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visit MIT OpenCourseWare at ocw.mit.edu. GARY GENSLER: Today we're coming
back to blockchain and money, Act Three of this course. Now that we've done a little
of the basics, a little bit of the economics, and
now it's some use cases through the lens of finance. And to say something
about one, why I thought it'd be worthwhile to
structure the course this way, and what I'm hoping
we all get out of these next 10
or 11 lectures is that I thought that it
was important after laying some foundation of what
blockchain technology might or might not be, and
cryptocurrencies, and of course, talking
about the economics, is to use one field that's the
most dominant field right now about potential
blockchain technology use, which is finance. It's not the only
area, but finance is completely reliant on ledgers. It's completely reliant
on moving property rights around multiple parties. And of course,
the first use case was about Bitcoin, which
was a peer-to-peer money. So I thought even
if you're thinking about this in terms
of health care, thinking about it terms
of the internet of things, et cetera, many, many other use
cases, why not take finance. Now it also happens to be
my comparative background. And I've spent the last three
or four decades of my life around finance. And so I can be most
helpful and dig deep, you know, probably
as deep as you want to get in the mortgage
market, the payment markets, the exchange markets. I've probably been there
at some point in my career, or still have contacts and
networks and have studied it. But no doubt, with the 80 of
you in this room, or 90 or so, you're going to press me. And that I like that. I will say last
weekend was really a joy reading 50-plus papers
that it was only about 25 of you that had decided to hand
in papers early in classes 2 through 9. But class 10 was 50-plus of you. So I really do have
a sense of the class in terms of what you think
about finance and blockchain. Of course, you'll
probably do the same. I think I might design it
differently the next time. But if you all hand in-- if 50 or 60 of you hand in
the papers for class 23, it will be-- and you have that right. I'm not taking that
away from any of you. But it means I might be delayed
getting back all the projects. I want to say two or three
other things overall. In terms of where we are, we're
halfway through the semester. And Sabrina and
Thalita and I did a good job of just
saying, how are we doing on class participation? And I've kidded a lot, and I've
joked a lot about who's talked and so forth. We're down to about 15
of you that have never talked in this whole 12-- so I want to work with you. I'm not trying to
torture anybody. And I really want you
to all not to worry too much about your grades. I want you to
worry a little bit, but not too much
about your grades. But if you've not
spoken yet, and you haven't gone online-- two people
have gone online, both of whom I've responded to. You know, come see me. Try to figure out how to
be part of this community and this discussion,
whether it's in class or online in some way. Cause again, I want this
to be a positive learning experience for everybody. In terms of the papers and
just some overall things, by and large they were good. Some were extraordinarily
good, which you'd expect with such a
talented group of people. But some really made me think
and challenged me and so forth. It is a bell-shaped curve. Some, on the other hand-- not many-- kind of
missed the mark. So I just want to say
a couple of things. One is, it's not about just
answering the three study questions. The study questions are really
to spur the dialogue here. There's three questions. Not many of you, but two or
three people just sort of just tried to answer those. Think about it as a
uniform three-page paper. Five is the limit. One or two of you that
did six or seven pages. That's fine, but it's just-- you don't need to, and it's
more work, in a sense, for us. Two is, I really did try to
give feedback and comments. And overall what we're
trying to get to is, what are the economics here? What is there about append-only
logs and consensus protocols amongst multiple parties
writing to a shared ledger? So multiple parties
updating some state of economic-- an
economic state, really-- of property rights or something. And what verification costs,
what networking costs, could be lowered. And it's unfair,
because all of you are going to try to figure
out a final project together. And I went back over the weekend
looking at the final projects. I think there's some really neat
ideas that you're looking at. But at the core is what
verification costs, what networking costs, can you lower. Why do append-only
logs consensus amongst multiple parties
sharing a ledger, and possibly a native token. Because you don't have
to do something around permissionless native tokens. But I think some of
you will get there. And we'll have some
exciting thoughts. So those were my thoughts. If I say in the
comments to your paper-- and I only did this
two or three times-- come see me, don't be scared. It might just be
I want to pursue. I said this on some
really excellent papers, and I said this on
one or two that just I thought it'd be
worthwhile to talk about. But I'm trying to just get
through this all with you and have you learn. So there's just some
overall thoughts on where we are halfway through. Post SIP week. Today we're going to
talk about payments. And Thursday we
have a guest, Alin. If you want to
get mic'd up, I've got a mic up here
somewhere for you, cause I'm going to call on you. Or you can speak from there. ALIN DRAGOS: I'll be loud. I'll be very loud. GARY GENSLER: Yeah. That's not hard, is it? So what are we going to do? We're going to talk
about just what are we trying to cover for the
rest of this semester? Sort of call it H2 in
blockchain and money. The readings, payment systems,
ledgers, and credit cards. Just a little bit of
history all together. And that's when you're
going to meet Alin. Not computer science
Alin, but payment Alin. And we're going to talk
about mobile payments, which is a very significant
change all the way around the globe in payments. Then global and US
payments statistics. Bitcoin and blockchain
we're going to come back to. And then conclusion. And remember, whether
it's this week, next week, or the following
week, this is all just to sort of say, well, wait. What are these use cases
tell us about blockchain? What are these use cases tell
us about cryptocurrencies? My goal isn't that everybody
here is an expert in payment. But if your final project
is around the payment space, or if you ultimately want
to go along and become an entrepreneur and do something
successful in this space, hopefully these two lectures
today and Thursday will help. And I can't remember
exactly what next week is. Next week's central bank
and commercial banking. So next week we're going
to turn to central bank digital currency and
what's going on in Sweden, and why the e-krona
project's interesting, but how's Canada looking at it
through their Jasper project? What's China kind
of thinking about and why they're a little
worried about this space? And yes, what's the
private sector doing around stable value tokens? So you have sort
of a similar thing coming both from central banks
and from the private sector. I just came from a meeting where
one of Larry's colleagues-- he's from the Harvard
Business School-- a professor at Harvard
Business School came over because he's got a
stable value token project. And so that's kind of next week. We're then going to go
and talk about ICOs. You couldn't do a course
in blockchain and money if we didn't talk about
initial coin offerings with, of course, $25 or $30
billion that's been raised. It's an enormous crowdfunding
opportunity for any of you that want to be venture
and entrepreneurial after this course. But it's an
important, also, test. Are there attributes of
certain economies where native token is appropriate? It will spur as an
incentive function. I'm not willing to give up. I know some of you
are minimalist. I'm still thinking of
the Skins and the gamers. Larry, when you weren't here we
identified our most avid gamers in the class. And so we always refer to
Skins, Shields, and Swords as a form of native token
in the gaming sites. But where there might be
economics-- token economics. So we'll sort of turn to that. On the 15th of
November we've got a couple of guests in Jeff
Sprecher and Kelly Loeffler, who run the Intercontinental
Exchange and the New York Stock Exchange and others, but have
real live payments and crypto exchange. We're going to turn-- oh-- I'm sorry. I got it out of order. Primary markets, ICOs is
before and after Thanksgiving, I guess. And then do a little of
the back office side. The back of a side is
clearing and settlement. I mean, why is the
Australian stock exchange using a permissioned system? Might you use something else? Why is the international
swap and dealer association using smart contracts now
to try to rationalize a lot of their payment flows? So we'll get to real
live use cases that are happening around
smart contracts and permissioned
clearing systems. A little bit of trade
finance, digital ID. I know at least one
group is doing some-- one of the groups here is
doing something on digital ID. So you'll be out ahead of us. So that's kind of a
review of H2 for us. So we had a bunch of readings. Some of them were quite short. I don't know, because
you're on sip week, whether you were able
to go through them. But maybe I should
just ask, does anybody want to tell me about some of
the major trends in payments? I don't know how sleepy
everybody is or whether-- Priya, I saw your hand, or
you were scratching your nose. AUDIENCE: Either ways, I'll go. GARY GENSLER: All right. AUDIENCE: So digital
wallets is a big thing now. All the articles acknowledge
how kind of [INAUDIBLE] according to what you
see in China where you have a digital wallet,
and you pay directly, cutting out all the
intermediaries that we can't [INAUDIBLE]. GARY GENSLER: So
one big, big trend. I mean, I've got a bunch
of discussion on this, but let's identify them. Digital wallets
or mobile wallets. What other big trend? AUDIENCE: Person to person
payments, so like, Venmo, Apple Pay, Cash. GARY GENSLER: And Zelle. All right. So person to person payments. Stephanie. AUDIENCE: Tokenization,
like in Apple Pay, the way you, like, transform your
credit card data into a token. GARY GENSLER: So tokenization
where you can actually transform your identity into
a token, in essence, right? Chris. AUDIENCE: There's a
lot of social aspects of payments going on. Like, for example, in
China there's WeChat. They have spending millions of
dollars on these red envelopes that used to always be cash. And people spend hours during
the new year sending these back and forth to each other. GARY GENSLER: So you're calling
it socialization of payments, so to speak. Any others? Jeff. AUDIENCE: Biometrics. GARY GENSLER: Biometrics. Absolutely. So it's sort of another trend. So lots going on. I'm sorry. AUDIENCE: I'm going to
mention one other thing that caught my eye
on the statistics was that the larger-- so checks, the number
of checks is going down, but the value is up slightly. So it seems to me that
the remote payment or digital payment
is not capturing the values of payments of
over $1,000 or [INAUDIBLE].. GARY GENSLER: Right. And I think part of that is
because for small values, by and large, few of
us use checks anymore. In fact, I'll ask. How many in this
room has written a physical-- any written
check in the last month? OK. But how many has
written a physical check for less than $100? All right. Some. I can't even remember the last
time I wrote a physical check for less than $100. Priya. AUDIENCE: If you have
a child in schools, and schools do field
trips and everything-- GARY GENSLER: Oh, this
was not a judgment. I wasn't trying to-- oh, Priya, I'm sorry. But I think we tend to
write them for larger. Rent checks sometimes,
even though I now pay my rent online. Yes. AUDIENCE: [INAUDIBLE]
like Ripple and Chain. GARY GENSLER: So
one more change. You said Ripple and who? AUDIENCE: Chain. Chain. Chaining? GARY GENSLER: Chaning. And are those really live? Or you're saying
those are things that are going to happen? AUDIENCE: Well, Ripple is live,
especially in Japan and Korea, [INAUDIBLE]. GARY GENSLER: So then what sort
of lessons can people draw? We're going to talk a little
bit more about M-Pesa and Alipay and so forth. But what lessons? Kelly. AUDIENCE: The thing that I
took from quite a few of them. And I liked [INAUDIBLE] article,
because it's sort of like, you mentioned the trend in China. It took trends from
separate countries and sort of identified
their own statistics. You saw a lot of
countries that people don't feel that their payment
data or their payment identity is secure on a lot of
mobile and digital devices. And that lack of security
if preventing them from entering the
digital retail space. GARY GENSLER: How many people
looked at it that Worldpay article, read your own country,
and said, I didn't know that. Like, there was something-- it
was just one page per country. So, of course, it
didn't say that much. But. Alpha? I don't remember, was
there a page on Ethiopia? AUDIENCE: There
wasn't, unfortunately. No. Not yet. But on M-Pesa, you know, the
big success story in Kenya, they've done a tremendous job. And it's billed
as a huge success at getting mobile payments and
wallet [INAUDIBLE] distributed. But it's interesting
to note that they're able to acquire
customers by partnering with visible networks of agents. And again, something
that going forward for a lot of these companies,
we have to be [INAUDIBLE].. You can't be completely
decentralized or completely automated. That's [INAUDIBLE]. GARY GENSLER: I mean, initially,
M-Pesa, which is in Kenya, and you had a reading on it. But it came out of mobile phones
and that the values stored on mobile phones for mobile
minutes people were trading, in essence. So the network of users
were these shops in Kenya where you could go
and get your minutes. Jihee. AUDIENCE: Kind of going
along with that M-Pesa, in addition to basically,
like, in an easy-- I mean, convenient and lower
transaction costs, like M-Pesa, for example, were
very instrumental in corruption cases
and like, keep letting people know that
kind of basically cutting the corruption. GARY GENSLER: Right. There was the example
in Afghanistan. Does anybody remember
that from the reading? The police officers
all of a sudden realized that they got a 30%
pay increase when the government was paying them directly. But it was actually they
didn't get a pay increase. It was like cutting out
the middle man or middle woman of corruption. I was going to say
gender neutral. But whomever was the-- it was probably men. But in that case,
in Afghanistan. And then what
challenges are there in the cross-border payment? Well, I probably
got 50% of the class that has personal challenges
with cross-border payments. But what would be the
biggest challenges that you took from the
readings or your personal life in cross-border payments? Anyone? AUDIENCE: I'll say the number
of [INAUDIBLE] from you that the payment service
providers to the other end, there are just so many layers,
which was just incredible how money can move seemingly so easy
from one country to another-- GARY GENSLER: So a lot of
layers of intermediation, tons of them. Anything else in
the cross-border? AUDIENCE: [INAUDIBLE] GARY GENSLER: Costs. You've probably had that. So let's go through
a little bit. So, I'm introducing a guest. There you go. You want to stand up? [APPLAUSE] So Alin , he heads part of the
digital currency initiative here at MIT in the Media Lab. All the efforts around
lightning network and layer two solutions. But before MIT, he was a
vice president of First Data. And First Data is a
payment system provider. And he had about
200 people reporting to him and a big business-- $200 million P&L.
That's revenues, right? Yeah. I mean, if it was profits,
even better for you. And then he spent three
years in a startup world. So he's somebody if you're
interested in blockchain and digital currency initiative,
you should get to know anyway. But if you're even interested
in startups outside of payment world, Alin's great. And he's going to be
here today and Thursday. And not only when
I make mistakes, but a couple of times
I'm going to get you up here to say stuff about
how payments really works. But he's like, way embedded in
the MIT blockchain community. So payment systems. Again, what is a payment system? It is moving money, of course. But on some level it is
a way to amend and record entries on ledgers. Because a ledger is
how we keep money now. Certainly in the
digital world it's always recorded on
some ledger somewhere. So there is an
authorization phase. There's a clearing phase,
and then final settlement. Does anybody want to take
a crack other than Alin as to what it means to
authorize a payment? Just to authorize a payment. It might not have
been in the readings, but it's sort of just
use your language skills to tell me what it might
mean to authorize a payment. Tom. Your laugh gets you called on. AUDIENCE: I am
struggling to describe it without using the
word to authorize. GARY GENSLER: It reminds
me of when I was, like, a freshman in English class
at University of Pennsylvania, and I had to describe a
telephone without using the word "telephone." AUDIENCE: So I was thinking
about the digital system we're using right now. It's like, when you
click Send on Venmo, like, you authorize the account,
the money to leave your ledger [INAUDIBLE]. GARY GENSLER: So you just
used the word "authorize" to define the word "authorize." AUDIENCE: Is it just-- GARY GENSLER: Oh, back here. I'm sorry, I don't
remember your name. What's that? AUDIENCE: Dan. GARY GENSLER: Dan. AUDIENCE: Yeah. I just think it's you're
approving the actual transfer of the money. You're saying it's OK that the-- GARY GENSLER: Right. [INAUDIBLE] I can't-- AUDIENCE: Aviva. GARY GENSLER: Aviva. Good to see you. AUDIENCE: It has to
do also with KYC AML And to authorize the source of-- the sender's identity and the
source of money, what countries it's coming from. If it's above a certain
threshold or a certain amount, financial institutions
have further checks to-- GARY GENSLER: So most systems
do what Aviva and Dan said. They have to say, we
know who the person is. They have the balance
is in some account. So they are who
they say they are, or at least digitally
they are, and they have a certain set of balances
and monies within an account. And they have the legal
ability to move that money, all without using the word
"authority" in essence. Clearing. Anybody know what clearing is? Or am I going to
have to call on Alin? James. AUDIENCE: Isn't the [INAUDIBLE]
that confirms that money, it's getting somewhere,
and it's going somewhere. GARY GENSLER: Yeah. And it also has to do
with netting, sometimes. Clearing can be-- if the
100 people in this room were all sending 10,000
movements all in the same day at the end of the day,
you might net all of those movements down so there's
fewer actual movements. So historic clearing,
which goes back centuries, was also a way to
lower the friction, just taking the 100
people in this room, of all those movements. So authorization-- Aviva. AUDIENCE: It also has to
do with foreign exchange. So if someone wants to
transact in peso versus dollar, so you then also have to
net off, like you said, that balance. GARY GENSLER: Right. So in foreign exchange,
any circumstance-- and this is in the
securities world as well-- you'll hear the words
"clearing" and "settling.". God knows, even when I was
chairing the Commodity Futures Trading Commission,
all of us sometimes got a little bit confused
about the two words. But clearing is pre-settlement. Clearing is netting
of transactions, arranging the paper when we
were still in a paper world, all in together, taking
all the physical checks and getting them all in the
same place in the right place. And then what's settlement? Sean. AUDIENCE: It's to discharge. GARY GENSLER: To discharge. I like that. AUDIENCE: Receipt. It's the receipt
from [INAUDIBLE].. GARY GENSLER: So
discharge the receipt. It's basically the final
amendment of a record. It's changing a balance
from 10 to 11 or 10 to 9. That's settlement. And that's true in securities. Alin. AUDIENCE: To me
this is mesmerizing, because there has
to be a history behind this authorized
clearing and settlement sort of free part
movement of money. Because if you think
of a computer system, or if you think of a
blockchain, if you want, there's no need
to do any of this. Right? You just do the damn
transaction, and it's atomic. A moves money to
B, and you're done. So like, how did
this even happen? Like, how do we-- like, to have a computer system
that does this is just inane. You don't need any of
this in a computer system. So why do we still do
this in a computer system? Where did this evolve from? GARY GENSLER: So
Alin's question, I was hoping would
come out of the group. So I'm going to go
to the other Alin. But there's centuries of
history as to why we have these. But this Alin. ALIN DRAGOS: Let me say
right here, because I think-- so first of all, I'm
happy that this came up, because it's excellent. Right? So when I saw the
slides, you know, I-- GARY GENSLER: I sent this
Alin the slides last night. ALIN DRAGOS: So I
saw that there is a really interesting historical
component to all of this, as you rightly
pointed out, right. This all came from about four
decades' worth of evolution here. So we started-- you
know, you started with a very convoluted way,
as it would appear now, to actually send out
paper-based receipts and have a plastic-based
card, if you will, that will have to be recorded
and, you know-- first of all, you just say, does the
person have the money there? Right. Is the money there? I'm [INAUDIBLE] authorize. Right? I'm gonna get an answer
right back, saying, yep. The money's there. OK. I just authorized it. But it's a very simple, like,
ping right back and forth. Right? So it needs to be a
very small transaction. From there on you
can start to say, OK. Now let's batch transactions
and do the clearing. And then from there on you
actually send on the money. Right? The interesting part
about all of this is that it evolved in time. So this technology, if
you were to do it now with all of the tools that
are at our disposal now, you'd do it
differently, entirely. However, payments, as
Gary will point out in the next couple of slides,
basically evolved organically through decades. And you know, they
started with [INAUDIBLE].. GARY GENSLER: So stay with us. Stay with us just so that-- That is literally a check
that Thomas Jefferson wrote to himself in 1809. But that is a
payment instruction from one Thomas
Jefferson account to another Thomas
Jefferson account. But it's a payment instruction. It didn't actually
move the money. It's just a payment instruction. This is a Western
Union Telegram. The telegraph came along in
the 1840's, if I remember. But Western Union took several
decades to come along and say, we can send instructions to
move value using the telegraph. And the Telex machine, which
was post-world War II-- and yes, I'm old enough to say
that there were still telex machines at
Goldman Sachs when I started in 1979
that you would type in to type in an instruction. So Alin, you're asking
where did it come from. It came from technology
move from first authorizing. Does that party have
the legal rights to move something, move value? Do they have enough
of the value? Is there enough
in their account? And so forth. That's the authorization phase. Now you'd say, well, can't that
all be done simultaneously? And the answer is, yes. Maybe. But most of the
payments system is still based on authorization,
clearing, and then settlement. Financial ledgers that
are also the reason. Ledgers record
economic activity. We've talked about this
earlier in the semester. They record transactions
or accounts. Bitcoin is a transaction ledger. Ethereum and others
are account ledgers. But they're both ledgers. They're both forms of recording
something that has a right. The data is usually used
around some right or a token. But the first ledgers were
thousands of years ago. And I think on those
ledgers, I don't know how they split
authorization, clearing, and settling. But they were a
form of a ledger. I like presidents, I
like American history. So I pulled-- George Washington used to use
a personal ledger, single entry ledger. But the IBM 360 came
along in the early 1960s. And it revolutionized the
world of finance and ledgers. It still took about 14 years. I think it was in
the early 1970s after big paperwork crash
on Wall Street, meaning literal, physical
pieces of paper were moving around
the late 1960s. And they had to shut the New
York Stock Exchange down, I think, for a day or
two, because they'd gotten weeks or months
behind in clearing the paper. They had passed authorization. It was all in clearing
securities trends, and was created by
an act of Congress that there would be central
clearing and settling. And DTCC was in essence
created to solve and get out of that huge mess and a problem. But it was on the
backs of technology that it could even
be done, that there would be a central ledger. Is it helping to answer
your question yet? AUDIENCE: I think my
question kind of changed. So I'll talk to you
after the class. GARY GENSLER: OK. You're good. Do you have a question? AUDIENCE: Yeah. So one thing that came out
of the readings for me, I guess it's kind
of solved by checks. But like, how are cash transfers
captured in all of this? GARY GENSLER: How are cash-- cash, cash. AUDIENCE: Cash cash. Right. Because now they have
digital everything. Everything is really
easy to track. And you talked about
confidential transactions or private transactions,
if you give me $10, nobody else in the world knows
that you gave me $10 back. GARY GENSLER: Well, right
now this is being recorded. It's being seen. And so you'll give
it back to me. AUDIENCE: 100%. GARY GENSLER: No,
you can take it. You can take it. AUDIENCE: [INAUDIBLE] GARY GENSLER: Now! Yeah, yeah. Remember. What lawsuit was that? The Scottish lawsuit? AUDIENCE: Can't remember. GARY GENSLER: Crawford. But that bill, what's
it say on the top? AUDIENCE: Federal Reserve note. GARY GENSLER: So it's
a Federal Reserve note. It is a Federal
Reserve note, which literally means it is a
liability of the central bank the US government. Now that's a social construct. We talked about it's not that
there is a room full of gold or a room full of
wheat behind it. There's some gold in Fort Knox. But that is a form of
a ledger transaction. If you read a little
bit more closely, can you see on the upper right
there's something in there? AUDIENCE: United
States of America. GARY GENSLER: All right. Is there a serial number? There is a unique serial number
on every Federal Reserve note. That unique serial
number is, in essence, tying it to a ledger, a
liability of the Federal Reserve. But it's a tokenized
ledger receipt. I've handed it to you. It's anonymous-- well,
it's not anonymous, because it was
captured on the film. But it was anonymous because
it's a tokenized paper. It's actually linen,
it's not really paper. Anybody know who
is the sole source manufacturer of the linen
that goes into Federal Reserve notes? AUDIENCE: [INAUDIBLE]? GARY GENSLER: No. Crane. C-R-A-N-E is the name of the
company that has the contract. But to answer your
question, it's a tokenized form of a
specific serialized ledger on the Federal Reserve. AUDIENCE: So that
only gets triggered if it goes into and
out of institutions. Right? If this bill comes to me, and
then goes to somebody else and goes to somebody else-- GARY GENSLER: Like, James. Yeah. AUDIENCE: --before
it goes on to a bank. GARY GENSLER: Yeah. AUDIENCE: Then none of those
transactions are tracked. GARY GENSLER: That's correct. AUDIENCE: But on something
like Venmo, they are. So something like
Bitcoin, they are too. GARY GENSLER: So we're moving. There's a big trend that's
happening over these last 50 years. And if you go back 200
years, it was all anonymous. But once you get into
the 20th century, it starts to be more
or more digitized, even early 20th century,
commerce-- big commerce-- was starting to be in
the banking system. But in the last 50 years, and
certainly the last 20 years, we're almost fully digitized
in developed countries, not middle economic countries. But that's correct. But this still ties
back to a ledger. I'll get that back later. Credit cards. The first big write-up
of credit cards was a book from the 1880s that
said, what would the world be like in the year 2000? And 15 or 20 times in the book
it used the word "credit card." They fictionalized the
future of credit cards. I haven't read the
book, but I just love that it was
written in the 1880s. But the actual start of
the use of credit tokens, if not credit cards,
started actually in the late 19th century. And the idea is that you
could have a token that was for as particular merchant. And by the 1920s you had them
for getting your gasoline when automobiles started to
be popular, and so forth. But they were not
generalized credit tokens. They were a credit token
really by one merchant. So think of them as a
merchant-specific token. In the 1940s in Brooklyn,
New York, somebody-- in essence the innovation was
to have a more generalized token that could give you credit
at more than one merchant. And once that happened, of
course, credit cards took off. First in the US, Diner's Card. American Express
was in the mid '50s. And then Bank of
America figured out, maybe we will even extend
credit multiple banks. And they created a network. Bank of America was
a California bank. It's not the bank
you think of now. In those days it was
California based. But maybe we can have a
network across the whole US. And that network is actually
the network that became Visa. It was a shared
ownership service amongst a bunch of banks across. But the cards had
to be processed. Does anybody even ever
see the processing that's in the left,
in the middle, any longer in the US and Europe? No, you probably-- ALIN DRAGOS: The
imprinters still exist. There are some cab
drivers who will still take out, like, one of those-- one of those machines. So they still exist. GARY GENSLER: So
they still exist. So technology has
moved us in advance. So here we're going to do
modern payment systems. I think Alin's going
to help me out here. You've got a customer. You'll see this play out. But this is complex system. The customer has
an issuing bank. I'm going to say it's me. And I'm Gary Gensler,
and it's Bank of America. And I might use a credit
card to instruct my bank, I might use a check, I
might use a debit card. I actually have all three-- credit card, debit
card, and checks. I could instruct them in
any of those three ways, but there's other ways
I can instruct them. I can instruct them and ask
Bank of America to send a wire. I can in the US ask them to
send an automated clearing house payment-- ACH. Wires are more real time. ACH take up to two days-- is it now? ALIN DRAGOS: That's
in the longest form. GARY GENSLER: OK. ALIN DRAGOS: The ACH has been
suffering some pressures, and now they actually offer-- GARY GENSLER: Real time. ALIN DRAGOS: --almost
real time [INAUDIBLE].. GARY GENSLER: But
traditionally, wires were something that you did
which were more immediate, and what's called
ACH, more slowly. So there's actually
five ways I could have my Bank of America
send something of value. It has to go through
some network. It's too small to see, but the
first little blue arrow there is Visa MasterCard. It might be going across
a credit card network. The second arrow there is
where this guy used to work, First Data stripe. There's dozens and dozens of
payment processors or payment system processors-- PSPs. So you have a credit
card, but you might also have somebody call it a PSP. Has anybody started a
business in this room? A merchant? I'm sure somebody-- has anybody? All right. Did you have to hire a
payment system processor? Who'd you hire? AUDIENCE: First Data. GARY GENSLER: First Data. When I was chief financial
officer of the Hillary campaign, we had to hire a
payment system processor. It was Stripe. So all the donations
that were coming in, somebody could use
a MasterCard, could use a Visa, could use
an American Express. We didn't have any
legal contract. We were a merchant-- I mean, you might think of
it as a political campaign, but we were a merchant. You were a merchant,
you hired first data. So when you start
your businesses, whether it's a grocery store,
a bar, a political campaign, or something else,
you're a merchant. You don't want to deal with a
bunch of credit card companies. You want one payment
system processor. And you chose First Data. We chose Stripe in
that circumstance. So those are the networks. Then on the other side
there's the merchant bank. For the Hillary campaign
it was Amalgamated Bank. Who is your bank? Do you care [INAUDIBLE]? AUDIENCE: It was in Korea. GARY GENSLER: It was in Korea? AUDIENCE: Yeah. GARY GENSLER: Korea
Bank One, let's call it. Korea Bank One. But the customer is all of a
sudden, it's at five layers before it gets to your bank. And then, of course,
you have access and so forth, and
you're the customer. So all of these steps
are in this chain. This is modern payment
systems, pretty detailed. Digital wallets we talked about. We're going to say a little
bit more about digital wallets. And the big question is
whether cryptocurrency is going to have something. But before you get
to digital wallets, this is the payment stream. And part of the
answer, Alin, too is why you need authorization,
clearing, and settlement is there's a lot
of steps in this, in the traditional
movement of money. And this is just domestic. You can add digital wallets,
and you could add Bitcoin. And the question is,
does cryptocurrency skip all this stuff
in the middle? And can digital wallets jump
start over some of these? And the answer is,
digital wallets need to do all these things
if they're going to jump. They have to store
the value; they have to do some authorization;
the equivalent of clearing, if there's any
clearing; and then move it, which is settlement. So these are the fees. You want to-- ALIN DRAGOS: Can I
add a few things? GARY GENSLER: Yeah, please. ALIN DRAGOS: A few minutes. GARY GENSLER: No, take more. ALIN DRAGOS: I wanted to
say a couple of things. Right? First of all, you'll have
to appreciate the fact that this is a system
created by banks for banks. Right? And I think that-- it shows, right? This entire value
chain, which we're going to go through
right afterwards, basically relies on
consumer using this process to pay a recipient. It can be a merchant
or another person. Right? Merchants like the fact
that they get value. They don't have the type that
have to pay a lot of money. So there's an inner
intention there. And that intention manifests
itself in a number of ways. But it's important. Right. So just the dynamics
are [INAUDIBLE] to where this black box out
here getting money over here automatically have kind
of a [INAUDIBLE] way to the banks for the merchants. Right? The interesting piece here
is that this access method is probably the most underrated
aspect of this entire bank chain. If you think of anytime
you go up to a merchant or to a website or
whatever, whoever manages that access
point is probably the most important thing. You may have the best
solution out there. If you're not in
that access method, might as well not have it. And that, I think, is
something to import. Cause as you're going to
go through [INAUDIBLE] where does value accumulate in
this value chain, what you're going to see is more often than
not [INAUDIBLE] methods aren't going to [INAUDIBLE] point to
actually any meaningful change. Because those are
hard changes, right? For a large merchant, changing
anything at access point, it's hard. So that's something
to keep in mind. Right? The other thing I
would say is one of the things where
we talked about how exactly to get big
change at scale, and you have to have two things. You have to have technology,
which is this is OK. It's not great. Right? This is kind of old. It used to be really great
about two or three decades ago, but this is not [INAUDIBLE]. But this is an unbelievable
business model. And if you look at the way
the business model operates, consumer love it. Consumers love it. So consumer gets-- I can pay wherever. It's great. Right? Banks love it. You know, they make a
lot of money out of it. They get what's
called [INAUDIBLE].. All these other vendors out
here exist because of it. Merchants, I would say
are kind of neutral to it. They dislike many aspects of
it, but then processing cash is also expensive. Right? So if you're trying
to understand where do I want to change things here? A lot of the folks in
the actual payment space will tell you, well,
payments is kind of-- you know-- it kind of works. Right? It really doesn't work
if you're on the fringes. But if you're in the
middle, it kind of works. It's a pretty good system. And the beauty of the existing
model we have right now is actually the business
model on the way it works. So I'll pause right
there [INAUDIBLE].. GARY GENSLER: But
it's expensive. ALIN DRAGOS: It's
expensive [INAUDIBLE].. GARY GENSLER: It's
got a lot of friction. World Bank statistics
say payment systems around the globe take a half
a percent to 1% of economies. Now economies would
be much smaller if we didn't have payment
systems, because we would have never probably come
out of the dark ages without some form
of payment systems. And in the last 50
years I think it's been part of how economic
growth has continued in the internet phase. You know, how we all
transact on the internet. But if you take nothing
other than, it's complicated and there's a lot of
points of friction, then I've done my job. You don't need to know all the
individual pieces unless you actually personally
want to compete with PayPal or Venmo or
Zelle or Alipay, which is what you might do one day. ALIN DRAGOS: I don't know. GARY GENSLER: Yeah,
just a rumor has it. ALIN DRAGOS: Well, the funny
thing is, as you'll see, every now and then there
comes a player that says, we're going to disrupt payments. And it is one of the
hardest products to disrupt. GARY GENSLER: It's a hard place
to disrupt, largely, I think, because of the
collective action issues. There's millions
of merchants that rely on dozens of payment
system providers that, yes, only rely on three to six credit
card or debit card companies. In any country there's
usually two to three dominant. It's not always Visa and
MasterCard, of course, not in China, for instance. But the merchant end has such
a huge collective action. And that's why Alin focused
on the access points. If you're going to
disrupt this, you've got to figure out some way to
get adoption-- broad adoption-- on the merchant class. The money. This was from the Bloomberg
article, the Bloomberg article that was reviewing China. $2.75 in the US on average comes
out of every $100 purchase. And by the way, if you make
$1,000 purchase, it's $27. And I used to think when I
was on the CFO of the Hillary campaign, if somebody
was generous enough to give us $2,700, which
was the legal limit to a political candidate
during that cycle, we were paying 70
US dollars to this, to that, to help
elect a president. Or in a billion dollar
campaign, 2.7% is $27 million. Now I'm not saying
we spent $27 million on this, because we
were able to encourage some donors to give us checks. But I will tell you,
even being recorded, in the modern economy it's
hard to convince somebody to give you a check, even
somebody who is generously giving their support to
a political candidate to win the presidency. And you say, well, we
actually get $70 more if you give us a check. Yeah, but I got my
credit card here. So, yes. AUDIENCE: How would that
work if say, you gave 27.70? And so the political
campaign actually ended up with $2,700
in the bucket. GARY GENSLER: So this is a
legal question for the Federal Election Commission lawyers. But we asked that question. We did ask that question. And it's not allowed. It's not allowed, because it's
going beyond the legal limit under our federal laws for
campaign contributions. That would be deemed to be
a 2,770 dollar contribution. Even if somehow the donor
is paying the $70 directly, we weren't able to solve-- by the way, we were not able to
solve that, because the payment system provider, in our
case, Stripe or First Data, is actually a vendor
for the merchant. And the political campaign
in essence is the merchant. You with me? Shawn. AUDIENCE: Well, when you make
a, for instance, $1 million donation, it's not that-- GARY GENSLER: A what donation? AUDIENCE: If you
make a $1 million-- GARY GENSLER: A
million dollars, that's breaking the law right there. But OK. I'm big filmed. I just want to-- AUDIENCE: Yeah. You're not actually
making a million, because you get perhaps
1.5% or 2% of the points back on your credit. GARY GENSLER: Oh. Yeah, right. So Sean is just observing
that well, actually the donor is getting some points back. So this is just averages, and
averages sometimes mask things. But $2.20 of the $2.75 actually
goes back to the quote-- "issuing bank." So if you're doing something
on Bank of America, Bank of America might
then give you points and share generously. And a lot of the bank
programs will share maybe up to half of that. You might get $1 per every $100
or one point for every 100. But they're getting $2.20. But you're right. There were some donors
that said, well, I'm using my American
Express card. I'm getting my points back. And if they gave $1,000-- not a million-- you know,
that they would maybe get the equivalent of
$10 of points back. That is correct. So merchants aren't
enthusiastic about this split. This is the US model. It does not cost
this much in India. It does not cost
this much in China. So in many other
countries the jump started around the credit
card payment systems. It costs a lot less. But in the US,
our payment system is significantly built
on credit card rails-- rails like tracks-- it's called. So cross-border. I'm not going to go
through these two charts. These were-- Shimon were you-- AUDIENCE: I think the US is
somewhat unique in the sense that there's bundling of
the payment as a service, and the credit. Right? GARY GENSLER: Right. AUDIENCE: And those are
being unbundled now. But doesn't have to be the case. And it's not always the case. Right. GARY GENSLER: So Shimon's point
is that we, in this country, have bundled the credit
provision with the payment provision. And there are many of us that
when the merchant says, give me your payment data, we
give him a credit card, even though we might, in fact,
regularly pay off our credit card on a monthly. I mean, many Americans don't. But many Americans do. So it's this bundling of
payment and credit services. And you're absolutely right,
because when the internet came along in our country, we had
established credit card payment rails. And most of the internet
payments, whether it was for your mortgage-- well, usually not
mortgage, but whether it was for your utilities or
your small dollar payments were built on top of
the credit card rails. Your mortgage-- most mortgage
lenders would say, no. I don't want to pay the 2.7%. We didn't have
enough market power even as a political
campaign to get people to give it
to us in checks, or to Zelle payment to us. But this 2.7 is economic rents. This is a form of
economic rents. Fraud. Does anybody know the figures
for frauds in this country? I went and looked at it
in the last two days. So it was not in the readings. Total fraud is about
10 to 20 basis points. So of this 270 basis
points-- or 2.7%-- less than 10% of it's really
going to pay for fraud. Now fraud is a really big
thing, don't get me wrong. But it's a small
portion of this. It's not the dominant
feature here. AUDIENCE: What is the credit
risk cost that's covered by that 2.20? So the bank is-- there's
typical losses on credit cards, [INAUDIBLE]. AUDIENCE: So one
thing I would say-- I think that point
that was just made was-- it was really just right. You do want to just
conceptually think about payments--
digital payments-- and credit as different. They're just different products. So typically, extending
credit to someone, it's a very personal
relationship. Right? You cannot really-- you can look
at [INAUDIBLE] and basically make a guess. Right? [INAUDIBLE] there's
so-- some type of [INAUDIBLE] called
debit payments. Right? When you're using
money you already have. Well, that credit risk is much,
much smaller than the money that you're not going to
pay me back if [INAUDIBLE].. So I would say the big thing
that I would encourage everyone is to separate the two. And more to the point of
a what is the credit risk. I would say it's
probably [? half. ?] GARY GENSLER: So I
don't know the number, and I'll research it. But I would caution to say
the compensation for credit doesn't only come out of this. It also comes out
of the anywhere from 18% to 27% interest
rates they're charging. So when you think about it
like, it's a dual model. It's this, which is not
solely for the payment, but I'm saying this is largely
for using the credit card rails as a payment rail. And then you charge an
interest rate spread, which is over 1,000
basis points, usually. The spread versus
underlying bank borrowing tends to be anywhere from
1,000 to 1,800 basis points on some of these. But I'm not saying
it's separate. It's two business models. Let me churn on. AUDIENCE: I'm just going to
[INAUDIBLE] a brief question. Is that just for credit cards? Or is it debit cards as well? GARY GENSLER: So this
is for credit cards. Debit cards tended
to be about the same. But after the Dodd-Frank Act--
the regulatory reform bill here in the US-- and the Durbin Amendment-- Senator Dick Durbin of
Illinois had an amendment where debit cards had to be
priced closer to cost plus-- I can't remember if it said
reasonable return on capital. And there was a Federal
Reserve rule making on that. Debit card numbers came down
significantly from this. I just don't know
the exact figures. But it's over 100 basis
points still on debit cards. But it's not 270. Good question. So I'm not going to go
through the details. But cross-border payments
have more complexity. I'm not going to go
through, but the paym-- this is the what I'll
call the front end. You have a payer on the left
and a payee on the right. Think of somebody in the US
sending money to somebody in the Philippines, maybe. I need on my side a
payment system processor. That's the bubble on the top. I need them to have some
payment system processor. They're both ends
on the front end. So just think more complexity,
more friction in the system. And really the reason is, is
because you're jumping from one money to another money. Or another way you can think
of it as you're usually jumping from one ledger system
to another ledger system, if you're thinking like the
computers and recording. And the back end-- I should have called this back
end, but I labeled both of them front end, sorry-- has a bunch of
things inside of it. And the one I'm just
going to mention is correspondent banking. It is a feature that came
out of centuries of banking. Arguably, you might not
need it as much now. But the concept was, I'm a
small regional bank in the US. I'm sending something to
somebody in the Philippines. The Philippines
doesn't recognize this small regional bank,
let's say, in Kansas. I need a correspondent
bank that they can trust. So it's a cost of trust that
it could go from one country's bank through a bank called
a correspondent bank, which had trust, to the
other country's bank. Or maybe you even had
correspondent banks in both countries. But usually you had one
international bank in between. Hugo. AUDIENCE: Hypothetically,
if there became enough trust in the Bitcoin
network, could that act as the correspondent bank? Where like you're in the US,
you go to a Chase or whatever. They transfer your US
dollars to Bitcoin. You go over to the
Philippines, they transfer your Bitcoin [INAUDIBLE]. There is no need for that. GARY GENSLER: So Hugo's
asking whether Bitcoin or any cryptocurrency could play
that role of a correspondent bank, or effectively play the
bridge currency between fiat to crypto, US dollar
to Bitcoin, you said. And what was the other country? The Philippines. Which is a peso? What's that? Peso. Yeah. So US dollar fiat to crypto
Bitcoin to Philippine peso. That is called a bridge
crypto or bridge currency. That's, in fact, what Ripple
is trying to do with XRP. So Ripple is a company that
started as a payment messaging service to compete with Swift. And that messaging
service, which we'll talk about more Thursday,
has been adopted by many banks. More recently in 2018 they
rolled out a prototype of using a crypto token-- XRP-- as a bridge currency. I would say yes,
that is possible. I think there's an issue
also about volatility. So if you're moving fiat
dollar to crypto Bitcoin XRP to fiat, if you have
a lot of volatility, that means it's a less-- it could be costly. But if it's stable
value, so you can you can lower the
cost two ways-- lowering the volatility of
the crypto or lower the time. And XRP believes they
have a solution that can be down to seconds. And thus, even if it's
volatility, that in seconds it won't move as much. And the friction
will be that you have to sell dollars to buy XRP,
and then sell XRP to buy peso. Or you can interpose
any bridge currency. One of the most significant
opportunities for stable value tokens that we'll talk about
in a few classes is maybe is what we can call it
is a bridge currency for cross-border. AUDIENCE: Yes. The question is, what
will be the fees? And if it makes sense from
an economic [INAUDIBLE].. GARY GENSLER: So Western Union
and other remittance companies can sometimes charge
as much as 9% or 10%, especially for small
dollar remittances. And I don't know if any of you
do cross-border remittances, but if it's small dollar, it
can be very significant fees. If it's large multi-million
dollar transactions, you're getting into
corporate treasury functions. So on the blockchain
payment solutions side, you have to always
think about, is this targeted for the retail
small dollar transactional side where you're trying to
get inside of an 8% to 10% fee structure? But again, if it's
only on $50 to $200 US dollar sort of
transactions, you'd have to figure out how to get
your cost structure down there. Or is it for the
multi-million dollar treasury function, for the
Fortune 500 or the World 1,000 or whatever
treasury function, where they're really
talking about frictions which are in basis points. But still, the bridge currency--
crypto bridge currencies-- might still help in the
treasury function side-- I'll call the corporate treasury
function side all the way to the retail remittance side. The percentage
fees are different. And you just have to be able
to say, well, can I get inside of those inefficiencies. And on the retail side
it takes two to five days to do a remittance. So can you get
inside the timing? Alin. ALIN DRAGOS: So
one of the things that I think I found useful
when I was doing remittances is trying to distinguish
between getting remittances from an account to an account. So account to account remittance
versus person to person. And I know they sound the
same, but they're not. Right. A person means,
hey, you know what? My mother out there doesn't
have a bank account. She's a person. If she were to have
an account, then that would be a fairly
easy transaction. Right. But is she doesn't have a bank
account, that's not that easy. Right? Most of the value that
all of these Western Union or whatever, they've
been valued by the fact that they have a
lot of locations, that people can walk in,
get their money, get out. Right? A lot of the folks that are
coming [INAUDIBLE] right now, they're trying to address this
account-to-acocunt problem. As in like, hey, you know what? If you have a bank
account here and a bank account in South Korea, that's
not that complicated, right? And cryptocurrency
can probably actually compete fairly well there. However, if you're trying
to say, hey, you know what? I have a bank account here. But my mother, who doesn't have
a bank account in South Korea, how do I get the money to her? If I send her cryptocurrency,
she's like, fine. What am I going to do with this? Right? So the real problem is,
you have to think about if you [INAUDIBLE]
the remittances, OK, where are the exit
ramps on both ends? How exactly are you going
to get that to actually use those funds? GARY GENSLER: And
also, right now because there's no
economy-wide use of crypto, if you're trying to move
value around the globe, on the other end it's probably
fiat to crypto, crypto to fiat. So it's probably
two money exchanges. If it's to be stored value,
if it's stored value, a lot of people are still
willing to store value in crypto. But until it grows
larger it's not a medium of exchange in
any economy-wide solution. So this is a slide
you've seen before. We're not going to
spend much time. But in payments some of
these matter and some don't. And I think if I did
my little thing-- some will grow. All right. Yeah. There you go. All the illicit activity. Remember in public
policy there's something called the
Bank Secrecy Act. If you're thinking about
anything in the payment space, you're probably moving
something of value. And in almost every
country you have to comply with some form
of anti-money laundering, know your customer, Bank
Secrecy type of thing. The US Department
Treasury said so in 2013. You probably also have to deal
with some consumer protection. That's why that box on
the bottom sort of grew. Like, you're just not
going to lose their money or steal their money. And maybe something
about privacy, whether it's GDPR type of
privacy in Europe or elsewhere. You're not worried about
investor protection. But in this country,
you have to worry about how to register as
a money service provider. And other countries
similarly register. So I just raise that. And as we go through
use cases in H2, I'm going to constantly
kind of use this start and say, well, what
public policy issues? You don't have to worry
about the SEC, probably. But maybe some
stable value token might be an exchange
traded fund. So it's possible you
might be blurring up against that regulatory state. So technology is affecting us. And this is a slide I think
I've used before with everybody. But I thought,
well, wait a minute. What of these
eight-- and there's more technology affecting
finance-- but what are these main eight
are really hitting payments, when I add payments. Well, I'd say there's kind
of four or five of them. Blockchain is
affecting payments. But biometrics, we talked
about that earlier. Biometrics, definitely. Mobile telephony, open API,
which is the UK initiative where they're saying that UK
banks must allow merchants an ability to get inside of
those bank accounts, basically. It's called open API, because
they have an interface directly into the bank accounts. And even robotic
scraping of data-- RPA. I think they're all related
to payments in some way. Or maybe everything. Maybe cloud and AI
and machine learning. But I kind of think-- I think that these
five are the ones. So blockchain is amongst
the things changing payment. It's not the only thing
changing payments. And then remember a bunch
of attempts in the '90s? A bunch of ways to do
digital cash in the '90s? We talked about this in the
first or section lecture of the course. Fundamentally, why
did they all fail? Anybody remember
why they failed? AUDIENCE: They didn't solve
the double spend problem. GARY GENSLER: They didn't
solve the double spend problem. So bitcoin and blockchain
technology, Nakamoto consensus, is a solution to
the double spend. Nothing's 100% solution,
it has some challenges too. But it's a solution to
the double spend issue. So then before Bitcoin we had
a bunch of mobile payment, and now afterwards. And I want to spend
our last minutes kind of just chatting about
what are the lessons learning. So first, Alipay and WeChat. Who wants to tell
me a little bit? There's probably somebody--
who has Alipay and WeChat on their phones? Thalita, you want
to tell us about it? No? AUDIENCE: Go ahead. [INAUDIBLE] GARY GENSLER: Chris. AUDIENCE: Yeah. So WeChat was started
as just a chat service. So they built out
a huge user base, which is the key to the
similarity between WeChat and Alipay. And so essentially once
they had that chatter base, they wanted to
start monetizing it. And that's where the payment
system was added on top. GARY GENSLER: So when
WeChat and Alipay started, they started one, out of
communications, basically. Chat, text. Right? And Alipay was off of like-- is it appropriate,
Shawn, to call it like, China's mixture of
eBay and Amazon. AUDIENCE: Yeah. P2P. GARY GENSLER: P2P. AUDIENCE: Or B2B. GARY GENSLER: B? AUDIENCE: Alibaba
is a B2B platform and combines an
e-commerce platform. So [INAUDIBLE]
combination service. GARY GENSLER: And those
payment channels-- I don't think it's a surprise. China was not as developed in
terms of a credit card rails as the US, and had
far fewer banked. So these two companies
solved a problem that kind of existed because there was not-- as it developed, banking
system and credit card systems. Overall, those systems
cost less than in the US then 270 basis points. And you had an article
in the readings that maybe the US payment
system is going to get shook up. I don't know the answer. But you know, maybe they'll
get shaken up by these two. How about the M-Pesa story? Anybody have any
M-Pesa on their phones? No. Who wants to give
a crack at M-Pesa? It's basically telephone,
mobile minutes. In all three of these,
the central banks saw a traditional
banking function-- payments, and a second
traditional banking function-- the store of value,
being done by non-banks. What do you think
the central banks in the official sector did? AUDIENCE: They
came in and started to regulate those [INAUDIBLE]. For example, we now are
reading, they talk about M-Pesa. Actually, the Kenya
government oversaw the trust so that even Vodaphone
ran out of the business, people can still use the
money stored with the M-Pesa. GARY GENSLER: So
let's break it down. So one is, the official
sector said, whoa. We've got to bring this inside
the public policy framework. Regulate it. And then two, they
said in the Kenya case, it's gotta be set up as a trust. And the value--
the stored value-- has to be in the banking
system, literally. So all those little-- Eric? AUDIENCE: Yeah, I just
wanted to add one example to your list that actually
is the opposite of what [INAUDIBLE] described. [INAUDIBLE] which is Peru modal. And it's the initiative
[INAUDIBLE]---- GARY GENSLER: Peru-- AUDIENCE: Peru modal. GARY GENSLER: Modal. AUDIENCE: Yeah. And it was tackled or begun
by a former production minister in Peru,
who actually thought about that potential issue. And she started reaching
out to all local banks and all local telcos,
brought them all together and created a whole
model that's called [SPANISH] which is
mobile wallet in Spanish. And it's been growing
since 2016 as a means of financial inclusion for
underserved populations and people that don't
have bank accounts. Because banks see
that as an opportunity to get more customers. GARY GENSLER: So Eric, can I
ask you a couple questions? Do you know, was it a
means for just payment? Or did they actually store
value in this system? AUDIENCE: It's both. Yeah. You can use your mobile
to pay to another person, to a merchant, for
example, a small store with another mobile. Or you can actually
cash it out to a-- GARY GENSLER: Has it
been brought inside? Is it now being regulated
as a financial firm? AUDIENCE: We got them regulated. And begun with a-- it's now a spinoff as a-- what we call sociedad
anonima, which is some sort of private company. But it's basically a consortium
of all the banks in Peru. GARY GENSLER: So if you can
send me an email with its name, I'd love that. And maybe I'll put something
on Canvas about it. But in all these circumstances,
they were payments. But they also had-- they started storing value. The other one I want to
mention is Starbucks. Starbucks. How many people have
Starbucks on their phone? And they have-- right? So wait a minute. Wait. I saw a hand back there. Larry. Geez. I'm going to call on you, then. Who knew? All right. Does it store value? AUDIENCE: Yeah. It steals value. Like, you have a minimum
amount you have to deposit. So $20, for example. Whenever it goes below the
minimum, it kicks another 20 in. So you never-- so they've
basically taken $20 and held it permanently. GARY GENSLER: So they're taking
it out of your bank account. Right? You gave them authorization--
back to that word "authorization"-- to just take money out
of your bank account. So this is a form
of what used to be when Larry and I were kids. you could have physical
prepaid cards, gift cards. I got them on my birthday. It's a gift card. But now it's sort of prepaid
cards on your mobile | I think if Starbucks
had billions of dollars in everybody's $20, that
the US Federal Reserve might knock on their door
and say, you've got to register as a
bank, or you've got to-- In China, basically, that's
what happened to Alibaba. The largest money market
fund in the whole world is at And Financial Alipay. Largest. About $300 billion US dollars. But I think the same would
happen with Starbucks, because they're storing value. And Kenya, they said you've
got to put it in a trust. And by the way, we want
you to make deposits with 100% of this in
the banking system. And that official
sector said, we don't want to dis-intermediate
the commercial banks. Now, they didn't write
that in a statement. They probably couched it
all in consumer protection. But at the essence,
the outcome was, they were keeping their
commercial banking system alive by doing it. Starbucks, I don't know
what they're doing, Larry, with your $20. But you don't, either. No. But I don't think
it's a surprise that Starbucks has partnered
with Intercontinental Exchange. And you should
ask Jeff and Kelly when they're with us, well,
why is that connection? I'm sorry. There were a couple of hands. I saw Jihee And I saw Alin. AUDIENCE: Well, we just
wanted to point out that you probably had set-- set the auto subscriber, or-- OK. GARY GENSLER: You can
tell Larry advice. How did he set his
auto subscriber? Oh, that's right. I mean, I could physically
have to go through every time I want to reload. But obviously, that's
just wasting my time. So. It's like the internet. That I'm losing is
probably worth my time. So I'm not saying
I have [INAUDIBLE].. But it is amazing. There must be an extraordinary
amount of money [INAUDIBLE] GARY GENSLER: Oh no. They're doing you a service. I'm not saying they're
not doing you a service. Let me take one
more, Priya, then I'm going to go to [INAUDIBLE]. AUDIENCE: Interesting back story
to the M-Pesa Safaricom fees. I used to work for
one of the NGOs that pioneered the savings and
loans concept in all of Africa, really. And what happened in
Kenya was that you had these groups, like
hundreds of thousands of them, in very remote places. And these groups, you know,
they had annual saving cycles. And eventually, you know, they
were saving very little money. But they were saving. And they didn't have
a way to then move into the formal economy. You know, so the money
just stayed there. And it literally was money
stored in a box with three locks, and they were-- And you know, it was a way
that even without literacy you could do it. At that time, DFID, the British
overseas development agency, was sponsoring a few of
these NGOs to do this work. And the consortium's
biggest problem was, now how did we-- the next
step up is to transition them into the formal economy
and gain access to credit. It was like the
opposite approach of the micro [INAUDIBLE]. And that's the point when
in Kenya this breakthrough happened is when these savings
groups finally had some money. And the first thing that
happened at their villages-- like, no bank was
going to open a branch. There was a movement
around mobile branches. But even that was very expensive
for the amount of money that each of these
scripts was saving. And so then these first
operators came up. It was almost like an act
of frustration, you know. Like, OK. We have this cash in this
box that cannot be stored. So now we're just going to move. GARY GENSLER: So
let me capture it. So some of the themes is that
where there is a market gap, there is a gap in
Kenya with unbanked. And by the way, half
of sub-Saharan Africa is still unbanked. But half of that unbanked
have mobile phones. But there is a gap in China. And so Alipay and WeChat and
so forth started to fill it. What gaps are there today
that you all can fill. And then secondly, does a
blockchain technology solution help fill that gap? There might be big gaps
created by 275 basis points in the US,
the 2 and 3/4 percent using the credit card
rails for payments. There might be gaps
of the unbanked. There might be big gaps in
customer user interface, because a lot of
the customer user interface in current
banking isn't that great as we move to mobile phones. QR codes. There was a nice comment-- see, if you do comment, I
remember what you say online. But there was a nice
comment about QR codes. Where are QR codes used in
payment most dominantly? Two countries. What? China and India. The US, and I would
even contend Europe, are no longer at the
forefront of payments. Because we're sort of had
existing big legacy systems. But that might mean that there
is big legacy systems built on the credit card
rails dominantly, might be vulnerable. A quick thing just
on the methods. This was out of a report
you had, but I just thought in 2016, 29% stole credit card. Estimate, five years from
now worldwide down to 15%. eWallet is 18% to 46%. Those trends, if they're
right, and of course, they won't be exactly
right, but those trends creates opportunity. When you have huge changes,
and people are changing the way they're doing things,
that's usually where business opportunities are. You had-- this is too detailed. But I think it's
sort of fascinating that the Federal Reserve
puts this out once a year. It's always old, stale data. But the big things
I took away is that we've got a
huge change that's happening here even in the US. And card payments still
growing, of course. But not like they once were. Mobile payments
are big changing. Half of all card payments
are done online, by the way, not in person now. So those statistics,
if you're going to build a real business
and not just a business for a final project
for Gensler's course, you're going to want to
dive into these statistics. You want to see where
are the opportunities. What are the trends
in the statistics. And then Bitcoin came along. And we're not
going to chat more, but I'm going to just say,
just as the two minutes left, don't forget the economics. And I say this again
coming back to having read 50 papers over the weekend. When you're writing for
the rest of the semester, whatever section-- whether you write on
payments, whether you write on central bank, whatever
you write one, remember about thinking about what
are the benefits of block J. What are the real specifics? And particularly, how
does it lower verification or networking costs? Like Christian
Catalini wrote about, but just we talked about it. Coming to my office. Ask for office hours. Say, wait a minute. How does-- does it really
need to happen this way? And most importantly,
what are the net benefits? And I keep coming to
my friend Brotish. No, don't do a
traditional database. You gotta get to a
private blockchain. This is not a traditional
database course. We're about permission
blockchains or permissionless blockchain. And remember, blockchains
are about append-only logs with some consensus
with multiple parties having the right to change
the state of the ledger. So it's sort of like,
when does that valuable? I believe there
is value to that. But not in every circumstance. And certainly if there
is a native token, why do you need a native token? Is it there to jump
start a network? Is it to help with
token economics? Remembering that there is
great network effects to having one currency per jurisdiction. But let's not forget that
certain multi-jurisdiction currencies have failed. The history of
multi-jurisdiction currencies is they almost always fail. We still have not
seen the end or what's going to happen with the URL. I mean, decades from
now, I'm saying. And don't forget the skins
and the swords as well. So we're back together
again on Thursday. We're going to do
payments on that day. We're going to dive more into
payments-- actual blockchain technology stuff and payments. Thank you, Alin. [APPLAUSE]
