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  • GARY GENSLER: So payments part two

  • we're going to chat a little bit about the overview today.

  • Readings, of course as we always do.

  • And then what was yesterday?

  • Does anybody want to tell me what yesterday was?

  • Kelly?

  • AUDIENCE: The 10th anniversary.

  • GARY GENSLER: 10th anniversary of bitcoin.

  • What else was yesterday?

  • It was Halloween.

  • No, it is not my birthday again.

  • Stop that, Tom.

  • So we're going to chat a little bit,

  • we're going to have some fun about happy anniversary

  • or birthday.

  • Would you call it a birthday or anniversary?

  • Anniversary?

  • OK.

  • Birthday, all right.

  • There's no established vocabulary really

  • in this field.

  • So--

  • AUDIENCE: Birthday comes in January.

  • GARY GENSLER: What's that?

  • AUDIENCE: Birthday comes in January.

  • GARY GENSLER: The birthday--

  • Hugo, why's the birthday come in January?

  • AUDIENCE: Birthday marks [INAUDIBLE]..

  • So the music is [INAUDIBLE].

  • GARY GENSLER: Riham?

  • AUDIENCE: Birth means death at a point in time in my mind,

  • so anniversary [INAUDIBLE] is better.

  • GARY GENSLER: You got--

  • did you get that?

  • Birth also connotes death.

  • Did I have that?

  • And so Rahim was saying she would go with anniversary.

  • But we have birth over here.

  • We're going to chat a little bit about that and try--

  • the existential.

  • Then we're going to talk about payment systems and the sort

  • of some of the pain points.

  • And we'll have a lively discussion.

  • What do you think the pain points

  • are in the payment system?

  • I, of course, will have listed some,

  • but your input's the most important.

  • How does blockchain fit into this payment system,

  • and why so far haven't there been any really economy-wide

  • or system-wide adoptions yet?

  • So one might even say what are the pain points of blockchain

  • technology that there has not yet

  • been some of those adoptions?

  • We're going to chat a little bit about some blockchain payment

  • companies, and there are not many.

  • I mean, there are many white papers

  • but there are not many that have actually taken off.

  • And then wrap it up.

  • So the study questions which we're

  • going to sort of dig into rather than right now

  • but just what lessons can be taken.

  • So for my layer two help us.

  • We're going to come back to these when we sort of dig

  • into the paint points.

  • What are the opportunities in cross-border and so forth,

  • and the trade offs of using permissioned

  • versus permissionless systems.

  • So happy anniversary, happy birthday

  • for some, 10 years ago.

  • It's remarkable.

  • Actually, some people say it was November 1st because I think

  • when it actually got on the website it was November

  • 1st in parts of the world.

  • So what do we know about the 10th anniversary?

  • Just some fun statistics.

  • This has all happened in 10 years.

  • So the price is around $6,300 to Bitcoin out

  • of nothing, Satoshi Nakamoto.

  • And it's $110 billion in size.

  • We might not all know each other in 10 years,

  • but write down for yourself on a piece of paper--

  • this is a real exercise I'm asking you to do for yourself.

  • Write down for yourself and put this piece of paper

  • somewhere or put it on your laptop.

  • You can put it down, where do you think the price of Bitcoin

  • will be 10 years from today on the 20th anniversary?

  • And remember this course in 10 years,

  • and look back, and laugh at yourself.

  • Just we won't all know each other.

  • Maybe there'll be a group chat, but--

  • what's that Alit?

  • You don't want to guess where it is-- you

  • don't need to share it with me.

  • No, no, but write down and think about it.

  • Where do you think this will be in 10 years?

  • Is this a hard question?

  • [INAUDIBLE]

  • Alpha, do you want to share your number with the class?

  • AUDIENCE: We're even just debating directionally,

  • it's really going to be higher or lower.

  • GARY GENSLER: Well, how many people

  • think it'll be lower in 10 years?

  • OK, I'd say it's about 30%, 35%.

  • How many higher?

  • Yeah, that's 60%, 65%.

  • Alin, you-- you did two Alin split, right?

  • AUDIENCE: Think it's going to be 0.

  • GARY GENSLER: I think that would be lower.

  • [LAUGHTER]

  • AUDIENCE: It is, because in 10 years

  • the system might change so dramatically

  • it might be unfair to even call it bitcoin.

  • GARY GENSLER: Fair enough.

  • It might have evolved into something else.

  • Back here please.

  • AUDIENCE: I just want to comment.

  • Isn't the real question market cap,

  • because that's what people are actually using the currency

  • for?

  • Because the question of what's the price going to be

  • presupposes a set number of shares of coins or tokens.

  • So the way that people are mining coins in the future also

  • depends on the price.

  • GARY GENSLER: So I think you raise a really good question.

  • If you're writing something down you

  • could write down the market cap rather than the price.

  • You could say--

  • I mean, in the Leeds case you would still say 0 for both,

  • but you might say that-- of course.

  • Because it depends on how many coins

  • there are, how many shares there are.

  • Does anybody want to take the other side from this--

  • the other Alin?

  • AUDIENCE: I think it'll have zeros--

  • it'll have zeros in the price.

  • GARY GENSLER: It will have zeros in the price.

  • Hugo?

  • AUDIENCE: Well, I just want to respond to the other comment.

  • Do you know exactly how many bitcoin there will

  • be in about 10 years from now?

  • GARY GENSLER: Do we actually know how many bitcoin there

  • will be in 10 years?

  • AUDIENCE: Yes.

  • GARY GENSLER: Hugo says you do because it's

  • written in the code.

  • Remind me your first name?

  • Isaac.

  • AUDIENCE: So I think one is mining.

  • I know that some folks may have a better technical background

  • on mining and the way you dedicate resources

  • based on price.

  • But I'm seeing a shake-up ahead, so maybe not.

  • The other piece of it, I think, is just

  • thinking about the flow.

  • Thinking about the bitcoin that's actually

  • being traded or transacted.

  • If there's a restricted market cap,

  • it's similar to looking at big cap stocks trading in China.

  • You know, you don't actually get a real price.

  • GARY GENSLER: While I agree with those,

  • there's one other reason we might not know the--

  • AUDIENCE: People could stop mining.

  • GARY GENSLER: People could stop mining.

  • AUDIENCE: In five years if it's zero.

  • GARY GENSLER: Oh, that's if it really just dwindles out.

  • Nobody wants to expand.

  • But what's one other reason why it could

  • be a different number that--

  • Shimon?

  • AUDIENCE: Fork.

  • GARY GENSLER: A fork.

  • There could be a consensus amongst 51% of the parties

  • on this node to change the what I'll call monetary policy.

  • We've seen that twice in Ethereum.

  • Ethereum was having a certain mining or block reward.

  • They cut it in half once-- or they cut it from 5 to 3,

  • and I think now they're going from 3 to 2.

  • It was not in the original Ethereum.

  • So there could be a consensus.

  • It's not written about a lot, but it

  • could be either what's called a fork

  • or it could be so almost unanimous that everybody

  • went for a change in the monetary policy.

  • All right, so that's just a little bit of fun.

  • Some other quick numbers and facts.

  • There's 17.3 million coins right now.

  • So 17 million coins have been mined so far,

  • 550,000 blocks roughly.

  • 189 gigs.

  • Transactions per day, quarter of a million transactions.

  • And then if I've got my decimals right,

  • the hash rate is 10 to the 18th times 50.

  • That's seven trillion times harder

  • than when it was in 2009.

  • There's seven trillion more computational power in Bitcoin

  • now than there was nine or 10 years ago.

  • It takes about 1/3 of 1% of the world's electricity,

  • and there were some nice comments overnight

  • in the discussion for this class about

  • whether that's a good thing or not.

  • And maybe it's not a good thing.

  • So that's Bitcoin anniversary.

  • A couple other things, unique addresses.

  • There's a little bit over 500,000 unique addresses--

  • Bitcoin addresses.

  • So if there's tens of millions of people

  • that have Bitcoin and only half a million Bitcoin addresses,

  • what does it mean about the probably 20 or 30 million

  • people that believe they own Bitcoin but don't

  • have a Bitcoin address?

  • Where do they own it?

  • James?

  • AUDIENCE: In an exchange?

  • GARY GENSLER: Yeah, on an exchange.

  • Or in some custodial--

  • in essence relying on somebody else

  • if there's a half a million unique addresses,

  • but it's thought there's 20 to 30 million accounts.

  • 10,000 nodes.

  • And bitnodes is a website where you

  • can see where the nodes are.

  • And it's concentration of where the actual nodes are.

  • So pretty spread around.

  • There's not any alpha in Ethiopia yet.

  • In fact, I don't see--

  • what's that?

  • Do you see two in Kenya?

  • AUDIENCE: Yeah, there's two little dots.

  • GARY GENSLER: Anybody from Greenland?

  • No.

  • And of course, it's spurred this whole thing--

  • we've seen this map before, but initial coin offerings.

  • $28 billion roughly raised.

  • Again, we don't know if the numbers are right

  • but this is what this 10 year anniversary or 10

  • years since it all started.

  • This means there's a lot of capital

  • chasing this field right now.

  • So anybody want to write down whether they

  • think ICOs are still going to be around in 10 years?

  • How many people think initial coin offerings will be around?

  • About half.

  • And so the other-- oh, I know where Alin is,

  • but where are the rest of you?

  • I don't actually know.

  • I think they're going to slow down.

  • I think in 2019 and 2020 they'll slow down

  • because so many will have failed,

  • the market will sort of adjust and say,

  • well, we're not going to invest in these unless there is

  • a much better business model.

  • And so it's spurred, this is just a bucket of other coins.

  • There's 1,600 odd coins, probably 1,500 plus of them

  • will fail or maybe all 1,600.

  • But 1,500 plus will probably fail.

  • I might be done with-- oh yeah, crypto finance.

  • Actually there's not as much volatility as there once was.

  • We're slowly getting a more stable coin.

  • It doesn't mean it will stay this way,

  • but to the extent that Bitcoin stabilizes in pricing

  • and stabilizes for a long period there

  • might be a little bit more use of it.

  • But I wouldn't read--

  • six months does not make enough history

  • to say that the volatility's out of this thing.

  • All right, so let's go back to payment systems.

  • So now I'm going to ask, what are the pain points?

  • I mean, maybe just putting up the chart tells you

  • where the pain points are, but this

  • is the chart we talked about Tuesday as to what

  • some of the challenges are.

  • Anybody want to give me some thoughts on this--

  • this was a consumer on one end and a consumer

  • on the other end, it happens to be a US model.

  • But it's not that different in most countries.

  • But what pain points could blockchain help address

  • in this complex system?

  • So pain points.

  • Anybody want to give me--

  • Brodish.

  • AUDIENCE: There are too many intermediaries

  • in the system, which means that too many parallel ledgers.

  • GARY GENSLER: So multiple intermediaries

  • with parallel ledgers.

  • What else?

  • AUDIENCE: I guess the usual suspect would be high costs.

  • GARY GENSLER: So high cost, usual suspect.

  • World Bank estimates it's between a half a percent

  • and 1% of world GDP, which would be,

  • I guess, about $400 to $800 billion a year.

  • Zan?

  • AUDIENCE: Speed of execution.

  • GARY GENSLER: Speed of execution.

  • So what do you mean when you say speed

  • of execution and payments?

  • AUDIENCE: I guess the ability for a counterparty

  • to receive the money and be able to spend it.

  • GARY GENSLER: So the final settlement--

  • sometimes it's authorization, clearing,

  • settlement-- but final settlement

  • often doesn't occur for a couple of days.

  • AUDIENCE: But I would then like for the customer perspective

  • just closing three seconds.

  • GARY GENSLER: So it's a really interesting--

  • there's a bifurcated market.

  • From the customer's perspective, there's

  • great speed of settlement.

  • For the merchant's side, the merchant

  • might not have that is what you're highlighting.

  • Sorry.

  • AUDIENCE: So are those for the bank?

  • Like if I have never had a bank account and [INAUDIBLE]

  • so it's very difficult for me to go through all this process.

  • GARY GENSLER: All right, so financial inclusion.

  • So we had cost, financial inclusion, latency at least

  • for the merchant side, lots of intermediaries as Brodish said.

  • There's a lot of ledgers--

  • there are multiple ledgers that might have some reconciliation

  • and cost to them.

  • Sure, Sean.

  • AUDIENCE: Real time FX settlement.

  • GARY GENSLER: Real time FX settlement.

  • What do you mean there?

  • AUDIENCE: When you have one currency,

  • it basically can convert the--

  • if you have the US dollar [INAUDIBLE] to Russian ruble.

  • And then if you can pledge that into one kind

  • of cryptocurrency, you could actually

  • resize you know that token, you can settle the trade

  • right away.

  • GARY GENSLER: So I think I'm with you.

  • It's basically cross-border.

  • Jumping from one currency, one fiat currency

  • to another, which happens to be technically jumping

  • from one ledger system--

  • the US dollar ledger system, did you say ruble?

  • Ruble.

  • Do they have ledgers there?

  • Yeah, they have ledgers there.

  • You know, as a background story, I

  • used to attend the financial stability board

  • meetings in Switzerland from time to time.

  • And when Russia was going to have the next G20 meeting--

  • I think it's next going to be in Argentina,

  • but that was the year is going to be in Russia--

  • the deputy governor of the central bank

  • wanted to have a dive into issues

  • that were in my area, the derivatives space.

  • So I got to know something of that.

  • They do have ledgers is what I just want to say.

  • I did know this.

  • So what are some of the things?

  • I heard from you cost, delayed settlement especially

  • for the merchant side.

  • I didn't hear anybody talk about charge backs.

  • So does anybody want to tell me about why merchants are not

  • happy what's called charge backs,

  • or is this something more a US thing?

  • Brodish?

  • AUDIENCE: So we saw the last class that out of $100, $2.75

  • was being given to the friend of.

  • Multiple interpreter is like the issuing bank

  • and the [INAUDIBLE].

  • GARY GENSLER: So there's a lot of cost,

  • 2 and 3/4 percent in the US, when it's

  • crossed the credit card rails.

  • But one of the features is charge backs.

  • AUDIENCE: There's just a lack of finality to the transactions.

  • So I think you talked about the example of the campaign

  • after the campaign was over having people

  • claiming the charges were fraud or whatever

  • and having to give back [INAUDIBLE]..

  • GARY GENSLER: Right.

  • So merchants don't really have finality.

  • Jack.

  • AUDIENCE: Sometimes charge backs are recourse for things

  • that weren't actually spent.

  • So doesn't this kind of affect what--

  • consumers might not be as willing to enter

  • a transaction that has that level of finality.

  • GARY GENSLER: All right.

  • So I think-- remind me your first name?

  • AUDIENCE: Dan.

  • GARY GENSLER: Dan.

  • So Dan and Jack really have the two sides of this.

  • From the consumer--

  • I'm sorry, Jack's the consumer side,

  • and Dan's the merchant side.

  • From the merchant, they want finality of settlement.

  • They want, I've sold you a good--

  • I was working on a campaign.

  • We weren't selling a good, but we got a donation

  • and we wanted to know that $2,700 was there.

  • Or I sell a good, a cup of coffee, and it's done.

  • But from Jack's perspective, well, I

  • might not have gotten a good or service.

  • I'm going to dispute it.

  • You say that I'm a monthly subscriber to the New York

  • Times.

  • I'm not a monthly subscriber to the New York Times.

  • I don't want to pay the $15 a month because I'm not

  • getting the New York Times, and it's called a charge back.

  • And so it's really consumers and merchants are a little bit

  • on the different side, but in the US that's

  • part of that 2 and 3/4 percent.

  • But merchants, probably in the US at least

  • say, I'd rather not be there.

  • And then it's whether customers are going to push back.

  • Fraud, of course.

  • Privacy I didn't hear anybody say,

  • but the current payment rails actually in the modern computer

  • age gives everybody along the chain, a lot of information

  • about all of us.

  • Now, many of us don't mind it.

  • I still want to use my Visa card,

  • and I want to use my bank account,

  • but know that we are all giving up

  • a little bit of our personal identity

  • because they know how we spend.

  • And based on those spending patterns,

  • they can know whether we like guns or we don't like guns.

  • And in the political space there's

  • people sort of look at those things.

  • Or how you live your life in many ways.

  • And in good ways, too, because it

  • means they can market to us what books we want to read,

  • and what wines we want to drink.

  • But it's privacy, as well.

  • Financial inclusion was mentioned.

  • Rahim?

  • AUDIENCE: To the privacy is cyber attacks

  • and identity theft.

  • So I will say this is a big pain point.

  • GARY GENSLER: So I should--

  • good.

  • I agree with you.

  • Cyber attacks and so forth.

  • So with all these pain points the question is,

  • will blockchain help address some of these or all of these?

  • So then we go back to benefits of blockchain.

  • What are the two big benefits that you

  • keep hearing me spout about whether it's from Christian

  • Catalini's paper or just--

  • Kelly?

  • AUDIENCE: The cost of the network

  • and then the cost of the verification.

  • GARY GENSLER: Yeah, so verification cost

  • and networking cost.

  • We're not going to go back through this,

  • but can lowering the verification cost address

  • basically some of these pain points,

  • including this cybersecurity one?

  • And where does that fit together?

  • I mean, Alon?

  • AUDIENCE: I would add, does blockchain add problems?

  • So it may solve some problem but add other problems.

  • And then we need to nab those problems and seize them.

  • GARY GENSLER: You're ahead of me.

  • No, no, it's good.

  • It's good.

  • In fact I'm going to go, challenges.

  • Which problems you're going to add.

  • AUDIENCE: Scalability.

  • GARY GENSLER: Scalability.

  • What other problems?

  • Brodish I've heard from, over here.

  • AUDIENCE: High transaction costs.

  • GARY GENSLER: High transaction costs, one blockchain.

  • AUDIENCE: Takes some days to process the transaction.

  • It's slow.

  • GARY GENSLER: So it's slow.

  • So scalability is slow.

  • It might be high transaction costs.

  • Alexis?

  • AUDIENCE: And interoperability.

  • GARY GENSLER: Interoperability.

  • So it's all our friends.

  • Stephanie?

  • AUDIENCE: There's also the issue of error resolution.

  • GARY GENSLER: Error resolution.

  • Good one.

  • AUDIENCE: Like when consumers are

  • trying to fix something wrong with like fraudulent card

  • transaction or something.

  • Like with blockchain, if it's immutable you can't do that.

  • GARY GENSLER: Right, so it's this trade-off.

  • It's a little bit like what Jack was saying about charge backs.

  • From the customer's side there might be an actual error--

  • it's a different type of error, but an error,

  • and I want to be able to say, I'm

  • not taking the New York Times any longer.

  • I'm sorry to the New York Times, I'm just picking.

  • But you're saying there could be true error.

  • Shimon, did you--

  • AUDIENCE: Isn't like the core system

  • where we have these delays in, is that really technologically

  • advance-- sort of a business issue in the sense

  • that [INAUDIBLE] finality opens up a lot of exposure for fraud.

  • So the core level that we see will probably

  • go up a lot if someone could game the system,

  • get their cash out at the same time.

  • It'd be very hard to trace it back.

  • GARY GENSLER: So Shimon's raising,

  • maybe we have delayed settlement.

  • Maybe we don't have immediate finality

  • because as a market feature we want some delayed settlement

  • to protect against fraud, to make sure that there's not

  • errors as Stephanie says.

  • Maybe there's a delay for business reasons.

  • But-- Kelly?

  • Now, anybody want to take the other side?

  • I want somebody to take the other side.

  • This Alin.

  • AUDIENCE: I mean, I'm biased, I'll admit it.

  • But I think that basically that says

  • let let's have an inferior system out there

  • because it's good.

  • And it's like, yeah, I mean, I think

  • to some extent you do want-- there are benefits

  • to having a delayed settlement.

  • But there are also a lot of benefits on having

  • finality, so why not have both?

  • You don't need just have an inferior settlement

  • kind of system out there and say, OK, this is established.

  • You can also bring another solution right

  • beside it that actually offers finality

  • for people who want it.

  • GARY GENSLER: All right, so if everybody remembers,

  • Alin works at the digital currency initiative.

  • Used to work in payments.

  • He's admitting he might have a little bit of a bias,

  • but he's saying, fine, you want some delayed settlement.

  • But shouldn't we have an alternative?

  • Because not every market will want delayed settlement.

  • Eric?

  • AUDIENCE: Yeah, but I just wanted

  • to tie these two points of view to another challenge, which

  • is the issues on the handling of governance.

  • In the case of [INAUDIBLE],, for example,

  • there's a little bit of more elaborate governance

  • of the distributed arrangement of the blockchain.

  • That decision between going from supposedly a theft close--

  • a fork.

  • So handling a centralized arrangement

  • is much easier than a blockchain [INAUDIBLE]..

  • GARY GENSLER: Rhys?

  • AUDIENCE: Another challenge is the government regulation

  • on the anti money laundering and the [INAUDIBLE]..

  • GARY GENSLER: Yeah, right.

  • So-- Kelly?

  • AUDIENCE: I'm not sure if this ties into the finality of it,

  • but one of the articles talked a little bit about the fact

  • that there is an issue with managing liquidity given

  • the speed of the transactions, especially

  • at the corporate level where the value of the transactions

  • are much higher.

  • There's a bit of an opportunity cost trade-off there.

  • GARY GENSLER: Right.

  • So we're going to chat about that

  • in a minute about the liquidity in particularly

  • using a cryptocurrency as a bridge between two fiat

  • currencies.

  • But it has somewhat to do with the volatility

  • of cryptocurrencies.

  • But I would say to this point about--

  • I'm coming back to Alin versus Dan, or Shimon, really--

  • sorry, different debate.

  • I think that this new technology is coming along at a time

  • where we can shorten settlement, and a lot

  • of the delayed settlement in payments, in Wall Street,

  • and securities we used to have that you would do equity trades

  • transaction day plus five days.

  • Before I was born, too, long time ago.

  • Then it went to transaction day plus three.

  • And in Europe they went to transaction plus two days--

  • two days for settlement of securities trades

  • somewhere 10 or 15 years ago, and the US caught up.

  • The US was behind and just went to transaction plus two days.

  • But I think technology could be t plus 0 in securities,

  • and in payments you could go to real time payments.

  • The US Federal Reserve had a big process

  • where they got public comment, and they're

  • moving towards what's called real time payments by 2020.

  • Now, maybe it will be adopted in 2021 because it'll take longer

  • to roll out, but I think that technology does provide

  • that it will be more options.

  • And in some cases, the markets will

  • stay with delayed settlement because it's just history,

  • it's just legacy.

  • And other times it will stay with delayed settlement

  • because they actually prefer it.

  • I think in the securities world some people actually

  • prefer delayed settlement.

  • We'll talk about this in a few lectures,

  • but they'd prefer it because it allows shorting of securities.

  • When you actually borrow somebody else's security

  • and sell it, you usually sell it before you borrow it.

  • And so the whole parts of our capital markets

  • that are built around delayed settlement,

  • because you usually sell, borrow, and settle rather

  • than borrow, sell, and settle.

  • AUDIENCE: So if you put securities lending

  • on a blockchain, then you're able to immediately point

  • to the varo that you get and trace that back.

  • When you then have securities lending on a t0

  • and you can short on t0, know exactly what

  • securities will be borrowed?

  • GARY GENSLER: I think that it is technically feasible to move

  • stock borrow onto a blockchain.

  • I'm agreeing with that.

  • But the question is whether the economics of that market--

  • whether the market participants want to actually arrange

  • the borrow before they sell because currently

  • they sell before they arrange the borrow.

  • AUDIENCE: But they have to get the locate on that same day,

  • right?

  • GARY GENSLER: Well, when it's t plus 2 depending upon--

  • I'm sorry I'm speaking finance here, but maybe you'll help me.

  • AUDIENCE: Well we have to give--

  • I used to be in sales and training.

  • We had to get a borrow, like a reference number,

  • before someone shorted something so they couldn't short.

  • I don't know if it's changed, so I don't know.

  • GARY GENSLER: No, it might be that I'm

  • the old season dog that was-- now that you're

  • saying they're tighter.

  • But--

  • AUDIENCE: If a client wanted to short something,

  • they would call me, and then I'd have to call the market maker,

  • get a borrow, get a reference number.

  • And they would carve off that amount, whatever

  • they wanted to borrow, so it wasn't

  • available for anyone else.

  • Then they sold it.

  • So it was like--

  • it was done on a ledger, but yeah.

  • GARY GENSLER: So the market may already be moving towards it.

  • AUDIENCE: So I work in the securities lending desk

  • that he used to call.

  • That's what I'm saying.

  • And that came into effect after 2008

  • with the no naked short selling.

  • And so then you had to get the locate on teaser

  • on the same exact day that you borrow.

  • But you didn't actually need to borrow the stocks until t3.

  • GARY GENSLER: So you just had to have the locate.

  • AUDIENCE: You just need to have a good locate on it.

  • AUDIENCE: So you couldn't double lend.

  • AUDIENCE: But I guess my question was

  • if you moved that securities lending

  • transaction to a blockchain, you could immediately borrow it

  • and be able to trace that.

  • And then when it came against recall--

  • GARY GENSLER: So for those of you

  • that are not as close to the world of finance, and stock

  • loan, and stock borrow, the point of the discussion

  • is that markets have evolved built upon delayed settlement.

  • And the delayed settlement may well

  • have been because they all evolved from paper, not

  • computer days.

  • So we had authorization, clearing, settling

  • in the payment world, but in stock

  • borrow you had to actually locate a security to sell.

  • It sounds like there's some market evolution

  • post-2008 that you actually had to add an identifier,

  • though you didn't have to borrow.

  • My point is that all of this can be put on a blockchain,

  • but there's also economic market realities

  • as to whether somebody wants to.

  • And I think, let's see, if you're

  • Dan you don't want charge backs but Jack still wants them.

  • And in the delayed settlement Shimon

  • wants to keep his delayed settlement,

  • and Alin wants to go the other way.

  • And I suspect that in some markets, let's go with Dan

  • and Alin are together, that finality will be important.

  • And what blockchain allows, it allows

  • for the economics of finality to be a fair debate in a sense.

  • A level whereas in the past you couldn't even

  • have the debate because it was so paper intensive.

  • So blockchain changes that economics.

  • Let me go back a slide to say why--

  • what are the possible suitability

  • of payments to the blockchain technology world?

  • And these were some that I threw out.

  • Payment systems use ledgers.

  • Geez all right, that's the sweet spot.

  • They use ledgers.

  • In fact, that's what Satoshi Nakamoto

  • started this whole thing on.

  • Multiple parties certainly want to read,

  • and in a lot of circumstances multiple parties

  • want to write to the ledger.

  • Like actually record to the ledger.

  • So it's kind of right in the middle of this.

  • You might be able to lower verification costs,

  • but more importantly verification costs

  • are really critical to the economics of payment.

  • That you have the money that you say you have, or the value.

  • You're sending it to this account and not that account.

  • So in a sense, I look at this and I go,

  • this feels like fertile ground that hasn't yet been plowed.

  • Because 10 year anniversary--

  • or birthday-- we're still not there.

  • But any other thoughts?

  • I mean, micro payments is another,

  • but Alin, you're the expert.

  • AUDIENCE: Yeah, I mean, the one thing that I think

  • is exciting to some of the folks in the DCI, myself included,

  • is the fact that we can attach codes

  • to these movements of value.

  • So you can program these chunks of money.

  • GARY GENSLER: And are you saying attach code

  • to identify it's Kelly's payment,

  • or it's James' payment, or are you saying identify code

  • in the form of smart contracts?

  • AUDIENCE: Basically it's smart contract.

  • Just say, hey, you know what, I'm

  • going to release the funds of this individual side

  • and this individual side at the same time,

  • and then you get the money, right?

  • And that adds an additional layer of complexity

  • that traditional payments of the Visa, MasterCard variety

  • don't have.

  • So you get a whole new layer, for lack of a better word,

  • of possibilities.

  • When you start adding, OK, I'm going

  • to I'm going to give you something

  • if it's sunny outside.

  • OK, we can make that happen real time.

  • GARY GENSLER: We didn't have a real--

  • AUDIENCE: Would that eliminate some cost and--

  • I mean, with the Visas and whatnot?

  • GARY GENSLER: Can you say a little louder just so we--

  • AUDIENCE: I get his point, yes, but I

  • mean, it will eliminate the trust issue,

  • which is with the Visa?

  • GARY GENSLER: I'm not sure I get why.

  • AUDIENCE: The cost, and the transaction movement,

  • and the validation.

  • Wouldn't that be eliminated?

  • Yes, you have a smart contract.

  • It's adding a layer.

  • But on the other hand, it's eliminating some layers

  • from the other process, as well.

  • AUDIENCE: Yeah, so assuming--

  • so the onus is on the technologies

  • that build this to make sure that you don't lose

  • functionality that you have in a Visa world

  • because otherwise nobody would use this whole new way of doing

  • payments.

  • So it's assumed that you may take

  • part of what the technology offers and then add

  • additional functionality.

  • GARY GENSLER: I'm going to say I'm pretty

  • relaxed about the open laptops.

  • I get less relaxed about people texting during class,

  • and I know that we're all multitaskers.

  • But I'm the most relaxed you can imagine,

  • but I'm starting to get a little on my edge here.

  • Tom?

  • AUDIENCE: So I get that blockchain

  • allows for smart contracts, and it's obviously

  • a much more brute force system where

  • you're talking about like attaching code

  • or the payments are automated.

  • I think of like I set up an automatic payment of my cable

  • bill every month.

  • And so it's like as soon as that payment comes to me,

  • I pre-authorize it to go through.

  • So why can't you, in a non-blockchain setting,

  • establish basically a smart contract that's got some more--

  • GARY GENSLER: A conditional payment?

  • AUDIENCE: Right.

  • So do you have to have a blockchain

  • to have a smart contract?

  • AUDIENCE: Sorry, if I could respond to that.

  • One of the coolest use cases that I've heard--

  • and I'm not going to name any entities, but you know,

  • this blockchain-based let's say company

  • for lack of a better word who wants to pay their employees.

  • And I said, look, you join me here now,

  • we're going to make a smart contract that basically

  • is going to pay you for your services for the next three

  • years period.

  • That's it.

  • There's no additional at such a such frequency.

  • And we sign a contract now and that's it.

  • You're going to get paid, right?

  • And then you start working and you actually

  • have a very ensured way that I will get

  • paid that nobody can stop it.

  • Today you don't have that.

  • There are many things that will happen-- you know,

  • management happens, you know, whatever

  • happens I can find a way to-- got to get around all of that,

  • right?

  • That's kind of useful to make sure

  • that, hey, I'm going to get paid for [INAUDIBLE]..

  • That's useful.

  • AUDIENCE: Do you have to then put aside--

  • like if I am your employer, I have

  • to put that three years worth of salary into a lockbox

  • and I can't do anything with it for those three years?

  • AUDIENCE: Yeah, if you're escrowing

  • three years more work.

  • AUDIENCE: It's a limitation.

  • All of this is a limitation.

  • It's not like you suddenly have free money,

  • it's all good for everyone, right?

  • But there are useful things that show up-- usable things

  • that we never thought about.

  • So I think all I'm saying that there

  • are a lot of possibilities.

  • And I don't know the right use case for it.

  • And I don't know, it's just an example

  • that I thought was like, that's pretty cool, I could use this.

  • But you know, you're right.

  • I mean, there are many implications.

  • But just the very fact that you have a whole new area

  • to explore, to me that's exciting.

  • Like we've seen what the system does.

  • We've seen it, right?

  • Like we bank 90% of the people.

  • If you're in the 10%, that's kind of sucky.

  • But for the [INAUDIBLE],, this kind of works, right?

  • You know, you have deep lines too, it's awesome, right?

  • But we've hit the ceiling of what

  • we can do with this system.

  • Maybe there's an additional approach.

  • Let's see what happens there.

  • GARY GENSLER: I invited Alin because we

  • needed a little bit more maximalism in the room

  • I'm sorry, James?

  • AUDIENCE: But think back to the point earlier,

  • it's do we really need blockchain

  • to do a lot of the stuff that smart contracts promised to do?

  • I mean, I set up my--

  • in the UK, our system [INAUDIBLE]..

  • That happens, that just disappeared from my account

  • at a certain time period.

  • Doesn't involve blockchain.

  • I could see some benefits of blockchain, but again,

  • a lot of the smart contracts, can we

  • not already use existing systems,

  • make those systems better?

  • But this goes back to the whole payment system.

  • There are a lot of players in the field that

  • haven't been innovating the last 20 years, what we read.

  • But can they not make existing systems so much better

  • without the use of blockchain?

  • GARY GENSLER: So the question is, do you really

  • need blockchain or is it just going

  • to be a catalyst for sort of the legacy systems to kind of

  • do what they otherwise technologically could have done

  • but it's a kind of sharp kick in the backside to kind of do

  • a little bit better?

  • AUDIENCE: That's a really good point, right?

  • That's something that we debate a lot about them.

  • And it actually is as we sit now,

  • it's absolutely possible that this would be the way, right?

  • So one example that shows up frequently is BitTorrent.

  • So BitTorrent, for those of you who don't know,

  • it's a way in which you share video online and nobody--

  • it has a lot of problems with it,

  • but it catalyzed and change the entire distribution of media,

  • right?

  • It has a lot of problems so it didn't work out

  • the way folks thought it would, but it still kind of changed

  • the whole industry.

  • And it is absolutely possible that blockchains

  • will take that path.

  • It's unclear now, but it's absolutely possible.

  • GARY GENSLER: So blockchain could

  • be just a catalyst like BitTorrent was,

  • and then all of a sudden at the end of the day we got Apple--

  • what do they call it?

  • Apple Store, thank you.

  • But Zan, were you're trying to--

  • AUDIENCE: Yeah well, I was going to build on that.

  • I think I've already seen that happening.

  • Like I was looking into Swift recently

  • and I think after blockchain in the past few years

  • they launched the Global Payments Innovation Initiative.

  • Which seems like, all right, we recognize

  • that our infrastructure is legacy

  • and we need to do something to kind of keep current.

  • And they've spent and invested a ton of money

  • in unifying standards across the messaging platform

  • and making it much easier to use.

  • So not a blockchain solution, but has certainly

  • been an event.

  • GARY GENSLER: Right, so it's been a catalyst for Swift.

  • Ripple has been a catalyst for Swift

  • that we're going to talk about in a minute,

  • but others have been as well.

  • But I still would challenge the group--

  • and it's sort of what we're all trying to do here--

  • are there still opportunities that an append-only log,

  • that you're appending, you're adding information

  • to the registry or the ledger, you're not deleting it--

  • well, this is going to be good--

  • and you need a consensus of multiple parties writing

  • to the ledger.

  • A special guest.

  • AUDIENCE: Hi, it's Sri.

  • Many of you know me.

  • GARY GENSLER: Sri many people might now

  • is Priya's significant other-- husband, I think.

  • AUDIENCE: But that's not why he's here.

  • GARY GENSLER: He's not here-- he's here as a payment expert.

  • AUDIENCE: No, that's the reason why I'm here.

  • GARY GENSLER: No, but you are a payment--

  • do you want to introduce--

  • AUDIENCE: Well, I'm not an expert.

  • I work for MasterCard, and I happen

  • to be Pria's husband, as well.

  • I've been in this industry for a few years.

  • AUDIENCE: Priceless.

  • AUDIENCE: Price?

  • AUDIENCE: Priceless.

  • AUDIENCE: Priceless.

  • Exactly, we're still running that.

  • GARY GENSLER: So you're at MasterCard payments,

  • and give us your thoughts on this.

  • AUDIENCE: So I'm actually in the opposite camp

  • from this blockchain and cryptocurrency

  • for a few reasons.

  • GARY GENSLER: So you're in a minimalist camp?

  • AUDIENCE: You can call it minimalist.

  • I believe that you can do everything

  • that blockchain promises it does using the currency

  • systems we have.

  • There are a couple of reasons for that.

  • Number one is crypto is expensive average

  • per transaction.

  • You can always secure transactions

  • in systems we have today using technologies that exist,

  • but you don't need to have a Bitcoin or a blockchain,

  • as an example.

  • So interlockability that you're talking

  • about when it comes to Bitcoin and the other kind

  • of advantages about distributed measures,

  • everything can be accomplished through the systems

  • we have today.

  • They just don't choose to do it because it's expensive,

  • and it will be expensive when you scale blockchain

  • to the millions of people in other industries you have.

  • It will become expensive there, as well.

  • So the two main things that are important in payment systems

  • are acceptance and scale.

  • Simple.

  • If you achieve the acceptance and scale to blockchain, sure.

  • That'll work, and everybody will be using blockchains,

  • and Bitcoins, and it'll all work.

  • The problem is it's taken us 40 years

  • to achieve acceptance of scale with Visa and MasterCard,

  • and [INAUDIBLE] of this whole ecosystem.

  • It's taken a long time.

  • And it's working.

  • And if you want to replace that with this new system

  • and achieve the same level of acceptance and scale,

  • think about how big of an effort that is.

  • It's almost impossible.

  • And the amount of dollars you would have to spend on that,

  • why?

  • GARY GENSLER: So I see a few people want to take--

  • Hugo are you going to take the other side?

  • AUDIENCE: I can start, sure.

  • GARY GENSLER: And then we're going to move on,

  • but I want to hear the other side.

  • And I thank you for being willing to speak up,

  • because it's really helpful.

  • And I don't know your role at MasterCard, but it's just--

  • what's that?

  • AUDIENCE: Product management.

  • GARY GENSLER: Product management.

  • But you're speaking for yourself personally or MasterCard?

  • AUDIENCE: MasterCard is dabbling in blockchain as well,

  • so I'm speaking for personally.

  • GARY GENSLER: Because MasterCard actually

  • filed a patent with the US Patent Office

  • for crypto fractional banking.

  • And Bank of America has 43 patents in the crypto space,

  • and Visa's filed for patents in the book.

  • So you have Visa, Bank of America MasterCard,

  • and others filing for patents on blockchain fractional banking

  • payments and so forth.

  • So it's sort of an interesting side.

  • We'll get established Professor Lessig.

  • AUDIENCE: Just one qualification on this.

  • It kind of depends on who you are right now.

  • I mean, because this is all true as a description of banking

  • in the developed world, but to the extent

  • you're talking about these transactions

  • outside the developed world then the coefficients

  • on these variables changes significantly.

  • So if you have no reliable legal infrastructure,

  • then blockchain technology becomes a real plus

  • relative to a world where you have

  • a very reliable infrastructure, which is obviously developed.

  • GARY GENSLER: So what Larry shared

  • with us is, well, there's a lot of different countries--

  • 180.

  • There's 1.7 billion people still not banked in the world.

  • Half of sub-Saharan Africa, for instance.

  • So there is still a challenge there.

  • I'm sorry, Hugo, we--

  • AUDIENCE: I was going to say something similar.

  • Like I appreciate the argument but it

  • kind of sounds like, it's not broke, don't fix it.

  • Like we've spent so much money building this system.

  • So you know it works now, but like,

  • let's not look at what technological innovation can

  • add.

  • AUDIENCE: Well no, that's not what I meant.

  • What I meant was it's not if it's not broken, don't fix it.

  • We have achieved so much in the payments world over the past 40

  • years.

  • Improve it while maintaining the goodness of the infrastructure

  • that exists today, instead of blockchain is just a rip

  • and replace the whole thing which doesn't solve a purpose.

  • AUDIENCE: Sure.

  • I don't think that blockchain is the, like, one stop shop

  • for everything.

  • I'm more on the Bitcoin maximalist side

  • where I think, sure, if you have a global currency where you can

  • go anywhere, and use it, and it's self-sovereign

  • and you can do all that, that would be great.

  • I know like MasterCard and Visa have an interest in saying,

  • well, we've spent so much money, you

  • can use MasterCard and Visa in most places in the world.

  • But what happens if you go into the middle of some village

  • in India or sub-Saharan Africa or wherever,

  • and they don't take a credit card.

  • But they have a cell phone with a Bitcoin wallet,

  • I can still transact there.

  • And yeah.

  • AUDIENCE: You can transact with a real currency, also.

  • AUDIENCE: Right, but then they have

  • to go through the process of changing that and [INAUDIBLE]..

  • GARY GENSLER: So let's take Brodish and then we'll--

  • this is a good debate, by the way.

  • AUDIENCE: Since the discussion came to India, so--

  • [LAUGHTER]

  • GARY GENSLER: So we have our expert now.

  • AUDIENCE: So there could be a third solution, as well.

  • So we have once we're in the readings of the last class,

  • as well, the united payment interests in India,

  • which is not a blockchain solution.

  • So the government of India has actually

  • promoted a new entity called a payment bank, which

  • is like a no frills, no service kind of bank

  • to promote financial inclusion.

  • And based on that, just using a unique identification number

  • and just a mobile device you can make any sort of payments

  • of any denomination.

  • It can be very, very local currency as well,

  • and you can do all of that at real time basis

  • without any of these intermediaries.

  • And those are low cost transactions

  • without leveraging on the blockchain technology.

  • AUDIENCE: So what you need an [INAUDIBLE] card?

  • AUDIENCE: You need a [INAUDIBLE] card, which is more than--

  • it's more than 95% coverage in the country.

  • AUDIENCE: What's the name of the card?

  • Just like, do you need some form of identification?

  • GARY GENSLER: So India's really been

  • at the cutting edge in the last, say, two to three years

  • partly because they could leapfrog

  • some of the card rails.

  • There was not broad adoption or access

  • Sri has talked about in India for credit cards.

  • And so similar to what we saw in Kenya

  • And we talked about on Tuesday in China

  • where companies, private sector, leapfrogged,

  • in India it was more if I believe it was the government

  • sector rather than the private sector

  • said we want to bring a great many of the population

  • into a system.

  • So they created a unique ID system.

  • I can't remember the name of each of these.

  • That's the card.

  • They created a payment--

  • IMSP, if I got that right?

  • AUDIENCE: IMPS was the older one.

  • Now it's UPI.

  • United payment interface.

  • GARY GENSLER: A payment system, which is not 270 basis points

  • but probably is measured and single to low double digit

  • basis points.

  • Your actual pay, everybody in India, your employment

  • goes into this.

  • And there's biometrics as well to the ID system.

  • Now there, might be cybersecurity risks

  • that this is all then in a sense somewhat centralized.

  • But India sort of leapfrogged.

  • It's kind of interesting.

  • But we've had a lively debate.

  • Is finality something we want or not?

  • Is charge back something we want or not?

  • Can you do this all without blockchain,

  • or is blockchain something that's needed?

  • And of course, the question even if blockchain's

  • really kind of neat and good, will it just

  • get the incumbents to move a little bit more

  • into innovation and lowering their costs?

  • Do you want to close this one out?

  • AUDIENCE: I think I may add something else.

  • It's censorship resistant.

  • So everyone can be exchanging Bitcoins

  • without any government forbidding it.

  • GARY GENSLER: Now, it's an interesting thing.

  • If it's censorship resistant to you must extend me credit

  • and you can't decide whether I get credit based on my race,

  • or religion, or ethnicity, and so forth,

  • that's probably something a broad group of people

  • would say, that's pretty good.

  • But if it's censorship resistant to being like you can

  • drug traffic society might say, well, that's not what we want.

  • So it's an interesting set of--

  • when the technology allows you to be censorship resistant

  • but society says, well, there's still

  • some social cohesion about drug trafficking, or child labor.

  • And I'm using the ones that are easy to hold onto,

  • so it's a little interesting debate.

  • Yes?

  • AUDIENCE: So when we're speaking about the underdeveloped

  • and developing part of the economy,

  • and payments, and blockchain--

  • GARY GENSLER: Professor Lessig's comments.

  • AUDIENCE: Yes.

  • And I think one thing that we haven't addressed

  • is the last mile, which is liquidity.

  • And so even if blockchain addresses, let's say,

  • the accountability of the transfer,

  • what it doesn't address is the actual liquidity

  • and utilization in the last mile on the ground, which

  • is very essential to a developing economy.

  • GARY GENSLER: Right.

  • Sorry, remind me--

  • Aviva.

  • So Aviva, are you saying last mile like that somebody could

  • actually use this cryptocurrency in a store to buy their grains,

  • or their goods for the week right to keep their family--

  • AUDIENCE: Yeah, so that doesn't solve the problem

  • of adoption and scalability.

  • GARY GENSLER: Right.

  • Fiat money-- and before we had paper money,

  • we had coins and everything-- money is a social construct.

  • We've talked about that.

  • And beyond its advantages that it's used for taxes,

  • and it's good for all debts public and private in most

  • countries, it really is exactly what Aviva's saying.

  • That society at large says, I will use this

  • as a unit of account.

  • That whether it's my employment, or the milled goods I'm buying

  • to feed my family, it's this unit of account that over

  • hundreds of years people adopt until they don't.

  • I don't know how long in Venezuela,

  • though I keep using their currency as a unit of account.

  • So sometimes there's last mile problem

  • is even with fiat currency, but I not only

  • hear you, I share your thoughts that where

  • is the adoption in the last mile, if you well said.

  • So just we talked about the challenges.

  • What are some companies?

  • Well, there's in crypto--

  • and I'm listing two or three.

  • But if you wanted to talk about others,

  • I just listed in crypto there's startups.

  • BitPay is one of the most popular ones where

  • it was basically saying to merchants, if you

  • want to take Bitcoin, we'll convert your Bitcoin for you

  • to fiat.

  • And that's in essence what they're doing.

  • So I'm going to take it back to the Hillary campaign.

  • We had some donors that wanted to give us Bitcoin.

  • We're a merchant in a sense, but we also

  • wanted to elect a president.

  • And those donors might have wanted to give us Bitcoin.

  • So one of my colleagues had to investigate, could we

  • take Bitcoin, and what did it mean under federal election

  • law, and things like that.

  • And we looked at whether to hire BitPay or somebody like that.

  • We chose not to because we didn't

  • think there was enough donors who really wanted to give us

  • enough Bitcoin, and we didn't think

  • we would freshen up Hillary's image

  • because we were going to announce

  • she's the Bitcoin candidate or something.

  • Tom, did we miss it?

  • Is this--

  • AUDIENCE: Could've won Wisconsin with that.

  • GARY GENSLER: We could've won Wisconsin with that.

  • [LAUGHTER] OK.

  • I'm going to be apologizing until my grave

  • for that election, but this is it, right?

  • But it's a real story.

  • One of my colleagues investigated it.

  • I'm not trying to throw him under the bus or anything,

  • but it was just like, oh my gosh, the amount of time

  • we would ad spend with Perkins Coie, the law firm,

  • and what we would have to pay to kind of think this through.

  • And we can only take $2,700, so every day

  • would be a different number of Bitcoin.

  • It could not be more than $2,700 because there

  • was no way that we were going to break the election laws.

  • So ultimately, the project went away.

  • And the reason I share that story is for a lot of merchants

  • right now, maybe as Aviva said in the last mile,

  • the merchants are saying, I'm not sure I need to do this.

  • But there's a way to do it.

  • If anybody in this room starts a company and you say,

  • I want to take crypto, there are companies out there

  • that will provide you that interface and their fees.

  • Does anybody know BitPay's fees?

  • It wasn't part of the readings, but other than Alin?

  • All right, Alin?

  • AUDIENCE: 1%.

  • GARY GENSLER: 1%.

  • So if you are a merchant--

  • Starbucks, the Hillary campaign--

  • if you're a merchant and you say,

  • I want to have less than 2.7%, I can have 1% fees.

  • I want finality and I don't want charge backs

  • depending upon which side of this you're on.

  • They're trying to just do it as a lower cost solution.

  • 1%.

  • Pria?

  • AUDIENCE: Similar story, but maybe with a happy ending.

  • So a lot--

  • GARY GENSLER: Happier than not winning the election?

  • [LAUGHTER]

  • AUDIENCE: So far a lot of philanthropic organizations,

  • this is becoming a very real issue.

  • So the Silicon Valley Community Foundation

  • recorded a 30% increase in its endowment

  • due to digital assets donations.

  • And it's happening in a few community foundations as well.

  • It's a growing field of interest, and there

  • even a story--

  • I mean, not a story, It really happened--

  • of one of the exchanges doing this service,

  • converting the digital donations into fiat currency,

  • and it crashed.

  • Because the volume was just so much they could not--

  • even the trickle they could not keep up.

  • But this is becoming a real thing now.

  • GARY GENSLER: And whether it's a large foundation

  • or political campaign, there's also a little bit

  • of reputational risk.

  • Because you want to make sure that the funds are not

  • illicit funds.

  • So there's a little bit of a reputational risk

  • that maybe a Starbucks wouldn't have when you're just

  • buying a cup of coffee.

  • Never run a Starbucks, but--

  • So the crypto exchanges and BitPay

  • sort of provide a lot of services.

  • E-wallet companies provide services.

  • Sean?

  • AUDIENCE: I'm just curious, how does BitPay manage volatility?

  • How does it cash out?

  • GARY GENSLER: How does it manage volatility?

  • AUDIENCE: So it only takes a 1% cut of the transaction value,

  • but the volatility of which can go over 1%

  • like every couple of seconds.

  • So in that case, how do they manage?

  • GARY GENSLER: So they are arranged basically

  • with a number of crypto exchanges.

  • I once knew, but I don't know whether they

  • have arrangements with three, or five, or whatever.

  • And they basically are pricing right at the--

  • so they have sort of close to real time pricing.

  • So I'm going to buy a cup of coffee.

  • The way the technology works--

  • and let's say it's--

  • what's a Starbucks cup of coffee, it's $5?

  • It's pretty expensive, isn't it?

  • AUDIENCE: Depending on what you buy.

  • GARY GENSLER: What's your cup of coffee?

  • AUDIENCE: $2.25.

  • GARY GENSLER: $2.25, all right.

  • But in real time, the app--

  • the BitPay app-- is computing what that is.

  • And they feel that within these seconds for them

  • to convert at they take volatility risk.

  • Is it possible that in some transactions

  • the volatility eats up the whole 1%?

  • Yes.

  • But basically they have that in their pricing model.

  • And then move basically Pria's Bitcoin to dollars,

  • and the dollars goes to Starbucks.

  • And they guarantee Starbucks $2.25 minus 1%.

  • Then there's startups actually getting in.

  • But most of these--

  • at least the second, third, and fourth--

  • are kind of institutional services.

  • Now, there might be retail services that I'm not--

  • Qurom was started by JP Morgan.

  • I think it might even still be owned by JP Morgan.

  • It was going to be spun out.

  • But R3, Ripple, these are really institutions.

  • Almost B2B or financial firm to financial firm right now.

  • I couldn't find a really good startup in the retail space,

  • but two weeks from today you're going

  • to have Jeff Sprecher and Kelly here, and you can--

  • Shrim, are you going to be back on November 15th?

  • No?

  • But you'll be able to challenge.

  • They're going to have a retail payments

  • system in their Bitcoin.

  • So it'll be interesting.

  • One retail payment solution is if anybody walks over

  • to building E14 there's a vending machine in the media

  • lab right now that takes Bitcoin.

  • Thank you, MIT.

  • Thank you, the digital currency initiative.

  • Thank you Alin.

  • But there is literally--

  • if you want to describe it, you put a QR code up?

  • AUDIENCE: Yeah, I mean, so yes absolutely.

  • So anyone who wants to do that, we

  • can walk over there and look at it.

  • It has cross change slots so we can

  • transact real time between three different currencies.

  • And--

  • GARY GENSLER: So you can take Bitcoin--

  • AUDIENCE: Litecoins, and you know,

  • dummy US dollars we call it.

  • But it's basically a stable coin, it's a stable coin.

  • GARY GENSLER: Stable coin.

  • So Bitcoin, Litecoin, and a stable coin.

  • And there's a vending machine sitting in the media lab.

  • You put a QR code up, if I remember?

  • AUDIENCE: Yeah, so QR code on the machine.

  • you scan, we published an app on Android and iOS.

  • And you basically scan your home null or you computer,

  • you allow your phone to control your computer,

  • and then you can send money from your phone

  • to your vending machine.

  • Real time.

  • GARY GENSLER: But in that case, the vending machine

  • receives the Bitcoin.

  • AUDIENCE: No, so we actually added an arduino

  • as well that converts the Bitcoin into impulses

  • that trick the machine to say, these are coins.

  • So the vending machine actually gets--

  • we tell it--

  • [INTERPOSING VOICES]

  • AUDIENCE: Yeah.

  • GARY GENSLER: There you go.

  • Check it out over in the media lab.

  • It was rolled out for media lab members' week, actually,

  • two weeks ago.

  • And then there's incumbents--

  • ICE's startup Bakkt.

  • I do put MasterCard on there, Sharim, I do.

  • But it's remarkable how many patents are being filed.

  • Hundreds of patents are being filed,

  • but they're almost all by the incumbents.

  • Now, is that because they want to block others

  • from getting in, or are they trying to create barriers

  • to entry, or are they doing it because they see real prospect

  • and opportunity, and they want to pursue it?

  • It's probably a bit of both.

  • Larry, you're shaking your head.

  • AUDIENCE: It's all barriers to entry.

  • GARY GENSLER: It's all barriers to-- you don't think it's any?

  • AUDIENCE: No, it's all barriers to entry

  • and then the argument's like this.

  • Our system's great, and guess what?

  • The legal cost of pursuing your system

  • is going to be through the roof, so.

  • GARY GENSLER: And we'll get some patents along the way.

  • AUDIENCE: No, those patterns are the legal costs.

  • That's the point.

  • The threat of the patent litigation

  • is enough to stop any--

  • so if you're a venture capitalist,

  • then they walk in like you make before your announcement,

  • you're dead.

  • GARY GENSLER: Well, Bank of America has 43, so--

  • in the blockchain space, I read.

  • AUDIENCE: This is the strategy in

  • every major incumbent complex, so it's nothing new here.

  • GARY GENSLER: So is it a sign that there's

  • something really real here?

  • That these startups might have something to be figured out?

  • Visa's started a business to business payment

  • connect in 2016.

  • They've even announced-- Visa's even outside it

  • hasn't had a lot of adoption.

  • They're not sure.

  • I think it's more permission than permissionless,

  • by the way.

  • But this is kind of--

  • now, is anybody in their own readings, maybe Alin--

  • I mean, I'm not trying to be exhaustive,

  • but there's not a lot of--

  • because of some of these issues back here, these

  • are real challenges, but I would say these

  • are real possibilities, too.

  • Kelly and then Alin?

  • AUDIENCE: So what about some of the companies

  • that sort of backed out?

  • And I'm reading Stripe ended their export [INAUDIBLE]

  • program.

  • It sounds like a pretty defeated situation,

  • but I don't really understand that much exactly why.

  • GARY GENSLER: You want to answer the Stripe question?

  • AUDIENCE: Yes, and Stripe is not Bitcoin.

  • Stripe wanted to maybe use Bitcoin as a service.

  • I mean, they're clients.

  • They're not the startup.

  • So I think backing up is--

  • it makes sense because they're clients.

  • But there's many startups out there that are still

  • here and not [INAUDIBLE].

  • GARY GENSLER: Yeah, and just as background, Stripe

  • is a payment system provider.

  • So they're not extending credit like a Visa, or MasterCard,

  • or they're not a network like Visa or MasterCard

  • where actually they don't provide the credit,

  • the banks do.

  • But they are a payment system provider

  • that merchants would hire, Stripe,

  • to interface with MasterCard, Discover,

  • American Express, and others.

  • But why did Stripe decide not to continue on this?

  • Partly they didn't see a lot of adoption is what I took.

  • But Alin, you were going to--

  • AUDIENCE: Yeah, just a couple of--

  • couple things I wanted to.

  • So this is a great list.

  • I think it's a great starting point.

  • And the rule that I think at some three months ago I had was

  • in the cryptocurrency space, most non-speculation money--

  • so no like I'm going to buy low, sell high--

  • is coming from either exchanges or miners.

  • So you got--

  • GARY GENSLER: Exchanges or mining.

  • AUDIENCE: Yes.

  • So that's where the money's made.

  • If you don't speculate, you're either a miner

  • and you make money or an exchanger make money.

  • The miner down I think would be interesting.

  • I think I would put Bitmain over there because I think it's--

  • GARY GENSLER: Bitmain?

  • AUDIENCE: Bitmain.

  • So Bitmain, for those who don't know,

  • is going through an ICO, an initial--

  • sorry, IPO.

  • Initial--

  • GARY GENSLER: Public offering.

  • A traditional [INAUDIBLE].

  • AUDIENCE: They have a lot of money,

  • there will be [INAUDIBLE] a very hefty rate.

  • They want to stop producing AI chips, artificial intelligence

  • chips.

  • So they're very good at producing chips,

  • and they will go--

  • they'll go into one of those.

  • GARY GENSLER: But is Bitmain in the payment space, using

  • blockchain for pay?

  • AUDIENCE: I mean, they've invested in Circle,

  • which is another exchange, so they're like--

  • they have a lot of money.

  • They're trying to kind of place it towards other companies.

  • So yeah, so exchanges of the finance or all

  • these other [INAUDIBLE],, there are a lot

  • of exchanges that make money.

  • And the other ones aren't.

  • GARY GENSLER: So I want to talk a little bit

  • about cross-border.

  • On Tuesday we put up a complex chart.

  • I don't need to go through that again,

  • but we all know and there's a lot of people here

  • that probably send money back.

  • When you're moving something overseas,

  • you're moving from one fiat to another fiat currency,

  • it takes some time.

  • And the banking system over centuries

  • has formed a way to do that to move from one money to another,

  • or as we say, one ledger system to another ledger system,

  • through correspondent banking.

  • And correspondent banking is a reasonably concentrated

  • business.

  • One student sent in the group chat

  • last night that there's only really 10 banks in this field.

  • I don't know if that's accurate, by the way,

  • but it is a very concentrated business

  • because they're large international banks.

  • Whether it's 10 or 20, it's--

  • you know, and they can charge a little excess because they

  • have to have correspondence.

  • They have to have relationships with all the local banks,

  • and they're taking some credit risk-- the correspondent banks

  • standing in between-- some credit risk of the local banks

  • on both sides in the US and so forth and in,

  • let's say, Mexico if it's between the US and Mexico.

  • So one idea that's been around, it's

  • widely associated with Ripple but it's not only

  • associated with Ripple is this simple chart.

  • What if I move fiat to crypto and crypto to fiat?

  • Just call it a bridge crypto or bridge currency.

  • I can say I can go from US dollars to Bitcoin,

  • or XRP, you fill in the middle, and then

  • move over to the other fiat--

  • Mexican peso, in my example.

  • And might that take some cost out of the system?

  • We have Sean's issue earlier of volatility.

  • If the crypto is fluctuating a lot, that causes some issues.

  • If there's a lot of cost or friction,

  • because now you're doing two currency exchanges not one.

  • I'm calling crypto a currency for this purpose.

  • I know that crypto is not technically a currency,

  • but for this moment let me just call it--

  • you have two currency exchanges, and thus you

  • have two bid ask spreads to pay.

  • Just the market makers you need to pay the bid

  • ask spreads twice, and you have some volatility

  • if the middle crypto is moving around.

  • But this simple diagram is a big part

  • of what Ripple is trying to create with xRapid.

  • xCurrent is a messaging app of Ripple's and it's

  • competing with Swift.

  • And it had some reasonable adoption.

  • A lot of banks are starting to use it.

  • But don't confuse that with another product, which

  • is an interesting product that kind of does this that goes

  • fiat to crypto, crypto to fiat.

  • So what problem, what pain points

  • would this be solving if it worked in the cross border?

  • Anybody want to remind the class what the--

  • Tom?

  • AUDIENCE: Well, this reduces the number of intermediaries.

  • You don't have to have your bank engaged with a correspondence

  • bank, which engages with a local bank, which then--

  • it sort of--

  • GARY GENSLER: All right, so it might.

  • I'm going to say it might lower the intermediation because you

  • still have on the two fiat sides your local bank and a bank,

  • and to do the crosses you need some market making function

  • which in Ripple's case they try to build into the application.

  • And they have market makers to provide liquidity.

  • There was a question somebody mentioned liquidity.

  • Some liquidity.

  • But it might lower the numbers of intermediaries.

  • What else might it do?

  • AUDIENCE: There's usually between exchanging currency

  • there's a balance between the settlement time and the fee

  • that you pay.

  • So if you want quick settlement you have to pay a higher fee,

  • or you can accept a lower fee but it takes multiple days

  • sometimes to catch over, so potentially it

  • could solve that.

  • GARY GENSLER: So this is basically a way

  • that you can shorten the settlement times.

  • This can be done literally in seconds.

  • I'm not saying that you wouldn't pay a little extra for it,

  • but this can be done very quickly.

  • If you have arrangements.

  • So some contend-- and I've spoken to them at conferences

  • and so forth--

  • that big corporate treasuries are going to try to do this--

  • that the treasury function of Apple and others

  • might take this up.

  • The big banks say that's ridiculous.

  • The big banks say, no, we can provide

  • real-time cross-border cash movement between dollar

  • and euro, and dollar and yen, and you

  • don't need to interpose something in the middle.

  • AUDIENCE: Wouldn't that require huge amounts of cash reserves

  • to be able to protect against volatility, and not

  • only volatility of the crypto, but the volatility

  • of the actual fiat for that particular country [INAUDIBLE]..

  • GARY GENSLER: So the question is, will it need

  • a lot of liquidity, basically?

  • You used a different word maybe, but--

  • AUDIENCE: Reserves.

  • GARY GENSLER: Reserves.

  • But somebody who can make markets in size

  • in crypto versus fiat, in crypto versus fiat,

  • I think the answer is yes in terms of--

  • the only probably token right now

  • that has enough liquidity in it to do this in size

  • is probably Bitcoin.

  • Even though Ripple is promoting this

  • and it's sort of an interesting technology,

  • they have a software, xRapid, that you can do this right now.

  • They're promoting on XRP, but is there enough liquidity?

  • Could you move more than a million dollars?

  • Probably not.

  • You probably couldn't move $100 million payment

  • without moving the market a lot.

  • Shimon.

  • AUDIENCE: So back to finance, the only way--

  • GARY GENSLER: So back to finance,

  • that's good from a finance professor.

  • AUDIENCE: The only way that this will work

  • is sort of subject to the cost of arbitraging this, right?

  • You don't care about the value of XRP provided that you're not

  • validating arbitrage relationship between the two

  • fiats, right?

  • GARY GENSLER: That's correct.

  • AUDIENCE: So whatever those frictions are,

  • you won't be able to go underneath them.

  • And if you're Apple, I don't see the treasury

  • in a business case.

  • If you're Apple and you're banking with JP Morgan Chase,

  • I mean, they're probably quoting you, you know, bips.

  • I mean, the two major currencies, the spread

  • is like in bips.

  • GARY GENSLER: A bip is 1/100 of a cent, basically.

  • I mean, it's very tiny.

  • We'll get there, just a second.

  • AUDIENCE: I'm not sure that isn't the--

  • GARY GENSLER: So the proponents--

  • and then we'll come back-- proponents of this say, yeah,

  • JP Morgan might solve Apple's needs between dollar euro,

  • but are they really doing it between dollar peso, or dollar

  • Kenyan currency?

  • AUDIENCE: Let's say they're not and the spread there

  • is 10 basis points, 50 basis points.

  • Well, that's going to be by construction, the spread,

  • that's going to be [INAUDIBLE] arbitrage that will be allowed

  • if you go that way to--

  • GARY GENSLER: All right, so Shimon's

  • saying there's maybe a cost in friction.

  • I think the proponents of this would also

  • say there's a friction in time moving from dollars to peso.

  • Remind me your first name?

  • AUDIENCE: My name's [INAUDIBLE].

  • Well, it's certainly true even in pesos or any currency,

  • like, all these points that anyone's getting

  • are extremely tight.

  • But there's still probably like weekends, for example.

  • Weekends they're just not quoted at all.

  • So if there's a major event that's

  • happening over a weekend that's going

  • to change the value of your asset or your currency,

  • then you can't trade until Sunday night

  • when Hong Kong opens.

  • And so there's still like a 36-hour time period

  • that is completely [INAUDIBLE].

  • GARY GENSLER: So the worldwide currency markets

  • are depending upon banks, and banks do actually

  • have holidays.

  • I know it's sometimes hard to believe, but.

  • And so there's a question of--

  • so there's a question of friction

  • which Shimon would say if it's even if it costs you

  • half a percent it better get inside of that.

  • There's a question of settlement delay, this could be faster.

  • But you're saying they could change that--

  • JP Morgan can change that.

  • And then there's weekends.

  • Do you have 160 some hour week?

  • I'm going to go to Alexis and back here.

  • AUDIENCE: I was just thinking like-- because this system like

  • India at the end of the day, it depends

  • on the a fixed rate on the two fiat rate

  • on the normal markets, right?

  • So even if we can't trade on a Sunday,

  • the rate is going to change on the tax form based on,

  • I don't know, the assumption of what the rate is going to be

  • tomorrow.

  • It's going to adjust, normally you should adjust, right?

  • Because as has been raised before,

  • adjust for new arbitrage take place.

  • So even if it's possible, doesn't this system

  • add more risk in terms of two different risk--

  • fiat-crypto, crypto-fiat?

  • And just there will always be the underlying risk of fiat

  • to fiat because it's always based

  • on a price on the private--

  • GARY GENSLER: Hold your question because I

  • want to see if the other--

  • yours comes in.

  • I got it, it's the risk.

  • AUDIENCE: I was just going to bring up

  • the accessibility for non-first world countries

  • or unbanked countries.

  • And I would be less concerned about moving like a yard

  • and more concerned about, OK, well maybe I could transact

  • like sub-$100--

  • GARY GENSLER: Do you want to translate

  • for the room what a yard is?

  • My Goldman Sachs days I knew what a yard is,

  • but some of the non-bankers.

  • AUDIENCE: It's $1 billion.

  • GARY GENSLER: $1 billion.

  • Now you can work on--

  • what trading floor to did you work on?

  • [INAUDIBLE]

  • Citi.

  • Now you can work on Citi.

  • A yard is $1 billion.

  • At Goldman Sachs it's floor 2.

  • AUDIENCE: Yeah, oh boy.

  • GARY GENSLER: We measured it differently, yeah.

  • AUDIENCE: But I think if you wanted

  • to transact maybe like under $100 from dollars to whatever,

  • no large bank is going to open an account and do that for you.

  • You're going to have to do that--

  • like a commercial bank, if you have access to it,

  • there's a really wide spread there.

  • So you can do this through an app through a Stablecoin,

  • or Ripple, or whatever, you're going

  • to be able to do it for cheaper if you're

  • making like micro transactions.

  • GARY GENSLER: So I'm going to react

  • and then trust bring it all together and summarize.

  • It's the last slide, so.

  • Alexis' point about risk, I agree.

  • I think that all of these points are valid that there

  • is additional cost.

  • There's two hops in this example,

  • and there's additional risks.

  • So the real business case question

  • is, is there enough value added on the other side?

  • Are you shortening settlement cycles?

  • Can you do it on the weekends when you otherwise

  • couldn't do it?

  • Could you move small dollar amounts, maybe retail?

  • Because Western Union still charges something

  • like 8% to 10% to do cross-border remittances.

  • So send some money to the Philippines,

  • and do it only for a couple of hundred dollars,

  • and you're probably spending 10%.

  • Could somebody build inside of those types of--

  • now, $200 movement 10%'s $20.

  • You still have to bring transaction costs down--

  • fixed transaction costs down.

  • But if you can bring the fixed transaction cost down and have

  • enough liquidity, it's kind of--

  • I wouldn't count this out.

  • I'm one who sort of doubts it will

  • be in the heart of treasury function

  • that Apple will be using it between dollar and euro,

  • but I want to say just the wide spectrum and just

  • an interesting-- can crypto be a bridge currency,

  • and might it be in the world of stable value?

  • I hope-- I mean, this was a good discussion

  • because this is what the rest of the semester is about.

  • We're going to take use case by use case and really debate,

  • and through it the learning objective is for all of us

  • to leave with a little critical reasoning skills

  • about when does an append-only log with consensus

  • amongst multiple parties and maybe a native token make

  • sense?

  • That's usually called blockchain,

  • but Aline doesn't let me call it blockchain technology anymore.

  • Next Tuesday is election day, so I'm going to make my pitch.

  • If you're a US citizen, please vote.

  • If you're not, I'm not going to ask

  • you to vote but please vote.

  • Participate in our incredible thing called democracy,

  • but we're going to talk about central bank

  • digital currencies.

  • And so I think we're doing this over two sessions, as well.

  • So next Tuesday is going to be a lot about central banking

  • and so forth.

  • So thank you.

  • Happy anniversary, Bitcoin.

  • [APPLAUSE]

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