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  • GARY GENSLER: All right, we're going

  • to turn today to a fun topic of how

  • central banks, right at the heart of the financial system,

  • are thinking about blockchain.

  • And we're going to do this over two classes.

  • We're fortunate that we have some real expertise

  • in the room, and I'm not talking about myself.

  • But Rob Ali, who ran the digital efforts at the Bank of England,

  • and is now--

  • and has been for some time-- part of the digital currency

  • initiative over at the Media Lab,

  • is going to come up from time to time and give his perspective.

  • Not only from MIT's Media Lab's perspective,

  • but also from the history of what he's done.

  • He's authored a number of papers in this area.

  • He works with technologists creating

  • a number of technologies.

  • But I'll let Rob tell you a little bit about what

  • he's doing in central banking.

  • Simon Johnson's also joined us, who

  • is a former chief economist of the International Monetary

  • Fund.

  • He's told me he doesn't want to be called on,

  • but I will call on Simon to give his perspective at some point

  • in time, from the IMF days.

  • But as you all know, Simon is Sloan faculty,

  • a great teacher, himself, teaches a lot of you

  • in the global markets course and the GLAB course,

  • and things like that.

  • And Simon and I in the spring teach a public policy

  • and private sector course, which is just one

  • more time for me to plug that that's a good course, too.

  • So now, let's just talk a little bit about central banking

  • and blockchain.

  • First, what are we going to do?

  • A little bit about our readings and the study questions.

  • We're going to start with Fiat currency,

  • and go back again to Fiat currency,

  • and how does it fit into central banking.

  • So the first 20% or 30% of today is really

  • just about what is a central bank,

  • and how does it fit into money?

  • Then, how are central banks thinking

  • about blockchain technology?

  • What are their approaches?

  • And we're going to talk about four different approaches

  • that central banks are taking to blockchain technology.

  • Then dive into one of those four approaches-- payment systems,

  • and how are they looking at payment systems right now.

  • Dive into probably the most interesting one-- central bank

  • digital currency, and what's called the money flower.

  • You might remember that money flower

  • that was in the BIS report, and so forth.

  • And then just wrap it up.

  • So that's a little bit of what we're trying to do.

  • The study questions were really about central banking--

  • what are they thinking about?

  • How are they thinking about digital reserves, and so forth?

  • Because I have a guest with me, I'm

  • not going to do as much cold calling,

  • because we're going to leave time for Rob

  • to get up here and give some of his thoughts as we go through.

  • But the key questions were really

  • how are central banks thinking about central bank

  • digital currency?

  • How might they think of the design considerations--

  • which we're going to dive into in the latter part

  • of the class.

  • Designing retail versus wholesale.

  • Access-- should it be a token or account-based?

  • Interest bearing or not?

  • And we'll talk a lot Thursday about why Sweden right now is

  • come out with their most recent paper, which was not

  • in assigned reading, because the paper came out

  • about a week ago.

  • But they're saying they're thinking they should make it

  • interest bearing, which I wouldn't have necessarily

  • predicted.

  • But that's where their thinking is as of October of 2018.

  • And then, what are the challenges?

  • That it might relate back to the commercial banking business,

  • the credit markets, the economy as a whole.

  • So that's a little bit of the background.

  • And these were the readings.

  • I apologize, because this week is probably

  • a little heavy reading, which meant you all skimmed

  • rather than actually dove in.

  • One of these readings, Broadbent--

  • Rob did you help write this speech that Broadbent wrote?

  • ROBLEH ALI: No, I confess, this is all Ben's work.

  • And I reviewed a draft that he sent round

  • and made some comments on it, but I

  • can't claim any [INAUDIBLE].

  • GARY GENSLER: Anybody working in the central bank

  • digital currency space really goes back

  • to Broadbent's speech--

  • I assumed that Rob may have written it or reviewed it.

  • And Garratt, who gave testimony in front of the US Congress

  • on these issues, is often quoted by the Bank of International

  • Settlement and others.

  • So if there were two that you really want to think about--

  • the economics of money and central bank digital currency,

  • Garratt and Broadbent are picked up a lot.

  • The Economist piece was kind of lively,

  • and walked us all the way back to Adam Smith.

  • Did anybody read The Economist piece and remember what he--

  • anybody remember the Adam-- so James?

  • AUDIENCE: He basically argued everything

  • that's done right and wrong with Fiat currencies, exactly

  • what's happening with Bitcoin.

  • GARY GENSLER: It's exactly what's happening with Bitcoin.

  • In The Economist piece, it talks about in the 1770s, when

  • they started to move a bit away from gold money to paper money,

  • and they set up a clearing house in 1773

  • to deal with the paper that was going amongst and between all

  • the banks.

  • That Adam Smith apparently wrote that it

  • was wagon wheels in the air, and that gold

  • was the highway of money--

  • but paper money and central clearing of that paper money

  • was the wagon wheels in the air.

  • So The Economist was basically saying,

  • these debates are as old as time.

  • Adam Smith was saying, you can promote an economy

  • with wagon wheels in the air--

  • money.

  • But maybe that's what's going on now, as well.

  • So I've already introduced Rob--

  • research scientist from the Digital Currency Initiative,

  • and before MIT.

  • He helped Broadbent-- he won't say he did,

  • but he helped Broadbent do everything

  • he did at the Bank of England.

  • And then Simon, who's taking notes feverishly--

  • did I get your--

  • did I get this right?

  • Yeah, good picture?

  • SIMON JOHNSON: Not sure about the picture.

  • GARY GENSLER: What's that?

  • Not sure about the picture?

  • So Fiat currency is anybody going to remind me

  • what Fiat currency is?

  • Brodish?

  • You were slouching in the chair a little bit there.

  • AUDIENCE: So Fiat currency is the currency particularly

  • issued by the central bank of the government

  • of the countries-- which is [INAUDIBLE] something

  • that is normally the norm in the ecosystem

  • to use as a [INAUDIBLE].

  • GARY GENSLER: So it's issued by a central bank,

  • it's the norm in the system.

  • And what are two very important economic features

  • of Fiat currency, that make it so widely accepted

  • in any economy that we've talked about?

  • AUDIENCE: One of the reasons is it's

  • typically used as the means to pay taxes for that [INAUDIBLE]..

  • GARY GENSLER: Right, so taxes.

  • And what was the other big one that almost every country

  • you can use it for?

  • Pria, were you looking at me?

  • No?

  • Shawn?

  • What?

  • Yeah, you can use it for debt payments.

  • So societies come together and say,

  • you can use it for all debts, public and private.

  • You can use it for taxes.

  • It sort of gives it an enormous network effect and an advantage

  • in any economy.

  • And then what happens is, so many of us in a society

  • then use it as a unit of account,

  • and there's an enormous amount of network effect.

  • Just the raw economics of money is

  • that others will use it, and exchange it,

  • and thus it becomes the medium of exchange, unit account

  • and store of value.

  • So it's represented by central bank notes.

  • And commercial bank deposits relies on a system of ledgers,

  • which makes it somewhat adaptable,

  • and why blockchain is interesting in this space.

  • And taxes and debts.

  • So then, I've pieced together a little bit of a slide

  • to think about, where do central banks fit into this?

  • Ultimately, you'll see where I'm going with this.

  • But commercial banks and central banks both have money.

  • Central bank money are reserves and cash.

  • So it's not simply the cash in our pocket, it's also reserves.

  • And bank deposits actually are a form of money.

  • So a little diagram--

  • if the central bank is at the top--

  • and these are number banks, commercial banks--

  • reserves are the deposits that commercial banks

  • have with the central bank.

  • When central banking started 200 and 300 years ago,

  • it was the commercial banks wanted something

  • from the government.

  • They wanted some backing, they wanted a lender of last resort,

  • and they would have to open up accounts at the central bank.

  • But today, when we have unified ledgers,

  • then the central bank issues reserves to the banking system,

  • and those reserves are a form of money.

  • The next thing is, there's the public down at the bottom--

  • Bob, Alice, and Charlie.

  • We all have money, and it's called bank deposits.

  • But there's one other piece of this puzzle, if I can get it,

  • it's cash.

  • So three forms of money--

  • we can all have cash in our pocket,

  • as I commonly pull out, this here, right.

  • I'm going to watch you, Hugo, I'm going to watch you.

  • No, no, but what is that right there?

  • AUDIENCE: Federal Reserve note?

  • GARY GENSLER: Right.

  • That Federal Reserve note is a representation

  • that at the central bank they're storing some value for me.

  • It's got a serial number.

  • That piece of paper itself is not the store of value,

  • in a sense, even though we accept it.

  • Would you say that's a store of value?

  • AUDIENCE: In some ways.

  • GARY GENSLER: In what way is that a store of value?

  • AUDIENCE: I know that it's worth $20.

  • GARY GENSLER: And why is it worth $20?

  • AUDIENCE: Because the central bank says so.

  • GARY GENSLER: And see what happens if you hand it to Rob.

  • He'll take it, right?

  • That's how you know it's worth something.

  • But it's a tokenized means of money.

  • It's a physical token, and the central bank

  • has something stored there.

  • But you also have bank deposits.

  • And if you go into Starbucks, and you buy something

  • at Starbucks--

  • James, if you buy something at Starbucks,

  • what are you giving them?

  • AUDIENCE: A piece of paper-- well, a piece of linen.

  • GARY GENSLER: No, but do you actually-- who here--

  • AUDIENCE: A credit card.

  • GARY GENSLER: All right, so when you

  • give a credit card, what are you giving to Starbucks,

  • ultimately?

  • AUDIENCE: A notion that I have some money in my bank account

  • that they can take in exchange for coffee.

  • GARY GENSLER: In exchange for coffee, you're going to--

  • I hope you give them more than a notion.

  • What will the payment system do?

  • Ross?

  • AUDIENCE: A receivable from the credit card company.

  • They just have a right to get paid from the credit card

  • company