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visit MIT OpenCourseWare at ocw.mit.edu. GARY GENSLER: So
payments part two we're going to chat a little
bit about the overview today. Readings, of course
as we always do. And then what was yesterday? Does anybody want to tell
me what yesterday was? Kelly? AUDIENCE: The 10th anniversary. GARY GENSLER: 10th
anniversary of bitcoin. What else was yesterday? It was Halloween. No, it is not my birthday again. Stop that, Tom. So we're going to
chat a little bit, we're going to have some
fun about happy anniversary or birthday. Would you call it a
birthday or anniversary? Anniversary? OK. Birthday, all right. There's no established
vocabulary really in this field. So-- AUDIENCE: Birthday
comes in January. GARY GENSLER: What's that? AUDIENCE: Birthday
comes in January. GARY GENSLER: The birthday-- Hugo, why's the birthday
come in January? AUDIENCE: Birthday
marks [INAUDIBLE].. So the music is [INAUDIBLE]. GARY GENSLER: Riham? AUDIENCE: Birth means death
at a point in time in my mind, so anniversary
[INAUDIBLE] is better. GARY GENSLER: You got-- did you get that? Birth also connotes death. Did I have that? And so Rahim was saying she
would go with anniversary. But we have birth over here. We're going to chat a little
bit about that and try-- the existential. Then we're going to talk about
payment systems and the sort of some of the pain points. And we'll have a
lively discussion. What do you think
the pain points are in the payment system? I, of course, will
have listed some, but your input's
the most important. How does blockchain fit
into this payment system, and why so far haven't there
been any really economy-wide or system-wide adoptions yet? So one might even say what are
the pain points of blockchain technology that
there has not yet been some of those adoptions? We're going to chat a little bit
about some blockchain payment companies, and
there are not many. I mean, there are
many white papers but there are not many that
have actually taken off. And then wrap it up. So the study
questions which we're going to sort of dig into
rather than right now but just what
lessons can be taken. So for my layer two help us. We're going to come back to
these when we sort of dig into the paint points. What are the opportunities
in cross-border and so forth, and the trade offs
of using permissioned versus permissionless systems. So happy anniversary,
happy birthday for some, 10 years ago. It's remarkable. Actually, some people say it
was November 1st because I think when it actually got on
the website it was November 1st in parts of the world. So what do we know about
the 10th anniversary? Just some fun statistics. This has all
happened in 10 years. So the price is around
$6,300 to Bitcoin out of nothing, Satoshi Nakamoto. And it's $110 billion in size. We might not all know
each other in 10 years, but write down for yourself
on a piece of paper-- this is a real exercise I'm
asking you to do for yourself. Write down for yourself
and put this piece of paper somewhere or put
it on your laptop. You can put it down, where do
you think the price of Bitcoin will be 10 years from today
on the 20th anniversary? And remember this
course in 10 years, and look back, and
laugh at yourself. Just we won't all
know each other. Maybe there'll be
a group chat, but-- what's that Alit? You don't want to
guess where it is-- you don't need to share it with me. No, no, but write down
and think about it. Where do you think this
will be in 10 years? Is this a hard question? [INAUDIBLE] Alpha, do you want to share
your number with the class? AUDIENCE: We're even just
debating directionally, it's really going to
be higher or lower. GARY GENSLER: Well,
how many people think it'll be
lower in 10 years? OK, I'd say it's about 30%, 35%. How many higher? Yeah, that's 60%, 65%. Alin, you-- you did
two Alin split, right? AUDIENCE: Think
it's going to be 0. GARY GENSLER: I think
that would be lower. [LAUGHTER] AUDIENCE: It is,
because in 10 years the system might
change so dramatically it might be unfair to
even call it bitcoin. GARY GENSLER: Fair enough. It might have evolved
into something else. Back here please. AUDIENCE: I just
want to comment. Isn't the real
question market cap, because that's what people are
actually using the currency for? Because the question of
what's the price going to be presupposes a set number of
shares of coins or tokens. So the way that people are
mining coins in the future also depends on the price. GARY GENSLER: So I think you
raise a really good question. If you're writing
something down you could write down the market
cap rather than the price. You could say-- I mean, in the Leeds case you
would still say 0 for both, but you might say
that-- of course. Because it depends
on how many coins there are, how many
shares there are. Does anybody want to take
the other side from this-- the other Alin? AUDIENCE: I think
it'll have zeros-- it'll have zeros in the price. GARY GENSLER: It will
have zeros in the price. Hugo? AUDIENCE: Well, I just want to
respond to the other comment. Do you know exactly how
many bitcoin there will be in about 10 years from now? GARY GENSLER: Do we actually
know how many bitcoin there will be in 10 years? AUDIENCE: Yes. GARY GENSLER: Hugo says
you do because it's written in the code. Remind me your first name? Isaac. AUDIENCE: So I
think one is mining. I know that some folks may have
a better technical background on mining and the way
you dedicate resources based on price. But I'm seeing a shake-up
ahead, so maybe not. The other piece of
it, I think, is just thinking about the flow. Thinking about the
bitcoin that's actually being traded or transacted. If there's a
restricted market cap, it's similar to looking at big
cap stocks trading in China. You know, you don't
actually get a real price. GARY GENSLER: While
I agree with those, there's one other reason
we might not know the-- AUDIENCE: People
could stop mining. GARY GENSLER: People
could stop mining. AUDIENCE: In five
years if it's zero. GARY GENSLER: Oh, that's if
it really just dwindles out. Nobody wants to expand. But what's one other
reason why it could be a different number that-- Shimon? AUDIENCE: Fork. GARY GENSLER: A fork. There could be a consensus
amongst 51% of the parties on this node to change the
what I'll call monetary policy. We've seen that
twice in Ethereum. Ethereum was having a certain
mining or block reward. They cut it in half once--
or they cut it from 5 to 3, and I think now they're
going from 3 to 2. It was not in the
original Ethereum. So there could be a consensus. It's not written
about a lot, but it could be either
what's called a fork or it could be so almost
unanimous that everybody went for a change in
the monetary policy. All right, so that's
just a little bit of fun. Some other quick
numbers and facts. There's 17.3 million
coins right now. So 17 million coins
have been mined so far, 550,000 blocks roughly. 189 gigs. Transactions per day, quarter
of a million transactions. And then if I've got
my decimals right, the hash rate is 10
to the 18th times 50. That's seven
trillion times harder than when it was in 2009. There's seven trillion more
computational power in Bitcoin now than there was
nine or 10 years ago. It takes about 1/3 of 1%
of the world's electricity, and there were some
nice comments overnight in the discussion
for this class about whether that's a
good thing or not. And maybe it's not a good thing. So that's Bitcoin anniversary. A couple other things,
unique addresses. There's a little bit over
500,000 unique addresses-- Bitcoin addresses. So if there's tens
of millions of people that have Bitcoin and only half
a million Bitcoin addresses, what does it mean about the
probably 20 or 30 million people that believe they
own Bitcoin but don't have a Bitcoin address? Where do they own it? James? AUDIENCE: In an exchange? GARY GENSLER: Yeah,
on an exchange. Or in some custodial-- in essence relying
on somebody else if there's a half a
million unique addresses, but it's thought there's
20 to 30 million accounts. 10,000 nodes. And bitnodes is a
website where you can see where the nodes are. And it's concentration of
where the actual nodes are. So pretty spread around. There's not any alpha
in Ethiopia yet. In fact, I don't see-- what's that? Do you see two in Kenya? AUDIENCE: Yeah, there's
two little dots. GARY GENSLER: Anybody
from Greenland? No. And of course, it's
spurred this whole thing-- we've seen this map before,
but initial coin offerings. $28 billion roughly raised. Again, we don't know if
the numbers are right but this is what this 10
year anniversary or 10 years since it all started. This means there's
a lot of capital chasing this field right now. So anybody want to
write down whether they think ICOs are still going
to be around in 10 years? How many people think initial
coin offerings will be around? About half. And so the other-- oh,
I know where Alin is, but where are the rest of you? I don't actually know. I think they're
going to slow down. I think in 2019 and
2020 they'll slow down because so many
will have failed, the market will sort
of adjust and say, well, we're not going to
invest in these unless there is a much better business model. And so it's spurred, this is
just a bucket of other coins. There's 1,600 odd coins,
probably 1,500 plus of them will fail or maybe all 1,600. But 1,500 plus
will probably fail. I might be done with--
oh yeah, crypto finance. Actually there's not as much
volatility as there once was. We're slowly getting
a more stable coin. It doesn't mean it
will stay this way, but to the extent that
Bitcoin stabilizes in pricing and stabilizes for
a long period there might be a little
bit more use of it. But I wouldn't read-- six months does not
make enough history to say that the volatility's
out of this thing. All right, so let's go
back to payment systems. So now I'm going to ask,
what are the pain points? I mean, maybe just putting
up the chart tells you where the pain
points are, but this is the chart we talked
about Tuesday as to what some of the challenges are. Anybody want to give me
some thoughts on this-- this was a consumer on
one end and a consumer on the other end, it
happens to be a US model. But it's not that different
in most countries. But what pain points could
blockchain help address in this complex system? So pain points. Anybody want to give me-- Brodish. AUDIENCE: There are
too many intermediaries in the system, which means
that too many parallel ledgers. GARY GENSLER: So
multiple intermediaries with parallel ledgers. What else? AUDIENCE: I guess the usual
suspect would be high costs. GARY GENSLER: So high
cost, usual suspect. World Bank estimates it's
between a half a percent and 1% of world
GDP, which would be, I guess, about $400 to
$800 billion a year. Zan? AUDIENCE: Speed of execution. GARY GENSLER:
Speed of execution. So what do you mean
when you say speed of execution and payments? AUDIENCE: I guess the
ability for a counterparty to receive the money
and be able to spend it. GARY GENSLER: So the
final settlement-- sometimes it's
authorization, clearing, settlement-- but
final settlement often doesn't occur
for a couple of days. AUDIENCE: But I would then like
for the customer perspective just closing three seconds. GARY GENSLER: So it's
a really interesting-- there's a bifurcated market. From the customer's
perspective, there's great speed of settlement. For the merchant's
side, the merchant might not have that is
what you're highlighting. Sorry. AUDIENCE: So are
those for the bank? Like if I have never had a
bank account and [INAUDIBLE] so it's very difficult for me
to go through all this process. GARY GENSLER: All right,
so financial inclusion. So we had cost, financial
inclusion, latency at least for the merchant side, lots of
intermediaries as Brodish said. There's a lot of ledgers-- there are multiple ledgers that
might have some reconciliation and cost to them. Sure, Sean. AUDIENCE: Real
time FX settlement. GARY GENSLER: Real
time FX settlement. What do you mean there? AUDIENCE: When you
have one currency, it basically can convert the-- if you have the US dollar
[INAUDIBLE] to Russian ruble. And then if you can
pledge that into one kind of cryptocurrency,
you could actually resize you know that token,
you can settle the trade right away. GARY GENSLER: So I
think I'm with you. It's basically cross-border. Jumping from one currency,
one fiat currency to another, which happens
to be technically jumping from one ledger system-- the US dollar ledger
system, did you say ruble? Ruble. Do they have ledgers there? Yeah, they have ledgers there. You know, as a
background story, I used to attend the
financial stability board meetings in Switzerland
from time to time. And when Russia was going to
have the next G20 meeting-- I think it's next going
to be in Argentina, but that was the year is
going to be in Russia-- the deputy governor
of the central bank wanted to have a
dive into issues that were in my area,
the derivatives space. So I got to know
something of that. They do have ledgers is
what I just want to say. I did know this. So what are some of the things? I heard from you cost,
delayed settlement especially for the merchant side. I didn't hear anybody
talk about charge backs. So does anybody want to tell
me about why merchants are not happy what's called
charge backs, or is this something
more a US thing? Brodish? AUDIENCE: So we saw the last
class that out of $100, $2.75 was being given
to the friend of. Multiple interpreter is
like the issuing bank and the [INAUDIBLE]. GARY GENSLER: So
there's a lot of cost, 2 and 3/4 percent
in the US, when it's crossed the credit card rails. But one of the features
is charge backs. AUDIENCE: There's just a lack
of finality to the transactions. So I think you talked about
the example of the campaign after the campaign
was over having people claiming the charges
were fraud or whatever and having to give
back [INAUDIBLE].. GARY GENSLER: Right. So merchants don't
really have finality. Jack. AUDIENCE: Sometimes charge
backs are recourse for things that weren't actually spent. So doesn't this kind
of affect what-- consumers might not
be as willing to enter a transaction that has
that level of finality. GARY GENSLER: All right. So I think-- remind
me your first name? AUDIENCE: Dan. GARY GENSLER: Dan. So Dan and Jack really
have the two sides of this. From the consumer-- I'm sorry, Jack's
the consumer side, and Dan's the merchant side. From the merchant, they
want finality of settlement. They want, I've
sold you a good-- I was working on a campaign. We weren't selling a good,
but we got a donation and we wanted to know
that $2,700 was there. Or I sell a good, a cup
of coffee, and it's done. But from Jack's
perspective, well, I might not have gotten
a good or service. I'm going to dispute it. You say that I'm a monthly
subscriber to the New York Times. I'm not a monthly subscriber
to the New York Times. I don't want to pay the
$15 a month because I'm not getting the New York Times,
and it's called a charge back. And so it's really consumers
and merchants are a little bit on the different side,
but in the US that's part of that 2 and 3/4 percent. But merchants, probably
in the US at least say, I'd rather not be there. And then it's whether customers
are going to push back. Fraud, of course. Privacy I didn't
hear anybody say, but the current payment rails
actually in the modern computer age gives everybody along the
chain, a lot of information about all of us. Now, many of us don't mind it. I still want to
use my Visa card, and I want to use
my bank account, but know that we
are all giving up a little bit of our
personal identity because they know how we spend. And based on those
spending patterns, they can know whether we like
guns or we don't like guns. And in the political
space there's people sort of look
at those things. Or how you live your
life in many ways. And in good ways,
too, because it means they can market to us
what books we want to read, and what wines we want to drink. But it's privacy, as well. Financial inclusion
was mentioned. Rahim? AUDIENCE: To the
privacy is cyber attacks and identity theft. So I will say this
is a big pain point. GARY GENSLER: So I should-- good. I agree with you. Cyber attacks and so forth. So with all these pain
points the question is, will blockchain help address
some of these or all of these? So then we go back to
benefits of blockchain. What are the two big
benefits that you keep hearing me spout about
whether it's from Christian Catalini's paper or just-- Kelly? AUDIENCE: The cost
of the network and then the cost
of the verification. GARY GENSLER: Yeah,
so verification cost and networking cost. We're not going to
go back through this, but can lowering the
verification cost address basically some of
these pain points, including this
cybersecurity one? And where does
that fit together? I mean, Alon? AUDIENCE: I would add, does
blockchain add problems? So it may solve some problem
but add other problems. And then we need to nab those
problems and seize them. GARY GENSLER:
You're ahead of me. No, no, it's good. It's good. In fact I'm going
to go, challenges. Which problems
you're going to add. AUDIENCE: Scalability. GARY GENSLER: Scalability. What other problems? Brodish I've heard
from, over here. AUDIENCE: High
transaction costs. GARY GENSLER: High transaction
costs, one blockchain. AUDIENCE: Takes some days
to process the transaction. It's slow. GARY GENSLER: So it's slow. So scalability is slow. It might be high
transaction costs. Alexis? AUDIENCE: And interoperability. GARY GENSLER: Interoperability. So it's all our friends. Stephanie? AUDIENCE: There's also the
issue of error resolution. GARY GENSLER: Error resolution. Good one. AUDIENCE: Like
when consumers are trying to fix something wrong
with like fraudulent card transaction or something. Like with blockchain, if it's
immutable you can't do that. GARY GENSLER: Right,
so it's this trade-off. It's a little bit like what Jack
was saying about charge backs. From the customer's side there
might be an actual error-- it's a different type
of error, but an error, and I want to be
able to say, I'm not taking the New
York Times any longer. I'm sorry to the New York
Times, I'm just picking. But you're saying there
could be true error. Shimon, did you-- AUDIENCE: Isn't
like the core system where we have these delays in,
is that really technologically advance-- sort of a
business issue in the sense that [INAUDIBLE] finality opens
up a lot of exposure for fraud. So the core level that
we see will probably go up a lot if someone
could game the system, get their cash out
at the same time. It'd be very hard
to trace it back. GARY GENSLER: So
Shimon's raising, maybe we have
delayed settlement. Maybe we don't have
immediate finality because as a market feature we
want some delayed settlement to protect against fraud, to
make sure that there's not errors as Stephanie says. Maybe there's a delay
for business reasons. But-- Kelly? Now, anybody want to
take the other side? I want somebody to
take the other side. This Alin. AUDIENCE: I mean, I'm
biased, I'll admit it. But I think that
basically that says let let's have an
inferior system out there because it's good. And it's like, yeah,
I mean, I think to some extent you do
want-- there are benefits to having a delayed settlement. But there are also a lot
of benefits on having finality, so why not have both? You don't need just have
an inferior settlement kind of system out there and
say, OK, this is established. You can also bring
another solution right beside it that actually
offers finality for people who want it. GARY GENSLER: All right,
so if everybody remembers, Alin works at the digital
currency initiative. Used to work in payments. He's admitting he might
have a little bit of a bias, but he's saying, fine, you
want some delayed settlement. But shouldn't we
have an alternative? Because not every market
will want delayed settlement. Eric? AUDIENCE: Yeah,
but I just wanted to tie these two points of view
to another challenge, which is the issues on the
handling of governance. In the case of
[INAUDIBLE],, for example, there's a little bit of
more elaborate governance of the distributed
arrangement of the blockchain. That decision between going
from supposedly a theft close-- a fork. So handling a
centralized arrangement is much easier than a
blockchain [INAUDIBLE].. GARY GENSLER: Rhys? AUDIENCE: Another challenge
is the government regulation on the anti money laundering
and the [INAUDIBLE].. GARY GENSLER: Yeah, right. So-- Kelly? AUDIENCE: I'm not sure if this
ties into the finality of it, but one of the articles talked
a little bit about the fact that there is an issue with
managing liquidity given the speed of the
transactions, especially at the corporate level where
the value of the transactions are much higher. There's a bit of an opportunity
cost trade-off there. GARY GENSLER: Right. So we're going to
chat about that in a minute about the
liquidity in particularly using a cryptocurrency as
a bridge between two fiat currencies. But it has somewhat to
do with the volatility of cryptocurrencies. But I would say to
this point about-- I'm coming back to Alin versus
Dan, or Shimon, really-- sorry, different debate. I think that this new technology
is coming along at a time where we can shorten
settlement, and a lot of the delayed settlement
in payments, in Wall Street, and securities we used to have
that you would do equity trades transaction day plus five days. Before I was born,
too, long time ago. Then it went to
transaction day plus three. And in Europe they went to
transaction plus two days-- two days for settlement
of securities trades somewhere 10 or 15 years
ago, and the US caught up. The US was behind and just went
to transaction plus two days. But I think technology could
be t plus 0 in securities, and in payments you could
go to real time payments. The US Federal Reserve
had a big process where they got public
comment, and they're moving towards what's called
real time payments by 2020. Now, maybe it will be adopted in
2021 because it'll take longer to roll out, but I think
that technology does provide that it will be more options. And in some cases,
the markets will stay with delayed settlement
because it's just history, it's just legacy. And other times it will
stay with delayed settlement because they actually prefer it. I think in the securities
world some people actually prefer delayed settlement. We'll talk about this
in a few lectures, but they'd prefer it because it
allows shorting of securities. When you actually borrow
somebody else's security and sell it, you usually
sell it before you borrow it. And so the whole parts
of our capital markets that are built around
delayed settlement, because you usually sell,
borrow, and settle rather than borrow, sell, and settle. AUDIENCE: So if you
put securities lending on a blockchain, then you're
able to immediately point to the varo that you
get and trace that back. When you then have
securities lending on a t0 and you can short on
t0, know exactly what securities will be borrowed? GARY GENSLER: I think that it
is technically feasible to move stock borrow onto a blockchain. I'm agreeing with that. But the question is whether
the economics of that market-- whether the market participants
want to actually arrange the borrow before they
sell because currently they sell before they
arrange the borrow. AUDIENCE: But they have to get
the locate on that same day, right? GARY GENSLER: Well, when it's
t plus 2 depending upon-- I'm sorry I'm speaking finance
here, but maybe you'll help me. AUDIENCE: Well we have to give-- I used to be in
sales and training. We had to get a borrow,
like a reference number, before someone shorted something
so they couldn't short. I don't know if it's
changed, so I don't know. GARY GENSLER: No,
it might be that I'm the old season dog that
was-- now that you're saying they're tighter. But-- AUDIENCE: If a client
wanted to short something, they would call me, and then I'd
have to call the market maker, get a borrow, get
a reference number. And they would carve off
that amount, whatever they wanted to
borrow, so it wasn't available for anyone else. Then they sold it. So it was like-- it was done on a
ledger, but yeah. GARY GENSLER: So the market may
already be moving towards it. AUDIENCE: So I work in the
securities lending desk that he used to call. That's what I'm saying. And that came into
effect after 2008 with the no naked short selling. And so then you had to
get the locate on teaser on the same exact
day that you borrow. But you didn't actually need
to borrow the stocks until t3. GARY GENSLER: So you just
had to have the locate. AUDIENCE: You just need to
have a good locate on it. AUDIENCE: So you
couldn't double lend. AUDIENCE: But I
guess my question was if you moved that
securities lending transaction to a blockchain,
you could immediately borrow it and be able to trace that. And then when it
came against recall-- GARY GENSLER: So
for those of you that are not as close to the
world of finance, and stock loan, and stock borrow,
the point of the discussion is that markets have evolved
built upon delayed settlement. And the delayed
settlement may well have been because they all
evolved from paper, not computer days. So we had authorization,
clearing, settling in the payment
world, but in stock borrow you had to actually
locate a security to sell. It sounds like there's
some market evolution post-2008 that you actually
had to add an identifier, though you didn't
have to borrow. My point is that all of this
can be put on a blockchain, but there's also
economic market realities as to whether somebody wants to. And I think, let's
see, if you're Dan you don't want charge backs
but Jack still wants them. And in the delayed
settlement Shimon wants to keep his
delayed settlement, and Alin wants to
go the other way. And I suspect that in some
markets, let's go with Dan and Alin are together, that
finality will be important. And what blockchain
allows, it allows for the economics of finality
to be a fair debate in a sense. A level whereas in the
past you couldn't even have the debate because
it was so paper intensive. So blockchain changes
that economics. Let me go back a
slide to say why-- what are the
possible suitability of payments to the
blockchain technology world? And these were some
that I threw out. Payment systems use ledgers. Geez all right,
that's the sweet spot. They use ledgers. In fact, that's what
Satoshi Nakamoto started this whole thing on. Multiple parties
certainly want to read, and in a lot of circumstances
multiple parties want to write to the ledger. Like actually record
to the ledger. So it's kind of right
in the middle of this. You might be able to
lower verification costs, but more importantly
verification costs are really critical to
the economics of payment. That you have the money that
you say you have, or the value. You're sending it to this
account and not that account. So in a sense, I look
at this and I go, this feels like fertile ground
that hasn't yet been plowed. Because 10 year anniversary-- or birthday-- we're
still not there. But any other thoughts? I mean, micro
payments is another, but Alin, you're the expert. AUDIENCE: Yeah, I mean,
the one thing that I think is exciting to some of the folks
in the DCI, myself included, is the fact that
we can attach codes to these movements of value. So you can program
these chunks of money. GARY GENSLER: And are
you saying attach code to identify it's
Kelly's payment, or it's James' payment, or
are you saying identify code in the form of smart contracts? AUDIENCE: Basically
it's smart contract. Just say, hey,
you know what, I'm going to release the funds
of this individual side and this individual
side at the same time, and then you get
the money, right? And that adds an additional
layer of complexity that traditional payments of
the Visa, MasterCard variety don't have. So you get a whole new layer,
for lack of a better word, of possibilities. When you start
adding, OK, I'm going to I'm going to
give you something if it's sunny outside. OK, we can make that
happen real time. GARY GENSLER: We
didn't have a real-- AUDIENCE: Would that
eliminate some cost and-- I mean, with the
Visas and whatnot? GARY GENSLER: Can you say a
little louder just so we-- AUDIENCE: I get his
point, yes, but I mean, it will eliminate
the trust issue, which is with the Visa? GARY GENSLER: I'm
not sure I get why. AUDIENCE: The cost, and
the transaction movement, and the validation. Wouldn't that be eliminated? Yes, you have a smart contract. It's adding a layer. But on the other hand, it's
eliminating some layers from the other process, as well. AUDIENCE: Yeah, so assuming-- so the onus is on
the technologies that build this to make
sure that you don't lose functionality that you
have in a Visa world because otherwise nobody would
use this whole new way of doing payments. So it's assumed
that you may take part of what the technology
offers and then add additional functionality. GARY GENSLER: I'm
going to say I'm pretty relaxed about the open laptops. I get less relaxed about
people texting during class, and I know that we're
all multitaskers. But I'm the most
relaxed you can imagine, but I'm starting to get
a little on my edge here. Tom? AUDIENCE: So I get
that blockchain allows for smart contracts,
and it's obviously a much more brute
force system where you're talking about
like attaching code or the payments are automated. I think of like I set up an
automatic payment of my cable bill every month. And so it's like as soon as
that payment comes to me, I pre-authorize
it to go through. So why can't you, in a
non-blockchain setting, establish basically a smart
contract that's got some more-- GARY GENSLER: A
conditional payment? AUDIENCE: Right. So do you have to
have a blockchain to have a smart contract? AUDIENCE: Sorry, if I
could respond to that. One of the coolest use
cases that I've heard-- and I'm not going to name
any entities, but you know, this blockchain-based
let's say company for lack of a better word who
wants to pay their employees. And I said, look,
you join me here now, we're going to make a smart
contract that basically is going to pay you for your
services for the next three years period. That's it. There's no additional at
such a such frequency. And we sign a contract
now and that's it. You're going to get paid, right? And then you start
working and you actually have a very ensured
way that I will get paid that nobody can stop it. Today you don't have that. There are many things that
will happen-- you know, management happens,
you know, whatever happens I can find a way to--
got to get around all of that, right? That's kind of
useful to make sure that, hey, I'm going to
get paid for [INAUDIBLE].. That's useful. AUDIENCE: Do you have
to then put aside-- like if I am your
employer, I have to put that three years worth
of salary into a lockbox and I can't do anything with
it for those three years? AUDIENCE: Yeah, if
you're escrowing three years more work. AUDIENCE: It's a limitation. All of this is a limitation. It's not like you
suddenly have free money, it's all good for
everyone, right? But there are useful things
that show up-- usable things that we never thought about. So I think all I'm
saying that there are a lot of possibilities. And I don't know the
right use case for it. And I don't know,
it's just an example that I thought was like, that's
pretty cool, I could use this. But you know, you're right. I mean, there are
many implications. But just the very fact that
you have a whole new area to explore, to me
that's exciting. Like we've seen what
the system does. We've seen it, right? Like we bank 90% of the people. If you're in the 10%,
that's kind of sucky. But for the [INAUDIBLE],,
this kind of works, right? You know, you have deep lines
too, it's awesome, right? But we've hit the
ceiling of what we can do with this system. Maybe there's an
additional approach. Let's see what happens there. GARY GENSLER: I
invited Alin because we needed a little bit more
maximalism in the room I'm sorry, James? AUDIENCE: But think back
to the point earlier, it's do we really
need blockchain to do a lot of the stuff that
smart contracts promised to do? I mean, I set up my-- in the UK, our
system [INAUDIBLE].. That happens, that just
disappeared from my account at a certain time period. Doesn't involve blockchain. I could see some benefits
of blockchain, but again, a lot of the smart
contracts, can we not already use
existing systems, make those systems better? But this goes back to
the whole payment system. There are a lot of
players in the field that haven't been innovating the
last 20 years, what we read. But can they not make existing
systems so much better without the use of blockchain? GARY GENSLER: So the
question is, do you really need blockchain or
is it just going to be a catalyst for sort of
the legacy systems to kind of do what they otherwise
technologically could have done but it's a kind of sharp kick
in the backside to kind of do a little bit better? AUDIENCE: That's a
really good point, right? That's something that we
debate a lot about them. And it actually
is as we sit now, it's absolutely possible that
this would be the way, right? So one example that shows
up frequently is BitTorrent. So BitTorrent, for those
of you who don't know, it's a way in which you share
video online and nobody-- it has a lot of
problems with it, but it catalyzed and change the
entire distribution of media, right? It has a lot of problems
so it didn't work out the way folks thought it would,
but it still kind of changed the whole industry. And it is absolutely
possible that blockchains will take that path. It's unclear now, but
it's absolutely possible. GARY GENSLER: So
blockchain could be just a catalyst
like BitTorrent was, and then all of a sudden at the
end of the day we got Apple-- what do they call it? Apple Store, thank you. But Zan, were you're trying to-- AUDIENCE: Yeah well, I was
going to build on that. I think I've already
seen that happening. Like I was looking
into Swift recently and I think after blockchain
in the past few years they launched the Global
Payments Innovation Initiative. Which seems like, all
right, we recognize that our infrastructure
is legacy and we need to do something
to kind of keep current. And they've spent and
invested a ton of money in unifying standards across
the messaging platform and making it much
easier to use. So not a blockchain
solution, but has certainly been an event. GARY GENSLER: Right, so it's
been a catalyst for Swift. Ripple has been a
catalyst for Swift that we're going to
talk about in a minute, but others have been as well. But I still would
challenge the group-- and it's sort of what we're
all trying to do here-- are there still opportunities
that an append-only log, that you're appending,
you're adding information to the registry or the ledger,
you're not deleting it-- well, this is going to be good-- and you need a consensus
of multiple parties writing to the ledger. A special guest. AUDIENCE: Hi, it's Sri. Many of you know me. GARY GENSLER: Sri
many people might now is Priya's significant
other-- husband, I think. AUDIENCE: But that's
not why he's here. GARY GENSLER: He's not here--
he's here as a payment expert. AUDIENCE: No, that's
the reason why I'm here. GARY GENSLER: No, but
you are a payment-- do you want to introduce-- AUDIENCE: Well,
I'm not an expert. I work for MasterCard,
and I happen to be Pria's husband, as well. I've been in this
industry for a few years. AUDIENCE: Priceless. AUDIENCE: Price? AUDIENCE: Priceless. AUDIENCE: Priceless. Exactly, we're
still running that. GARY GENSLER: So you're
at MasterCard payments, and give us your
thoughts on this. AUDIENCE: So I'm actually
in the opposite camp from this blockchain
and cryptocurrency for a few reasons. GARY GENSLER: So you're
in a minimalist camp? AUDIENCE: You can
call it minimalist. I believe that you
can do everything that blockchain promises
it does using the currency systems we have. There are a couple
of reasons for that. Number one is crypto
is expensive average per transaction. You can always
secure transactions in systems we have today
using technologies that exist, but you don't need to have
a Bitcoin or a blockchain, as an example. So interlockability
that you're talking about when it comes to
Bitcoin and the other kind of advantages about
distributed measures, everything can be accomplished
through the systems we have today. They just don't choose to do
it because it's expensive, and it will be expensive
when you scale blockchain to the millions of people in
other industries you have. It will become expensive
there, as well. So the two main things that are
important in payment systems are acceptance and scale. Simple. If you achieve the acceptance
and scale to blockchain, sure. That'll work, and everybody
will be using blockchains, and Bitcoins, and
it'll all work. The problem is it's
taken us 40 years to achieve acceptance of scale
with Visa and MasterCard, and [INAUDIBLE] of
this whole ecosystem. It's taken a long time. And it's working. And if you want to replace
that with this new system and achieve the same level
of acceptance and scale, think about how big
of an effort that is. It's almost impossible. And the amount of dollars you
would have to spend on that, why? GARY GENSLER: So I see a
few people want to take-- Hugo are you going to
take the other side? AUDIENCE: I can start, sure. GARY GENSLER: And then
we're going to move on, but I want to hear
the other side. And I thank you for being
willing to speak up, because it's really helpful. And I don't know your role at
MasterCard, but it's just-- what's that? AUDIENCE: Product management. GARY GENSLER:
Product management. But you're speaking for yourself
personally or MasterCard? AUDIENCE: MasterCard is
dabbling in blockchain as well, so I'm speaking for personally. GARY GENSLER: Because
MasterCard actually filed a patent with
the US Patent Office for crypto fractional banking. And Bank of America has 43
patents in the crypto space, and Visa's filed for
patents in the book. So you have Visa, Bank
of America MasterCard, and others filing for patents
on blockchain fractional banking payments and so forth. So it's sort of an
interesting side. We'll get established
Professor Lessig. AUDIENCE: Just one
qualification on this. It kind of depends on
who you are right now. I mean, because this is all
true as a description of banking in the developed world,
but to the extent you're talking about
these transactions outside the developed
world then the coefficients on these variables
changes significantly. So if you have no reliable
legal infrastructure, then blockchain technology
becomes a real plus relative to a world
where you have a very reliable infrastructure,
which is obviously developed. GARY GENSLER: So
what Larry shared with us is, well, there's a
lot of different countries-- 180. There's 1.7 billion people
still not banked in the world. Half of sub-Saharan
Africa, for instance. So there is still
a challenge there. I'm sorry, Hugo, we-- AUDIENCE: I was going to
say something similar. Like I appreciate
the argument but it kind of sounds like, it's
not broke, don't fix it. Like we've spent so much
money building this system. So you know it
works now, but like, let's not look at what
technological innovation can add. AUDIENCE: Well no,
that's not what I meant. What I meant was it's not if
it's not broken, don't fix it. We have achieved so much in the
payments world over the past 40 years. Improve it while maintaining the
goodness of the infrastructure that exists today, instead
of blockchain is just a rip and replace the whole thing
which doesn't solve a purpose. AUDIENCE: Sure. I don't think that blockchain
is the, like, one stop shop for everything. I'm more on the
Bitcoin maximalist side where I think, sure, if you have
a global currency where you can go anywhere, and use it,
and it's self-sovereign and you can do all that,
that would be great. I know like MasterCard and Visa
have an interest in saying, well, we've spent
so much money, you can use MasterCard and Visa
in most places in the world. But what happens if you go
into the middle of some village in India or sub-Saharan
Africa or wherever, and they don't
take a credit card. But they have a cell phone
with a Bitcoin wallet, I can still transact there. And yeah. AUDIENCE: You can transact
with a real currency, also. AUDIENCE: Right,
but then they have to go through the process of
changing that and [INAUDIBLE].. GARY GENSLER: So let's take
Brodish and then we'll-- this is a good
debate, by the way. AUDIENCE: Since the
discussion came to India, so-- [LAUGHTER] GARY GENSLER: So we
have our expert now. AUDIENCE: So there could be
a third solution, as well. So we have once we're in the
readings of the last class, as well, the united
payment interests in India, which is not a
blockchain solution. So the government of
India has actually promoted a new entity
called a payment bank, which is like a no frills,
no service kind of bank to promote financial inclusion. And based on that, just using
a unique identification number and just a mobile device you
can make any sort of payments of any denomination. It can be very, very
local currency as well, and you can do all of
that at real time basis without any of these
intermediaries. And those are low
cost transactions without leveraging on the
blockchain technology. AUDIENCE: So what you
need an [INAUDIBLE] card? AUDIENCE: You need a [INAUDIBLE]
card, which is more than-- it's more than 95%
coverage in the country. AUDIENCE: What's the
name of the card? Just like, do you need some
form of identification? GARY GENSLER: So
India's really been at the cutting edge in the
last, say, two to three years partly because
they could leapfrog some of the card rails. There was not broad
adoption or access Sri has talked about in
India for credit cards. And so similar to
what we saw in Kenya And we talked about
on Tuesday in China where companies, private
sector, leapfrogged, in India it was more if I
believe it was the government sector rather than
the private sector said we want to bring a
great many of the population into a system. So they created a
unique ID system. I can't remember the
name of each of these. That's the card. They created a payment-- IMSP, if I got that right? AUDIENCE: IMPS
was the older one. Now it's UPI. United payment interface. GARY GENSLER: A payment system,
which is not 270 basis points but probably is measured and
single to low double digit basis points. Your actual pay, everybody
in India, your employment goes into this. And there's biometrics
as well to the ID system. Now there, might be
cybersecurity risks that this is all then in a
sense somewhat centralized. But India sort of leapfrogged. It's kind of interesting. But we've had a lively debate. Is finality something
we want or not? Is charge back something
we want or not? Can you do this all
without blockchain, or is blockchain
something that's needed? And of course, the question
even if blockchain's really kind of neat
and good, will it just get the incumbents to
move a little bit more into innovation and
lowering their costs? Do you want to
close this one out? AUDIENCE: I think I
may add something else. It's censorship resistant. So everyone can be
exchanging Bitcoins without any government
forbidding it. GARY GENSLER: Now, it's
an interesting thing. If it's censorship resistant
to you must extend me credit and you can't decide whether
I get credit based on my race, or religion, or
ethnicity, and so forth, that's probably something
a broad group of people would say, that's pretty good. But if it's censorship
resistant to being like you can drug traffic society might say,
well, that's not what we want. So it's an interesting set of-- when the technology allows
you to be censorship resistant but society says,
well, there's still some social cohesion about drug
trafficking, or child labor. And I'm using the ones
that are easy to hold onto, so it's a little
interesting debate. Yes? AUDIENCE: So when we're speaking
about the underdeveloped and developing part
of the economy, and payments, and blockchain-- GARY GENSLER: Professor
Lessig's comments. AUDIENCE: Yes. And I think one thing
that we haven't addressed is the last mile,
which is liquidity. And so even if blockchain
addresses, let's say, the accountability
of the transfer, what it doesn't address
is the actual liquidity and utilization in the last
mile on the ground, which is very essential to
a developing economy. GARY GENSLER: Right. Sorry, remind me-- Aviva. So Aviva, are you saying last
mile like that somebody could actually use this cryptocurrency
in a store to buy their grains, or their goods for the week
right to keep their family-- AUDIENCE: Yeah, so that
doesn't solve the problem of adoption and scalability. GARY GENSLER: Right. Fiat money-- and before
we had paper money, we had coins and everything--
money is a social construct. We've talked about that. And beyond its advantages
that it's used for taxes, and it's good for all debts
public and private in most countries, it really is
exactly what Aviva's saying. That society at large
says, I will use this as a unit of account. That whether it's my employment,
or the milled goods I'm buying to feed my family, it's this
unit of account that over hundreds of years people
adopt until they don't. I don't know how
long in Venezuela, though I keep using their
currency as a unit of account. So sometimes there's
last mile problem is even with fiat
currency, but I not only hear you, I share your
thoughts that where is the adoption in the last
mile, if you well said. So just we talked
about the challenges. What are some companies? Well, there's in crypto-- and I'm listing two or three. But if you wanted to
talk about others, I just listed in crypto
there's startups. BitPay is one of the
most popular ones where it was basically saying
to merchants, if you want to take Bitcoin, we'll
convert your Bitcoin for you to fiat. And that's in essence
what they're doing. So I'm going to take it back
to the Hillary campaign. We had some donors that
wanted to give us Bitcoin. We're a merchant in
a sense, but we also wanted to elect a president. And those donors might have
wanted to give us Bitcoin. So one of my colleagues had
to investigate, could we take Bitcoin, and what did it
mean under federal election law, and things like that. And we looked at whether to hire
BitPay or somebody like that. We chose not to
because we didn't think there was enough donors
who really wanted to give us enough Bitcoin,
and we didn't think we would freshen
up Hillary's image because we were
going to announce she's the Bitcoin
candidate or something. Tom, did we miss it? Is this-- AUDIENCE: Could've won
Wisconsin with that. GARY GENSLER: We could've
won Wisconsin with that. [LAUGHTER] OK. I'm going to be
apologizing until my grave for that election,
but this is it, right? But it's a real story. One of my colleagues
investigated it. I'm not trying to throw him
under the bus or anything, but it was just like, oh
my gosh, the amount of time we would ad spend with
Perkins Coie, the law firm, and what we would have to pay
to kind of think this through. And we can only take
$2,700, so every day would be a different
number of Bitcoin. It could not be more
than $2,700 because there was no way that we were going
to break the election laws. So ultimately, the
project went away. And the reason I share that
story is for a lot of merchants right now, maybe as Aviva
said in the last mile, the merchants are saying, I'm
not sure I need to do this. But there's a way to do it. If anybody in this room
starts a company and you say, I want to take crypto, there
are companies out there that will provide you that
interface and their fees. Does anybody know BitPay's fees? It wasn't part of the
readings, but other than Alin? All right, Alin? AUDIENCE: 1%. GARY GENSLER: 1%. So if you are a merchant-- Starbucks, the
Hillary campaign-- if you're a merchant
and you say, I want to have less than
2.7%, I can have 1% fees. I want finality and I
don't want charge backs depending upon which
side of this you're on. They're trying to just do
it as a lower cost solution. 1%. Pria? AUDIENCE: Similar story, but
maybe with a happy ending. So a lot-- GARY GENSLER: Happier than
not winning the election? [LAUGHTER] AUDIENCE: So far a lot of
philanthropic organizations, this is becoming
a very real issue. So the Silicon Valley
Community Foundation recorded a 30% increase
in its endowment due to digital assets donations. And it's happening in a few
community foundations as well. It's a growing field
of interest, and there even a story-- I mean, not a story,
It really happened-- of one of the exchanges
doing this service, converting the digital
donations into fiat currency, and it crashed. Because the volume was just
so much they could not-- even the trickle they
could not keep up. But this is becoming
a real thing now. GARY GENSLER: And whether
it's a large foundation or political campaign,
there's also a little bit of reputational risk. Because you want to make
sure that the funds are not illicit funds. So there's a little bit
of a reputational risk that maybe a Starbucks
wouldn't have when you're just buying a cup of coffee. Never run a Starbucks, but-- So the crypto
exchanges and BitPay sort of provide a
lot of services. E-wallet companies
provide services. Sean? AUDIENCE: I'm just curious, how
does BitPay manage volatility? How does it cash out? GARY GENSLER: How does
it manage volatility? AUDIENCE: So it only takes a 1%
cut of the transaction value, but the volatility of
which can go over 1% like every couple of seconds. So in that case,
how do they manage? GARY GENSLER: So they
are arranged basically with a number of
crypto exchanges. I once knew, but I
don't know whether they have arrangements with
three, or five, or whatever. And they basically are
pricing right at the-- so they have sort of close
to real time pricing. So I'm going to buy
a cup of coffee. The way the technology works-- and let's say it's-- what's a Starbucks cup
of coffee, it's $5? It's pretty expensive, isn't it? AUDIENCE: Depending
on what you buy. GARY GENSLER: What's
your cup of coffee? AUDIENCE: $2.25. GARY GENSLER: $2.25, all right. But in real time, the app-- the BitPay app-- is
computing what that is. And they feel that within
these seconds for them to convert at they
take volatility risk. Is it possible that
in some transactions the volatility eats
up the whole 1%? Yes. But basically they have
that in their pricing model. And then move basically
Pria's Bitcoin to dollars, and the dollars
goes to Starbucks. And they guarantee
Starbucks $2.25 minus 1%. Then there's startups
actually getting in. But most of these-- at least the second,
third, and fourth-- are kind of
institutional services. Now, there might be retail
services that I'm not-- Qurom was started by JP Morgan. I think it might even still
be owned by JP Morgan. It was going to be spun out. But R3, Ripple, these
are really institutions. Almost B2B or financial firm
to financial firm right now. I couldn't find a really good
startup in the retail space, but two weeks from
today you're going to have Jeff Sprecher and
Kelly here, and you can-- Shrim, are you going to
be back on November 15th? No? But you'll be able to challenge. They're going to have
a retail payments system in their Bitcoin. So it'll be interesting. One retail payment solution
is if anybody walks over to building E14 there's a
vending machine in the media lab right now that
takes Bitcoin. Thank you, MIT. Thank you, the digital
currency initiative. Thank you Alin. But there is literally-- if you want to describe
it, you put a QR code up? AUDIENCE: Yeah, I mean,
so yes absolutely. So anyone who wants
to do that, we can walk over there
and look at it. It has cross change
slots so we can transact real time between
three different currencies. And-- GARY GENSLER: So you
can take Bitcoin-- AUDIENCE: Litecoins,
and you know, dummy US dollars we call it. But it's basically a stable
coin, it's a stable coin. GARY GENSLER: Stable coin. So Bitcoin, Litecoin,
and a stable coin. And there's a vending machine
sitting in the media lab. You put a QR code
up, if I remember? AUDIENCE: Yeah, so QR
code on the machine. you scan, we published an
app on Android and iOS. And you basically scan your
home null or you computer, you allow your phone to
control your computer, and then you can send
money from your phone to your vending machine. Real time. GARY GENSLER: But in that
case, the vending machine receives the Bitcoin. AUDIENCE: No, so we
actually added an arduino as well that converts
the Bitcoin into impulses that trick the machine
to say, these are coins. So the vending machine
actually gets-- we tell it-- [INTERPOSING VOICES] AUDIENCE: Yeah. GARY GENSLER: There you go. Check it out over
in the media lab. It was rolled out for media
lab members' week, actually, two weeks ago. And then there's incumbents-- ICE's startup Bakkt. I do put MasterCard on
there, Sharim, I do. But it's remarkable how many
patents are being filed. Hundreds of patents
are being filed, but they're almost
all by the incumbents. Now, is that because
they want to block others from getting in, or are they
trying to create barriers to entry, or are they doing it
because they see real prospect and opportunity, and
they want to pursue it? It's probably a bit of both. Larry, you're shaking your head. AUDIENCE: It's all
barriers to entry. GARY GENSLER: It's all barriers
to-- you don't think it's any? AUDIENCE: No, it's
all barriers to entry and then the
argument's like this. Our system's great,
and guess what? The legal cost of
pursuing your system is going to be
through the roof, so. GARY GENSLER: And we'll get
some patents along the way. AUDIENCE: No, those patterns
are the legal costs. That's the point. The threat of the
patent litigation is enough to stop any-- so if you're a
venture capitalist, then they walk in like you
make before your announcement, you're dead. GARY GENSLER: Well, Bank
of America has 43, so-- in the blockchain space, I read. AUDIENCE: This is
the strategy in every major incumbent complex,
so it's nothing new here. GARY GENSLER: So is
it a sign that there's something really real here? That these startups might have
something to be figured out? Visa's started a business
to business payment connect in 2016. They've even announced--
Visa's even outside it hasn't had a lot of adoption. They're not sure. I think it's more permission
than permissionless, by the way. But this is kind of-- now, is anybody in their
own readings, maybe Alin-- I mean, I'm not trying
to be exhaustive, but there's not a lot of-- because of some of these
issues back here, these are real challenges,
but I would say these are real possibilities, too. Kelly and then Alin? AUDIENCE: So what about
some of the companies that sort of backed out? And I'm reading Stripe ended
their export [INAUDIBLE] program. It sounds like a pretty
defeated situation, but I don't really understand
that much exactly why. GARY GENSLER: You want to
answer the Stripe question? AUDIENCE: Yes, and
Stripe is not Bitcoin. Stripe wanted to maybe
use Bitcoin as a service. I mean, they're clients. They're not the startup. So I think backing up is-- it makes sense because
they're clients. But there's many startups
out there that are still here and not [INAUDIBLE]. GARY GENSLER: Yeah, and
just as background, Stripe is a payment system provider. So they're not extending credit
like a Visa, or MasterCard, or they're not a network
like Visa or MasterCard where actually they
don't provide the credit, the banks do. But they are a payment
system provider that merchants
would hire, Stripe, to interface with
MasterCard, Discover, American Express, and others. But why did Stripe decide
not to continue on this? Partly they didn't see a lot
of adoption is what I took. But Alin, you were going to-- AUDIENCE: Yeah,
just a couple of-- couple things I wanted to. So this is a great list. I think it's a great
starting point. And the rule that I think at
some three months ago I had was in the cryptocurrency space,
most non-speculation money-- so no like I'm going
to buy low, sell high-- is coming from either
exchanges or miners. So you got-- GARY GENSLER:
Exchanges or mining. AUDIENCE: Yes. So that's where
the money's made. If you don't speculate,
you're either a miner and you make money or
an exchanger make money. The miner down I think
would be interesting. I think I would put Bitmain over
there because I think it's-- GARY GENSLER: Bitmain? AUDIENCE: Bitmain. So Bitmain, for
those who don't know, is going through an
ICO, an initial-- sorry, IPO. Initial-- GARY GENSLER: Public offering. A traditional [INAUDIBLE]. AUDIENCE: They have
a lot of money, there will be [INAUDIBLE]
a very hefty rate. They want to stop producing AI
chips, artificial intelligence chips. So they're very good
at producing chips, and they will go-- they'll go into one of those. GARY GENSLER: But is Bitmain
in the payment space, using blockchain for pay? AUDIENCE: I mean, they've
invested in Circle, which is another exchange,
so they're like-- they have a lot of money. They're trying to kind of place
it towards other companies. So yeah, so exchanges
of the finance or all these other [INAUDIBLE],,
there are a lot of exchanges that make money. And the other ones aren't. GARY GENSLER: So I want
to talk a little bit about cross-border. On Tuesday we put
up a complex chart. I don't need to go
through that again, but we all know and there's
a lot of people here that probably send money back. When you're moving
something overseas, you're moving from one fiat
to another fiat currency, it takes some time. And the banking
system over centuries has formed a way to do that to
move from one money to another, or as we say, one ledger system
to another ledger system, through correspondent banking. And correspondent banking
is a reasonably concentrated business. One student sent
in the group chat last night that there's only
really 10 banks in this field. I don't know if that's
accurate, by the way, but it is a very
concentrated business because they're large
international banks. Whether it's 10 or 20, it's-- you know, and they can charge
a little excess because they have to have correspondence. They have to have relationships
with all the local banks, and they're taking some credit
risk-- the correspondent banks standing in between-- some
credit risk of the local banks on both sides in the
US and so forth and in, let's say, Mexico if it's
between the US and Mexico. So one idea that's
been around, it's widely associated with
Ripple but it's not only associated with Ripple
is this simple chart. What if I move fiat to
crypto and crypto to fiat? Just call it a bridge
crypto or bridge currency. I can say I can go from
US dollars to Bitcoin, or XRP, you fill in
the middle, and then move over to the other fiat-- Mexican peso, in my example. And might that take some
cost out of the system? We have Sean's issue
earlier of volatility. If the crypto is fluctuating a
lot, that causes some issues. If there's a lot of
cost or friction, because now you're doing two
currency exchanges not one. I'm calling crypto a
currency for this purpose. I know that crypto is not
technically a currency, but for this moment
let me just call it-- you have two currency
exchanges, and thus you have two bid ask spreads to pay. Just the market makers
you need to pay the bid ask spreads twice, and
you have some volatility if the middle crypto
is moving around. But this simple
diagram is a big part of what Ripple is trying
to create with xRapid. xCurrent is a messaging
app of Ripple's and it's competing with Swift. And it had some
reasonable adoption. A lot of banks are
starting to use it. But don't confuse that
with another product, which is an interesting product that
kind of does this that goes fiat to crypto, crypto to fiat. So what problem,
what pain points would this be solving if it
worked in the cross border? Anybody want to remind
the class what the-- Tom? AUDIENCE: Well, this reduces
the number of intermediaries. You don't have to have your bank
engaged with a correspondence bank, which engages with
a local bank, which then-- it sort of-- GARY GENSLER: All
right, so it might. I'm going to say it might lower
the intermediation because you still have on the two fiat sides
your local bank and a bank, and to do the crosses you need
some market making function which in Ripple's case they try
to build into the application. And they have market makers
to provide liquidity. There was a question
somebody mentioned liquidity. Some liquidity. But it might lower the
numbers of intermediaries. What else might it do? AUDIENCE: There's usually
between exchanging currency there's a balance between the
settlement time and the fee that you pay. So if you want quick settlement
you have to pay a higher fee, or you can accept a lower fee
but it takes multiple days sometimes to catch
over, so potentially it could solve that. GARY GENSLER: So this
is basically a way that you can shorten
the settlement times. This can be done
literally in seconds. I'm not saying that you wouldn't
pay a little extra for it, but this can be
done very quickly. If you have arrangements. So some contend-- and I've
spoken to them at conferences and so forth-- that big corporate treasuries
are going to try to do this-- that the treasury function
of Apple and others might take this up. The big banks say
that's ridiculous. The big banks say,
no, we can provide real-time cross-border cash
movement between dollar and euro, and dollar
and yen, and you don't need to interpose
something in the middle. AUDIENCE: Wouldn't that require
huge amounts of cash reserves to be able to protect
against volatility, and not only volatility of the
crypto, but the volatility of the actual fiat for that
particular country [INAUDIBLE].. GARY GENSLER: So the
question is, will it need a lot of liquidity, basically? You used a different
word maybe, but-- AUDIENCE: Reserves. GARY GENSLER: Reserves. But somebody who can
make markets in size in crypto versus fiat,
in crypto versus fiat, I think the answer
is yes in terms of-- the only probably
token right now that has enough liquidity
in it to do this in size is probably Bitcoin. Even though Ripple
is promoting this and it's sort of an
interesting technology, they have a software, xRapid,
that you can do this right now. They're promoting on XRP, but
is there enough liquidity? Could you move more
than a million dollars? Probably not. You probably couldn't
move $100 million payment without moving the market a lot. Shimon. AUDIENCE: So back to
finance, the only way-- GARY GENSLER: So
back to finance, that's good from a
finance professor. AUDIENCE: The only way
that this will work is sort of subject to the cost
of arbitraging this, right? You don't care about the value
of XRP provided that you're not validating arbitrage
relationship between the two fiats, right? GARY GENSLER: That's correct. AUDIENCE: So whatever
those frictions are, you won't be able to
go underneath them. And if you're Apple, I
don't see the treasury in a business case. If you're Apple and you're
banking with JP Morgan Chase, I mean, they're probably
quoting you, you know, bips. I mean, the two major
currencies, the spread is like in bips. GARY GENSLER: A bip is
1/100 of a cent, basically. I mean, it's very tiny. We'll get there, just a second. AUDIENCE: I'm not
sure that isn't the-- GARY GENSLER: So
the proponents-- and then we'll come back--
proponents of this say, yeah, JP Morgan might solve Apple's
needs between dollar euro, but are they really doing it
between dollar peso, or dollar Kenyan currency? AUDIENCE: Let's say they're
not and the spread there is 10 basis points,
50 basis points. Well, that's going to be by
construction, the spread, that's going to be [INAUDIBLE]
arbitrage that will be allowed if you go that way to-- GARY GENSLER: All
right, so Shimon's saying there's maybe
a cost in friction. I think the proponents
of this would also say there's a friction in time
moving from dollars to peso. Remind me your first name? AUDIENCE: My name's [INAUDIBLE]. Well, it's certainly true
even in pesos or any currency, like, all these points
that anyone's getting are extremely tight. But there's still probably
like weekends, for example. Weekends they're just
not quoted at all. So if there's a
major event that's happening over a
weekend that's going to change the value of your
asset or your currency, then you can't trade
until Sunday night when Hong Kong opens. And so there's still like
a 36-hour time period that is completely [INAUDIBLE]. GARY GENSLER: So the
worldwide currency markets are depending upon banks,
and banks do actually have holidays. I know it's sometimes
hard to believe, but. And so there's a question of-- so there's a
question of friction which Shimon would say if
it's even if it costs you half a percent it better
get inside of that. There's a question of settlement
delay, this could be faster. But you're saying they
could change that-- JP Morgan can change that. And then there's weekends. Do you have 160 some hour week? I'm going to go to
Alexis and back here. AUDIENCE: I was just thinking
like-- because this system like India at the end of
the day, it depends on the a fixed rate
on the two fiat rate on the normal markets, right? So even if we can't
trade on a Sunday, the rate is going to change
on the tax form based on, I don't know, the assumption
of what the rate is going to be tomorrow. It's going to adjust, normally
you should adjust, right? Because as has
been raised before, adjust for new
arbitrage take place. So even if it's possible,
doesn't this system add more risk in terms
of two different risk-- fiat-crypto, crypto-fiat? And just there will always be
the underlying risk of fiat to fiat because
it's always based on a price on the private-- GARY GENSLER: Hold
your question because I want to see if the other-- yours comes in. I got it, it's the risk. AUDIENCE: I was just
going to bring up the accessibility for
non-first world countries or unbanked countries. And I would be less concerned
about moving like a yard and more concerned about, OK,
well maybe I could transact like sub-$100-- GARY GENSLER: Do you
want to translate for the room what a yard is? My Goldman Sachs days
I knew what a yard is, but some of the non-bankers. AUDIENCE: It's $1 billion. GARY GENSLER: $1 billion. Now you can work on-- what trading floor
to did you work on? [INAUDIBLE] Citi. Now you can work on Citi. A yard is $1 billion. At Goldman Sachs it's floor 2. AUDIENCE: Yeah, oh boy. GARY GENSLER: We measured
it differently, yeah. AUDIENCE: But I
think if you wanted to transact maybe like under
$100 from dollars to whatever, no large bank is going to open
an account and do that for you. You're going to
have to do that-- like a commercial bank,
if you have access to it, there's a really
wide spread there. So you can do this through
an app through a Stablecoin, or Ripple, or
whatever, you're going to be able to do it
for cheaper if you're making like micro transactions. GARY GENSLER: So
I'm going to react and then trust bring it
all together and summarize. It's the last slide, so. Alexis' point about
risk, I agree. I think that all of these
points are valid that there is additional cost. There's two hops
in this example, and there's additional risks. So the real business
case question is, is there enough value
added on the other side? Are you shortening
settlement cycles? Can you do it on the
weekends when you otherwise couldn't do it? Could you move small dollar
amounts, maybe retail? Because Western Union
still charges something like 8% to 10% to do
cross-border remittances. So send some money
to the Philippines, and do it only for a
couple of hundred dollars, and you're probably
spending 10%. Could somebody build
inside of those types of-- now, $200 movement 10%'s $20. You still have to bring
transaction costs down-- fixed transaction costs down. But if you can bring the fixed
transaction cost down and have enough liquidity, it's kind of-- I wouldn't count this out. I'm one who sort
of doubts it will be in the heart of
treasury function that Apple will be using
it between dollar and euro, but I want to say just
the wide spectrum and just an interesting-- can crypto
be a bridge currency, and might it be in the
world of stable value? I hope-- I mean, this
was a good discussion because this is what the rest
of the semester is about. We're going to take use case
by use case and really debate, and through it the learning
objective is for all of us to leave with a little
critical reasoning skills about when does an
append-only log with consensus amongst multiple parties and
maybe a native token make sense? That's usually
called blockchain, but Aline doesn't let me call it
blockchain technology anymore. Next Tuesday is election day,
so I'm going to make my pitch. If you're a US
citizen, please vote. If you're not, I'm
not going to ask you to vote but please vote. Participate in our incredible
thing called democracy, but we're going to
talk about central bank digital currencies. And so I think we're doing this
over two sessions, as well. So next Tuesday is going to
be a lot about central banking and so forth. So thank you. Happy anniversary, Bitcoin. [APPLAUSE]
