450 --> 00:08:38.929 The banks themselves are not guaranteeing the credit. 00:08:38.929 --> 00:08:41.840 But they are performing enormous services 00:08:41.840 --> 00:08:44.820 in terms of the paperwork. 00:08:44.820 --> 00:08:50.210 And in essence, it's documents versus performance or documents 00:08:50.210 --> 00:08:54.530 versus authentication that goes in. 00:08:54.530 --> 00:08:55.820 A bunch of different ways. 00:08:55.820 --> 00:08:59.030 Factoring and forfaiting, not that this 00:08:59.030 --> 00:09:01.190 is a quiz on these terms. 00:09:01.190 --> 00:09:03.810 But these are different terms. 00:09:03.810 --> 00:09:06.410 Factoring is when you sell receivables, 00:09:06.410 --> 00:09:08.300 short-term receivables. 00:09:08.300 --> 00:09:10.970 Forfaiting is when they're longer term. 00:09:10.970 --> 00:09:13.670 So they're kind of a little bit the same thing. 00:09:13.670 --> 00:09:15.740 But one is short-term receivables, 00:09:15.740 --> 00:09:17.390 short-term letters of credit. 00:09:17.390 --> 00:09:19.580 One are longer term. 00:09:19.580 --> 00:09:21.920 You can actually take import and export loans 00:09:21.920 --> 00:09:27.470 out which are longer term. 00:09:27.470 --> 00:09:29.720 And they're about a whole inventory and a whole supply 00:09:29.720 --> 00:09:30.750 chain. 00:09:30.750 --> 00:09:33.800 You can get financing beforehand, supplier credit, 00:09:33.800 --> 00:09:36.590 and a new form aboard called supply chain financing 00:09:36.590 --> 00:09:39.770 where you're really funding the whole supply chain. 00:09:39.770 --> 00:09:43.250 But we're going to focus primarily on the first two. 00:09:43.250 --> 00:09:47.430 And most of the blockchain projects in this space 00:09:47.430 --> 00:09:50.970 are focusing on the first two. 00:09:50.970 --> 00:09:55.420 But international trade also has trade credit. 00:09:55.420 --> 00:09:57.800 What's open account? 00:09:57.800 --> 00:09:59.300 What does that mean in any business 00:09:59.300 --> 00:10:01.714 when we're here at Sloan, somebody? 00:10:04.612 --> 00:10:06.070 Alean I'm not going to call on you. 00:10:06.070 --> 00:10:07.153 I'm not going to make you. 00:10:07.153 --> 00:10:08.010 Jake. 00:10:08.010 --> 00:10:10.480 AUDIENCE: Trade is that when you ship the goods like prior 00:10:10.480 --> 00:10:11.550 to payment being due. 00:10:11.550 --> 00:10:12.268 GARY GENSLER: So? 00:10:12.268 --> 00:10:14.560 AUDIENCE: So you ship goods prior to payment being due. 00:10:14.560 --> 00:10:15.140 GARY GENSLER: All right. 00:10:15.140 --> 00:10:16.640 AUDIENCE: The payment is due like 90 days later. 00:10:16.640 --> 00:10:18.400 GARY GENSLER: So it's due 90 days later. 00:10:18.400 --> 00:10:20.620 Open account is what most businesses do. 00:10:20.620 --> 00:10:23.440 If you just say I'm shipping something, send an invoice. 00:10:23.440 --> 00:10:27.540 And the terms might be 2 and 30. 00:10:27.540 --> 00:10:32.190 You get a 2% discount if you pay prompt, but 30 days, just open 00:10:32.190 --> 00:10:32.690 account. 00:10:35.600 --> 00:10:39.650 In domestic business that's how most services are provided 00:10:39.650 --> 00:10:41.660 and goods are shipped is open account. 00:10:41.660 --> 00:10:44.720 It's the international export business 00:10:44.720 --> 00:10:45.890 that you find it different. 00:10:45.890 --> 00:10:50.430 Then cash in advance, of course, is what it sounds like. 00:10:50.430 --> 00:10:53.590 And consignment is all the other way. 00:10:53.590 --> 00:10:55.300 An exporter would actually ship. 00:10:55.300 --> 00:10:57.190 You'd put it on your shelves. 00:10:57.190 --> 00:10:59.350 You wouldn't have to pay. 00:10:59.350 --> 00:11:02.800 And the exporter continues to have the risk of the sale. 00:11:02.800 --> 00:11:07.650 Not used a lot in international trade. 00:11:07.650 --> 00:11:12.860 You can also get public guarantees or insurance. 00:11:12.860 --> 00:11:19.910 So that's the whole world of these $17 trillion of trade. 00:11:19.910 --> 00:11:22.040 Only about 5 or 6 trillion is thought 00:11:22.040 --> 00:11:27.110 to be actually using trade credit, letters 00:11:27.110 --> 00:11:32.300 of credit and documentary commitments, 00:11:32.300 --> 00:11:33.500 these two main things. 00:11:38.350 --> 00:11:40.040 So this ranges it. 00:11:40.040 --> 00:11:42.650 This gives you a little bit of a flavor. 00:11:42.650 --> 00:11:46.510 And this you can think of is what's the most secure 00:11:46.510 --> 00:11:48.730 for the exporter is over here. 00:11:48.730 --> 00:11:52.240 The exporter is going to have the most security 00:11:52.240 --> 00:11:54.910 if they get cash in advance. 00:11:54.910 --> 00:11:57.490 But does an importer like that? 00:11:57.490 --> 00:11:58.030 Not really. 00:11:58.030 --> 00:12:00.490 An importer really would rather have 00:12:00.490 --> 00:12:05.380 consignment, having risk all the way on the other side. 00:12:05.380 --> 00:12:08.960 Consignment would say the exporter takes all the risk. 00:12:08.960 --> 00:12:11.630 So it's all about commercial terms. 00:12:11.630 --> 00:12:14.440 But you can think of it as the other side of this 00:12:14.440 --> 00:12:20.200 is the least attractive for the importer is paying 00:12:20.200 --> 00:12:21.850 cash in advance. 00:12:21.850 --> 00:12:26.010 The most attractive to the exporter is cash in advance. 00:12:26.010 --> 00:12:28.680 And every one of these happens somewhere. 00:12:28.680 --> 00:12:32.790 In a $17 trillion market, $17 trillion of exports, 00:12:32.790 --> 00:12:38.190 all of this is open for negotiation. 00:12:38.190 --> 00:12:40.425 But think of the exporter likes this curve. 00:12:43.160 --> 00:12:46.070 And the importer likes this. 00:12:46.070 --> 00:12:53.620 And as I will show in a second, most of the market 00:12:53.620 --> 00:12:55.250 is in the middle. 00:12:55.250 --> 00:12:56.995 So now trade finance. 00:12:59.900 --> 00:13:04.207 Exporters, importers, advising banks, and issuing banks. 00:13:04.207 --> 00:13:06.290 And what you're going to quickly sort of sense is, 00:13:06.290 --> 00:13:08.690 there's a lot of room maybe for blockchain technology 00:13:08.690 --> 00:13:12.530 because there's a lot of moving parts. 00:13:12.530 --> 00:13:16.910 By the way, normally if you work at Wall Street 00:13:16.910 --> 00:13:18.740 or at a commercial bank, you might never 00:13:18.740 --> 00:13:20.360 touch trade finance. 00:13:20.360 --> 00:13:23.780 It's just like a department that if you're on a trading floor, 00:13:23.780 --> 00:13:27.400 you're not really thinking about a lot. 00:13:27.400 --> 00:13:30.500 Who's worked on a trading floor here? 00:13:30.500 --> 00:13:33.240 Did you ever think about trade finance? 00:13:33.240 --> 00:13:34.660 No. 00:13:34.660 --> 00:13:36.640 But it's a big market. 00:13:36.640 --> 00:13:38.130 It's a very big market. 00:13:38.130 --> 00:13:42.990 But basically, the exporter and importer sign a contract that's 00:13:42.990 --> 00:13:44.878 for the sale of goods. 00:13:44.878 --> 00:13:45.545 It could be oil. 00:13:45.545 --> 00:13:48.360 It could be agriculture product or manufacturers. 00:13:48.360 --> 00:13:51.870 The importer then arranges with an issuing bank 00:13:51.870 --> 00:13:53.790 a letter of credit. 00:13:53.790 --> 00:13:57.950 The letter of credit is sent to the exporter's bank. 00:13:57.950 --> 00:14:03.630 Sometimes the exporter's bank puts a second guarantee on it. 00:14:03.630 --> 00:14:07.290 The exporter's bank might be actually guaranteeing 00:14:07.290 --> 00:14:11.410 the importer's bank performance. 00:14:11.410 --> 00:14:14.830 So there's hundreds of different arrangements. 00:14:14.830 --> 00:14:18.190 But the classic thing is that the importer gets 00:14:18.190 --> 00:14:21.190 a letter of credit to say, look, you don't know me, 00:14:21.190 --> 00:14:28.000 but you can take the risk and I get this letter of credit. 00:14:28.000 --> 00:14:32.200 You exporter will get your money based upon some documents, when 00:14:32.200 --> 00:14:34.660 you put some documents together and send them to me 00:14:34.660 --> 00:14:39.640 that you've actually put your oil or agricultural products 00:14:39.640 --> 00:14:41.900 on a ship. 00:14:41.900 --> 00:14:43.950 So shipping is a big part of it. 00:14:43.950 --> 00:14:47.750 The second piece of this is, how did the documents actually go? 00:14:47.750 --> 00:14:51.410 The exporter then ships something. 00:14:51.410 --> 00:14:54.620 The shipment usually leads to some documents. 00:14:54.620 --> 00:14:56.120 And at the time of the shipping, you 00:14:56.120 --> 00:15:00.380 see number six in this little box over here 00:15:00.380 --> 00:15:02.570 is, the exporter, when they ship something, 00:15:02.570 --> 00:15:05.570 also sends some documents to their bank. 00:15:05.570 --> 00:15:10.530 Their bank sends it overseas to the bank in Kenya, 00:15:10.530 --> 00:15:17.670 let's say, even though that doesn't have any ports. 00:15:17.670 --> 00:15:19.617 Ethiopia, you have ports, right? 00:15:19.617 --> 00:15:20.700 AUDIENCE: Kenya has ports. 00:15:20.700 --> 00:15:22.890 GARY GENSLER: Kenya has ports, sorry. 00:15:22.890 --> 00:15:23.742 You're landlocked. 00:15:23.742 --> 00:15:24.450 All right, sorry. 00:15:24.450 --> 00:15:25.325 So I've got it right. 00:15:25.325 --> 00:15:26.460 So Kenya-- I got it wrong. 00:15:26.460 --> 00:15:29.340 But Kenya's got ports. 00:15:29.340 --> 00:15:31.560 But the exporter, at the same time they're shipping, 00:15:31.560 --> 00:15:34.200 will also send the documents, but send the documents 00:15:34.200 --> 00:15:34.890 to their bank. 00:15:34.890 --> 00:15:36.580 Their bank sends it to the foreign bank. 00:15:36.580 --> 00:15:38.790 The foreign bank says, ah-ha. 00:15:38.790 --> 00:15:41.790 That triggers the condition in the letter of credit. 00:15:41.790 --> 00:15:44.410 Payment will be made. 00:15:44.410 --> 00:15:48.070 And payment can be made when you put the goods on the ship. 00:15:48.070 --> 00:15:51.160 Payment maybe is made when the goods 00:15:51.160 --> 00:15:54.200 get to the foreign country. 00:15:54.200 --> 00:15:56.280 All these arrangements can be different. 00:16:00.200 --> 00:16:02.290 So this gives you a sense of the change. 00:16:02.290 --> 00:16:08.380 Letter credits were estimated in 1970 to be about half 00:16:08.380 --> 00:16:09.970 of all of trade. 00:16:09.970 --> 00:16:13.590 Now they're about 15%. 00:16:13.590 --> 00:16:16.620 World Economic Forum Bain papers that you all 00:16:16.620 --> 00:16:22.827 had the pleasure of either reading or skimming or you'll 00:16:22.827 --> 00:16:23.535 read it tomorrow. 00:16:26.610 --> 00:16:30.360 But letters of credit is a big piece of the market. 00:16:30.360 --> 00:16:36.430 Primary open account has widened as part of the market, 00:16:36.430 --> 00:16:41.020 I think, in part because international trade 00:16:41.020 --> 00:16:43.270 is probably more dominated by large companies 00:16:43.270 --> 00:16:44.440 now than in the past. 00:16:44.440 --> 00:16:46.990 And in the 1970s, even the large companies 00:16:46.990 --> 00:16:49.480 didn't know if they could trust each other. 00:16:49.480 --> 00:16:53.020 The larger enterprises, larger multinationals 00:16:53.020 --> 00:16:55.570 really would prefer just to trade on open account 00:16:55.570 --> 00:16:58.710 and extend each other's credit rather 00:16:58.710 --> 00:17:03.580 than using the banking system to guarantee their credit. 00:17:03.580 --> 00:17:09.869 But trade finance is still a good call at 15% to 20%, 00:17:09.869 --> 00:17:14.349 which would still be rather significant numbers. 00:17:14.349 --> 00:17:17.520 So that's a little bit on the sort of questions 00:17:17.520 --> 00:17:20.819 about trade finance, how it fits in, before we start talking 00:17:20.819 --> 00:17:22.379 about blockchain projects. 00:17:25.170 --> 00:17:27.243 I think I had one other thing. 00:17:27.243 --> 00:17:29.160 Here are all the parties that can be involved. 00:17:33.290 --> 00:17:36.180 And just to sort of confuse us all, 00:17:36.180 --> 00:17:38.390 here is a list of some of the documents. 00:17:38.390 --> 00:17:42.340 And that's not even a complete list. 00:17:42.340 --> 00:17:44.680 I went to a legal website to find out 00:17:44.680 --> 00:17:48.640 what all the different documents you might have. 00:17:48.640 --> 00:17:50.350 Anybody know what a bill of lading is? 00:17:53.074 --> 00:17:58.750 AUDIENCE: It's some kind of receipt from the vessel carrier 00:17:58.750 --> 00:18:01.450 that is carrying your goods. 00:18:01.450 --> 00:18:03.640 And whoever owns that bill of lading 00:18:03.640 --> 00:18:05.470 has the right to claim the goods. 00:18:05.470 --> 00:18:07.240 GARY GENSLER: Right. 00:18:07.240 --> 00:18:08.800 So it's like a warehouse receipt. 00:18:08.800 --> 00:18:11.440 Remember, we talked about some of the origins of money 00:18:11.440 --> 00:18:13.660 were around warehouse receipts because I 00:18:13.660 --> 00:18:18.340 might put my corn or wheat or gold or bronze in a warehouse. 00:18:18.340 --> 00:18:23.950 A bill of lading originally, though the definition is moved 00:18:23.950 --> 00:18:27.760 on over the centuries, the original definition it was 00:18:27.760 --> 00:18:30.850 like a warehouse receipt on a ship 00:18:30.850 --> 00:18:34.930 that you took your products or goods and placed it on a ship. 00:18:34.930 --> 00:18:39.820 And you had a bill of lading because it was on the ship. 00:18:39.820 --> 00:18:42.570 And you could actually, just like those original forms 00:18:42.570 --> 00:18:46.200 of money, warehouse receipts, you could sell a bill of lading 00:18:46.200 --> 00:18:48.570 or discount it and get money for it. 00:18:48.570 --> 00:18:50.700 So bills of lading have centuries 00:18:50.700 --> 00:18:54.000 old, maybe thousands of years of history, 00:18:54.000 --> 00:18:55.670 similar to warehouse receipts. 00:18:55.670 --> 00:18:57.630 And in essence, you might think of a bill 00:18:57.630 --> 00:19:00.150 of lading a little bit as a form of money. 00:19:03.910 --> 00:19:06.790 But what did I list just for fun? 00:19:06.790 --> 00:19:09.845 50 different documents. 00:19:09.845 --> 00:19:10.345 Alean. 00:19:10.345 --> 00:19:11.520 AUDIENCE: How easy is it to fake one of these? 00:19:11.520 --> 00:19:12.310 GARY GENSLER: Say it louder. 00:19:12.310 --> 00:19:14.440 AUDIENCE: How easy is it to fake one of these bills 00:19:14.440 --> 00:19:15.915 and claim someone else's goods? 00:19:15.915 --> 00:19:17.290 GARY GENSLER: Very good question. 00:19:17.290 --> 00:19:19.830 So is was a point earlier. 00:19:19.830 --> 00:19:21.610 And again, this goes back centuries 00:19:21.610 --> 00:19:26.980 that there's been a lot of fraud around faking a bill of lading 00:19:26.980 --> 00:19:30.420 or a bill of exchange, a warehouse receipt, 00:19:30.420 --> 00:19:34.750 in another effort. 00:19:34.750 --> 00:19:38.500 So what you have is you have a lot of forms of notary, 00:19:38.500 --> 00:19:41.740 well before cryptography, a lot of forms of notary 00:19:41.740 --> 00:19:48.910 where various transport agents and shippers had to really 00:19:48.910 --> 00:19:53.154 have seals and forms of ways to say this was a committed. 00:19:55.760 --> 00:19:56.450 Leonardo. 00:19:56.450 --> 00:19:58.380 AUDIENCE: And I think part of the problem 00:19:58.380 --> 00:20:02.150 is that each one single piece of those documents 00:20:02.150 --> 00:20:04.860 are easy to falsify. 00:20:04.860 --> 00:20:08.000 That's why this system became so burdensome 00:20:08.000 --> 00:20:09.830 in terms of paperwork, because they started 00:20:09.830 --> 00:20:12.620 to build a lot of steps to guarantee 00:20:12.620 --> 00:20:15.300 that you can track all those things and make sure 00:20:15.300 --> 00:20:17.810 you reduce the risk. 00:20:17.810 --> 00:20:22.310 It's relatively easy to get one of those faked too. 00:20:22.310 --> 00:20:25.400 GARY GENSLER: And it's why many people think this is actually 00:20:25.400 --> 00:20:32.420 one of the better use cases, better ecosystems for a revised 00:20:32.420 --> 00:20:34.910 technology similar to blockchain or actually 00:20:34.910 --> 00:20:38.830 blockchain technology itself, a lot of multiple parties. 00:20:38.830 --> 00:20:43.940 And though I only listed seven, you can have multiple banks. 00:20:43.940 --> 00:20:46.640 You can have the importer's bank, the exporter's bank, 00:20:46.640 --> 00:20:50.410 between them you can have a correspondent bank, right, 00:20:50.410 --> 00:20:54.970 so at least three banks in the chain or sometimes even more. 00:20:54.970 --> 00:20:58.000 Freight forwarders, shippers, customs 00:20:58.000 --> 00:21:00.480 agents in both countries. 00:21:00.480 --> 00:21:01.656 You have a question, James? 00:21:01.656 --> 00:21:03.280 AUDIENCE: Nope. 00:21:03.280 --> 00:21:07.630 GARY GENSLER: So lots of parties, lots of documents, 00:21:07.630 --> 00:21:10.040 high chance of fraud. 00:21:10.040 --> 00:21:12.910 And guaranteeing validation and verification 00:21:12.910 --> 00:21:15.340 is a big piece of this marketplace. 00:21:19.610 --> 00:21:22.110 So then the question is, can you put somebody in the middle? 00:21:22.110 --> 00:21:26.380 See that little blockchain in the middle, kind of cute. 00:21:26.380 --> 00:21:29.670 All right, you're not going to laugh a little with me. 00:21:29.670 --> 00:21:34.130 That's the question, so multiple parties involved. 00:21:34.130 --> 00:21:36.860 Verification is critical to all the workflows 00:21:36.860 --> 00:21:40.250 and the economics. 00:21:40.250 --> 00:21:43.400 And it relies on significant document flows. 00:21:43.400 --> 00:21:46.380 That's the basic. 00:21:46.380 --> 00:21:47.690 And it's what-- 00:21:47.690 --> 00:21:49.760 Today's lecture is really to say well 00:21:49.760 --> 00:21:52.160 whether you're looking at health care records, 00:21:52.160 --> 00:21:54.590 whether you're thinking about commercial real estate, 00:21:54.590 --> 00:21:59.020 you're thinking about internet of things, 00:21:59.020 --> 00:22:02.710 remind yourself of trade finance because this is probably 00:22:02.710 --> 00:22:04.660 one of the best use cases, at least 00:22:04.660 --> 00:22:06.870 for permissioned blockchains. 00:22:06.870 --> 00:22:09.280 So you can debate whether it could be 00:22:09.280 --> 00:22:11.050 done on a traditional database. 00:22:11.050 --> 00:22:14.350 But it's multiple parties. 00:22:14.350 --> 00:22:16.210 Lots of validation and verification 00:22:16.210 --> 00:22:20.300 is important, an awful lot of different documents. 00:22:20.300 --> 00:22:22.450 And there there's property rights involved. 00:22:22.450 --> 00:22:24.940 Critically, there is key property rights 00:22:24.940 --> 00:22:27.400 because when you're shipping oil on the high seas 00:22:27.400 --> 00:22:31.720 or shipping any bits of that $17 trillion on the high seas, 00:22:31.720 --> 00:22:35.040 people want to finance against it. 00:22:35.040 --> 00:22:36.960 AUDIENCE: I have one question for me 00:22:36.960 --> 00:22:38.320 to better understand this. 00:22:38.320 --> 00:22:40.240 How do you finance these from sending a good 00:22:40.240 --> 00:22:43.280 from San Francisco to Boston? 00:22:43.280 --> 00:22:44.950 And the same time, why? 00:22:44.950 --> 00:22:47.110 Is it a matter of that we need all these documents 00:22:47.110 --> 00:22:49.027 and we need to put documents on the blockchain 00:22:49.027 --> 00:22:50.930 or can we just get rid of the documents? 00:22:50.930 --> 00:22:53.395 Why don't we see the same thing in intra-US? 00:22:56.350 --> 00:22:57.730 GARY GENSLER: Very good question. 00:22:57.730 --> 00:23:00.920 Though the word trade finance has come to mean, 00:23:00.920 --> 00:23:06.710 for many decades, maybe hundreds of years, international trade, 00:23:06.710 --> 00:23:09.740 the same can be true for domestic trade, 00:23:09.740 --> 00:23:12.560 particularly as you're going, as you said, from San Francisco 00:23:12.560 --> 00:23:14.450 to Boston. 00:23:14.450 --> 00:23:19.060 You could use a letter of credit between 00:23:19.060 --> 00:23:23.600 a major domestic manufacturer and a small business in Boston. 00:23:23.600 --> 00:23:26.510 So I might say, I don't want to take-- 00:23:26.510 --> 00:23:30.770 sorry, Joe Quin, but you're that small manufacturer. 00:23:30.770 --> 00:23:33.470 You're that small entity in Boston. 00:23:33.470 --> 00:23:36.290 And Tom's not willing to take your credit risk. 00:23:36.290 --> 00:23:38.990 You could still want to have a letter of credit. 00:23:38.990 --> 00:23:40.400 It wouldn't be called technically 00:23:40.400 --> 00:23:42.890 a bill of lading if it's not on a ship, 00:23:42.890 --> 00:23:45.870 even though that term sometimes is used. 00:23:45.870 --> 00:23:51.930 But everything back here could happen in domestic trade, 00:23:51.930 --> 00:23:53.430 but usually doesn't. 00:23:53.430 --> 00:23:57.240 Most of domestic trade is done on open account. 00:23:57.240 --> 00:24:01.060 But some of it's done on letter of credit especially, 00:24:01.060 --> 00:24:02.865 if just small businesses. 00:24:02.865 --> 00:24:04.290 Does that help? 00:24:04.290 --> 00:24:06.120 AUDIENCE: Yes. 00:24:06.120 --> 00:24:09.780 I'm trying to think why do we need it in one case 00:24:09.780 --> 00:24:11.013 and not in the other one? 00:24:11.013 --> 00:24:12.180 GARY GENSLER: There's more-- 00:24:12.180 --> 00:24:15.390 I think it's applicable in both. 00:24:15.390 --> 00:24:17.430 It's more applicable on international trade 00:24:17.430 --> 00:24:23.280 because you have more challenges of trust, 00:24:23.280 --> 00:24:26.370 I would even say information asymmetries. 00:24:26.370 --> 00:24:31.890 If you're sitting in China and you're exporting to Kenya, 00:24:31.890 --> 00:24:35.220 you have less chance to actually know that local community. 00:24:35.220 --> 00:24:38.990 And your bank in China doesn't know them either. 00:24:38.990 --> 00:24:44.610 And so what was built up to satisfy those issues of trust 00:24:44.610 --> 00:24:46.830 is the banking sector largely picked up 00:24:46.830 --> 00:24:50.510 that, either guaranteeing the documents 00:24:50.510 --> 00:24:53.220 or actually guaranteeing the credit. 00:24:53.220 --> 00:24:53.720 Hugo. 00:24:53.720 --> 00:24:56.387 AUDIENCE: There's also something to say for like border control, 00:24:56.387 --> 00:24:56.980 right. 00:24:56.980 --> 00:25:00.480 Like, I know, in my lab we've had like waste materials 00:25:00.480 --> 00:25:02.760 shipped to us internationally. 00:25:02.760 --> 00:25:06.450 And customs agents really even care about that. 00:25:06.450 --> 00:25:10.480 You have to put a price on that, even if it has no price. 00:25:10.480 --> 00:25:13.440 So like if you could just put something on a car 00:25:13.440 --> 00:25:16.890 and drive it from San Francisco to Boston, 00:25:16.890 --> 00:25:17.910 then maybe like, yeah. 00:25:17.910 --> 00:25:19.610 If you're driving from Canada to the US, 00:25:19.610 --> 00:25:21.570 it would be different from shipping it 00:25:21.570 --> 00:25:23.290 from China to the US. 00:25:23.290 --> 00:25:27.150 But I think the trust issue comes up a lot more 00:25:27.150 --> 00:25:30.180 when you're dealing with international and regulatory 00:25:30.180 --> 00:25:32.065 differences between the two places. 00:25:32.065 --> 00:25:33.690 GARY GENSLER: I'm not saying it doesn't 00:25:33.690 --> 00:25:35.220 exist in domestic trade. 00:25:35.220 --> 00:25:38.040 It definitely exists in domestic trade. 00:25:38.040 --> 00:25:42.390 But international trade long ago created a system 00:25:42.390 --> 00:25:46.960 to address different languages, different cultures, 00:25:46.960 --> 00:25:50.570 different regulatory regimes, taxing regimes. 00:25:50.570 --> 00:25:53.040 And it was going on a ship. 00:25:53.040 --> 00:25:55.470 AUDIENCE: Even more anti-money laundering. 00:25:55.470 --> 00:25:57.240 So there is other regulation that 00:25:57.240 --> 00:26:00.070 is part of the policy that complicates it. 00:26:00.070 --> 00:26:01.740 One nation, a letter of credit-- you 00:26:01.740 --> 00:26:03.630 need to make sure that you're not 00:26:03.630 --> 00:26:08.730 breaking any regulation between different jurisdictions. 00:26:08.730 --> 00:26:14.010 Part of it will be ML as well or ABC or whatever. 00:26:14.010 --> 00:26:14.990 GARY GENSLER: James. 00:26:14.990 --> 00:26:17.100 AUDIENCE: But, I think, looking at that question, 00:26:17.100 --> 00:26:20.380 it seems like we are using technology, 00:26:20.380 --> 00:26:23.190 in this case, blockchain to fit into the existing 00:26:23.190 --> 00:26:24.488 framework of how things work. 00:26:24.488 --> 00:26:26.030 But shouldn't the question be flipped 00:26:26.030 --> 00:26:28.380 to say, hang on a second, do we need blockchain 00:26:28.380 --> 00:26:30.370 in a system that is better designed, 00:26:30.370 --> 00:26:32.400 not having 50 different documents, 00:26:32.400 --> 00:26:36.030 and actually thinking about the actual problem. 00:26:36.030 --> 00:26:38.160 I can see the point of the trust which 00:26:38.160 --> 00:26:40.560 may need a blockchain solution. 00:26:40.560 --> 00:26:41.790 But a lot of that-- 00:26:41.790 --> 00:26:44.010 be that trucking receipts, railroad receipts, 00:26:44.010 --> 00:26:48.390 or cargo receipts, those are historical relics. 00:26:48.390 --> 00:26:50.090 Surely there must be a technology 00:26:50.090 --> 00:26:52.927 other than blockchain that could solve the problem. 00:26:52.927 --> 00:26:54.010 GARY GENSLER: Well, maybe. 00:26:54.010 --> 00:26:56.230 Or maybe blockchain technology is just 00:26:56.230 --> 00:26:59.110 the right technology that's coming along 00:26:59.110 --> 00:27:03.280 in the 21st century to solve it better than initially pieces 00:27:03.280 --> 00:27:08.080 of paper and literally document couriers that 00:27:08.080 --> 00:27:09.932 had to be trusted to do it. 00:27:09.932 --> 00:27:11.890 AUDIENCE: They've gone the way the dodo, right? 00:27:11.890 --> 00:27:12.973 So-- 00:27:12.973 --> 00:27:15.640 GARY GENSLER: Well, they haven't fully gone the way of the dodo. 00:27:15.640 --> 00:27:17.440 AUDIENCE: While I think that there's 00:27:17.440 --> 00:27:21.220 much to be said about blockchain that creates trust in parties 00:27:21.220 --> 00:27:24.913 that may not naturally trust each other, 00:27:24.913 --> 00:27:27.580 the problem seems to me is there is a lot of things that doesn't 00:27:27.580 --> 00:27:30.490 need to happen in this day and age, as you mentioned, 00:27:30.490 --> 00:27:32.420 domestic mail services. 00:27:32.420 --> 00:27:34.480 It's between sender and receiver. 00:27:34.480 --> 00:27:39.070 What happens in between is tracked by UPS or whoever. 00:27:39.070 --> 00:27:42.390 But what we certainly don't see is all of that list of stuff 00:27:42.390 --> 00:27:43.390 while this is happening. 00:27:43.390 --> 00:27:47.340 But it's unnecessary, domestically, 00:27:47.340 --> 00:27:49.200 GARY GENSLER: You might be right. 00:27:49.200 --> 00:27:52.020 But what's happened well before blockchain technology came 00:27:52.020 --> 00:27:54.720 along is digitization. 00:27:54.720 --> 00:27:58.230 But part of the trade can't be dematerialized. 00:27:58.230 --> 00:28:00.660 See in the securities business, what 00:28:00.660 --> 00:28:03.120 we talked about when we talked about clearing and settling 00:28:03.120 --> 00:28:06.150 of securities, the equity ownership 00:28:06.150 --> 00:28:07.710 has been dematerialized. 00:28:07.710 --> 00:28:10.660 And it started to happen in the 1970s. 00:28:10.660 --> 00:28:15.150 The legal right that you have this cash flow 00:28:15.150 --> 00:28:21.600 called an equity interest in Apple is all digitized. 00:28:21.600 --> 00:28:24.990 Part of this trade is not digitized, $17 trillion 00:28:24.990 --> 00:28:30.020 of physical goods on the high seas. 00:28:30.020 --> 00:28:32.300 So I still think you're going to need something 00:28:32.300 --> 00:28:37.490 that shows that the physical goods made it on a ship 00:28:37.490 --> 00:28:40.500 or on a cargo vessel of some sort. 00:28:40.500 --> 00:28:43.050 And so there are some differences. 00:28:43.050 --> 00:28:43.818 Erik. 00:28:43.818 --> 00:28:44.860 Still haven't heard from. 00:28:44.860 --> 00:28:46.220 AUDIENCE: Yes. 00:28:46.220 --> 00:28:50.320 Just to address a concern of James 00:28:50.320 --> 00:28:55.460 that many of the manual plus the station projects 00:28:55.460 --> 00:28:59.020 fail at the beginning because they actually did that. 00:28:59.020 --> 00:29:02.450 They kind of tried to reflect exactly what happened 00:29:02.450 --> 00:29:07.160 in the manual world into the digitized world, which resulted 00:29:07.160 --> 00:29:08.860 in many inefficiencies. 00:29:08.860 --> 00:29:12.090 And this is not the case. 00:29:12.090 --> 00:29:17.690 We're not actually trying to do exactly that off line process 00:29:17.690 --> 00:29:18.935 using blockchain technology. 00:29:18.935 --> 00:29:20.060 That's not the alternative. 00:29:20.060 --> 00:29:25.820 But that actually made me think that I wanted to point out this 00:29:25.820 --> 00:29:29.510 to your argumentative of centralized databases. 00:29:29.510 --> 00:29:31.430 And centralized databases have been around 00:29:31.430 --> 00:29:32.940 for more than 60 years. 00:29:32.940 --> 00:29:35.300 They've been digitizing manual processes for a while. 00:29:35.300 --> 00:29:39.300 The question comes is, why didn't they already digitize 00:29:39.300 --> 00:29:41.490 these sort of problems? 00:29:41.490 --> 00:29:45.860 The answer is because this trade finance issue 00:29:45.860 --> 00:29:50.000 has special characteristics that make it especially 00:29:50.000 --> 00:29:53.460 suitable for it to be addressed by these specific technologies. 00:29:53.460 --> 00:29:55.760 So that's why I would argue that. 00:29:55.760 --> 00:29:58.600 GARY GENSLER: And what do you think that specialness is? 00:29:58.600 --> 00:30:00.050 AUDIENCE: It's precisely the fact 00:30:00.050 --> 00:30:03.710 that you have multiple stakeholders dealing 00:30:03.710 --> 00:30:09.140 with information that goes among all of these moving parts 00:30:09.140 --> 00:30:11.940 and you have a high cost of trust. 00:30:11.940 --> 00:30:15.710 So what you're actually doing is using blockchain technology 00:30:15.710 --> 00:30:18.680 permissioned or otherwise to address 00:30:18.680 --> 00:30:22.015 this specific challenge. 00:30:22.015 --> 00:30:24.140 GARY GENSLER: And you have a property right as well 00:30:24.140 --> 00:30:27.290 that people often want to borrow still against while it's 00:30:27.290 --> 00:30:29.750 on the high seas. 00:30:29.750 --> 00:30:33.770 But I agree it may well be that the blockchain technology is 00:30:33.770 --> 00:30:36.470 not the only solution to this. 00:30:36.470 --> 00:30:42.050 But it does feel like it's a particularly fertile area. 00:30:42.050 --> 00:30:44.630 And we're going to turn right now to some of the projects. 00:30:44.630 --> 00:30:48.000 And there is a lot of projects in this space. 00:30:48.000 --> 00:30:48.500 Alean. 00:30:48.500 --> 00:30:50.315 And then we'll go in back to Aviva. 00:30:50.315 --> 00:30:54.710 AUDIENCE: So is the overarching goal here to fix the fraud 00:30:54.710 --> 00:30:57.292 or to fix the complexity, what's the goal? 00:30:57.292 --> 00:30:59.250 GARY GENSLER: Well it's a really good question. 00:30:59.250 --> 00:31:01.550 So those working on projects, is it 00:31:01.550 --> 00:31:04.440 more about fraud or the complexity? 00:31:04.440 --> 00:31:05.963 AUDIENCE: Fraud. 00:31:05.963 --> 00:31:07.130 GARY GENSLER: So efficiency. 00:31:07.130 --> 00:31:08.672 AUDIENCE: Yes, the complexity I guess 00:31:08.672 --> 00:31:10.400 is a function of the fact. 00:31:10.400 --> 00:31:12.870 GARY GENSLER: So you can you can drive a lot of efficiency, 00:31:12.870 --> 00:31:16.670 which is due to the complexity. 00:31:16.670 --> 00:31:19.610 I think, that's one of the overarching goals 00:31:19.610 --> 00:31:27.760 is driving efficiency, but also to lower the fraud or the loss 00:31:27.760 --> 00:31:28.970 to fraud. 00:31:28.970 --> 00:31:29.570 It's both. 00:31:29.570 --> 00:31:31.580 But I think it's driven more by the efficiency 00:31:31.580 --> 00:31:33.360 from my readings of this. 00:31:33.360 --> 00:31:34.885 AUDIENCE: Fraud. 00:31:34.885 --> 00:31:36.510 GARY GENSLER: More by the efficiencies. 00:31:36.510 --> 00:31:38.030 AUDIENCE: What's the fraud rate? 00:31:38.030 --> 00:31:39.780 GARY GENSLER: I don't know the fraud rate. 00:31:39.780 --> 00:31:41.820 That's a good question. 00:31:41.820 --> 00:31:45.135 We'll see if we can find it out Aviva was going to be next. 00:31:45.135 --> 00:31:47.510 AUDIENCE: So let's say that trade finance does transition 00:31:47.510 --> 00:31:50.200 to a blockchain and then that it's 00:31:50.200 --> 00:31:51.560 more in the private blockchain. 00:31:51.560 --> 00:31:57.338 So then how do we solve the problem of interoperability? 00:31:57.338 --> 00:31:59.130 GARY GENSLER: Can I hold that, because it's 00:31:59.130 --> 00:32:00.713 a very good question that will come up 00:32:00.713 --> 00:32:03.260 when we talk a little bit about some of the IBM projects, 00:32:03.260 --> 00:32:05.840 particularly with one of the largest shippers? 00:32:05.840 --> 00:32:07.590 So it's the right question. 00:32:07.590 --> 00:32:09.997 But we're going to chat about when we talk about it. 00:32:09.997 --> 00:32:12.080 Can I talk about some of the projects or was there 00:32:12.080 --> 00:32:13.920 something? 00:32:13.920 --> 00:32:16.410 So where are we? 00:32:16.410 --> 00:32:19.290 Well, there's five big consortium. 00:32:19.290 --> 00:32:21.630 Two of them you can see are backed on-- 00:32:21.630 --> 00:32:23.310 or working on the Corda. 00:32:23.310 --> 00:32:28.020 That was R3 Corda that we talked about earlier this semester. 00:32:28.020 --> 00:32:30.120 Two are on IBM. 00:32:30.120 --> 00:32:34.020 One that's on a Ping An Group, we 00:32:34.020 --> 00:32:36.690 didn't talk about earlier this year. 00:32:39.510 --> 00:32:42.300 So letter of credit approach. 00:32:42.300 --> 00:32:45.247 Receivables and payment guarantee financing, which 00:32:45.247 --> 00:32:46.330 is a little bit different. 00:32:46.330 --> 00:32:48.030 This is, we already have receivables, 00:32:48.030 --> 00:32:48.960 how do we fund them? 00:32:51.510 --> 00:32:55.870 Monitoring open transactions and letters of credit. 00:32:55.870 --> 00:32:59.610 And then the Hong Kong group is a supply chain record keeping. 00:32:59.610 --> 00:33:04.260 And just if you want to see it sort of visually, 00:33:04.260 --> 00:33:06.420 this is all the banks that are involved 00:33:06.420 --> 00:33:09.430 in each of the consortium. 00:33:09.430 --> 00:33:14.190 And you'll see basically that there's some overlap, I think, 00:33:14.190 --> 00:33:16.530 unless I'm mistaken. 00:33:16.530 --> 00:33:18.450 I and G might be in a couple of them. 00:33:18.450 --> 00:33:21.480 I think two of these consortia maybe have now merged. 00:33:24.570 --> 00:33:25.920 But it goes a little bit. 00:33:25.920 --> 00:33:28.680 It's not fully going to answer your question of Aviva. 00:33:28.680 --> 00:33:31.590 But even if there were five different consortium trying 00:33:31.590 --> 00:33:35.750 to figure this out amongst different groups of banks, 00:33:35.750 --> 00:33:38.210 at some point in time to really gain a great deal 00:33:38.210 --> 00:33:42.530 more efficiency, how do they operate, how do they transact 00:33:42.530 --> 00:33:47.000 across their platforms? 00:33:47.000 --> 00:33:50.120 Now they each, obviously, don't want to give up economic rents. 00:33:50.120 --> 00:33:54.203 They don't want to give up market power to somebody. 00:33:54.203 --> 00:33:55.620 They don't want to all of a sudden 00:33:55.620 --> 00:33:58.680 find out that some entrepreneur is charging them 00:33:58.680 --> 00:34:04.380 so much because they created a network, because the one 00:34:04.380 --> 00:34:10.170 consortium that figures this out early on could price pretty 00:34:10.170 --> 00:34:14.760 close to their cost structure, but later on could, you know, 00:34:14.760 --> 00:34:17.520 price a lot higher and collect a lot of monopoly 00:34:17.520 --> 00:34:20.489 or economic rents. 00:34:20.489 --> 00:34:22.583 So I don't know where this will sort out. 00:34:22.583 --> 00:34:24.000 And I don't even know that they're 00:34:24.000 --> 00:34:28.290 going to want to solve the interoperability problem 00:34:28.290 --> 00:34:29.530 amongst themselves. 00:34:29.530 --> 00:34:30.250 Sean. 00:34:30.250 --> 00:34:33.989 AUDIENCE: One interesting kind of finding fault with consortia 00:34:33.989 --> 00:34:36.630 is all of the banks listed up there, 00:34:36.630 --> 00:34:38.670 all these are Asian bank or European bank. 00:34:38.670 --> 00:34:40.830 None of the US banks are actually participating. 00:34:40.830 --> 00:34:44.130 I see US Bank, so one. 00:34:44.130 --> 00:34:46.860 GARY GENSLER: But do you see JP Morgan Chase? 00:34:53.280 --> 00:34:59.190 Now, who's the largest issuer of trade finance in the world? 00:34:59.190 --> 00:35:00.570 AUDIENCE: US Government? 00:35:00.570 --> 00:35:01.170 GARY GENSLER: What's that? 00:35:01.170 --> 00:35:02.590 AUDIENCE: It's not the US Government, is it? 00:35:02.590 --> 00:35:03.632 GARY GENSLER: No, no, no. 00:35:03.632 --> 00:35:04.450 I think it's-- 00:35:04.450 --> 00:35:07.430 I think it's HSBC. 00:35:07.430 --> 00:35:08.640 I might be mistaken. 00:35:08.640 --> 00:35:09.900 AUDIENCE: I think it's HSBC. 00:35:09.900 --> 00:35:11.567 GARY GENSLER: You think too, it is HSBC. 00:35:15.220 --> 00:35:16.550 But you're right. 00:35:16.550 --> 00:35:21.530 The five big-- Wells Fargo is not on there either. 00:35:21.530 --> 00:35:24.030 Now that doesn't mean they're not working on other projects, 00:35:24.030 --> 00:35:26.140 because here here's some other projects. 00:35:26.140 --> 00:35:27.870 And these aren't the consortia. 00:35:27.870 --> 00:35:29.280 I'm just giving us flavor. 00:35:29.280 --> 00:35:31.530 There's a lot going on in this space. 00:35:31.530 --> 00:35:34.500 And those of you who are doing final projects, 00:35:34.500 --> 00:35:38.640 I challenge you to think about these projects. 00:35:38.640 --> 00:35:41.650 And say, well what are you recommending that's different, 00:35:41.650 --> 00:35:42.150 you know. 00:35:42.150 --> 00:35:46.072 It's not just me too, me too financial, not the other 00:35:46.072 --> 00:35:46.820 me too stuff. 00:35:51.110 --> 00:35:53.430 India's interesting to me. 00:35:53.430 --> 00:35:58.530 There's another consortium that wasn't on that page. 00:35:58.530 --> 00:36:01.620 And I'll probably pronounce it wrong. 00:36:01.620 --> 00:36:03.390 "Final Cal" or "Finic Cal." 00:36:03.390 --> 00:36:04.140 AUDIENCE: Finacle. 00:36:04.140 --> 00:36:05.223 GARY GENSLER: What's that? 00:36:05.223 --> 00:36:06.570 AUDIENCE: Finacle. 00:36:06.570 --> 00:36:08.490 GARY GENSLER: Are you familiar with that? 00:36:08.490 --> 00:36:10.040 AUDIENCE: Not much, I just know the pronunciation. 00:36:10.040 --> 00:36:11.582 GARY GENSLER: Just the pronunciation. 00:36:11.582 --> 00:36:12.840 Thank you for helping me out. 00:36:12.840 --> 00:36:14.170 I needed it. 00:36:14.170 --> 00:36:16.790 For validation documents and payment, 00:36:16.790 --> 00:36:19.290 so they're not really saying we're just trade finance. 00:36:19.290 --> 00:36:22.020 But we're going to validate all the documents This goes more 00:36:22.020 --> 00:36:23.300 to fraud. 00:36:23.300 --> 00:36:26.880 I think this project, validating the documents, saying, 00:36:26.880 --> 00:36:28.920 yes, they're true and good, and you can 00:36:28.920 --> 00:36:31.440 lend against these documents. 00:36:31.440 --> 00:36:33.150 And a lot of times these documents 00:36:33.150 --> 00:36:35.250 are the bills of lading and bills 00:36:35.250 --> 00:36:39.760 of exchange or loan lendable and so forth. 00:36:39.760 --> 00:36:43.700 So a lot of projects, one-- 00:36:43.700 --> 00:36:45.780 I could only find and there may be others, 00:36:45.780 --> 00:36:47.910 I could only find one with a token. 00:36:47.910 --> 00:36:49.660 And I put it up there last, Ethereum 00:36:49.660 --> 00:36:53.640 based ConsenSys, the company that's 00:36:53.640 --> 00:36:57.930 run by Joe Lubin who is the Canadian venture capitalist who 00:36:57.930 --> 00:37:03.570 helped back Vitalik Buterin and Ethereum. 00:37:03.570 --> 00:37:06.330 ConsenSys has 300 or 400 people at least 00:37:06.330 --> 00:37:10.230 working in ConsenSys doing Ethereum based projects. 00:37:10.230 --> 00:37:14.010 So I was pleased to see I could find one native based token. 00:37:14.010 --> 00:37:19.050 But to my knowledge, all of the consortia and all of the ones 00:37:19.050 --> 00:37:22.320 I listed up there are permissioned blockchains 00:37:22.320 --> 00:37:23.910 from what I can tell. 00:37:23.910 --> 00:37:27.010 But I'm curious, those of you who are working on this, 00:37:27.010 --> 00:37:31.740 have you found any native token projects here? 00:37:31.740 --> 00:37:34.110 AUDIENCE: There is still b-verify, 00:37:34.110 --> 00:37:37.170 which is a project from the Media Lab. 00:37:37.170 --> 00:37:39.910 It doesn't have a native token per se, 00:37:39.910 --> 00:37:42.510 but uses permissionless blockchain, 00:37:42.510 --> 00:37:45.510 existing permissionless blockchain infrastructure 00:37:45.510 --> 00:37:53.040 to gain the readability of lots of statements 00:37:53.040 --> 00:37:58.200 to build a warehouse receipts use case. 00:37:58.200 --> 00:38:01.680 So they are using transactions in the Bitcoin network 00:38:01.680 --> 00:38:05.190 right now to write-- 00:38:05.190 --> 00:38:07.650 GARY GENSLER: But does b-verify have a token? 00:38:07.650 --> 00:38:08.522 AUDIENCE: No. 00:38:08.522 --> 00:38:09.480 GARY GENSLER: No token. 00:38:09.480 --> 00:38:10.855 AUDIENCE: It's been restructured. 00:38:10.855 --> 00:38:11.510 Yeah. 00:38:11.510 --> 00:38:12.097 Yeah. 00:38:12.097 --> 00:38:13.430 GARY GENSLER: What's that Alean? 00:38:13.430 --> 00:38:17.065 AUDIENCE: I think they build on top of our research from Cecil. 00:38:17.065 --> 00:38:17.940 GARY GENSLER: Catina? 00:38:17.940 --> 00:38:18.560 AUDIENCE: Yes. 00:38:18.560 --> 00:38:19.060 Exactly. 00:38:19.060 --> 00:38:20.620 Yeah. 00:38:20.620 --> 00:38:23.340 Catina is a person. 00:38:23.340 --> 00:38:24.970 GARY GENSLER: So is that your research? 00:38:24.970 --> 00:38:25.260 AUDIENCE: That's right. 00:38:25.260 --> 00:38:25.690 Yeah. 00:38:25.690 --> 00:38:26.940 GARY GENSLER: That's terrific. 00:38:26.940 --> 00:38:31.470 But you're-- you're-- so you're going to talk to Eric. 00:38:31.470 --> 00:38:33.300 But you didn't have a token in that. 00:38:33.300 --> 00:38:34.300 AUDIENCE: No, you don't need a token. 00:38:34.300 --> 00:38:35.258 That's the whole point. 00:38:35.258 --> 00:38:36.570 Like Bitcoin is out there. 00:38:36.570 --> 00:38:37.650 It's a great system. 00:38:37.650 --> 00:38:40.600 And you can build on top of it efficiently, 00:38:40.600 --> 00:38:44.250 providing mutability to any permissioned app. 00:38:44.250 --> 00:38:46.743 So don't start it as a contract necessarily, 00:38:46.743 --> 00:38:48.910 unless, I don't know, maybe there's a need for that. 00:38:48.910 --> 00:38:50.368 But in a lot of things there's not, 00:38:50.368 --> 00:38:52.820 like digital identity, for example. 00:38:52.820 --> 00:38:54.620 That can be very conservative. 00:38:54.620 --> 00:38:56.370 GARY GENSLER: But if you put a token in it 00:38:56.370 --> 00:38:58.230 and sold it right into this bull market, 00:38:58.230 --> 00:39:01.130 I guess you wouldn't be sitting in this class. 00:39:01.130 --> 00:39:02.296 AUDIENCE: Well, yeah. 00:39:02.296 --> 00:39:05.420 [LAUGHTER] 00:39:05.420 --> 00:39:08.500 GARY GENSLER: But I mean, I'm glad you didn't put a token. 00:39:08.500 --> 00:39:09.722 I'm glad you're here. 00:39:09.722 --> 00:39:11.680 But I mean that's part of-- like you're saying, 00:39:11.680 --> 00:39:16.240 you didn't need it as a technological and commercial 00:39:16.240 --> 00:39:18.920 point is what you're saying. 00:39:18.920 --> 00:39:19.800 Leonardo. 00:39:19.800 --> 00:39:21.680 AUDIENCE: I was just going to mention, 00:39:21.680 --> 00:39:24.637 I happen to know a couple of people working on this project. 00:39:24.637 --> 00:39:25.970 GARY GENSLER: Which one of them? 00:39:25.970 --> 00:39:27.080 AUDIENCE: The last one. 00:39:27.080 --> 00:39:28.540 GARY GENSLER: Could you tell us something about it? 00:39:28.540 --> 00:39:31.550 AUDIENCE: Yeah, so I had to dig a little bit into the native 00:39:31.550 --> 00:39:33.080 talking that you mentioned. 00:39:33.080 --> 00:39:35.780 But most of the trading firms there 00:39:35.780 --> 00:39:42.440 are petroleum based, so like very large shippers of oil. 00:39:42.440 --> 00:39:46.160 Back to your point, bill of lading, in the commodity space, 00:39:46.160 --> 00:39:49.830 the petroleum bill of lading are the ones that most actively 00:39:49.830 --> 00:39:50.330 traded. 00:39:50.330 --> 00:39:53.987 And they change hands very often while the vessel is at sea. 00:39:53.987 --> 00:39:56.570 GARY GENSLER: Actually if I can add to this, because I learned 00:39:56.570 --> 00:40:00.290 a little bit about this when I was in the US Commodity Futures 00:40:00.290 --> 00:40:01.790 Trading Commission. 00:40:01.790 --> 00:40:06.260 The bill of lading for oil on the high seas 00:40:06.260 --> 00:40:09.260 can trade hands hundreds if not thousands of times. 00:40:09.260 --> 00:40:16.850 The oil coming from the Strait of Hormuz to Houston 00:40:16.850 --> 00:40:18.930 might change ownership in-- 00:40:18.930 --> 00:40:22.445 I don't know how long it takes a 15 or 30 day trip. 00:40:22.445 --> 00:40:23.603 AUDIENCE: About 20 days. 00:40:23.603 --> 00:40:24.770 GARY GENSLER: A 20 day trip. 00:40:24.770 --> 00:40:28.790 It can change the ownership hundreds of times. 00:40:28.790 --> 00:40:33.410 So those documents become tradable goods. 00:40:33.410 --> 00:40:34.800 And it's not just in theory. 00:40:34.800 --> 00:40:37.393 It's very much in practice. 00:40:37.393 --> 00:40:38.810 AUDIENCE: So the point I was going 00:40:38.810 --> 00:40:42.170 to make is I suspect they may be talking there must be 00:40:42.170 --> 00:40:46.680 some kind of collateralization against those, 00:40:46.680 --> 00:40:52.690 you know, the bill of lading from the company. 00:40:52.690 --> 00:40:55.290 GARY GENSLER: So Alpha, who I'm sure I remember everybody 00:40:55.290 --> 00:40:56.940 in your group, what can you tell us 00:40:56.940 --> 00:40:58.770 about what you're working on? 00:40:58.770 --> 00:41:01.250 How are you going to beat all these consortia? 00:41:01.250 --> 00:41:03.440 I'm thinking, you know, your final project is going 00:41:03.440 --> 00:41:04.847 to do better than these, right? 00:41:04.847 --> 00:41:05.680 AUDIENCE: Of course. 00:41:05.680 --> 00:41:09.120 [LAUGHTER] 00:41:09.120 --> 00:41:09.870 We're taking the-- 00:41:09.870 --> 00:41:12.210 GARY GENSLER: I did give these two groups the heads up that I 00:41:12.210 --> 00:41:13.377 was going to I call on them. 00:41:13.377 --> 00:41:15.342 So this is not just-- but yeah. 00:41:15.342 --> 00:41:16.800 AUDIENCE: We're taking the approach 00:41:16.800 --> 00:41:18.420 of just being very specific. 00:41:18.420 --> 00:41:20.440 So we're focusing on a narrow corridor 00:41:20.440 --> 00:41:24.360 between Chinese exports coming into Ethiopia. 00:41:24.360 --> 00:41:27.600 And so one there aren't many people, obviously, 00:41:27.600 --> 00:41:30.660 looking at that space, at least not yet. 00:41:30.660 --> 00:41:32.910 GARY GENSLER: And is it through the trade finance side 00:41:32.910 --> 00:41:35.140 or what I'll call the supply chain side? 00:41:35.140 --> 00:41:36.705 AUDIENCE: The trade finance side. 00:41:36.705 --> 00:41:38.580 And so we think it's particularly interesting 00:41:38.580 --> 00:41:40.330 around not just Ethiopia, but all 00:41:40.330 --> 00:41:42.540 of the sort of developing countries in that region, 00:41:42.540 --> 00:41:46.250 because credit and finance is already so limited. 00:41:46.250 --> 00:41:49.518 And so the domestic banking systems are undeveloped. 00:41:49.518 --> 00:41:51.060 GARY GENSLER: Domestic banking system 00:41:51.060 --> 00:41:52.133 in Ethiopia particularly? 00:41:52.133 --> 00:41:55.200 AUDIENCE: Right, and across East Africa, I would say. 00:41:55.200 --> 00:41:58.860 And so the reliance on trade finance in those import 00:41:58.860 --> 00:42:01.060 heavy economies, I think, is even higher. 00:42:01.060 --> 00:42:03.690 So the ping point, I think, is even stronger there. 00:42:03.690 --> 00:42:04.320 GARY GENSLER: James, did you have 00:42:04.320 --> 00:42:05.445 a question for their group? 00:42:05.445 --> 00:42:09.260 Anybody that has questions for the group, pile in. 00:42:09.260 --> 00:42:10.500 They'll take the advice. 00:42:10.500 --> 00:42:11.958 AUDIENCE: Not specific on this one, 00:42:11.958 --> 00:42:13.220 but more of a clarification. 00:42:13.220 --> 00:42:17.322 So I can clearly see that trade finance requires 00:42:17.322 --> 00:42:18.780 different parties and the ownership 00:42:18.780 --> 00:42:22.620 of the goods at any point in time in the supply chain 00:42:22.620 --> 00:42:24.870 is important, but-- 00:42:24.870 --> 00:42:27.240 GARY GENSLER: Particularly when it becomes commoditized, 00:42:27.240 --> 00:42:28.710 like oil and so forth. 00:42:28.710 --> 00:42:31.590 AUDIENCE: But from like over time-- 00:42:31.590 --> 00:42:33.390 a lot of the times I hear about people 00:42:33.390 --> 00:42:36.720 saying blockchain using, in this scenario, 00:42:36.720 --> 00:42:39.000 there's a supply chain. 00:42:39.000 --> 00:42:41.070 Given that they're not really exchanging it 00:42:41.070 --> 00:42:44.970 for money, are there actually any commercial cases or use 00:42:44.970 --> 00:42:48.170 cases with genuine useful points about supply chain 00:42:48.170 --> 00:42:49.170 being on the blockchain? 00:42:49.170 --> 00:42:51.600 I mean, tracing where my coffee bean came 00:42:51.600 --> 00:42:54.450 from on the blockchain is pretty useless to me. 00:42:54.450 --> 00:42:57.088 But people seem to think about it as a great thing. 00:42:57.088 --> 00:42:58.880 I can trace back where something came from. 00:42:58.880 --> 00:43:00.740 GARY GENSLER: Are you a coffee drinker? 00:43:00.740 --> 00:43:01.410 AUDIENCE: Yes. 00:43:01.410 --> 00:43:01.920 Yes. 00:43:01.920 --> 00:43:03.010 Not because of your class. 00:43:03.010 --> 00:43:03.180 GARY GENSLER: No. 00:43:03.180 --> 00:43:03.330 No. 00:43:03.330 --> 00:43:04.260 I just didn't know. 00:43:04.260 --> 00:43:08.587 You could drink tea to stay awake in my class too. 00:43:08.587 --> 00:43:10.170 AUDIENCE: But I just didn't understand 00:43:10.170 --> 00:43:12.020 when people keep talking about supply chain needing 00:43:12.020 --> 00:43:13.020 to be on the blockchain. 00:43:13.020 --> 00:43:15.410 I just don't understand why. 00:43:15.410 --> 00:43:17.250 Where's there is trade finance, absolutely. 00:43:17.250 --> 00:43:18.750 GARY GENSLER: All right, your solved 00:43:18.750 --> 00:43:21.240 is-- wait before everybody piles in. 00:43:21.240 --> 00:43:26.010 Does anybody have advice for China Ethiopia trade finance? 00:43:26.010 --> 00:43:27.510 I'm going to give everybody a chance 00:43:27.510 --> 00:43:29.130 to pile into James's question. 00:43:29.130 --> 00:43:32.995 But you're in a China Ethiopia trade finance. 00:43:32.995 --> 00:43:35.370 AUDIENCE: Yes, I have a question of the interoperability. 00:43:35.370 --> 00:43:39.990 I mean, what's the solution for the Ethiopian purchasers, just 00:43:39.990 --> 00:43:42.720 have to basically buy into whatever system 00:43:42.720 --> 00:43:45.200 these firms are using? 00:43:45.200 --> 00:43:49.610 So Ethiopian firms have to use letters of credit. 00:43:49.610 --> 00:43:51.180 So that's a regulation. 00:43:51.180 --> 00:43:53.910 So everything is done completely manualized right now. 00:43:53.910 --> 00:43:57.000 So we would offer just something very, very sort of specific 00:43:57.000 --> 00:44:01.690 like an eBill of lading or an eInvoice platform. 00:44:01.690 --> 00:44:03.556 It could be on a smartphone. 00:44:03.556 --> 00:44:05.190 My Impression is that it'd be easier 00:44:05.190 --> 00:44:08.090 to get the Ethiopian firms to buy into this, 00:44:08.090 --> 00:44:11.640 whereas the Chinese firms may have multiple options 00:44:11.640 --> 00:44:12.690 or multiple systems. 00:44:12.690 --> 00:44:17.280 So how would you approach getting them onto your system 00:44:17.280 --> 00:44:19.980 specifically or being able to utilize 00:44:19.980 --> 00:44:22.675 your system using websites or whatever else they are using? 00:44:22.675 --> 00:44:23.550 So yeah, so we agree. 00:44:23.550 --> 00:44:26.640 So you'd have to get just Ethiopian businesses and banks 00:44:26.640 --> 00:44:27.960 on the system. 00:44:27.960 --> 00:44:30.810 And so they would be sort of our initial customers. 00:44:30.810 --> 00:44:32.400 And for any Chinese bank that wants 00:44:32.400 --> 00:44:33.942 to do business to export to Ethiopia, 00:44:33.942 --> 00:44:35.850 they have to go through Ethiopian Bank. 00:44:35.850 --> 00:44:38.040 So inevitably, they'd have to go through this. 00:44:38.040 --> 00:44:38.850 GARY GENSLER: So it sounds like you're 00:44:38.850 --> 00:44:40.440 trying to build a solution. 00:44:40.440 --> 00:44:42.840 Your adoption is through the importer side, 00:44:42.840 --> 00:44:45.400 through the Ethiopian side initially. 00:44:45.400 --> 00:44:47.490 And then the Chinese exporters would say, 00:44:47.490 --> 00:44:50.040 well this is how I get into the Ethiopian market 00:44:50.040 --> 00:44:53.130 in a more secure, maybe more efficient, but certainly more 00:44:53.130 --> 00:44:54.090 secure way. 00:44:54.090 --> 00:44:57.940 Other thoughts on this project? 00:44:57.940 --> 00:45:01.170 AUDIENCE: I thought I saw there was a new consortium that 00:45:01.170 --> 00:45:05.280 was predominantly Chinese shippers and container 00:45:05.280 --> 00:45:06.215 companies. 00:45:06.215 --> 00:45:07.590 It wasn't on that particular one. 00:45:07.590 --> 00:45:08.450 GARY GENSLER: And it's not this. 00:45:08.450 --> 00:45:09.930 It's not the first one, The People's-- 00:45:09.930 --> 00:45:11.097 AUDIENCE: Not the first one. 00:45:11.097 --> 00:45:14.530 No, this one has a couple of Chinese shipping companies. 00:45:14.530 --> 00:45:15.750 It's very new. 00:45:15.750 --> 00:45:19.450 It's like November 8th or 9th or something that it was launched. 00:45:19.450 --> 00:45:21.030 So it's just getting started. 00:45:21.030 --> 00:45:22.320 They were looking for vendors. 00:45:22.320 --> 00:45:23.905 And yeah, it's a huge consortia there. 00:45:23.905 --> 00:45:24.780 GARY GENSLER: No, no. 00:45:24.780 --> 00:45:28.930 This is one of the most active and it's remained active, 00:45:28.930 --> 00:45:32.560 but mostly permissioned blockchain chain technology. 00:45:32.560 --> 00:45:36.210 It's the most active and very vibrant. 00:45:36.210 --> 00:45:39.060 And if you had to say probability weighted, 00:45:39.060 --> 00:45:41.340 there'll be something successful in this space more 00:45:41.340 --> 00:45:46.530 than maybe some of the other spaces. 00:45:46.530 --> 00:45:50.130 So who wants to chime into James' supply chain-- 00:45:50.130 --> 00:45:51.120 this unit? 00:45:51.120 --> 00:45:52.120 You're going to jump in. 00:45:52.120 --> 00:45:54.450 So I just want to tell-- here's just two 00:45:54.450 --> 00:45:55.980 example of some shipping. 00:45:55.980 --> 00:45:58.170 And I just pulled up five quick examples 00:45:58.170 --> 00:46:00.450 of supply chain projects. 00:46:00.450 --> 00:46:03.880 But Eric, you want to address James coffee? 00:46:03.880 --> 00:46:06.580 You like coffee more than James. 00:46:06.580 --> 00:46:08.580 AUDIENCE: I won't give you an example of coffee, 00:46:08.580 --> 00:46:10.300 but let's say fruits. 00:46:10.300 --> 00:46:13.200 You have a big retailer chain that-- 00:46:13.200 --> 00:46:16.470 and I think the example is in Britain. 00:46:16.470 --> 00:46:19.260 Suddenly you have reports of sudden infection 00:46:19.260 --> 00:46:21.350 of E coli in a specific fruit. 00:46:21.350 --> 00:46:27.570 OK, so as a responsible measure, the retailer have to hold off-- 00:46:27.570 --> 00:46:32.420 actually has to know which part or which load of fruit is 00:46:32.420 --> 00:46:34.110 the one affected. 00:46:34.110 --> 00:46:37.040 So since the whole process of, you know, 00:46:37.040 --> 00:46:40.680 digging through a huge file of paperwork takes weeks. 00:46:40.680 --> 00:46:44.190 These guys would have to hold off a big bunch of fruit 00:46:44.190 --> 00:46:46.620 that they would eventually get lost 00:46:46.620 --> 00:46:50.590 with the economic implications of that. 00:46:50.590 --> 00:46:51.190 That was a-- 00:46:51.190 --> 00:46:52.103 They probably-- 00:46:52.103 --> 00:46:53.270 GARY GENSLER: So wait, wait. 00:46:53.270 --> 00:46:53.830 So let's see. 00:46:53.830 --> 00:46:55.080 AUDIENCE: We're getting there. 00:46:55.080 --> 00:46:56.930 We're getting there. 00:46:56.930 --> 00:47:00.600 So having your supply chain connect 00:47:00.600 --> 00:47:05.210 to a blockchain, that can allow you quickly 00:47:05.210 --> 00:47:09.897 get the information within hours and immediately identify 00:47:09.897 --> 00:47:11.480 which is the load that's been affected 00:47:11.480 --> 00:47:15.460 and take it out with the decreased economic costs. 00:47:15.460 --> 00:47:17.790 GARY GENSLER: So you got at least three other hands. 00:47:17.790 --> 00:47:19.350 We'll go-- 00:47:19.350 --> 00:47:21.020 AUDIENCE: So I tend to agree with James. 00:47:21.020 --> 00:47:24.245 So what I've heard critiques of using 00:47:24.245 --> 00:47:25.620 both blockchain for supply chains 00:47:25.620 --> 00:47:29.220 for things like blood diamonds or preventing counterfeit goods 00:47:29.220 --> 00:47:30.060 or whatever. 00:47:30.060 --> 00:47:33.360 Diamonds we have DeBeers project. 00:47:33.360 --> 00:47:35.530 Yeah, so I know these guys are doing that. 00:47:35.530 --> 00:47:36.730 But the criticism. 00:47:36.730 --> 00:47:40.385 I've heard is that because these aren't digital native goods, 00:47:40.385 --> 00:47:42.510 there has to be an interface between the real world 00:47:42.510 --> 00:47:43.680 and the blockchain. 00:47:43.680 --> 00:47:45.120 GARY GENSLER: Physical good to the digital good. 00:47:45.120 --> 00:47:47.010 AUDIENCE: And what I've heard from critics 00:47:47.010 --> 00:47:50.010 is that it's at the point of origin 00:47:50.010 --> 00:47:52.937 that fraud or counterfeiting whatever takes place. 00:47:52.937 --> 00:47:55.062 And it's the point of origin, where that data needs 00:47:55.062 --> 00:47:56.550 to take place anyway. 00:47:56.550 --> 00:47:58.080 So it's garbage in garbage out. 00:47:58.080 --> 00:47:59.720 You can put a counterfeit thing in, 00:47:59.720 --> 00:48:02.100 but then that passes through the supply chain. 00:48:02.100 --> 00:48:05.683 GARY GENSLER: We have Shammon, Raheem, and then Tom. 00:48:05.683 --> 00:48:07.350 AUDIENCE: I'm going to pick James' side. 00:48:07.350 --> 00:48:09.017 GARY GENSLER: Oh my god, I need somebody 00:48:09.017 --> 00:48:10.860 on the other side of James. 00:48:10.860 --> 00:48:13.062 AUDIENCE: Maybe you can help me in a sense 00:48:13.062 --> 00:48:15.270 that like Walmart, right, is kind of a prime example. 00:48:15.270 --> 00:48:16.980 They've implemented, et cetera. 00:48:16.980 --> 00:48:19.920 But basically if Walmart just said like, so 00:48:19.920 --> 00:48:22.380 basically they're using IBM infrastructure, right. 00:48:22.380 --> 00:48:25.230 If they went to the supply chain said, look guys, 00:48:25.230 --> 00:48:27.510 we hired IBM, OK. 00:48:27.510 --> 00:48:28.860 Now you're going to send-- 00:48:28.860 --> 00:48:31.510 every time this good can transfer hands, 00:48:31.510 --> 00:48:33.510 you're going to to send that information to IBM. 00:48:33.510 --> 00:48:33.840 That's it. 00:48:33.840 --> 00:48:35.923 I mean basically that's what happened because it's 00:48:35.923 --> 00:48:37.920 being stored on a server that IBM-- 00:48:37.920 --> 00:48:41.247 like what is blockchain about? 00:48:41.247 --> 00:48:42.080 GARY GENSLER: Well-- 00:48:42.080 --> 00:48:45.390 AUDIENCE: Like I heard them how this is blockchain. 00:48:45.390 --> 00:48:49.170 But I really don't see what is blockchain about it. 00:48:49.170 --> 00:48:49.920 I mean basically-- 00:48:49.920 --> 00:48:51.795 GARY GENSLER: So who wants to take-- who want 00:48:51.795 --> 00:48:53.100 to take the other side for him? 00:48:53.100 --> 00:48:53.850 And I know, James. 00:48:53.850 --> 00:48:55.920 You're not taking the other side of James. 00:48:55.920 --> 00:48:57.900 AUDIENCE: I think is a bit controversial. 00:48:57.900 --> 00:49:00.820 But when I was in the UK a couple of years ago, 00:49:00.820 --> 00:49:02.280 there were some activists talking 00:49:02.280 --> 00:49:05.280 about the origin of weapons and some areas 00:49:05.280 --> 00:49:08.790 where weapons were being smuggled in some war zones. 00:49:08.790 --> 00:49:10.620 The point of origin in this case will 00:49:10.620 --> 00:49:15.990 be the developed world, which is going into the US, UK, China. 00:49:15.990 --> 00:49:20.850 If you can trace the origin of the weapons sent in war zones, 00:49:20.850 --> 00:49:25.980 you could know how did it end up there and you can stop maybe. 00:49:25.980 --> 00:49:26.760 I don't know. 00:49:26.760 --> 00:49:28.950 You need to trust the data entry in the first place. 00:49:28.950 --> 00:49:30.100 GARY GENSLER: You do have to have-- 00:49:30.100 --> 00:49:32.058 AUDIENCE: But the point of origin in this case, 00:49:32.058 --> 00:49:34.930 is not trusted. 00:49:34.930 --> 00:49:38.620 It would be trusted because it would be manufacturers. 00:49:38.620 --> 00:49:40.287 And most of the manufacturing would be-- 00:49:40.287 --> 00:49:42.828 GARY GENSLER: I'm going to hold off because I want to get Tom 00:49:42.828 --> 00:49:44.770 and then I'm going to give you a reply, James. 00:49:44.770 --> 00:49:45.270 Tom. 00:49:45.270 --> 00:49:47.640 AUDIENCE: Yes, so I am on the other side. 00:49:47.640 --> 00:49:48.717 I think it works. 00:49:48.717 --> 00:49:51.050 And it sort of goes back to Alean's original question of 00:49:51.050 --> 00:49:53.850 whether or not this is about addressing fraud or addressing 00:49:53.850 --> 00:49:55.540 the efficiency of the system. 00:49:55.540 --> 00:49:57.530 The data entry is the same. 00:49:57.530 --> 00:50:00.140 I mean, if the data entry from a paper system 00:50:00.140 --> 00:50:04.860 or a non-block digital system or a blockchain system is bad, 00:50:04.860 --> 00:50:07.080 then it's always going to be bad. 00:50:07.080 --> 00:50:10.430 But if it's good, it's as good as it is right now and probably 00:50:10.430 --> 00:50:12.560 as good as it's going to be short of like RFID 00:50:12.560 --> 00:50:15.150 chipping every individual product, 00:50:15.150 --> 00:50:17.900 then what it does is allow that same record to go 00:50:17.900 --> 00:50:19.760 through the entire supply chain. 00:50:19.760 --> 00:50:23.630 So what is deemed by whatever data input 00:50:23.630 --> 00:50:28.780 system to be a conflict free diamond is seen by DeBeers, 00:50:28.780 --> 00:50:33.860 the exporter, the producer, the porch, the ultimate importer 00:50:33.860 --> 00:50:34.370 of the good. 00:50:34.370 --> 00:50:39.470 And so you can save what are now verification costs in terms 00:50:39.470 --> 00:50:43.760 of time by processing a railway receipt, 00:50:43.760 --> 00:50:46.310 a trucking receipt, a shipping receipt, forwarding exchange 00:50:46.310 --> 00:50:50.480 receipt by making that same document viewable 00:50:50.480 --> 00:50:52.810 and immutable to all of the partners in the trade. 00:50:52.810 --> 00:50:55.610 GARY GENSLER: And to Shammon's question, 00:50:55.610 --> 00:50:58.430 I think you've framed the right question. 00:50:58.430 --> 00:51:01.550 Basically, well, why not just the traditional database? 00:51:01.550 --> 00:51:06.770 IBM is the software provider of Hyperledger Fabric. 00:51:06.770 --> 00:51:09.020 Why not just give the information to IBM? 00:51:09.020 --> 00:51:11.510 And in fact, maybe that's what Walmart is doing, 00:51:11.510 --> 00:51:12.218 is what you said. 00:51:12.218 --> 00:51:13.843 AUDIENCE: That's why I said what I did. 00:51:13.843 --> 00:51:15.800 GARY GENSLER: Now I haven't dug deeply enough. 00:51:15.800 --> 00:51:18.425 And often when you dig into these websites and the news 00:51:18.425 --> 00:51:20.300 articles and the white papers you can't quite 00:51:20.300 --> 00:51:23.150 tell how they're using IBM. 00:51:23.150 --> 00:51:26.360 IBM, I think, has 1,500 people in their division 00:51:26.360 --> 00:51:28.460 that does Hyperledger projects. 00:51:28.460 --> 00:51:29.900 So they they're out there. 00:51:29.900 --> 00:51:33.350 IBM is marketing this. 00:51:33.350 --> 00:51:35.540 But I think the theory at least, because I'm not 00:51:35.540 --> 00:51:39.290 going to be able to answer what Walmart's really doing. 00:51:39.290 --> 00:51:43.430 The theory is it's more censorship resistant, 00:51:43.430 --> 00:51:46.330 that the data is actually shared on multiple nodes 00:51:46.330 --> 00:51:48.080 even if it's permissioned, even if there's 00:51:48.080 --> 00:51:54.640 only 15 or 20 nodes or 30 nodes, that it's 00:51:54.640 --> 00:51:57.010 more censorship resistant than if it's all 00:51:57.010 --> 00:51:59.080 stored on an IBM server. 00:51:59.080 --> 00:52:02.260 And I don't know the answer, whether the Walmart is actually 00:52:02.260 --> 00:52:05.200 stored on 30 different nodes. 00:52:05.200 --> 00:52:09.430 But if it were, then arguably then, 00:52:09.430 --> 00:52:12.250 even though it's permissioned and private, 00:52:12.250 --> 00:52:17.560 it's more censorship resistant and you can have more assurance 00:52:17.560 --> 00:52:18.850 around this. 00:52:18.850 --> 00:52:19.840 One of the challenges-- 00:52:19.840 --> 00:52:23.740 Aviva left the room, on interoperability is this number 00:52:23.740 --> 00:52:25.330 two, TradeLens. 00:52:25.330 --> 00:52:31.390 TradeLens, the IBM and "Marks," "Merks," how 00:52:31.390 --> 00:52:32.990 do you pronounce that company? 00:52:32.990 --> 00:52:33.880 AUDIENCE: Maersk. 00:52:33.880 --> 00:52:34.300 GARY GENSLER: Maersk. 00:52:34.300 --> 00:52:35.200 It's one of the largest-- 00:52:35.200 --> 00:52:37.492 it's one of the two or three largest shipping companies 00:52:37.492 --> 00:52:38.930 in the entire world. 00:52:38.930 --> 00:52:41.570 They come up with a project. 00:52:41.570 --> 00:52:43.190 They announce it, tout it. 00:52:43.190 --> 00:52:45.350 It's over a year and a half ago. 00:52:45.350 --> 00:52:48.020 There's no adoption because the other shipping 00:52:48.020 --> 00:52:49.970 companies are saying, why do I want 00:52:49.970 --> 00:52:53.740 to adopt something with you? 00:52:53.740 --> 00:52:58.540 Now it would be one thing if some neutral standard setter, 00:52:58.540 --> 00:53:01.810 almost like in the internet the I Can or something. 00:53:01.810 --> 00:53:06.940 But some neutral standard setter came up with a consortium. 00:53:06.940 --> 00:53:09.070 But all the other shippers in the world 00:53:09.070 --> 00:53:14.420 say, I don't want to give up to Maersk my data, my information, 00:53:14.420 --> 00:53:17.540 and what might be also market power. 00:53:17.540 --> 00:53:21.260 So interoperability works there as well. 00:53:21.260 --> 00:53:24.350 All right, James wants to have a reply. 00:53:24.350 --> 00:53:26.365 But are you all right holding off? 00:53:26.365 --> 00:53:26.990 AUDIENCE: Sure. 00:53:26.990 --> 00:53:27.990 GARY GENSLER: All right. 00:53:27.990 --> 00:53:29.880 So we'll take two from my right. 00:53:29.880 --> 00:53:31.010 AUDIENCE: I think there's another issue which 00:53:31.010 --> 00:53:32.677 is more about the economics of it, which 00:53:32.677 --> 00:53:35.280 is, OK, let's say that Walmart adopts, 00:53:35.280 --> 00:53:38.615 like basically right now they can force a lot of the supply 00:53:38.615 --> 00:53:39.470 chain to adopt this. 00:53:39.470 --> 00:53:42.313 I think there's a real question about what they're 00:53:42.313 --> 00:53:43.730 going to do with that data, right, 00:53:43.730 --> 00:53:46.670 because essentially what it does it allows them access 00:53:46.670 --> 00:53:47.900 to the end producer. 00:53:47.900 --> 00:53:52.530 So the production of mangoes is very fragmented, right. 00:53:52.530 --> 00:53:53.780 But then you get consolidated. 00:53:53.780 --> 00:53:57.110 So there are multiple steps along the chain 00:53:57.110 --> 00:53:59.570 that actually extract economic value, not the growers. 00:53:59.570 --> 00:54:01.370 I mean, they're kind of screwed, right. 00:54:01.370 --> 00:54:05.960 But now Walmart can go directly to the growers, 00:54:05.960 --> 00:54:09.750 because now they have access to the data of who the grower is, 00:54:09.750 --> 00:54:12.560 what their productivity is, and how much they produce 00:54:12.560 --> 00:54:15.020 or what time of the year they produce, et cetera. 00:54:15.020 --> 00:54:17.630 Well, there's a question about whether they 00:54:17.630 --> 00:54:20.810 want to cooperate with that or how much information I 00:54:20.810 --> 00:54:22.790 want to share with that if I'm in the middle 00:54:22.790 --> 00:54:25.190 and I'm actually accepting economic rent right now. 00:54:25.190 --> 00:54:28.510 GARY GENSLER: Right, so if the whole supply chain is somehow-- 00:54:28.510 --> 00:54:30.538 AUDIENCE: It's not just the administration. 00:54:30.538 --> 00:54:32.330 GARY GENSLER: Yeah, that's right, the data. 00:54:32.330 --> 00:54:36.330 Just like Facebook collects data or Visa collects EMI 00:54:36.330 --> 00:54:39.940 data, that maybe Walmart would collect data. 00:54:39.940 --> 00:54:42.440 AUDIENCE: My question takes the Walmart example a little bit 00:54:42.440 --> 00:54:42.940 further. 00:54:42.940 --> 00:54:44.900 I'm curious to understand do you put 00:54:44.900 --> 00:54:47.040 a supplier early on in the process, 00:54:47.040 --> 00:54:49.610 say a farmer or something selling to Walmart, 00:54:49.610 --> 00:54:53.090 do they even have exposure in terms of the user experience 00:54:53.090 --> 00:54:56.210 that they are on blockchain or does this just 00:54:56.210 --> 00:54:57.740 become the back end. 00:54:57.740 --> 00:54:59.550 I guess, I understand what we've talked 00:54:59.550 --> 00:55:01.490 in terms of private keys for digital currency. 00:55:01.490 --> 00:55:03.530 I'm trying to connect how that ties to the user experience 00:55:03.530 --> 00:55:04.030 here. 00:55:04.030 --> 00:55:06.450 They have like scanners that they basically 00:55:06.450 --> 00:55:09.520 scan or it's their phones or whatever, right. 00:55:09.520 --> 00:55:12.890 So you have third parties using these linkages. 00:55:12.890 --> 00:55:18.523 They don't know basically where this data is going. 00:55:18.523 --> 00:55:19.690 GARY GENSLER: So I'm honest. 00:55:19.690 --> 00:55:22.410 I'm going to take Shammon's description of it. 00:55:22.410 --> 00:55:24.680 I'm not as close to the Walmart. 00:55:24.680 --> 00:55:27.800 I think in the trade finance side, the consortium 00:55:27.800 --> 00:55:34.820 that these and these, the importer, the exporter, 00:55:34.820 --> 00:55:40.100 the banks, the shippers, and the best of these 00:55:40.100 --> 00:55:44.060 are meant to have a lot of involvement and exposure, 00:55:44.060 --> 00:55:51.060 because even though this looks pretty complicated and it is, 00:55:51.060 --> 00:55:52.460 they're large institutions. 00:55:52.460 --> 00:55:53.090 They're banks. 00:55:53.090 --> 00:55:53.870 They're shippers. 00:55:53.870 --> 00:55:57.080 They're freight forwarders, except for maybe 00:55:57.080 --> 00:56:00.740 the small and medium sized enterprises in Ethiopia. 00:56:00.740 --> 00:56:04.860 But then they're an importer that needs to have involvement. 00:56:04.860 --> 00:56:07.850 I think on the supply chain side, the Walmart, 00:56:07.850 --> 00:56:10.520 an individual grower of mango, you're 00:56:10.520 --> 00:56:14.020 saying from your understanding Walmart's not looking for them. 00:56:14.020 --> 00:56:17.212 AUDIENCE: Again, this is because they're very proud of that. 00:56:17.212 --> 00:56:19.670 They're proud of the fact that they can actually influence. 00:56:19.670 --> 00:56:23.970 The reason why is because they have the last mile. 00:56:23.970 --> 00:56:25.987 It is very simple. 00:56:25.987 --> 00:56:28.070 GARY GENSLER: But they would have to have some way 00:56:28.070 --> 00:56:29.090 to do what Tom said. 00:56:29.090 --> 00:56:33.290 They have to be able to put into digital form 00:56:33.290 --> 00:56:35.825 the physical asset, the mangoes are from this pack farm. 00:56:35.825 --> 00:56:36.450 AUDIENCE: Yeah. 00:56:36.450 --> 00:56:38.140 But they can use a cell phone. 00:56:38.140 --> 00:56:40.740 You know, so you type in, OK, so you know like-- 00:56:40.740 --> 00:56:41.700 GARY GENSLER: A scan. 00:56:41.700 --> 00:56:42.325 AUDIENCE: Yeah. 00:56:42.325 --> 00:56:45.020 GARY GENSLER: A QR code or something. 00:56:45.020 --> 00:56:46.322 James, you want to reply? 00:56:46.322 --> 00:56:47.780 And then we'll go back to you here. 00:56:47.780 --> 00:56:48.530 AUDIENCE: Just quick points. 00:56:48.530 --> 00:56:49.160 I think-- 00:56:49.160 --> 00:56:50.880 GARY GENSLER: Are you convinced yet? 00:56:50.880 --> 00:56:52.742 AUDIENCE: No. 00:56:52.742 --> 00:56:54.200 I think ultimately there's no doubt 00:56:54.200 --> 00:56:55.900 that once the digital record's created, 00:56:55.900 --> 00:56:58.160 the digital immutability, whether it's 00:56:58.160 --> 00:57:04.310 a blockchain or a very secure standard traditional database, 00:57:04.310 --> 00:57:05.910 they are going to be the same. 00:57:05.910 --> 00:57:08.000 The digital records, it's fine. 00:57:08.000 --> 00:57:10.190 But in the fiscal world in the context 00:57:10.190 --> 00:57:14.120 of supply chain, whether it's from the origin 00:57:14.120 --> 00:57:17.420 or any other individuals along the chain, all it takes 00:57:17.420 --> 00:57:20.410 is one bad actor to do something to the physical good. 00:57:20.410 --> 00:57:23.510 But while traditional record is immutable, 00:57:23.510 --> 00:57:27.240 you're link between the physical and digital is not guaranteed. 00:57:27.240 --> 00:57:32.570 So I still don't see how a physical commodity can 00:57:32.570 --> 00:57:35.420 be guaranteed to go from one end to the other of the supply 00:57:35.420 --> 00:57:39.520 chain without ever being tampered or altered. 00:57:39.520 --> 00:57:43.628 That is still a big question for me. 00:57:43.628 --> 00:57:44.420 GARY GENSLER: Hugo. 00:57:44.420 --> 00:57:45.560 AUDIENCE: Yeah, I was going to say that. 00:57:45.560 --> 00:57:47.540 I don't know if that's the objective. 00:57:47.540 --> 00:57:51.045 Because if you take diamonds, right, and as long as you-- 00:57:51.045 --> 00:57:53.420 like what people care about when they're buying a diamond 00:57:53.420 --> 00:57:55.480 is just the margin, right. 00:57:55.480 --> 00:57:58.400 But my point is that it doesn't stop anyone along the supply 00:57:58.400 --> 00:57:59.120 chain to have-- 00:57:59.120 --> 00:58:02.840 It just makes it more expensive. 00:58:02.840 --> 00:58:03.667 But, but-- 00:58:03.667 --> 00:58:05.750 GARY GENSLER: Seriously, I think you're holding it 00:58:05.750 --> 00:58:07.790 up to too high of a standard. 00:58:07.790 --> 00:58:11.960 Because even the oil, let's go back, not diamonds, but oil. 00:58:11.960 --> 00:58:16.430 For quite some time you could have a bill of lading 00:58:16.430 --> 00:58:17.400 and then sell it. 00:58:17.400 --> 00:58:19.700 And as I mentioned earlier for the 20 days 00:58:19.700 --> 00:58:23.180 that things are coming from the Mideast to Houston, 00:58:23.180 --> 00:58:27.060 that might transact 20 times, 100 times 00:58:27.060 --> 00:58:29.710 today in 2018 markets. 00:58:29.710 --> 00:58:32.660 And nobody is actually looking to see whether the oil has 00:58:32.660 --> 00:58:36.680 been somehow siphoned off the ship and it's no longer there. 00:58:36.680 --> 00:58:40.970 So there are aspects of trust that would still 00:58:40.970 --> 00:58:47.170 be in the system with somebody certifying when the ship is-- 00:58:47.170 --> 00:58:49.700 I don't remember the word, but on board, 00:58:49.700 --> 00:58:53.060 when the oil is put on the ship and when it comes off. 00:58:53.060 --> 00:58:56.720 And there's validations at those moments 00:58:56.720 --> 00:59:00.060 that would then communicate to the digital records. 00:59:00.060 --> 00:59:01.310 AUDIENCE: But I guess that's-- 00:59:01.310 --> 00:59:03.110 GARY GENSLER: Then you could do that through inspections 00:59:03.110 --> 00:59:03.640 of diamonds. 00:59:03.640 --> 00:59:05.390 I don't think you're going to change that. 00:59:05.390 --> 00:59:07.640 I think that's still going to be important. 00:59:07.640 --> 00:59:10.490 But what you can do is Alean's earlier point, 00:59:10.490 --> 00:59:12.830 you can lower a lot of the cost. 00:59:12.830 --> 00:59:16.380 You can drive a lot of efficiency. 00:59:16.380 --> 00:59:20.215 And you can probably lower the fraud around the documents. 00:59:20.215 --> 00:59:20.840 AUDIENCE: Yeah. 00:59:20.840 --> 00:59:22.190 So I guess my point-- 00:59:22.190 --> 00:59:24.130 one of my-- I guess what I'm saying is-- 00:59:24.130 --> 00:59:24.950 GARY GENSLER: And then we're going to move on. 00:59:24.950 --> 00:59:27.158 AUDIENCE: If the trust isn't there in the first place 00:59:27.158 --> 00:59:30.050 or you have to rely on some other trust, what exactly 00:59:30.050 --> 00:59:31.970 is blockchain adding in terms of the physical, 00:59:31.970 --> 00:59:34.140 the digital records? 00:59:34.140 --> 00:59:36.140 That's what I'm finding difficult to understand. 00:59:36.140 --> 00:59:38.690 But I think I'll finish up with a quick point. 00:59:38.690 --> 00:59:41.030 I spoke to someone at the conference from ExxonMobil, 00:59:41.030 --> 00:59:43.030 since we're talking oil. 00:59:43.030 --> 00:59:45.530 And he does a supply chain and implementation of blockchain. 00:59:45.530 --> 00:59:49.650 And I challenged him, why not use a standardized database? 00:59:49.650 --> 00:59:52.370 And he said, well, it's because if you're going to get everyone 00:59:52.370 --> 00:59:55.760 along the chain to upgrade to a new system, 00:59:55.760 --> 00:59:58.178 it's far easier by telling them, oh, it's blockchain, 00:59:58.178 --> 01:00:00.720 rather than saying, well, I have this sophisticated database. 01:00:00.720 --> 01:00:02.512 GARY GENSLER: I'm going to hold that point. 01:00:02.512 --> 01:00:03.890 I'm agreeing with that point. 01:00:03.890 --> 01:00:05.545 But we had Dan and Jay. 01:00:05.545 --> 01:00:06.170 AUDIENCE: Yeah. 01:00:06.170 --> 01:00:07.700 I just want to say, I mean, I fell 01:00:07.700 --> 01:00:11.210 like this is way more feasible for a smaller 01:00:11.210 --> 01:00:16.180 kind of vertically integrated supply chains, 01:00:16.180 --> 01:00:17.750 where like for DeBeers where like 01:00:17.750 --> 01:00:19.950 they own every kind of step in the process. 01:00:19.950 --> 01:00:21.950 And therefore, you kind of-- 01:00:21.950 --> 01:00:26.210 can really trust and trace the flow of the product. 01:00:26.210 --> 01:00:30.440 But something for like groceries where you have, 01:00:30.440 --> 01:00:32.670 kind of, farmers all over the world 01:00:32.670 --> 01:00:35.580 and, you know, there's seasonality, right, changing. 01:00:35.580 --> 01:00:39.650 So there's just so many smaller shops that I can't ever 01:00:39.650 --> 01:00:42.950 see it being feasible for them to adopt kind of a high level 01:00:42.950 --> 01:00:45.590 technology. 01:00:45.590 --> 01:00:47.720 GARY GENSLER: You may well be right, 01:00:47.720 --> 01:00:51.800 though QR codes have been adopted in millions 01:00:51.800 --> 01:00:55.520 of retail establishments, when 20 years ago it was kind 01:00:55.520 --> 01:00:57.710 of like, what's this all about? 01:00:57.710 --> 01:00:59.030 In fact 30 years ago-- 01:01:01.853 --> 01:01:03.770 he's in the news because he just passed away-- 01:01:03.770 --> 01:01:07.510 but President George Herbert Walker Bush, 01:01:07.510 --> 01:01:09.050 some people say part of the reason 01:01:09.050 --> 01:01:12.080 he lost the election in 1992 was that he 01:01:12.080 --> 01:01:15.270 didn't know what a scanner was in a grocery store. 01:01:15.270 --> 01:01:17.090 And he was president of the United States. 01:01:17.090 --> 01:01:17.965 Can you imagine that? 01:01:17.965 --> 01:01:21.560 But he didn't because he grew up in an era 01:01:21.560 --> 01:01:23.990 and it was happening while he was in the White House. 01:01:23.990 --> 01:01:28.400 And now you couldn't imagine not knowing what a scanner is. 01:01:28.400 --> 01:01:30.590 So I agree with you. 01:01:30.590 --> 01:01:35.200 But what's happening in 20 years is sometimes hard to predict. 01:01:35.200 --> 01:01:37.670 AUDIENCE: Yes to build on that a little bit, I 01:01:37.670 --> 01:01:39.555 think if you are completely vertical, 01:01:39.555 --> 01:01:41.930 then you don't really need blockchain in the first place, 01:01:41.930 --> 01:01:43.998 because you have your own database. 01:01:43.998 --> 01:01:46.040 Your tracking everything as it goes through that. 01:01:46.040 --> 01:01:48.540 The reason you need block chain is for the traceability when 01:01:48.540 --> 01:01:50.090 you have 20 different parties. 01:01:50.090 --> 01:01:53.690 But also once you digitalized this whole thing, 01:01:53.690 --> 01:01:57.440 I mean, right now it's all paperwork, so you bring it-- 01:01:57.440 --> 01:01:58.940 digitalization is going to allow you 01:01:58.940 --> 01:02:00.920 to use other tools like IoT. 01:02:00.920 --> 01:02:02.120 So you can maybe use-- 01:02:02.120 --> 01:02:04.610 to take the diamond example, use computer vision 01:02:04.610 --> 01:02:07.100 to actually tell that you have the exact diamond that you 01:02:07.100 --> 01:02:09.920 started with at the end of the supply chain. 01:02:09.920 --> 01:02:12.560 Or with food, that you can test the texture of food and things 01:02:12.560 --> 01:02:13.280 like that. 01:02:13.280 --> 01:02:14.697 So it's all about quality as well. 01:02:14.697 --> 01:02:16.363 GARY GENSLER: By the way, you can hash-- 01:02:16.363 --> 01:02:18.980 you remember that stuff, that broccoli at the beginning? 01:02:18.980 --> 01:02:20.960 You can use cryptographic hashes also 01:02:20.960 --> 01:02:24.560 to take pictures, to take other data about the diamond, 01:02:24.560 --> 01:02:26.650 other data about the foods. 01:02:26.650 --> 01:02:29.540 AUDIENCE: I'm just going to add, especially with the diamonds, 01:02:29.540 --> 01:02:32.342 I got kind of razzed after reading the article because we 01:02:32.342 --> 01:02:33.050 all know DeBeers. 01:02:33.050 --> 01:02:36.420 They're like the best marketers out in the world. 01:02:36.420 --> 01:02:37.940 They convinced every woman that they 01:02:37.940 --> 01:02:39.230 need a diamond in their life. 01:02:39.230 --> 01:02:42.380 They invented the concept of like a diamond engagement ring. 01:02:42.380 --> 01:02:45.290 So I think like this is the perfect marketing ploy 01:02:45.290 --> 01:02:49.670 to say they needed to blockchain for diamonds, like the entire-- 01:02:49.670 --> 01:02:53.780 like DeBeers is the entire diamond industry 01:02:53.780 --> 01:02:56.420 and how they now receive diamonds is already 01:02:56.420 --> 01:02:58.280 completely regulated. 01:02:58.280 --> 01:02:59.780 But with regard of about in house 01:02:59.780 --> 01:03:03.440 and controlled by them because of the backlash 01:03:03.440 --> 01:03:05.150 against like conflict-- 01:03:05.150 --> 01:03:09.830 diamonds from conflict-- or conflict originated diamonds. 01:03:09.830 --> 01:03:13.250 So for me, it just seems like a big marketing scheme 01:03:13.250 --> 01:03:17.220 that they already feel like they have this under control. 01:03:17.220 --> 01:03:20.840 But in order to like buy more consumer confidence, 01:03:20.840 --> 01:03:23.590 they're using it. 01:03:23.590 --> 01:03:27.170 GARY GENSLER: I think you land upon a point about marketing. 01:03:27.170 --> 01:03:29.840 And James has said it earlier, and a little bit of others 01:03:29.840 --> 01:03:31.520 in short. 01:03:31.520 --> 01:03:33.470 Oil executives, says, well, it's the only way 01:03:33.470 --> 01:03:38.110 I'm going to get broad adoption is if I call this blockchain. 01:03:38.110 --> 01:03:40.770 And that might be true even of the Australian stock exchange, 01:03:40.770 --> 01:03:45.210 even though I think there's a real use case there. 01:03:45.210 --> 01:03:47.080 But it's about adoption. 01:03:47.080 --> 01:03:49.270 Now DeBeers might be doing it because they 01:03:49.270 --> 01:03:50.710 want to sell more diamonds. 01:03:50.710 --> 01:03:52.390 The oil executive might be doing it 01:03:52.390 --> 01:03:54.760 because he just wants to get rid of a legacy system. 01:03:54.760 --> 01:03:56.500 Or the Australian stock exchange might 01:03:56.500 --> 01:04:00.850 say, this is the only way I can get investment in getting rid 01:04:00.850 --> 01:04:03.040 of a legacy system, because I can 01:04:03.040 --> 01:04:05.680 either scare my board of directors 01:04:05.680 --> 01:04:07.810 and say we have to do blockchain or I 01:04:07.810 --> 01:04:10.060 can inspire my board of directors 01:04:10.060 --> 01:04:12.370 by saying I have to use blockchain. 01:04:12.370 --> 01:04:14.560 But nonetheless, blockchain technology 01:04:14.560 --> 01:04:16.580 will have some adoption. 01:04:16.580 --> 01:04:18.900 And I think it will have more adoption, 01:04:18.900 --> 01:04:20.860 so it's more ripe for adoption. 01:04:20.860 --> 01:04:22.840 And I'm going to turn to this again. 01:04:22.840 --> 01:04:24.430 You know where I'm going. 01:04:24.430 --> 01:04:27.710 It's like, yep, yep, you know, cost and benefits. 01:04:27.710 --> 01:04:30.340 These are-- I'm doing this as a favor for all of you 01:04:30.340 --> 01:04:32.920 too because, you're all writing your final projects. 01:04:32.920 --> 01:04:35.310 But it's really about-- 01:04:35.310 --> 01:04:38.500 it's going to be where there's multiple parties involved 01:04:38.500 --> 01:04:42.070 in data and that data represents some property 01:04:42.070 --> 01:04:45.560 right, either money. 01:04:45.560 --> 01:04:47.740 In a dematerialized way, it's easier 01:04:47.740 --> 01:04:51.520 to envision that's money versus security, money 01:04:51.520 --> 01:04:54.190 versus something dematerialized. 01:04:54.190 --> 01:04:57.070 It's a little harder as we've done today on the supply chain, 01:04:57.070 --> 01:05:00.440 when it's against a physical asset. 01:05:00.440 --> 01:05:04.120 But if there's multiple parties and where verification matters, 01:05:04.120 --> 01:05:06.850 verification costs, you can probably 01:05:06.850 --> 01:05:10.720 drive some efficiency with a blockchain technology solution. 01:05:10.720 --> 01:05:12.310 Good question Shammon raises. 01:05:12.310 --> 01:05:13.685 Well, wait a minute, maybe you're 01:05:13.685 --> 01:05:16.390 just shipping the data to IBM. 01:05:16.390 --> 01:05:18.130 Are you really shipping it to just-- 01:05:18.130 --> 01:05:20.920 that's called a traditional database, a distributed 01:05:20.920 --> 01:05:21.430 database. 01:05:21.430 --> 01:05:25.270 Or do you get something out of censorship resistance? 01:05:25.270 --> 01:05:30.370 And if it's truly shared in 20, 30, 50, or 100 places, 01:05:30.370 --> 01:05:32.980 do you lower, as the Australian stock exchange really 01:05:32.980 --> 01:05:36.370 does believe they'll do, lower reconciliation costs, which 01:05:36.370 --> 01:05:39.002 is, again, a way to drive efficiency. 01:05:39.002 --> 01:05:40.585 But I can't remember the number, there 01:05:40.585 --> 01:05:47.410 are 77 member companies can all have a shared ledger 01:05:47.410 --> 01:05:50.530 and then lower the cost of reconciliation. 01:05:50.530 --> 01:05:52.210 It's still what somewhat controlled. 01:05:52.210 --> 01:05:55.405 Those 77, it's not a public blockchain like Bitcoin. 01:05:58.080 --> 01:06:02.160 So whether it's the two groups that are here today 01:06:02.160 --> 01:06:03.420 that are doing trade finance. 01:06:03.420 --> 01:06:05.878 And you have a harder challenge, by the way, because you've 01:06:05.878 --> 01:06:09.910 got to go beyond this lecture. 01:06:09.910 --> 01:06:12.670 Alpha's is going, yeah, sure. 01:06:12.670 --> 01:06:16.860 But if you're doing commercial or consumer finance 01:06:16.860 --> 01:06:19.130 or real estate or whatever, and there 01:06:19.130 --> 01:06:21.500 are some really interesting projects amongst you, 01:06:21.500 --> 01:06:24.060 just thinking about where is that value add? 01:06:24.060 --> 01:06:28.110 What verification and networking costs are going to be lowered? 01:06:28.110 --> 01:06:30.060 What's the competition doing? 01:06:30.060 --> 01:06:33.180 Figure out if there's any consortium doing whatever 01:06:33.180 --> 01:06:35.470 you're proposing to do. 01:06:35.470 --> 01:06:38.220 Or is there any of the 3,000 to 5,000 white papers, 01:06:38.220 --> 01:06:41.380 was there any ICO token? 01:06:41.380 --> 01:06:43.750 And then if you want to do a slap down and say 01:06:43.750 --> 01:06:46.900 why what they're doing is foolish and doesn't work 01:06:46.900 --> 01:06:48.280 and you're doing something better 01:06:48.280 --> 01:06:51.370 or you just want to learn, just please don't plagiarize. 01:06:51.370 --> 01:06:56.470 But just look at what the competition's doing as well. 01:06:56.470 --> 01:07:01.300 And why is an append only log, you know, the right way to go? 01:07:01.300 --> 01:07:02.120 Alean. 01:07:02.120 --> 01:07:05.700 AUDIENCE: What about competitors who are incumbents? 01:07:05.700 --> 01:07:06.940 GARY GENSLER: Absolutely. 01:07:06.940 --> 01:07:09.910 So you're still doing the mortgage product, right? 01:07:09.910 --> 01:07:11.950 I don't know if you changed. 01:07:11.950 --> 01:07:14.260 Yeah, what's happening in the mortgage market? 01:07:14.260 --> 01:07:15.970 How is it being-- 01:07:15.970 --> 01:07:20.170 whether it's securitized or underwritten 01:07:20.170 --> 01:07:24.110 and whether it's traditional database management. 01:07:24.110 --> 01:07:26.200 But it's also an interesting to know 01:07:26.200 --> 01:07:29.080 if anyone else is trying to look at either permissioned or 01:07:29.080 --> 01:07:34.460 permissionless systems and where you fit in to that, 01:07:34.460 --> 01:07:36.200 because you're actually trying to raise 01:07:36.200 --> 01:07:37.520 money on this, if I remember. 01:07:37.520 --> 01:07:38.310 AUDIENCE: Yeah. 01:07:38.310 --> 01:07:39.620 GARY GENSLER: Yeah, so to the extent that you're 01:07:39.620 --> 01:07:41.590 going to raise money, those venture capitalists 01:07:41.590 --> 01:07:44.690 are going to be asking tougher questions than I'll ever 01:07:44.690 --> 01:07:48.310 be asking, at least I hope. 01:07:48.310 --> 01:07:49.750 AUDIENCE: I honestly don't. 01:07:49.750 --> 01:07:50.580 GARY GENSLER: Yeah. 01:07:50.580 --> 01:07:51.080 Yeah. 01:07:51.080 --> 01:07:51.735 I got it. 01:07:51.735 --> 01:07:52.610 You want cheap money. 01:07:52.610 --> 01:07:54.260 You want me to be the toughie. 01:07:54.260 --> 01:07:54.760 Yeah. 01:07:54.760 --> 01:07:56.540 All right. 01:07:56.540 --> 01:07:59.480 And what are the trade-offs? 01:07:59.480 --> 01:08:01.200 I'm not asking any of you to have solved 01:08:01.200 --> 01:08:02.723 scalability and performance. 01:08:02.723 --> 01:08:04.640 Some of the scalability and performance issues 01:08:04.640 --> 01:08:06.930 won't be solved for 5 to 10 years. 01:08:06.930 --> 01:08:08.200 But at least note them. 01:08:08.200 --> 01:08:10.250 At least say, hey, this won't work 01:08:10.250 --> 01:08:14.120 until this is solved or something like that. 01:08:14.120 --> 01:08:17.930 Thursday we're going to do identity. 01:08:17.930 --> 01:08:20.776 I can't remember, is anybody doing projects on identity? 01:08:25.350 --> 01:08:26.359 You're together, right? 01:08:26.359 --> 01:08:26.859 Yeah. 01:08:26.859 --> 01:08:27.819 All right. 01:08:27.819 --> 01:08:32.470 Be ready to chat on Thursday and share where you are. 01:08:32.470 --> 01:08:36.500 Kelly's looking like you're going to be sick on Thursday. 01:08:36.500 --> 01:08:38.319 You'll be here. 01:08:38.319 --> 01:08:41.050 And how many of you are going to get your MIT 01:08:41.050 --> 01:08:43.399 diploma on a blockchain? 01:08:43.399 --> 01:08:44.660 AUDIENCE: You have option? 01:08:44.660 --> 01:08:46.600 GARY GENSLER: Yes. 01:08:46.600 --> 01:08:49.106 AUDIENCE: Do we get an option of not getting one? 01:08:49.106 --> 01:08:49.843 I don't think so. 01:08:49.843 --> 01:08:51.885 GARY GENSLER: Oh, you mean you think you have to. 01:08:51.885 --> 01:08:53.385 AUDIENCE: I think it's done for you. 01:08:53.385 --> 01:08:54.890 GARY GENSLER: Oh, it's done for you. 01:08:54.890 --> 01:08:56.729 All right, there you go. 01:08:56.729 --> 01:08:57.520 What's that? 01:08:57.520 --> 01:09:00.689 You excited by that? 01:09:00.689 --> 01:09:04.569 Do you think you can finance off of it though? 01:09:04.569 --> 01:09:08.260 So trade finance, $17 trillion. 01:09:08.260 --> 01:09:12.729 It's a very significant role that in financing 01:09:12.729 --> 01:09:19.490 this $17 trillion of trade, lots of people involved, 01:09:19.490 --> 01:09:22.189 sort of ripe for blockchain technology, 01:09:22.189 --> 01:09:26.810 a lot of consortiums and projects underway. 01:09:26.810 --> 01:09:29.330 But they're almost all permissioned systems 01:09:29.330 --> 01:09:33.140 with a couple of exceptions. 01:09:33.140 --> 01:09:35.420 But it feels like it's a catalyst for change. 01:09:35.420 --> 01:09:37.700 I think that even if it's just simply 01:09:37.700 --> 01:09:41.229 because it's the way to get adoption. 01:09:41.229 --> 01:09:43.870 And I'm talking about trade finance. 01:09:43.870 --> 01:09:47.920 And then there's this related part of the supply chain 01:09:47.920 --> 01:09:50.080 management and so forth. 01:09:50.080 --> 01:09:52.120 Any other questions or are we breaking early? 01:09:52.120 --> 01:09:53.130 AUDIENCE: Early. 01:09:53.130 --> 01:09:57.040 GARY GENSLER: Do you want anything? 01:09:57.040 --> 01:09:58.270 All right, we'll break early. 01:09:58.270 --> 01:09:58.870 Great. 01:09:58.870 --> 01:10:01.320 [APPLAUSE]