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visit MIT OpenCourseWare at ocw.mit.edu. GARY GENSLER: Welcome back. People can sit at
that back table, or Rob you want to come up here? So I said you're
to have a special-- ROB GENSLER: Focus
on you during class. I'm his twin brother. GARY GENSLER: Everybody can
meet my twin brother Rob. [APPLAUSE] Rob's not your guest speaker. He's my guest. But he will speak
a little later when we talk about Nouriel Roubini
and Roubini's thoughts on blockchain economics. Rob worked at T. Rowe Price
for 25 years, 24 years? ROB GENSLER: 20 years, before
that on Wall Street for 10, Salomon Brothers mostly. GARY GENSLER: So he's from
Salomon Brothers, Wall Street. He started his own hedge fund. And that didn't work out. So he closed that hedge fund. He went to work for T.
Rowe Price for 20 years. And he ran a global equity fund. But before that, he was
doing telecom and investment. But I will ask Rob, as an asset
manager around $20 billion of money at one point in
time and was successful at it, his thoughts about this
cryptocurrency, crypto phase. He has not-- as opposed to
everybody in this class, he has not read the
readings for today's class. But I know you all read
the readings maybe. But that will be
when we're talking a little bit about the
blockchain minimalist. So we're now turning
into what I call act two. We've talked a lot about
the economics of blockchain throughout talking
about the technology. But now we're going to
take today and Thursday really to dive a little bit
more into the economics. Now of course, we're
talking about the economics the entire semester. But this is going to be just-- we're just going to
stay right on that. And because my goal
on this journey together is that we all get a
little bit closer to the ground truth, separating the
hype from the reality, I've tried to put
in the readings, if you've chosen to sort of even
do the skim read or look in, some of the blockchain
minimalists, like the Nouriel Roubini
piece that you had. And it doesn't get
much more minimalist than Roubini's piece. But I think it's
relevant to know where Paul Krugman
or Nouriel Roubini or Joe Stiglitz or others
are on this technology. I don't happen to
agree with them. But I'm not all the way
over on the other side. I'm not with the Tim Drapers. And yesterday I had
the honor to appear at a conference in New York City
where Fidelity was rolling out their new blockchain
digital asset business. And so I was the setup
speaker, I guess. But one of the
other speakers there was Mike Novogratz, who started
a company called Galaxy. I would put Mike and some
others closer to the maximalist, or he cautioned me he's
not a 10 on the 10 scale. He's probably an eight. But I've tried to put into
this readings and this course so that you can leave this
course with critical reasoning skills really what
are the economics. So let's go on that
journey together today. And also, I say,
think about some of what we're talking
about today in light of your final projects,
because you're going to be looking for
some pain point in finance or with a little special
discussion with me outside of finance and say
what's a use case that all this crazy blockchain
stuff can come together and actually work on it. So the overview, of
course, as always I'll talk a little bit
about what our readings. I'll see if we'll do a
little Socratic method. So we're going to
talk about blockchain economics, a little bit about
blockchain versus the internet. That was Joi Ito's article
that kind of set that up. And Joi wrote that
several years ago. He might write it a
little differently now. But I still think
it's really relevant to get behind how do we think of
blockchain versus the internet. I call them the minimalists,
whether it's Roubini or Krugman or Stiglitz, but-- or Gensler. You're going to hear
from one back in-- that Gensler, who came three
minutes after this Gensler. Well, he might have come before
me, actually, because Rob, you lived in Botswana. And didn't they believe
that the second delivered was the first conceived? But we're identical, so maybe
it didn't happen that way. And some costs-- I'm sorry. I mean, you know, I-- oh yes,
we have to do the twins thing, you know? How many twins in this class? Yeah, yeah, all right. It might be just statistical. And you said you're
Peruvian, identical twin? AUDIENCE: I have
an identical twin. GARY GENSLER: Identical twin. AUDIENCE: I had--
he's a medical doctor. He lives in Peru. And in Peru, by the way, they
do say that the second is the-- GARY GENSLER: The
second delivered is-- AUDIENCE: Kind of the older. GARY GENSLER: So
has the birthright. AUDIENCE: I was the first,
so I tend to disagree. GARY GENSLER: Rob has
the birthright in Peru. We'll talk about
costs and trade-offs. We've done a little bit
of this in the past. And then we'll wrap it up
and a little fewer slides. I slimmed this out just so we
can have a bit more discussion. But the study questions-- how do decentralized
blockchain applications affect the cost of verification
and cost of networking? And anybody want
to dive into that or we want to dive in
when I do the little bit? I'll give my read about how
blockchain changes verification and networking. Those are the two things. That was in the
Christian Catalini paper. I know you didn't love it that
I assigned a 30-some page paper. But Christian's at
the forefront of this. He's in the Sloan faculties. He's not here. He's sort of on a
sabbatical semester. But Christian's paper-- he's at
the forefront of the economics around blockchain. You can't take a good
blockchain course without reading
Catalini's paper. And it's not just
because he's a Sloanie. I think he's kind of got that. And then the comparison
to the internet. So it's sort of
those two big items. And I know I-- as somebody said,
there were too many readings. There was only five
that were required. Of course, Roubini's was
just low-hanging fruit, because he gave
it last Thursday. And it was-- how many people
read the Roubini piece? It wasn't required, but-- so about a third or a half. Do you agree it was
kind of a slap down? What'd do you think, Alene? AUDIENCE: It was hilarious. I loved it. GARY GENSLER: You loved it? AUDIENCE: I couldn't
really finish it. But it was hilarious. GARY GENSLER: How
many of you that read the Roubini piece
found that you agreed with most of what he said? OK, so 2, 3, 4, 5-- oh, Alene-- 6. All right. Wow. AUDIENCE: I don't know. Every time I read
one, I'm like, yeah, they totally know what
they're talking about. I'm on board. And I feel the same way with
all the minimalists now. GARY GENSLER: So
you're identifying with the minimalists now? OK, OK, on Thursday
you're going to read things like an open letter to
Jamie Dimon that kind of goes-- it's not a maximalist. But it kind of
goes the other way. And then the optional bits. So let's start a little bit
with blockchain economics and the first
thing, verification. So what are you-- what
are the costs, anybody who actually dived in or dove
in to the longer Catalini piece? The cost of verification. And these are things
that I'm not just presenting because
somebody wrote about it. I think Christian's
right about this. I think that the
blockchain can-- doesn't always, but can really
lower the cost of verification. Beau, do you have a-- AUDIENCE: You talked
about efficiently verifying auditing
transactions that happen and the cost of audits lowering. GARY GENSLER: So efficiently
auditing and lowering the cost of auditing
transactions. What else do he talk about? Kelley? AUDIENCE: Part of
that efficiency was the fact that
currently there is quite a few third-party
actors that are involved, separate between the
input and output actors. GARY GENSLER: Right. So you might have fewer people
in the chain, fewer actors. AUDIENCE: [INAUDIBLE]. They also mention the privacy
policy and also censorship. GARY GENSLER: OK, so let me-- you raised two--
privacy and censorship. Do you want to say, or somebody
else, what is it about privacy? I mean, because these are
really critical things that blockchain can do. AUDIENCE: So with privacy,
the addresses are synonymous. So there's no name
attached to an address that you can interact
with your peer without people knowing
who you are necessarily. GARY GENSLER: Right. But why does that matter? So-- AUDIENCE: Why would people pay
more to be able to do that? So there's an
understanding that there's a fundamental right to privacy. You don't want the world
to know all of your doings. GARY GENSLER: So some of
it's about rights and values. James? AUDIENCE: The key
element was hacking. These are examples when
people's information are so readily available
that a third party can hack. GARY GENSLER: Totally agree. But what's the big
commercial thing that's going on right now in big data? AUDIENCE: [INAUDIBLE] can
profit from that information they're gathering as-- GARY GENSLER: I
mean the dominant-- I'm sorry. AUDIENCE: I think resale of
the data as well as the-- [INAUDIBLE] GARY GENSLER: So what
Sean and Eric are saying, the dominant revenue
model in tech today, whether it's big tech like
Facebook and Google and so forth or any tech-- the dominant
revenue model, not the only, is basically give me some of
your data, let me analyze it and either advertise against
it or somehow in these days use machine learning
and AI to analyze it and really market other
products back to you maybe. We all do it. We live in this. We give up our data, some more
so than others, some less so. But it's a big piece. Blockchain, Catalini
raises, well maybe you can get a little bit
more privacy if you wish it. It might be part of
the revenue model. How about censorship? What was the point
about censorship? Anybody? So when you're dealing
with a central authority, a commercial bank,
they can decide whether to extend credit or not. That's a form of censorship. It's a form of
allocating something. But it can be as simple
as to whether to even sell you the ticket to the
movie theater or not in a sense. It doesn't happen to us often. But distributed
decentralized platforms are more censorship resistant,
I mean on a spectrum. Anything else from verification? So let's see how we did. So this was how I sort of take
it back, these six points. The direct costs-- there
may be a cost trade-off that blockchain could have a
lower cost of verification. That doesn't always, but a
lot of verification in finance has multiple back offices
trying to reconcile between the ledgers. We've talked a lot in
this class about ledgers-- ledgers recording
property rights. So you can have
one bank recording the property rights, another
bank recording a property right. It could be the
ownership of equities. It could be cash
called payments. So there's a lot of direct
costs that it can lower. And I would say in the
permissioned blockchain space, a lot of big banks are looking
at that very first point. We just lower our direct
costs of the back office. Stop there, straight and simple. We have a lot less
reconciliation costs. Privacy and data leakage costs. I call it both privacy,
which sounds like Hugo and I want my personal
privacy, or I just know Facebook is taking my data. I call that data leakage. I'm not terribly
worried about it. But it's something. Alene. AUDIENCE: So I'm very curious,
is there a use case here? Because I really
fail to see one. I could see privacy in the sense
that you could transfer coins from anonymous spenders
to anonymous receivers and you could even
hide the amount. And that's useful for
business, because businesses don't want other businesses
knowing what they're up to. But what other
use case is there? GARY GENSLER: Oh, I think
it's a very good question. Anybody have an
answer for Alene? Because I do, but
I just-- do others? Like a business
use case where you might have users not
giving up as much of their data and privacy. I'm going to use Uber. Oh, did you-- AUDIENCE: Yeah, I think
an example I can think of is, for example,
the hedge fund in-- GARY GENSLER: The which fund? AUDIENCE: Hedge fund. GARY GENSLER: Hedge fund. AUDIENCE: In asset
management, you don't want to know, because for
example, also the hedge fund, they hide behind the brokers. They have certain
swaps with the brokers so they don't have to review
the acquisition they viewed. And also they try to do their
position under the 5 percentage threshold. So in this way,
because any action-- their action maybe can move
the market over a certain stop. GARY GENSLER: OK, so there
is a commercial situation as an asset manager. I might not want
others to know what trades I'm doing, what
positions I'm taking. I was going to use a
personal situation. You could envision Uber having
been created on a blockchain. It's not on a blockchain. But I'm saying you could
have envisioned it-- riders, equipment owners
called car owners, and drivers. It's like three communities--
who owns the car, who drives the car,
who needs the cars-- coming together in a blockchain. And maybe part of the reason I'm
comfortable with a blockchain Uber-- maybe, maybe-- is I might
have a few girlfriends. And I don't want
anybody tracking that I'm visiting
different girlfriends. This would be-- you would call
it privacy, but perfectly-- I'm single. I'm single. But I'm just saying that it's
a perfectly legitimate thing. Do I want to share that data? We all share a
tremendous amount of data if we use a credit card that-- particularly in today's world
of machine learning and AI, that you can take
somebody's spending patterns and really narrow it down. Let's, for instance,
say that I have a certain religious affiliation
or a certain pro-guns or anti-guns or any
orientation I might have. You get enough
spending patterns, you can sort of piece
together that's probably you. That's probably your religion. That's probably your
sexual orientation. That's probably the
country you're from, the ethnic group if you pull
enough spending pattern coupled with machine learning and AI. So use case is people are really
talking about, well, maybe there's something
that I can give a little privacy-preserving
attribute. It won't be the dominant
use case, but something. And this class today is
just about economics. That's a legitimate economic
thing that's going on here. Was there a hand over here? Censorship risk. Basically that-- oh, I'm sorry. AUDIENCE: Can I ask
a related question? So in terms of the
privacy, there is-- [INAUDIBLE] mentioned those
financial institutions, like before this, they can just
keep their data inside and only maybe reveal that to regulators. But if we use the
blockchain, they need to make all those
transactions public. And it's kind of
like the other-- it's like the opposite
to keeping it private. GARY GENSLER: So to the
regulators you said? AUDIENCE: Like, say one
thing it keeps you anonymous. So that's kind of
protection of privacy. On the other side, we
need to make public all the information, which
may otherwise just involve some certain institutions. GARY GENSLER: Right. So you're abso-- remind
me your first name. AUDIENCE: Jennifer. GARY GENSLER: Jennifer. Jennifer is right. There is a tension-- the traditional blockchains
like Bitcoin have both. They have-- they
mask a lot of data because of the pseudoanonymity. But it's not truly
completely masked, because you can use
forensics and track things. And to verify a permission list
blockchain, it's all public. So I agree with you. It sort of goes both ways. There are technical ways,
whether through zero knowledge proofs and other ways,
to have more privacy. But I'm saying there's a
legitimate economic cause. Paul Krugman's the last
sentence in his op-ed was "tell me a use case." Tell me-- remember Krugman's-- he's a Nobel laureate. Paul is brilliant. And he writes eloquently
for the New York Times. But there are-- and
Jennifer, you're right. It's not perfect yet. But there are privacy attributes
that you can give to a system. I do want to clarify, I
only have one girlfriend. She lives in New York. I just want to make sure. It was a hypothetical
about Uber. Realized we're on film. ROB GENSLER: Now they'll
just all think it's me. [LAUGHTER] GARY GENSLER: There you go. There you go. Thank you, Rob. There was a story-- no. OK, settlement. We've talked about this. I think if you don't have some
economics around settlement, that you don't need
some immutable record of the movement of a right,
particularly a property right, you might just as well just stay
with a traditional database. I'm not sure I'm entirely
right about that. There might be some permissioned
blockchain worthwhile. But I'm kind of a
view if you're not moving something that matters-- and settlement means
something that's final. We talked briefly six
or eight lectures ago about that old lawsuit in
Scotland, the Crawford case, that if James steals $1
from me but then hands the dollar to Andrew, I can't
get it back from Andrew. I have no legal rights to
get my dollar from Andrew. I might have legal
rights about James. But it's final. There's final settlement. It's Andrew's dollar. So there's some things that
you just want finality. One thing I would talk about
is a lot of merchants in the US don't like paying 2 and 1/2
to 3% of all their sales to the payment system-- Visa, First Data, and so forth. A lot of that goes to the banks,
not to Visa and First Data. And a lot of that is also for
what's called chargebacks. So I was the chief
financial officer of the Hillary campaign. Now, it was really lousy that
we lost for a lot of reasons beyond this discussion
about blockchain. But I continued to be the
CFO for the next six months, because we had to
wind down a campaign. And we had to deal with
what I called the computer and refrigerator graveyard. The hundreds of people we
had working at headquarters left the equipment. And they left. But the other thing I had
to deal with for 60 days was chargebacks. Did you know that
donors could go to Visa and say, no, I didn't
really buy that donation, whether it was $50-- low dollar-- or $2,700. And so I have a personal sense
of this whole chargeback thing. Now, donations to a
political campaign are different than
services you buy. But it's something
merchants deal with a lot. Hugo. AUDIENCE: Are merchants
responsible then to pay Visa to
refund the client? Or is it on Visa and First Data? GARY GENSLER: We were
in essence the merchant. And yes, we had to pay. The campaign-- and this happens
in every losing campaign. It didn't have
anything to do with-- AUDIENCE: What if you've
already spent the money? GARY GENSLER: That's a problem. That's a real problem. And what the payment processing
companies-- in that case-- it's a matter of public record. We used a company called
Stripe rather than First Data and so forth. I mean, the Stripes
of this world are taking some
counterparty risk. Now, most merchants
are not shutting down. We were shutting down. But yeah. So effectively it's
on the merchant. Cost of trust. In blockchain, there
is a cost of trust. But it's trusting the code-- the computer code. You're trusting the Bitcoin
core developer, so to speak, and the consensus protocol. So when some people
say it's trustless, it's not truly trustless. You still have to
trust the code. You have to trust the consensus
protocol versus the trust in the central intermediary. So it's sort of trade-off of-- yes, Aline. AUDIENCE: You're also trusting
the network in Bitcoin. Just a reminder. GARY GENSLER: Yes,
you're trusting the network in Bitcoin. It's a very good point. I think by and large we all
trust the network even when we're dealing with
Citibank as well. But you're right that right
in the center of a blockchain solution, you're trusting
the network for all its communications. But even at a
central intermediary, there's some trust in a network. AUDIENCE: Yeah, but
not for correctness. So in Bitcoin, you
can double spend if the network never messes up. But in a permissioned algorithm,
you cannot double spend-- GARY GENSLER: There's
different issues. I agree with that. You had a question? AUDIENCE: I would go
one step further and say you also trust the ISP, right? Not just Citibank, but
you're trusting intermediary that gets you to
Citibank's website. But then I-- GARY GENSLER: That's true. AUDIENCE: --can put a fake
website in between there. So there's layers of
trust all throughout this. GARY GENSLER: That's right. And I drive a car-- not when I'm in Boston. When I drive a car, I'm
trusting the carburetor as well. And I don't really know
how a carburetor works. So there's all sorts
of layers of trust. But I would say that the central
trade-off with blockchain is you're moving
away from trusting the central intermediary. And you're trusting
code and consensus. And then economic rents,
and we've talked about this. I mean, it is not the
reason why payment systems cost a half a percent
to a percent of GDP around the globe. But some of that
is economic rents. And the financial
sector in the US is a trillion and a half
dollars or 7 and 1/2 percent of our economy. There's a fair degree of
economic rents in there. So these are kind of
the six or seven things not only that I think is
worthwhile to discern out of Christian Catalini's paper,
but it's also to Paul Krugman. There are legitimate things
that you would say, well, we can maybe lower the
cost of verification. The second big
piece in Catalini, he talked about networks. Now, these are my
words, not his. But it's basically the
value of networking, moving property rights. But again, because I'm
thinking blockchain is about property rights-- I mean, we can
talk differently-- but moving some property
right or computer code that's going to trigger
a smart contract that's going to be installed and move
some property rights around. And does blockchain
have an ability to lower the cost to develop
or operate the network? Basically, in Catalini's words,
to jump start the network or get over the collective
action challenges. And collective action challenges
are always in business when you're trying
to start a business. Some businesses it's
really hard to get over the collective action issues. I mean, I don't
know that any of you would have read a business
case on Federal Express. But when I first went
to business school, they still had a case
on Federal Express, because the gentleman-- I think it was Fred Smith-- who started this
incredible idea, how do you do overnight
delivery the first day. How do you make sure you
have enough airplanes to fly all the packages, in
his case to Memphis, Tennessee, and then fly the packages
somewhere else where you have no customers
and you have no employees and you have all these
collective action issues within one company? Uber, Bitcoin itself had to
get and jump over and build a network. Facebook built a network. There's all sorts of study
about how you build a network and how you sort of
move towards a network and get the big pay
day of a network. Blockchain can be part of that. I'm not saying
it's the only way. But it is one thing. And Christian speaks
about two things. A token-- and yes,
token economics might not have much to
do with many things. But it might incentivize
and help fund the network. So it's a new form
of crowdfunding. And economically
speaking, there's been crowdfunding for centuries. But I mean, it's a new form of
crowdfunding, kind of building on what Kickstarter and
others have done, to basically have a community of interest
to pre-fund a project before it's functional. Now we get into all sorts
of public policy issues of whether it's a security or not. But the raw economics
is it's a form-- it's a new form of crowdfunding
before the theater is going to show its show. But it also might be
an incentive mechanism during an operating phase. That's one where I'm a
little bit less sure of. I have to admit, I
might be on the 1 to 10 scale kind of a two or a three. And I don't want my bias
to infect you all, though, because there's some people
that think there really are lots of token
economics to help operate. I think the first one-- it's
a great way to crowdfund. I think that's
already been shown. I think that's kind
of been proven. I'm less sure about
the second one. Do we need tokens and token
economics to run a platform? But let us not forget there
are many gaming sites that effectively have tokens. They might be called
hammers and swords. How many of you are gamers? You don't want to
admit it maybe? That's six or seven. So what do you have
to pay a lot for? Is it shields, swords,
or hammers these days? AUDIENCE: Actually, I'm going
to work for Activision Blizzard. But you have to-- one of the big ones is skins. It's like-- GARY GENSLER: Skins? AUDIENCE: Yeah. GARY GENSLER: Who figures? So there's a social community. There's a reward and
incentive system in gaming that's very real and
has been deeply studied. And it's a reward or an
affinity or an identity. I mean, some of you probably
have affinity or identity points or air miles. Anybody collect air miles? Do you do it just for the
travel that you can get, or do you feel a little cool
when you get extra points? You don't have to
admit that, Tom. AUDIENCE: Hey, I'll take
anything I can to be cool. GARY GENSLER: Right. You remember that George
Clooney movie, Up in the Air? How many people
saw Up in the Air? And do you remember one of the
later scenes when he finally-- he wins. He's like 10 million miles. So there is a piece
of human nature. And the people who are
maximalist on the last point say this is part of an incentive
system like that scene in Up in the Air. I'm towards the minimalist end. But I have to respect
that it might be I should be more neutral on that point. Metcalfe's law. Anybody know Metcalfe's
law other than Alin? Brotish? Yeah, yeah, I figured. Brodish, have you
told the class, do you have a PhD too
somewhere or something? No. No, no, no, no. I didn't know. That was a word going around. AUDIENCE: [INAUDIBLE] the
value of a network, and it is proportional to
the [INAUDIBLE].. GARY GENSLER: Right. So it's an important concept
that the value increases with the number of nodes. Idea, if I can only call
Alfa and Alfa can call me, he doesn't find that very
valuable to call me actually. But that's the bit. But if Alfa can now
call five people, he doesn't view that as just
five times more valuable. Maybe it's 5 squared,
the number of nodes. Now, further
studies have sort of said that doesn't really
work once you get probably past 100 or 150 nodes. Alfa doesn't really care. Once he can call his
first 150 people, is it really going
to keep going up? So there's a modified
Metcalfe's law that talks about n times log n. But whatever the
actual value is, the concept is that
it's non-linear. And that is part of the reason
why Apple and Google and Amazon trade where they trade. Why are they worth $500
billion to a trillion dollars? Rob will tell us why
in the marketplace. But part of it is
this Metcalfe's law, that it's non-linear
with two billion, quote, "users" of Facebook. And so part of token economics
are around Metcalfe's law. And you'll hear people
sort of say this. So I thought I'd make
sure you have it. So back to Joi Ito. Tom. AUDIENCE: Before
we jump to this, as I was reading
the Catalini paper, I kept thinking about the
transaction costs and the cost of hashing, particularly for
Bitcoin in a proof of work system and how those things-- I still just can't wrap
my brain around the idea that Bitcoin becomes
so diffuse, but yet transaction fees are small
enough that that's possible. GARY GENSLER: If you're
worried that in Bitcoin's case that the proof of work
and the electricity and the hashing
function is just-- by design is going to be
costly for a long time. AUDIENCE: Right. I mean, we think
back to last winter where there were too
many transactions for a Bitcoin blockchain
and transaction fees. GARY GENSLER: So
one of the big-- I'm going to hold this point for
a bit, but you're going to see. One of the big thing
the minimalists, I call them-- the
minimalists would say is by its very
design and nature, blockchain is meant
to be complex. It's meant to have some
latencies because it's doesn't have a central authority. And the trade-off of
having a central authority is some complexity. You called it the hashing,
the proof of work, the other-- the network,
Alene would say. Well, you've got to
propagate on a network. You have some latencies. In Bitcoin's case, blocks
are added every 10 minutes. Whatever that bucket of
complexity and design features, to not have
a central authority that by its very nature
the minimalists say will never take off
in any scalable way. Though I respect each
piece of that argument, I think, one, we might move
to other consensus formulas. Two, it doesn't have to
take off in every use case. Question is whether
in some use cases it will provide an alternative
to a central intermediary. AUDIENCE: Just think about-- GARY GENSLER: But if you're
saying about Bitcoin how it's designed right
now, I think Bitcoin-- it's very hard to get to
very big scalable solutions. AUDIENCE: Like the
idea of using Bitcoin to buy a cup of coffee
versus my Visa card when the required
transaction cost is-- GARY GENSLER: It's probably
too high right now. That's probably true. But we're going to
hear on November 15-- we are going to have not
just guests, but guest speakers when Jeff and Kelly-- Jeff Sprecher and Kelly
Loeffler are coming. Jeff is the chief
executive officer of Intercontinental Exchange. And I hope you stick
with the class or even if you don't stick with
the class you come, because Jeff and Kelly-- Kelly is the CEO of
their new startup Bakkt. Hold your question
for Jeff and Kelly. Jeff's one of the great
entrepreneurs in the US. So the question that Ito
raises in his write up is, is Bitcoin kind
of the next layer? Did we go-- all these protocols
of the internet-- and these are just the four big known. There's dozens of other
protocols, sub-protocols and so forth. But is Bitcoin kind
of that next protocol? So what did you all
take out of Joi's work? And again, it was
about three years ago. But if Joi were here
today, he's still-- this is his architecture. He started-- he
runs the Media Lab. He started the first
internet service provider in his bathroom in
Tokyo at 23 years old. And he's lived in. Any thoughts from his piece? No? Same. Do I code call? Akira, did you read the-- AUDIENCE: Yeah. Interesting point
for me is the email was the application
for internet. And Bitcoin could
be [INAUDIBLE].. GARY GENSLER: So
what do you think? Do you agree with Ito or not? AUDIENCE: Controversial
[INAUDIBLE] Bitcoin, because as Dr. Roubini said,
the concentration of the miners and association, et cetera. GARY GENSLER: So blockchain
versus the internet, some thoughts. Both are open protocols. I mean, they're a little
bit different protocols. But broadly for this level,
both are open protocols. Both transport packets of data
around a distributed network. Now, in the case of blockchain
or certainly Bitcoin, those packets are
packets of data representing some
property right that then becomes known as value. Remember, when blockchain
start-- when Bitcoin started, it wasn't worth anything. It was kind of an idea. But then all of a sudden, it
was worth a penny of coin, so to speak. And when those two pizzas
were delivered May 22, 2010, it took a year and
a half for anybody to transact 10,000
Bitcoin for two pizzas. So it started to
have some value. But at first, it was
just an electronic code, a property right, whereas
the internet is content. Both have apps built on
top of a protocol level. So Facebook is really an app
on top of a protocol level. And there's many other apps
on top of a protocol level. And we studied smart contracts. So just for your
thinking about this and if you're investing in it or
if you're managing around this, is somebody pitching you on a
protocol level like Ethereum, like Bitcoin, a new protocol
level that other things are built on top of, or is it an
app built on top of it, usually through a smart
contract, not always. Layer one is like
Bitcoin and ether. Layer two is like the
Lightning Network. And maybe there should be
something that's interoperable. And one of the reasons he
thinks of Bitcoin as an app-- I don't use that vocab-- there's not settled vocab-- what you've highlighted there
is not settled vocabulary. Like, this would be
a heck of a class to give a vocabulary test
in, because in fairness to students, there's not
a settled vocabulary, even on the word blockchain or
permissioned systems blockchain or not. The purist would say no. I would say, well
yes, it's blockchain. I might not be that
pure around blockchain. Just want to make sure. Is that right? No, Rob's not going to answer. Both are said to be open
network development. But I would contend
really in both there's a lot of centralization. And Joi Ito writes about
how a group around ICAN really does a lot
of the centralized-- I'm talking about internet
protocol, not the apps on top of it. And of course, the Bitcoin
core developers or in Ethereum, if Vitalik Buterin
sneezes, everybody wants to know which
way did he sneeze. So there's a lot
of centralization around development. But it is open. It's on GitHub. It's open source. It's highly centralized
kind of in both cases. Interoperability, and this
goes back to Joi's point. Bitcoin is not
interoperable with ether, which is not interoperable
with EOS, et cetera, et cetera. They all are kind of
in their own space. They're not that
ultimate base layer. And so I think of it-- I might have the wrong word-- as
almost like the era when it was a private intranet and it's
not truly the internet-- Bitcoin. It's not communicating--
that word internet meant between networks. Alene will correct
my words here. AUDIENCE: What does
it mean for Bitcoin to be interoperable
with Ethereum? So for all intents and
purposes, right now you could do this
atomic cross-chain swaps where you could swap some
Ethereum and some Bitcoin. So that's pretty
amazing in itself. What more do you want? GARY GENSLER: So Alene is saying
whoa, whoa, wait a minute. Wait a minute. Slow down. You can move something
of value from one ledger system, the Bitcoin
ledger system, to the Ethereum ledger
system through something called atomic swaps,
which we talked about, which is a form of a layer, too. And maybe I don't
want anything more. Maybe that solves this problem. But there still is a
problem that Bitcoin code, scripting code is different than
the Ethereum scripting code. And you might say, so who cares. But they are separate networks. You have to have
this atomic swap to jump between
Bitcoin and ether. And you'd have to have probably
a different protocol to jump from ether to EOS. AUDIENCE: Depends on what
you mean by different. Same algorithm, but yeah. But they solve
different problems. So that's why the
script in Bitcoin is different than the EVM
in Ethereum, for example. So by nature, they
have to be different. GARY GENSLER: I've said
this to this class before. I think a lot of the
interoperability challenges will get past that. But we're really at
a different stage. The internet pre-1990s,
before the world wide web in '91 or '92 and there were
still more private networks-- this feels like we're
still kind of closer to that stage of the internet. Alene's pointing out,
well, maybe we're closer to the world wide
web because the solution is atomic swaps and jumping-- ROB GENSLER: Sorry, I'm
going to jump in here. GARY GENSLER: Rob, speak up,
because I can't hear you. ROB GENSLER: Sorry
if you can't hear me. But like euros and
dollars and yen, you still have to worry about
the currency exchange rate, no matter what you techies
over here-- sorry-- can say. Oh, but I can do
this in my sleep. Yeah, but what's it worth to me? Because this price is going up
and that price is going down. And the minute you get currency
exchange and value questions in there, it's not seamless, OK? It's just not seamless. It might be seamless
technologically. But-- AUDIENCE: But that
was the whole point of starting Ethereum,
starting Bitcoin, is that you were going to have
two different currencies. So just make up your mind. GARY GENSLER: So
what Rob is raising-- what Rob-- this isn't debate. There's not one right or wrong. What Rob is raising
is there's friction. ROB GENSLER: Right. If there's so much
value, what is my value relative to this
other currency, this other [INAUDIBLE]. AUDIENCE: Just to
clarify, I don't understand what people mean
when they say interoperability. Like, I really don't
know what they mean. I hear this a lot. And I don't know what they
mean-- what they want. That's what I'm trying to say. GARY GENSLER: OK, what I mean-- AUDIENCE: And I should
understand what they mean, because I'm the
technical person. GARY GENSLER:
Right, right, right. But you haven't gotten
your PhD yet, right? You know? All right, all right. ROB GENSLER: There's the
money side interoperability. That's what I'm bringing up. Interoperability
technically might be fine. But the money side is-- is one worth two or
is one worth three? GARY GENSLER: So what I
mean by interoperability is that you, with the
lowest amount of friction, one might even say seamlessly
move across various ledgers in this space. I mean, interoperable can mean
things differently elsewhere. But so it's like if I-- I'm a financial firm and I
set up a blockchain system, can it speak to and move
information and data and value with my Legacy databases
to the blockchain? That's not going to
be zero friction. There's going to be some
friction moving stuff from the Legacy
systems to this system. And if it's blockchain
to blockchain, again, what I think of is
can you with the lowest amount of friction cost-- whether the cost or what
Rob's talking about, like the currency
risk cost or just how you hook up the
API or atomic swaps with the lowest
amount of friction. And so from a user
interface, is it seamless? If I'm an institutional
user, can I hop, skip, and a jump
across these systems? Let me move on. But that would be
my lay definition. The incentives-- in blockchain
and particularly Bitcoin, you have miners. But there are incentives
even in the internet that you have registries
and registrars that Joi talks about,
but other incentives. You have somebody's
got to be motivated to keep this thing alive
and program as well. And then I would lastly
talk about the government. The internet kind of came
out of the government. US Department of
Defense and something called DARPA in the 19-- late '60s, '70s-- it kind of-- government ultimately
by the 1990s took a light touch
approach to the internet. But it wasn't like
the internet was birthed in a libertarian
anti-government way. And Bitcoin and Satoshi
Nakamoto and the papers all kind of came from the
cypherpunk libertarian ethos and culture. So it's a little bit
different cultural background. It doesn't mean the
internet loves government. But it's just sort of a little
bit different background. Alexis, was that-- or
you're just thinking? I should have said
there's one other point, significant investment. The internet took 20 to 25
years before a lot of money got thrown. And an avalanche of money
came into the internet by the mid to late '90s. Amazon, eBay, and some others
I think were started in 1995, Netscape and everything
was going on. But by '98, '99, and 2000,
you had that huge avalanche of money. The avalanche of money into
blockchain is not as big. But it came earlier. There was a good 15 to 20
years of quiet development on research labs like at MIT
and the Defense Department before that avalanche of
money came to the internet. And here we had it much faster. Those are my sense of some
of the differences with it. So now let's talk
about the minimalists. They're kind of fun, as
the paintings in the corner so suggest, minimalist. This was the one that I think
was talked about before, Tom. So what else do the
minimalists say? I'm going to have,
like, 10 or 15 things. Who is a minimalist? Alene is a minimalist. Who else kind of agrees
with Roubini right now? Show of hands? Anybody? All right, so I've got-- and you're still
coming to class. That's good. That's good. What else is in
the minimalist cap? Rob, get ready, because you're
going to give your view. AUDIENCE: So a class is one. Store of value is another
one because a class is not-- GARY GENSLER: So you're saying
it's not a good store of value. All right, not a
good store of value. Let's just kind of roll. Tom. AUDIENCE: I don't know
if this is the same, but it has no intrinsic value. GARY GENSLER: Has
no intrinsic value. I'll take that. Sean. AUDIENCE: The one thing
that's really interesting is the Gini coefficiency
that you mentioned-- GARY GENSLER:
Highly concentrated, the wealth concentration. Wealth concentration. Others? Remind me your first name. AUDIENCE: Jack. GARY GENSLER: Jack. AUDIENCE: Similar
point is that-- GARY GENSLER: So there's more
than one Jack in the class. AUDIENCE: Jack
[INAUDIBLE],, MBA 2019. GARY GENSLER: Good move. AUDIENCE: Is that it's
not really centralized. So there was some stat
that 99% of transactions go through
centralized exchanges. GARY GENSLER: Right. So I usually ask in talks how
many people have owned Bitcoin. Yesterday, I am at a
very high-end conference in New York with 150 to 200 what
I call curated invitation list. And Fidelity is rolling
out this big announcement. So the people in the
room are kind of engaged. And Mike Novogratz, who made
personally a half a billion dollars on betting on
ether and Bitcoin-- it was more ether than
Bitcoin, but on those two. I asked how many
people own Bitcoin. Two-thirds of the hands have
traded or owned Bitcoin. Two-thirds of the hands
go up, as you would think in a room like that. How many had owned it
directly on the blockchain, meaning they downloaded the
software, they have the nodes-- of about 100 hands that went
up that had owned it or traded, three hands went up
in that pretty darn sophisticated high-touch area. So it's rather centralized
because of crypto exchanges. Other issues? AUDIENCE: 51% issue [INAUDIBLE]. GARY GENSLER: So it's subject
to the 51% majority attack. And as Roubini
points out, that's probably more true with
regard to the small coins. If you start a coin and there's
only a million dollars of value or even $50 million of
value and there's only a dozen or 100 nodes,
it's far easier to overwhelm it than this
thing like Bitcoin that's lived out there in
the wild, one might say in the swamp for
all these 10 years. But a state actor with a few
probably single digit billions to mess around could do a
51% attack even on Bitcoin. If the government of China or
the government of North Korea really wanted to buy enough
computing power and ASICs, or frankly maybe even
the government of China would just take over
those two big mining pools that are in China. I don't know, but-- or the government of Russia. There's a big mining pool. And they-- So 51% attacks. It's kind of an
interesting thing. Other things? Jihee. AUDIENCE: No killer
app, so it's-- GARY GENSLER: No killer apps. So hey, where's
the "there, there"? AUDIENCE: There are a lot
of bugs in their code. GARY GENSLER: A lot of-- AUDIENCE: Bugs. GARY GENSLER: Bugs. Bugs in the-- so there's
still a lot to work out. So let me show you the list. And then Rob's going to
tell us what he thinks. There's many
technical challenges. We've talked about this
at an earlier lecture. We're not through the
scalability performance end of this. Again, I keep contending I
think in single-digit years-- not months, but years-- we'll get through a lot of
these scalability things. Maybe I'm too cockeyed
optimist about the ability of technologists here
at MIT and elsewhere. But I think we'll
get through a lot. We won't necessarily get
through the governance. There's still a bunch of
collective action issues. But I think maybe we're already
through the interoperability. I think there's still
stuff to do there. They lack intrinsic value. That was said. You didn't say there's
a lot of volatility. A lot of people raise
that there's just a ton of volatility
in these things. That's not a technical bug. But it's a feature
of the crypto itself. And we talked about
limited adoption. Paul Krugman's piece says, hey,
they're not accepted for taxes. They're not legal tender. Fiat currencies
have an advantage, because over the last
300 or 400 years, nearly every society
around the globe has said let's accept them
for taxes and legal tender. Good point to Paul Krugman. He's right. Can't get around that. Having multiple currencies
counter an economic history and logic. This is Roubini's point. But do we really need 20, 50,
100, 1,000 separate currencies? Maybe not, but on
the other side, why is it-- what did
you call it, skins? AUDIENCE: Skins, yeah. GARY GENSLER: Yeah, why is
it that some people will value skins in the middle of a
gaming site or affinity points? So I wouldn't necessarily
discard it completely. It's like, I just-- I think that's too simplistic
to completely discard it. And then token monetary policy. We've talked about
at Bitcoin, you can have the maximum of 21
million coins by the year 2140. It's put in the code. Do we want it to be the base
currency-- it's not technically the monetary policy; it's the
base monetary policy-- only in code, or do we want humans? The minimalists
would also tell you that blockchains tend towards
centralization, whether it's crypto exchanges, whether it's
development, the mining pools themselves, the holders, and
even alternative consensus protocols. So right now you're thinking
you're going to go to the door and get out of this
blockchain class. But it's important
to kind of know these things to
think, all right, now where can it have a place? Nobody raised the
private key thing. You lose your private
key, you're done. In most ledger systems, we have
backdoor ways to correct that. If I lose my password,
if a bank sometimes get-- somehow gets hacked, there's
a way to backdoor and protect against the loss. This is the other
side of finality. If we truly want
final settlement, this is the other side. Buterin's trilemma-- I'm not
going to review that again. We talked about. And then people doubt the
claims of token economics. I'm probably a little
bit in that camp. Oh, no killer app. The scams and frauds. All right, Rob,
what do you think? Rob ran $20 billion funds. And he's not read a single
thing on the syllabus. ROB GENSLER: No, I haven't
even read a single thing on blockchain. In the '90s, I was a-- GARY GENSLER: Covert twins. ROB GENSLER: Yes. In the '90s, I was a tech
and telecom investor. And it's relevant to inform
my biases, because I saw-- Google wasn't the
first search engine that came public and
came through our offices. It wasn't even the top five. It was the sixth or
seventh, if I recall, search engine that came through. And the first five didn't
have a monetization case. And Google wound up
figuring out the puzzle. And I saw all the
things in the '90s and the tech crash and all. What intrigues me
about this is-- and I'm not a minimalist
as to blockchain has no economic basis. It actually probably does. And some will figure it out. And I'm very reminded-- I'm going to give
you the bull side, and then I'll give you my real-- is when I first met,
in the '80s actually, the head of Bell Labs-- if anyone doesn't know that,
it was AT&T's labs and all. He said-- and I asked him,
all his years in research, what was the biggest lesson
I could take away and learn in my tech investing. He says, when big
change happens, it always takes longer
than you think to happen. Always much longer. He says, but when
it does, it happens much faster than you could ever
imagine when it finally does. And where that compares to all
of technology evolution, even this-- this is what worries me. Maybe I'm wrong in my--
because I'm bearish, actually. But maybe I'm wrong. So I'm going to give
why it could be-- Maybe we're in that first
stage where all the hype is happening, because usually
you have excitement, hype, disappointment, and then
years later the use case, the broad use case
actually happens, because right now I
really feel strongly we're in that first
excitement hype. I don't know whether the broad
use case will ever happen. It might. But what worries me about
Bitcoin in particular-- I'm just a markets guy. That's all I am. I don't think much-- and I'm a practical
guy, not a research guy. And in markets, it's like,
OK, Bitcoin comes along. And it's going up because the
taxi driver's talking about it. And everybody is in it. Why do they own Bitcoin? They own it because the
greater fool theory. I'm going to find someone
to pay me a higher price. And I'm going to miss
out if I don't own it. And I got to be involved
in it and all the rest. And then you see how many
other coins are there if you-- GARY GENSLER: 1,600. ROB GENSLER:
--CoinMarketCap.com, and you're just like, oh my god, supply. You know, the last thing you
want is interoperability. If you've got interoperability,
then supply is infinite. So the value of
these-- now, they may still have an
amazing use case as being a utility to provide
this ease of transactions and all the positive things. But what I'm bearish on
is the value of Bitcoin, if you notice. I'm not bearish on
blockchain having value. But if they're
all interoperable, actually it would be great,
or if the medical system all figured out a way to keep
medical records in some better way that used blockchain,
wow, wouldn't that be great? But would we be using Bitcoin
as a very high-value thing? And I'm also reminded,
I think Bitcoin-- sorry, I'm real
biased about this-- is a massive
regulatory arbitrage. I don't want the
governments, the officials anywhere in the world
to know something. I want to create a system
that's beyond governments. Have you found anything--
maybe in the history of humankind there
is something-- where officially-- the official
sector doesn't come back with a vengeance and
get its fair share? So I think blockchain can
be very good as a utility to make a lot of other things. It's like, what are the
killer apps that will come? And it was true
with the internet. When the killer apps
came, guess what. Amazon was a killer app
and Apple was a killer app. Well, Apple's different,
but Facebook, et cetera. And oh by the way, all of them-- so because you were going
to say, why would it say there weren't $500 billion
or a trillion of them. Remember, there was an
installed base of value-- Amazon's case, 100% of global
retail that they could disrupt. Wow, they have not even 5% yet. I don't know whether you
should own Amazon stock or not. I'm not trying to say that. But all of global advertising-- that's what's Google-- wow,
and they're disruptive. So maybe Bitcoin
becomes the utility that some app resides
on top of and is-- and this becomes ubiquitous
enough in 10 or 15 years. And I actually
think something will happen that just will wow us all
that we hadn't even considered. But it's in the second phase,
not in this first phase of hype, disappointment. And I don't think we're anywhere
near the disappointment. The disappointment takes years. And then all the sudden, like
the Phoenix from the ashes, it rises up again. And it's once the distributed
process is all out there and there's not nodes
like the Bitcoin nodes, but nodes of users--
it's like guess what. These things in our phone, in
our hands, distributed these. Until these were all there,
you couldn't have a Facebook, right? Facebook needed this
first in a weird sense, or they needed the desktop
versions of this first. And I still think we're very
early days of this stuff. The real value will be made. And I'm telling you,
major investment dollars somewhere 5
minimum years, maybe 10 or 15 years out. And it'll be some sort of thing
that's enabled because of this. But it's not going to
be these first guys. There's too much supply. GARY GENSLER: And here I had no
idea what he was going to say. But that's been
true for 60 years. So-- ROB GENSLER: Sorry, you had
a question for him or me? AUDIENCE: Both of you. GARY GENSLER: And then I'm going
to do a couple more slides. Sean, ask the question. AUDIENCE: I think it's really
interesting the way that you mentioned that, because
Amazon has a TAM and Facebook has a TAM. And during the
peak of its bubble last year, people were
referring to TAM of-- ROB GENSLER: Total
addressable market. AUDIENCE: Total
addressable market. ROB GENSLER: Go ahead. AUDIENCE: To let go
to the market of gold. And what's your
perception on that? And do you think that's a real-- to some degree a
realistic assumption? ROB GENSLER: I guess. But gold has 5,000
years or even longer of being the scarce resource
that no one understands. I certainly don't. But it's the-- mining. And so it's got a lot
of stability from that. If Bitcoin truly was the only
one-- but how many-- you said there's 160 of them. And you just said they're
going to all be interoperable. So I don't know what the
currency exchange is. So is supply really constrained? I don't know. So I don't know. Maybe you know better
answer, because I know that comparison-- GARY GENSLER: No, no. It's a real challenge. One of the things
about valuing-- one of the things about
valuing any crypto-- and I told you at
the beginning, I'm just not going to run a
class that tells you how to invest in or out of crypto. But here is just an observation. And feel free to
ask more questions. But that-- if any token-- I'm not just talking
about Bitcoin-- any token-- it could be file
sharing app like Filecoin-- has a really good, good use. And it's being used. You have to start
to jump to say, what is the velocity of the token? And any of you that have
studied a little bit about macro economics and you know
the velocity of money, it's how many times a piece
of currency turns over. It's sort of the economy divided
by the monetary base, whatever your measure is. So how many times does a
piece of currency turn over? In the digital age it
can turn over faster. If it was just file storage and
I'd get file storage from James and then James wants to get
file storage from Hugo and along and along, and if there was high
velocity, you need fewer coins, almost like the
higher the velocity, the less value in the coin. So you almost need some people
to be holding on to the-- James wants to hold
it because he thinks it's a good store of value and
not use it for file storage, because if all you're doing is
turning it over, whether it's file storage or anything
else, it sort of lowers the value, higher velocity. And yet it's kind
of counter to it. So I don't know. There's a mixture in the
valuation mode of speculation, store value, usability,
but not too much velocity. ROB GENSLER: I'm going
to say one last thing. I am convinced there
is huge value that's going to be created. But it's in the things
that are enabled to be able to be done by this. It's not in the-- I don't know if you call them
coins or tokens or whatever. They're the enablers. And if you've got a
really expensive one, somebody else is going to have
a cheaper one that will enable all this great potentiality. And somebody will-- and there
will be huge value in that. GARY GENSLER: Let me just-- I just want to cover. You can stay up, Rob. I just want to-- So we've already
talked about this. But I just want to
remind you of this. It's sort of like centralization
versus decentralization when we're all thinking
together about the economics. And again, you could
change the slopes. The cost of decentralization
might come down-- the orange one. But as you know, I'm
sort of a little bit closer to permission systems
than permissionless systems. And in terms of
traditional databases, we've done this before. But again, the
public blockchains versus the traditional
databases-- and I don't mean every word
you need to remember or anything like that. But if you don't need a ledger,
if you don't fundamentally need something to move
around property rights, I think you're probably in
the traditional database side. You can move over
into the middle if you think that an
invention of the early 1990s-- append-only databases,
the blockchain, sprinkle a whole bunch of
cryptography on top of it, the hash functions, and
the digital signatures-- that's kind of your
permissioned database systems. It can give you
finality of settlement. It can give you an awful lot. But it's a club deal. And amongst the big commercial
banks or amongst some systems, they're doing a lot there. I think to get to
the right-hand side, we'll need to get some of
this performance behind us-- in some single-digit years, get
the performance up to speed. But still, even after those
three or five or six years, when we get the
performance up to speed, I think you have to
say one of two things. One is, is this a lower
cost of verification? And it might be. And I say this for your
final projects, too. If you find a pain point
that has high economic rents, this might be a lower cost. If you find a pain
point around privacy, a pain point around censorship-- it depends on what
the pain point is, or if you're just something
that's not yet centralized-- I continue to believe that
if you're trying to attack, if you all are trying to
attack a centralized system with blockchain, you've
got to basically go through the door of lower
verification costs, lower economic rents, lower privacy,
lower censorship, but lower some verification cost. If it's currently a
decentralized thing, there's no centralized
intermediary, it might be the token
economics are a way to jump-start the consensus
and the collective action. But I remind you, even
in medical records where there's no
centralized thing, you still have to
think, how is this going to jump start and get
over this darn collective action problem that has
existed for decades, or loan syndication
is another example. Collective action--
it might-- it might-- and by the way, Goldman
Sachs and Morgan Stanley and JP Morgan and
Banque Nationale Paris-- BNP and others-- they trust
each other only to an extent. So even the middle category-- these club deals are
a little odd, too. So I'm just repeating. This is going to be
something you've seen. So can you lower
verification costs? That's my core thing. Can you lower
verification costs, whether it's direct costs,
privacy, censorship, settlement and finality risks, and the
cost of trust or economic rents? If you can, this might
be an alternative to the centralized databases,
or does it jump start through some reward affinity. And I love the skins. Does it somehow help you
jump-start something? I'm sorry. AUDIENCE: Yeah, I
was just thinking about what are your
thoughts collectively on-- ROB GENSLER: Collectively? AUDIENCE: Yeah, both. GARY GENSLER: Double. AUDIENCE: So Bitcoin is-- I mean, there's no
necessarily intrinsic value, like direct peg where you can
say, this is tied to this. But what about,
like, tokenization of some assets, namely maybe
real estate where if you sell a piece of real estate or new-- on a new-found token,
you kind of understand where the market value of
that piece of real estate is from sales
comparables, et cetera. But the value potentially add
from tokenizing the asset is lower transaction costs. So you can kind of directly
peg a value to the real estate and also the value
from the cost savings from not having to pay
those transaction fees. GARY GENSLER: So
the real question is, is there an application of
blockchain technology to using a token to digitize an otherwise
either a liquid or liquid asset, because it could be. Dan used real estate. But you could just
as well say, is there a role to have a blockchain
token and underlying it is oil, or
underlying it is gold, or maybe underlying it is a
basket of equities or even Fiat currency. I think yes. It's sort of a newer modern-day
version of exchange traded funds, or it's a modern-day
version of warehouse receipts. Paper money started
exactly this way. Paper money was like, please,
will you store my grain and give me a warehouse receipt. And then it was gold. And I'll take a
warehouse receipt. And it was easier to exchange
the paper warehouse receipt than the gold or the
wheat and so forth. So I have to say, from an
economic point of view, there's a long history. The answer has to be yes. However, caution is particularly
when you get to illiquids, is it really going
to create liquidity where there isn't liquidity? Real estate is still
very idiosyncratic. Gold is very fungible. Gold is something
that doesn't degrade. It could be in a warehouse. Now, it might be that they
start issuing too much paper. But so I think that
I have to say yes with a big footnote that
I'm not as sure when you get to the illiquid
end of the curve. But the highly liquid
commodity end of the curve-- but even on the
commodity end, you might say, well, why is this any
better than an exchange traded fund? And particularly, by the time
the securities regulators say yes to it and
sprinkle holy water on it, it might look like an
exchange traded fund. Eric. AUDIENCE: Just going back
from that point to lowering verification costs,
there's a point I think Catalini makes
that when you have the necessity of
matching an offline asset to the digital version
or representation, then you kind of don't
gain the same lowering costs as you would do when
you're dealing with a purely digital asset. So that could
actually set the stage for some sort of collaboration
with existing intermediaries that could kind of
work on making sure that that offline and digital
version matching can be-- GARY GENSLER: So what I think
Eric's talking in the Catalini paper is that a
digital token tied to some other digital asset-- there might be higher
benefits than tying it to something that's offline. I colloquially called
them illiquids. But not everything
offline is illiquid. And his point is basically
if it's digital-to-digital, it probably has more benefit
and there's less costs embedded. And it could be
with less friction. And that's one reason why it
might have more applicability in the world of finance than it
does to the world of diamonds or supply chain management. But one of the
reasons I think it might have a real benefit
in supply chain management is supply chain
management has not dealt with collective
action issues in the past. So rather than verification,
supply chain management and health care records
are somewhere down in the network bag. Maybe this is a way to start
to jump start or get some of the network effects in here. Oops, starting or operating. I knew there was something
else on this page. Did you have anything to add? No. So we're going to do the
same thing on Thursday. You don't have five
readings and five optionals. I know it was a long list. I think it's only-- what is it-- four. An open letter. Let's see. I know you're a bunch of
business school students. The open letter to Jamie
Dimon is kind of brief. And the Economist article's
two pages and so forth. So McKinsey's is so-so. I'm not going to say all
of these McKinsey's and PWC and some of them that I put in-- they're general surveys. But I like to include them
with the academic papers, because this is what
the business community-- they skim. They look at these things. It's McKinsey-- some
of you are going to go work for consulting, Tom. And so you know,
it's good to know what that vocabulary
and that world's about. The Geneva Report--
you've read some of that. That's, of course, Simon's and
Neha's and Jonah and Michael's and mine. We came together. But we tried to sort lay out
some of these economic issues in there as well. Any other questions? Eilon? Any other questions for Rob who,
like, actually knows something? AUDIENCE: That would
be relevant, yes. Some of the questions-- some
of the comments on the-- from the minimalist point of
view were actually about money. They consider
cryptocurrency a currency. But if they are
securities, so there's no need for medium of
exchange or no need for monetary policies. There's need maybe for
issuance of securities policy, but not monetary policies. So if it's not coins,
I just disagree with-- if it's not
currency, I disagree with some of the comments. GARY GENSLER: Let
me just step back. I hope that many of you
going on this journey and doing these
readings don't need to agree with many of the things
that are written, whether it's by the minimalist
or the maximalist, whether it's by the tech
folks or the McKinsey's that are doing big glossy
business reviews. I hope you come to your
own judgment and opinion, just like you have. I will react to
what you're saying. I think that whether it's
a currency or a security is relevant for the
regulatory situation. It might be relevant
to the business cases. But I'm not with you on that. I'm probably not with you. I don't really care if
you call it a currency or call it a crypto asset. What I'm kind of
interested in is, is blockchain technology and
the permission or permissionless way something that can either
disrupt the incumbents, do it cheaper, do
verification cheaper, do databases, ledgers cheaper,
or is it a neat, nifty way to jump-start a new network. And we're-- literally, if
we did not have Uber today, I could see, wow, that would
be an interesting use case. You could use
something like this to connect a community
of people that own cars, people that
want to drive cars, people that want to rent cars. ROB GENSLER: And as
someone that lived and lost a lot of money, made a lot of
money for others in disruptors, think to yourself, because
is Bitcoin and blockchain-- I put them together for
this statement only. Is it going to be a disruptor
to traditional stores of value, the monetary systems,
dollars, euros, yen? You could be
disrupting that, or is it a disruptor for medical
records or Uber tech-- is it an enabler to disrupt
some other industry? I'm betting on the second case. I actually think
this will someday be a disruptor to some
industry just like, guess what, the internet. We didn't know it at the time. And was a disruptor
to the taxi industry. Somehow it happened. Nobody saw that
coming in the '90s. But the taxi industry
got disrupted, et cetera, et cetera, Airbnb and
the hotel industry, et cetera, et cetera,
all this stuff. So is-- and it
might be a disruptor to the monetary system. That's one bet I
actually am negative-- I'm bearish on that bet. But I'm very bullish that it
will be a disruptor on things that we aren't even
talking about yet, haven't considered, or
maybe you guys have. And I think that's the
more interesting discussion is what's going to disrupt
as an enabling platform. GARY GENSLER: So I thank you. We're going to close
with your question. But also, remember for
Thursday, for those of you that feel that you
wanted another way to participate in the
class-- it's not required. It's not required. You can participate. We'll have a little bit of this
discussion about whether it's minimalist, maximalist,
blockchain economics this Thursday, not
discussions of something that's not related to Thursday.
