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GARY GENSLER: Today we're coming
back to blockchain and money,

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Act Three of this course.

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00:00:30,787 --> 00:00:33,120
Now that we've done a little
of the basics, a little bit

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of the economics, and
now it's some use cases

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through the lens of finance.

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And to say something
about one, why

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I thought it'd be worthwhile to
structure the course this way,

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and what I'm hoping
we all get out

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00:00:48,400 --> 00:00:54,010
of these next 10
or 11 lectures is

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that I thought that it
was important after laying

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some foundation of what
blockchain technology might

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or might not be, and
cryptocurrencies,

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and of course, talking
about the economics,

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is to use one field that's the
most dominant field right now

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about potential
blockchain technology

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use, which is finance.

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It's not the only
area, but finance is

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completely reliant on ledgers.

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It's completely reliant
on moving property rights

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around multiple parties.

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And of course,
the first use case

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was about Bitcoin, which
was a peer-to-peer money.

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So I thought even
if you're thinking

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about this in terms
of health care,

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thinking about it terms
of the internet of things,

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00:01:41,650 --> 00:01:46,540
et cetera, many, many other use
cases, why not take finance.

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Now it also happens to be
my comparative background.

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And I've spent the last three
or four decades of my life

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around finance.

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And so I can be most
helpful and dig deep,

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you know, probably
as deep as you

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00:02:01,090 --> 00:02:03,850
want to get in the mortgage
market, the payment markets,

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the exchange markets.

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I've probably been there
at some point in my career,

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or still have contacts and
networks and have studied it.

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But no doubt, with the 80 of
you in this room, or 90 or so,

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you're going to press me.

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And that I like that.

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I will say last
weekend was really

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a joy reading 50-plus papers
that it was only about 25

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of you that had decided to hand
in papers early in classes 2

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00:02:35,890 --> 00:02:36,700
through 9.

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But class 10 was 50-plus of you.

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So I really do have
a sense of the class

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in terms of what you think
about finance and blockchain.

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Of course, you'll
probably do the same.

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I think I might design it
differently the next time.

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But if you all hand in--

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if 50 or 60 of you hand in
the papers for class 23,

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it will be--

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and you have that right.

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I'm not taking that
away from any of you.

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But it means I might be delayed
getting back all the projects.

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I want to say two or three
other things overall.

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In terms of where we are, we're
halfway through the semester.

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And Sabrina and
Thalita and I did

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a good job of just
saying, how are we

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doing on class participation?

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And I've kidded a lot, and I've
joked a lot about who's talked

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and so forth.

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We're down to about 15
of you that have never

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talked in this whole 12--

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so I want to work with you.

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I'm not trying to
torture anybody.

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And I really want you
to all not to worry

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too much about your grades.

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I want you to
worry a little bit,

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but not too much
about your grades.

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But if you've not
spoken yet, and you

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haven't gone online-- two people
have gone online, both of whom

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I've responded to.

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You know, come see me.

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Try to figure out how to
be part of this community

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and this discussion,
whether it's

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in class or online in some way.

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Cause again, I want this
to be a positive learning

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experience for everybody.

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In terms of the papers and
just some overall things,

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by and large they were good.

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Some were extraordinarily
good, which

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you'd expect with such a
talented group of people.

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But some really made me think
and challenged me and so forth.

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It is a bell-shaped curve.

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Some, on the other hand--

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not many-- kind of
missed the mark.

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So I just want to say
a couple of things.

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One is, it's not about just
answering the three study

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questions.

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The study questions are really
to spur the dialogue here.

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There's three questions.

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Not many of you, but two or
three people just sort of just

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tried to answer those.

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Think about it as a
uniform three-page paper.

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Five is the limit.

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One or two of you that
did six or seven pages.

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That's fine, but it's just--

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you don't need to, and it's
more work, in a sense, for us.

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00:05:04,210 --> 00:05:07,180
Two is, I really did try to
give feedback and comments.

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And overall what we're
trying to get to is,

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what are the economics here?

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What is there about append-only
logs and consensus protocols

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amongst multiple parties
writing to a shared ledger?

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So multiple parties
updating some state

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of economic-- an
economic state, really--

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of property rights or something.

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And what verification costs,
what networking costs,

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could be lowered.

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And it's unfair,
because all of you

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are going to try to figure
out a final project together.

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And I went back over the weekend
looking at the final projects.

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I think there's some really neat
ideas that you're looking at.

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But at the core is what
verification costs, what

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networking costs, can you lower.

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Why do append-only
logs consensus

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amongst multiple parties
sharing a ledger, and possibly

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a native token.

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Because you don't have
to do something around

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permissionless native tokens.

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But I think some of
you will get there.

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And we'll have some
exciting thoughts.

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So those were my thoughts.

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If I say in the
comments to your paper--

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and I only did this
two or three times--

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come see me, don't be scared.

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It might just be
I want to pursue.

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I said this on some
really excellent papers,

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and I said this on
one or two that just

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I thought it'd be
worthwhile to talk about.

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But I'm trying to just get
through this all with you

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and have you learn.

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So there's just some
overall thoughts

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on where we are halfway through.

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Post SIP week.

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Today we're going to
talk about payments.

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And Thursday we
have a guest, Alin.

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If you want to
get mic'd up, I've

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00:07:03,040 --> 00:07:04,660
got a mic up here
somewhere for you,

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00:07:04,660 --> 00:07:05,952
cause I'm going to call on you.

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Or you can speak from there.

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ALIN DRAGOS: I'll be loud.

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I'll be very loud.

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GARY GENSLER: Yeah.

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That's not hard, is it?

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So what are we going to do?

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We're going to talk
about just what are we

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trying to cover for the
rest of this semester?

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Sort of call it H2 in
blockchain and money.

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The readings, payment systems,
ledgers, and credit cards.

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Just a little bit of
history all together.

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And that's when you're
going to meet Alin.

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Not computer science
Alin, but payment Alin.

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And we're going to talk
about mobile payments, which

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is a very significant
change all the way

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around the globe in payments.

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Then global and US
payments statistics.

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Bitcoin and blockchain
we're going to come back to.

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And then conclusion.

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And remember, whether
it's this week, next week,

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or the following
week, this is all just

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to sort of say, well, wait.

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What are these use cases
tell us about blockchain?

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00:08:05,560 --> 00:08:09,370
What are these use cases tell
us about cryptocurrencies?

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My goal isn't that everybody
here is an expert in payment.

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But if your final project
is around the payment space,

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or if you ultimately want
to go along and become

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an entrepreneur and do something
successful in this space,

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hopefully these two lectures
today and Thursday will help.

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And I can't remember
exactly what next week is.

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Next week's central bank
and commercial banking.

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So next week we're going
to turn to central bank

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digital currency and
what's going on in Sweden,

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00:08:38,590 --> 00:08:40,990
and why the e-krona
project's interesting,

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00:08:40,990 --> 00:08:43,760
but how's Canada looking at it
through their Jasper project?

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What's China kind
of thinking about

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and why they're a little
worried about this space?

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And yes, what's the
private sector doing

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around stable value tokens?

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So you have sort
of a similar thing

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coming both from central banks
and from the private sector.

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I just came from a meeting where
one of Larry's colleagues--

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he's from the Harvard
Business School--

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00:09:06,227 --> 00:09:07,810
a professor at Harvard
Business School

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00:09:07,810 --> 00:09:12,300
came over because he's got a
stable value token project.

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And so that's kind of next week.

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We're then going to go
and talk about ICOs.

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You couldn't do a course
in blockchain and money

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00:09:21,010 --> 00:09:22,927
if we didn't talk about
initial coin offerings

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with, of course, $25 or $30
billion that's been raised.

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It's an enormous crowdfunding
opportunity for any of you

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that want to be venture
and entrepreneurial

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00:09:35,110 --> 00:09:36,400
after this course.

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But it's an
important, also, test.

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Are there attributes of
certain economies where

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00:09:43,660 --> 00:09:45,540
native token is appropriate?

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00:09:45,540 --> 00:09:51,670
It will spur as an
incentive function.

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I'm not willing to give up.

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I know some of you
are minimalist.

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00:09:55,960 --> 00:09:59,950
I'm still thinking of
the Skins and the gamers.

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Larry, when you weren't here we
identified our most avid gamers

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00:10:04,570 --> 00:10:06,650
in the class.

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00:10:06,650 --> 00:10:10,450
And so we always refer to
Skins, Shields, and Swords

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00:10:10,450 --> 00:10:15,310
as a form of native token
in the gaming sites.

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00:10:15,310 --> 00:10:19,150
But where there might be
economics-- token economics.

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So we'll sort of turn to that.

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On the 15th of
November we've got

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a couple of guests in Jeff
Sprecher and Kelly Loeffler,

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00:10:26,950 --> 00:10:30,400
who run the Intercontinental
Exchange and the New York Stock

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Exchange and others, but have
real live payments and crypto

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exchange.

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00:10:37,180 --> 00:10:38,350
We're going to turn--

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00:10:38,350 --> 00:10:39,383
oh-- I'm sorry.

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00:10:39,383 --> 00:10:40,300
I got it out of order.

220
00:10:40,300 --> 00:10:45,760
Primary markets, ICOs is
before and after Thanksgiving,

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00:10:45,760 --> 00:10:46,930
I guess.

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00:10:46,930 --> 00:10:49,510
And then do a little of
the back office side.

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The back of a side is
clearing and settlement.

224
00:10:52,090 --> 00:10:54,140
I mean, why is the
Australian stock exchange

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00:10:54,140 --> 00:10:55,870
using a permissioned system?

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00:10:55,870 --> 00:10:57,880
Might you use something else?

227
00:10:57,880 --> 00:11:00,970
Why is the international
swap and dealer association

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00:11:00,970 --> 00:11:04,930
using smart contracts now
to try to rationalize a lot

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00:11:04,930 --> 00:11:06,830
of their payment flows?

230
00:11:06,830 --> 00:11:09,280
So we'll get to real
live use cases that

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00:11:09,280 --> 00:11:12,220
are happening around
smart contracts

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and permissioned
clearing systems.

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00:11:14,630 --> 00:11:16,690
A little bit of trade
finance, digital ID.

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00:11:16,690 --> 00:11:18,890
I know at least one
group is doing some--

235
00:11:18,890 --> 00:11:22,600
one of the groups here is
doing something on digital ID.

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00:11:22,600 --> 00:11:24,370
So you'll be out ahead of us.

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00:11:24,370 --> 00:11:31,590
So that's kind of a
review of H2 for us.

238
00:11:31,590 --> 00:11:34,050
So we had a bunch of readings.

239
00:11:34,050 --> 00:11:35,492
Some of them were quite short.

240
00:11:35,492 --> 00:11:37,200
I don't know, because
you're on sip week,

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00:11:37,200 --> 00:11:39,780
whether you were able
to go through them.

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00:11:39,780 --> 00:11:45,330
But maybe I should
just ask, does anybody

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00:11:45,330 --> 00:11:48,490
want to tell me about some of
the major trends in payments?

244
00:11:48,490 --> 00:11:50,880
I don't know how sleepy
everybody is or whether--

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00:11:50,880 --> 00:11:56,220
Priya, I saw your hand, or
you were scratching your nose.

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00:11:56,220 --> 00:11:57,512
AUDIENCE: Either ways, I'll go.

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00:11:57,512 --> 00:11:58,720
GARY GENSLER: All right.

248
00:11:58,720 --> 00:12:03,360
AUDIENCE: So digital
wallets is a big thing now.

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00:12:03,360 --> 00:12:07,723
All the articles acknowledge
how kind of [INAUDIBLE]

250
00:12:07,723 --> 00:12:09,390
according to what you
see in China where

251
00:12:09,390 --> 00:12:11,510
you have a digital wallet,
and you pay directly,

252
00:12:11,510 --> 00:12:13,370
cutting out all the
intermediaries that we

253
00:12:13,370 --> 00:12:14,120
can't [INAUDIBLE].

254
00:12:14,120 --> 00:12:16,520
GARY GENSLER: So
one big, big trend.

255
00:12:16,520 --> 00:12:18,930
I mean, I've got a bunch
of discussion on this,

256
00:12:18,930 --> 00:12:19,940
but let's identify them.

257
00:12:19,940 --> 00:12:21,650
Digital wallets
or mobile wallets.

258
00:12:21,650 --> 00:12:23,180
What other big trend?

259
00:12:23,180 --> 00:12:25,380
AUDIENCE: Person to person
payments, so like, Venmo,

260
00:12:25,380 --> 00:12:28,210
Apple Pay, Cash.

261
00:12:28,210 --> 00:12:29,730
GARY GENSLER: And Zelle.

262
00:12:29,730 --> 00:12:30,230
All right.

263
00:12:30,230 --> 00:12:32,210
So person to person payments.

264
00:12:32,210 --> 00:12:33,440
Stephanie.

265
00:12:33,440 --> 00:12:35,840
AUDIENCE: Tokenization,
like in Apple Pay, the way

266
00:12:35,840 --> 00:12:38,893
you, like, transform your
credit card data into a token.

267
00:12:38,893 --> 00:12:41,060
GARY GENSLER: So tokenization
where you can actually

268
00:12:41,060 --> 00:12:47,820
transform your identity into
a token, in essence, right?

269
00:12:47,820 --> 00:12:48,320
Chris.

270
00:12:48,320 --> 00:12:50,100
AUDIENCE: There's a
lot of social aspects

271
00:12:50,100 --> 00:12:51,830
of payments going on.

272
00:12:51,830 --> 00:12:55,350
Like, for example, in
China there's WeChat.

273
00:12:55,350 --> 00:12:59,300
They have spending millions of
dollars on these red envelopes

274
00:12:59,300 --> 00:13:00,560
that used to always be cash.

275
00:13:00,560 --> 00:13:04,350
And people spend hours during
the new year sending these

276
00:13:04,350 --> 00:13:06,780
back and forth to each other.

277
00:13:06,780 --> 00:13:09,520
GARY GENSLER: So you're calling
it socialization of payments,

278
00:13:09,520 --> 00:13:10,330
so to speak.

279
00:13:10,330 --> 00:13:10,830
Any others?

280
00:13:10,830 --> 00:13:11,840
Jeff.

281
00:13:11,840 --> 00:13:12,870
AUDIENCE: Biometrics.

282
00:13:12,870 --> 00:13:14,100
GARY GENSLER: Biometrics.

283
00:13:14,100 --> 00:13:15,570
Absolutely.

284
00:13:15,570 --> 00:13:19,470
So it's sort of another trend.

285
00:13:19,470 --> 00:13:21,180
So lots going on.

286
00:13:21,180 --> 00:13:22,263
I'm sorry.

287
00:13:22,263 --> 00:13:24,180
AUDIENCE: I'm going to
mention one other thing

288
00:13:24,180 --> 00:13:26,730
that caught my eye
on the statistics

289
00:13:26,730 --> 00:13:28,170
was that the larger--

290
00:13:28,170 --> 00:13:31,230
so checks, the number
of checks is going down,

291
00:13:31,230 --> 00:13:33,450
but the value is up slightly.

292
00:13:33,450 --> 00:13:36,720
So it seems to me that
the remote payment

293
00:13:36,720 --> 00:13:38,970
or digital payment
is not capturing

294
00:13:38,970 --> 00:13:42,167
the values of payments of
over $1,000 or [INAUDIBLE]..

295
00:13:42,167 --> 00:13:43,000
GARY GENSLER: Right.

296
00:13:43,000 --> 00:13:48,840
And I think part of that is
because for small values,

297
00:13:48,840 --> 00:13:52,470
by and large, few of
us use checks anymore.

298
00:13:52,470 --> 00:13:53,220
In fact, I'll ask.

299
00:13:53,220 --> 00:13:55,890
How many in this
room has written

300
00:13:55,890 --> 00:14:00,230
a physical-- any written
check in the last month?

301
00:14:00,230 --> 00:14:01,050
OK.

302
00:14:01,050 --> 00:14:03,660
But how many has
written a physical check

303
00:14:03,660 --> 00:14:06,580
for less than $100?

304
00:14:06,580 --> 00:14:07,080
All right.

305
00:14:07,080 --> 00:14:08,970
Some.

306
00:14:08,970 --> 00:14:11,550
I can't even remember the last
time I wrote a physical check

307
00:14:11,550 --> 00:14:13,150
for less than $100.

308
00:14:13,150 --> 00:14:13,650
Priya.

309
00:14:13,650 --> 00:14:15,510
AUDIENCE: If you have
a child in schools,

310
00:14:15,510 --> 00:14:17,750
and schools do field
trips and everything--

311
00:14:17,750 --> 00:14:19,500
GARY GENSLER: Oh, this
was not a judgment.

312
00:14:19,500 --> 00:14:21,200
I wasn't trying to--

313
00:14:21,200 --> 00:14:22,440
oh, Priya, I'm sorry.

314
00:14:28,180 --> 00:14:31,770
But I think we tend to
write them for larger.

315
00:14:31,770 --> 00:14:34,320
Rent checks sometimes,
even though I now

316
00:14:34,320 --> 00:14:37,720
pay my rent online.

317
00:14:37,720 --> 00:14:38,220
Yes.

318
00:14:38,220 --> 00:14:42,800
AUDIENCE: [INAUDIBLE]
like Ripple and Chain.

319
00:14:42,800 --> 00:14:44,450
GARY GENSLER: So
one more change.

320
00:14:44,450 --> 00:14:45,800
You said Ripple and who?

321
00:14:45,800 --> 00:14:46,480
AUDIENCE: Chain.

322
00:14:46,480 --> 00:14:48,090
Chain.

323
00:14:48,090 --> 00:14:48,590
Chaining?

324
00:14:48,590 --> 00:14:49,670
GARY GENSLER: Chaning.

325
00:14:49,670 --> 00:14:50,995
And are those really live?

326
00:14:50,995 --> 00:14:52,370
Or you're saying
those are things

327
00:14:52,370 --> 00:14:53,530
that are going to happen?

328
00:14:53,530 --> 00:14:57,250
AUDIENCE: Well, Ripple is live,
especially in Japan and Korea,

329
00:14:57,250 --> 00:14:58,090
[INAUDIBLE].

330
00:15:01,780 --> 00:15:04,390
GARY GENSLER: So then what sort
of lessons can people draw?

331
00:15:04,390 --> 00:15:07,270
We're going to talk a little
bit more about M-Pesa and Alipay

332
00:15:07,270 --> 00:15:08,950
and so forth.

333
00:15:08,950 --> 00:15:10,040
But what lessons?

334
00:15:10,040 --> 00:15:10,540
Kelly.

335
00:15:10,540 --> 00:15:12,915
AUDIENCE: The thing that I
took from quite a few of them.

336
00:15:12,915 --> 00:15:16,150
And I liked [INAUDIBLE] article,
because it's sort of like, you

337
00:15:16,150 --> 00:15:18,480
mentioned the trend in China.

338
00:15:18,480 --> 00:15:20,650
It took trends from
separate countries

339
00:15:20,650 --> 00:15:23,080
and sort of identified
their own statistics.

340
00:15:23,080 --> 00:15:25,450
You saw a lot of
countries that people

341
00:15:25,450 --> 00:15:29,890
don't feel that their payment
data or their payment identity

342
00:15:29,890 --> 00:15:32,917
is secure on a lot of
mobile and digital devices.

343
00:15:32,917 --> 00:15:34,750
And that lack of security
if preventing them

344
00:15:34,750 --> 00:15:38,237
from entering the
digital retail space.

345
00:15:38,237 --> 00:15:40,570
GARY GENSLER: How many people
looked at it that Worldpay

346
00:15:40,570 --> 00:15:44,120
article, read your own country,
and said, I didn't know that.

347
00:15:44,120 --> 00:15:47,620
Like, there was something-- it
was just one page per country.

348
00:15:47,620 --> 00:15:49,960
So, of course, it
didn't say that much.

349
00:15:49,960 --> 00:15:52,420
But.

350
00:15:52,420 --> 00:15:53,582
Alpha?

351
00:15:53,582 --> 00:15:55,540
I don't remember, was
there a page on Ethiopia?

352
00:15:55,540 --> 00:15:56,900
AUDIENCE: There
wasn't, unfortunately.

353
00:15:56,900 --> 00:15:57,410
No.

354
00:15:57,410 --> 00:15:58,660
Not yet.

355
00:15:58,660 --> 00:16:01,820
But on M-Pesa, you know, the
big success story in Kenya,

356
00:16:01,820 --> 00:16:03,070
they've done a tremendous job.

357
00:16:03,070 --> 00:16:04,445
And it's billed
as a huge success

358
00:16:04,445 --> 00:16:07,950
at getting mobile payments and
wallet [INAUDIBLE] distributed.

359
00:16:07,950 --> 00:16:09,730
But it's interesting
to note that they're

360
00:16:09,730 --> 00:16:11,560
able to acquire
customers by partnering

361
00:16:11,560 --> 00:16:13,625
with visible networks of agents.

362
00:16:13,625 --> 00:16:15,250
And again, something
that going forward

363
00:16:15,250 --> 00:16:17,710
for a lot of these companies,
we have to be [INAUDIBLE]..

364
00:16:17,710 --> 00:16:19,360
You can't be completely
decentralized

365
00:16:19,360 --> 00:16:20,518
or completely automated.

366
00:16:20,518 --> 00:16:21,310
That's [INAUDIBLE].

367
00:16:21,310 --> 00:16:25,330
GARY GENSLER: I mean, initially,
M-Pesa, which is in Kenya,

368
00:16:25,330 --> 00:16:26,630
and you had a reading on it.

369
00:16:26,630 --> 00:16:31,240
But it came out of mobile phones
and that the values stored

370
00:16:31,240 --> 00:16:35,650
on mobile phones for mobile
minutes people were trading,

371
00:16:35,650 --> 00:16:36,940
in essence.

372
00:16:36,940 --> 00:16:46,000
So the network of users
were these shops in Kenya

373
00:16:46,000 --> 00:16:50,990
where you could go
and get your minutes.

374
00:16:50,990 --> 00:16:51,490
Jihee.

375
00:16:51,490 --> 00:16:53,800
AUDIENCE: Kind of going
along with that M-Pesa,

376
00:16:53,800 --> 00:16:56,140
in addition to basically,
like, in an easy--

377
00:16:56,140 --> 00:17:00,280
I mean, convenient and lower
transaction costs, like M-Pesa,

378
00:17:00,280 --> 00:17:03,440
for example, were
very instrumental

379
00:17:03,440 --> 00:17:05,680
in corruption cases
and like, keep

380
00:17:05,680 --> 00:17:08,190
letting people know that
kind of basically cutting

381
00:17:08,190 --> 00:17:08,977
the corruption.

382
00:17:08,977 --> 00:17:09,810
GARY GENSLER: Right.

383
00:17:09,810 --> 00:17:12,400
There was the example
in Afghanistan.

384
00:17:12,400 --> 00:17:14,480
Does anybody remember
that from the reading?

385
00:17:14,480 --> 00:17:16,510
The police officers
all of a sudden

386
00:17:16,510 --> 00:17:20,470
realized that they got a 30%
pay increase when the government

387
00:17:20,470 --> 00:17:22,270
was paying them directly.

388
00:17:22,270 --> 00:17:24,640
But it was actually they
didn't get a pay increase.

389
00:17:24,640 --> 00:17:27,550
It was like cutting out
the middle man or middle

390
00:17:27,550 --> 00:17:30,180
woman of corruption.

391
00:17:30,180 --> 00:17:31,930
I was going to say
gender neutral.

392
00:17:31,930 --> 00:17:33,740
But whomever was the--

393
00:17:33,740 --> 00:17:35,440
it was probably men.

394
00:17:35,440 --> 00:17:41,020
But in that case,
in Afghanistan.

395
00:17:41,020 --> 00:17:42,520
And then what
challenges are there

396
00:17:42,520 --> 00:17:43,880
in the cross-border payment?

397
00:17:43,880 --> 00:17:46,540
Well, I probably
got 50% of the class

398
00:17:46,540 --> 00:17:49,180
that has personal challenges
with cross-border payments.

399
00:17:49,180 --> 00:17:51,772
But what would be the
biggest challenges

400
00:17:51,772 --> 00:17:53,980
that you took from the
readings or your personal life

401
00:17:53,980 --> 00:17:55,850
in cross-border payments?

402
00:17:55,850 --> 00:17:56,350
Anyone?

403
00:17:59,153 --> 00:18:01,570
AUDIENCE: I'll say the number
of [INAUDIBLE] from you that

404
00:18:01,570 --> 00:18:03,640
the payment service
providers to the other end,

405
00:18:03,640 --> 00:18:07,090
there are just so many layers,
which was just incredible how

406
00:18:07,090 --> 00:18:10,690
money can move seemingly so easy
from one country to another--

407
00:18:10,690 --> 00:18:13,240
GARY GENSLER: So a lot of
layers of intermediation,

408
00:18:13,240 --> 00:18:14,133
tons of them.

409
00:18:14,133 --> 00:18:15,550
Anything else in
the cross-border?

410
00:18:15,550 --> 00:18:16,990
AUDIENCE: [INAUDIBLE]

411
00:18:16,990 --> 00:18:18,760
GARY GENSLER: Costs.

412
00:18:18,760 --> 00:18:21,635
You've probably had that.

413
00:18:21,635 --> 00:18:23,010
So let's go through
a little bit.

414
00:18:23,010 --> 00:18:25,938
So, I'm introducing a guest.

415
00:18:25,938 --> 00:18:26,480
There you go.

416
00:18:26,480 --> 00:18:28,420
You want to stand up?

417
00:18:28,420 --> 00:18:30,980
[APPLAUSE]

418
00:18:30,980 --> 00:18:35,560
So Alin , he heads part of the
digital currency initiative

419
00:18:35,560 --> 00:18:38,220
here at MIT in the Media Lab.

420
00:18:38,220 --> 00:18:42,590
All the efforts around
lightning network and layer two

421
00:18:42,590 --> 00:18:43,190
solutions.

422
00:18:43,190 --> 00:18:46,150
But before MIT, he was a
vice president of First Data.

423
00:18:46,150 --> 00:18:50,270
And First Data is a
payment system provider.

424
00:18:50,270 --> 00:18:52,640
And he had about
200 people reporting

425
00:18:52,640 --> 00:18:56,170
to him and a big business--

426
00:18:56,170 --> 00:18:59,540
$200 million P&L.
That's revenues, right?

427
00:18:59,540 --> 00:19:00,350
Yeah.

428
00:19:00,350 --> 00:19:03,660
I mean, if it was profits,
even better for you.

429
00:19:03,660 --> 00:19:06,530
And then he spent three
years in a startup world.

430
00:19:06,530 --> 00:19:09,380
So he's somebody if you're
interested in blockchain

431
00:19:09,380 --> 00:19:12,120
and digital currency initiative,
you should get to know anyway.

432
00:19:12,120 --> 00:19:14,840
But if you're even interested
in startups outside

433
00:19:14,840 --> 00:19:17,480
of payment world, Alin's great.

434
00:19:17,480 --> 00:19:19,430
And he's going to be
here today and Thursday.

435
00:19:19,430 --> 00:19:22,120
And not only when
I make mistakes,

436
00:19:22,120 --> 00:19:23,870
but a couple of times
I'm going to get you

437
00:19:23,870 --> 00:19:26,270
up here to say stuff about
how payments really works.

438
00:19:26,270 --> 00:19:32,330
But he's like, way embedded in
the MIT blockchain community.

439
00:19:32,330 --> 00:19:33,560
So payment systems.

440
00:19:33,560 --> 00:19:37,050
Again, what is a payment system?

441
00:19:37,050 --> 00:19:38,960
It is moving money, of course.

442
00:19:38,960 --> 00:19:42,470
But on some level it is
a way to amend and record

443
00:19:42,470 --> 00:19:44,330
entries on ledgers.

444
00:19:44,330 --> 00:19:48,140
Because a ledger is
how we keep money now.

445
00:19:48,140 --> 00:19:49,820
Certainly in the
digital world it's

446
00:19:49,820 --> 00:19:53,120
always recorded on
some ledger somewhere.

447
00:19:53,120 --> 00:19:55,980
So there is an
authorization phase.

448
00:19:55,980 --> 00:19:59,270
There's a clearing phase,
and then final settlement.

449
00:19:59,270 --> 00:20:01,430
Does anybody want to take
a crack other than Alin

450
00:20:01,430 --> 00:20:04,670
as to what it means to
authorize a payment?

451
00:20:04,670 --> 00:20:06,225
Just to authorize a payment.

452
00:20:06,225 --> 00:20:07,850
It might not have
been in the readings,

453
00:20:07,850 --> 00:20:12,200
but it's sort of just
use your language

454
00:20:12,200 --> 00:20:14,810
skills to tell me what it might
mean to authorize a payment.

455
00:20:14,810 --> 00:20:15,830
Tom.

456
00:20:15,830 --> 00:20:17,690
Your laugh gets you called on.

457
00:20:17,690 --> 00:20:19,430
AUDIENCE: I am
struggling to describe it

458
00:20:19,430 --> 00:20:21,480
without using the
word to authorize.

459
00:20:21,480 --> 00:20:23,480
GARY GENSLER: It reminds
me of when I was, like,

460
00:20:23,480 --> 00:20:26,135
a freshman in English class
at University of Pennsylvania,

461
00:20:26,135 --> 00:20:28,940
and I had to describe a
telephone without using

462
00:20:28,940 --> 00:20:31,460
the word "telephone."

463
00:20:31,460 --> 00:20:34,933
AUDIENCE: So I was thinking
about the digital system

464
00:20:34,933 --> 00:20:35,850
we're using right now.

465
00:20:35,850 --> 00:20:37,990
It's like, when you
click Send on Venmo,

466
00:20:37,990 --> 00:20:42,860
like, you authorize the account,
the money to leave your ledger

467
00:20:42,860 --> 00:20:43,400
[INAUDIBLE].

468
00:20:43,400 --> 00:20:45,525
GARY GENSLER: So you just
used the word "authorize"

469
00:20:45,525 --> 00:20:48,800
to define the word "authorize."

470
00:20:48,800 --> 00:20:49,750
AUDIENCE: Is it just--

471
00:20:49,750 --> 00:20:50,600
GARY GENSLER: Oh, back here.

472
00:20:50,600 --> 00:20:52,220
I'm sorry, I don't
remember your name.

473
00:20:52,220 --> 00:20:52,590
What's that?

474
00:20:52,590 --> 00:20:53,160
AUDIENCE: Dan.

475
00:20:53,160 --> 00:20:53,690
GARY GENSLER: Dan.

476
00:20:53,690 --> 00:20:54,315
AUDIENCE: Yeah.

477
00:20:54,315 --> 00:20:58,880
I just think it's you're
approving the actual transfer

478
00:20:58,880 --> 00:20:59,540
of the money.

479
00:20:59,540 --> 00:21:01,250
You're saying it's OK that the--

480
00:21:01,250 --> 00:21:02,083
GARY GENSLER: Right.

481
00:21:02,083 --> 00:21:04,683
[INAUDIBLE] I can't--

482
00:21:04,683 --> 00:21:05,350
AUDIENCE: Aviva.

483
00:21:05,350 --> 00:21:06,183
GARY GENSLER: Aviva.

484
00:21:06,183 --> 00:21:07,310
Good to see you.

485
00:21:07,310 --> 00:21:10,640
AUDIENCE: It has to
do also with KYC AML

486
00:21:10,640 --> 00:21:14,510
And to authorize the source of--

487
00:21:14,510 --> 00:21:17,120
the sender's identity and the
source of money, what countries

488
00:21:17,120 --> 00:21:18,290
it's coming from.

489
00:21:18,290 --> 00:21:21,530
If it's above a certain
threshold or a certain amount,

490
00:21:21,530 --> 00:21:25,380
financial institutions
have further checks to--

491
00:21:25,380 --> 00:21:28,700
GARY GENSLER: So most systems
do what Aviva and Dan said.

492
00:21:28,700 --> 00:21:33,410
They have to say, we
know who the person is.

493
00:21:33,410 --> 00:21:39,010
They have the balance
is in some account.

494
00:21:39,010 --> 00:21:40,800
So they are who
they say they are,

495
00:21:40,800 --> 00:21:42,640
or at least digitally
they are, and they

496
00:21:42,640 --> 00:21:46,630
have a certain set of balances
and monies within an account.

497
00:21:46,630 --> 00:21:51,100
And they have the legal
ability to move that money,

498
00:21:51,100 --> 00:21:55,240
all without using the word
"authority" in essence.

499
00:21:55,240 --> 00:21:56,350
Clearing.

500
00:21:56,350 --> 00:21:57,700
Anybody know what clearing is?

501
00:21:57,700 --> 00:22:00,780
Or am I going to
have to call on Alin?

502
00:22:00,780 --> 00:22:01,525
James.

503
00:22:01,525 --> 00:22:04,890
AUDIENCE: Isn't the [INAUDIBLE]
that confirms that money,

504
00:22:04,890 --> 00:22:07,090
it's getting somewhere,
and it's going somewhere.

505
00:22:07,090 --> 00:22:07,882
GARY GENSLER: Yeah.

506
00:22:07,882 --> 00:22:09,960
And it also has to do
with netting, sometimes.

507
00:22:09,960 --> 00:22:13,470
Clearing can be-- if the
100 people in this room

508
00:22:13,470 --> 00:22:17,160
were all sending 10,000
movements all in the same day

509
00:22:17,160 --> 00:22:19,500
at the end of the day,
you might net all of those

510
00:22:19,500 --> 00:22:24,000
movements down so there's
fewer actual movements.

511
00:22:24,000 --> 00:22:27,240
So historic clearing,
which goes back centuries,

512
00:22:27,240 --> 00:22:32,160
was also a way to
lower the friction,

513
00:22:32,160 --> 00:22:34,260
just taking the 100
people in this room,

514
00:22:34,260 --> 00:22:36,310
of all those movements.

515
00:22:36,310 --> 00:22:38,555
So authorization-- Aviva.

516
00:22:38,555 --> 00:22:41,520
AUDIENCE: It also has to
do with foreign exchange.

517
00:22:41,520 --> 00:22:46,055
So if someone wants to
transact in peso versus dollar,

518
00:22:46,055 --> 00:22:48,870
so you then also have to
net off, like you said,

519
00:22:48,870 --> 00:22:49,577
that balance.

520
00:22:49,577 --> 00:22:50,410
GARY GENSLER: Right.

521
00:22:50,410 --> 00:22:54,720
So in foreign exchange,
any circumstance--

522
00:22:54,720 --> 00:22:56,700
and this is in the
securities world as well--

523
00:22:56,700 --> 00:22:59,430
you'll hear the words
"clearing" and "settling.".

524
00:22:59,430 --> 00:23:01,920
God knows, even when I was
chairing the Commodity Futures

525
00:23:01,920 --> 00:23:04,500
Trading Commission,
all of us sometimes

526
00:23:04,500 --> 00:23:07,530
got a little bit confused
about the two words.

527
00:23:07,530 --> 00:23:09,990
But clearing is pre-settlement.

528
00:23:09,990 --> 00:23:13,080
Clearing is netting
of transactions,

529
00:23:13,080 --> 00:23:16,710
arranging the paper when we
were still in a paper world,

530
00:23:16,710 --> 00:23:20,940
all in together, taking
all the physical checks

531
00:23:20,940 --> 00:23:24,340
and getting them all in the
same place in the right place.

532
00:23:24,340 --> 00:23:27,150
And then what's settlement?

533
00:23:27,150 --> 00:23:27,650
Sean.

534
00:23:27,650 --> 00:23:30,066
AUDIENCE: It's to discharge.

535
00:23:30,066 --> 00:23:31,680
GARY GENSLER: To discharge.

536
00:23:31,680 --> 00:23:32,320
I like that.

537
00:23:32,320 --> 00:23:33,070
AUDIENCE: Receipt.

538
00:23:33,070 --> 00:23:35,570
It's the receipt
from [INAUDIBLE]..

539
00:23:35,570 --> 00:23:39,440
GARY GENSLER: So
discharge the receipt.

540
00:23:39,440 --> 00:23:43,430
It's basically the final
amendment of a record.

541
00:23:43,430 --> 00:23:48,740
It's changing a balance
from 10 to 11 or 10 to 9.

542
00:23:48,740 --> 00:23:49,730
That's settlement.

543
00:23:49,730 --> 00:23:51,240
And that's true in securities.

544
00:23:51,240 --> 00:23:52,230
Alin.

545
00:23:52,230 --> 00:23:53,730
AUDIENCE: To me
this is mesmerizing,

546
00:23:53,730 --> 00:23:55,105
because there has
to be a history

547
00:23:55,105 --> 00:23:58,080
behind this authorized
clearing and settlement

548
00:23:58,080 --> 00:24:00,640
sort of free part
movement of money.

549
00:24:00,640 --> 00:24:02,655
Because if you think
of a computer system,

550
00:24:02,655 --> 00:24:04,530
or if you think of a
blockchain, if you want,

551
00:24:04,530 --> 00:24:05,980
there's no need
to do any of this.

552
00:24:05,980 --> 00:24:06,480
Right?

553
00:24:06,480 --> 00:24:08,640
You just do the damn
transaction, and it's atomic.

554
00:24:08,640 --> 00:24:11,100
A moves money to
B, and you're done.

555
00:24:11,100 --> 00:24:13,590
So like, how did
this even happen?

556
00:24:13,590 --> 00:24:14,670
Like, how do we--

557
00:24:14,670 --> 00:24:18,060
like, to have a computer system
that does this is just inane.

558
00:24:18,060 --> 00:24:20,340
You don't need any of
this in a computer system.

559
00:24:20,340 --> 00:24:22,500
So why do we still do
this in a computer system?

560
00:24:22,500 --> 00:24:23,940
Where did this evolve from?

561
00:24:23,940 --> 00:24:26,700
GARY GENSLER: So
Alin's question,

562
00:24:26,700 --> 00:24:29,428
I was hoping would
come out of the group.

563
00:24:29,428 --> 00:24:30,970
So I'm going to go
to the other Alin.

564
00:24:30,970 --> 00:24:35,760
But there's centuries of
history as to why we have these.

565
00:24:35,760 --> 00:24:36,612
But this Alin.

566
00:24:36,612 --> 00:24:38,820
ALIN DRAGOS: Let me say
right here, because I think--

567
00:24:38,820 --> 00:24:41,132
so first of all, I'm
happy that this came up,

568
00:24:41,132 --> 00:24:42,090
because it's excellent.

569
00:24:42,090 --> 00:24:42,590
Right?

570
00:24:42,590 --> 00:24:45,530
So when I saw the
slides, you know, I--

571
00:24:45,530 --> 00:24:48,522
GARY GENSLER: I sent this
Alin the slides last night.

572
00:24:48,522 --> 00:24:49,980
ALIN DRAGOS: So I
saw that there is

573
00:24:49,980 --> 00:24:53,100
a really interesting historical
component to all of this,

574
00:24:53,100 --> 00:24:55,020
as you rightly
pointed out, right.

575
00:24:55,020 --> 00:24:59,460
This all came from about four
decades' worth of evolution

576
00:24:59,460 --> 00:25:00,090
here.

577
00:25:00,090 --> 00:25:01,800
So we started-- you
know, you started

578
00:25:01,800 --> 00:25:05,850
with a very convoluted way,
as it would appear now,

579
00:25:05,850 --> 00:25:08,160
to actually send out
paper-based receipts

580
00:25:08,160 --> 00:25:12,090
and have a plastic-based
card, if you will,

581
00:25:12,090 --> 00:25:14,960
that will have to be recorded
and, you know-- first of all,

582
00:25:14,960 --> 00:25:17,400
you just say, does the
person have the money there?

583
00:25:17,400 --> 00:25:18,000
Right.

584
00:25:18,000 --> 00:25:18,820
Is the money there?

585
00:25:18,820 --> 00:25:19,650
I'm [INAUDIBLE] authorize.

586
00:25:19,650 --> 00:25:20,110
Right?

587
00:25:20,110 --> 00:25:21,960
I'm gonna get an answer
right back, saying, yep.

588
00:25:21,960 --> 00:25:22,620
The money's there.

589
00:25:22,620 --> 00:25:22,820
OK.

590
00:25:22,820 --> 00:25:23,840
I just authorized it.

591
00:25:23,840 --> 00:25:26,250
But it's a very simple, like,
ping right back and forth.

592
00:25:26,250 --> 00:25:26,768
Right?

593
00:25:26,768 --> 00:25:28,560
So it needs to be a
very small transaction.

594
00:25:28,560 --> 00:25:30,185
From there on you
can start to say, OK.

595
00:25:30,185 --> 00:25:32,610
Now let's batch transactions
and do the clearing.

596
00:25:32,610 --> 00:25:34,440
And then from there on you
actually send on the money.

597
00:25:34,440 --> 00:25:34,950
Right?

598
00:25:34,950 --> 00:25:37,620
The interesting part
about all of this

599
00:25:37,620 --> 00:25:39,750
is that it evolved in time.

600
00:25:39,750 --> 00:25:42,020
So this technology, if
you were to do it now

601
00:25:42,020 --> 00:25:44,340
with all of the tools that
are at our disposal now,

602
00:25:44,340 --> 00:25:46,050
you'd do it
differently, entirely.

603
00:25:46,050 --> 00:25:50,250
However, payments, as
Gary will point out

604
00:25:50,250 --> 00:25:52,980
in the next couple of slides,
basically evolved organically

605
00:25:52,980 --> 00:25:53,925
through decades.

606
00:25:53,925 --> 00:25:55,800
And you know, they
started with [INAUDIBLE]..

607
00:25:55,800 --> 00:25:57,050
GARY GENSLER: So stay with us.

608
00:25:57,050 --> 00:25:58,920
Stay with us just so that--

609
00:25:58,920 --> 00:26:01,830
That is literally a check
that Thomas Jefferson

610
00:26:01,830 --> 00:26:05,570
wrote to himself in 1809.

611
00:26:05,570 --> 00:26:07,670
But that is a
payment instruction

612
00:26:07,670 --> 00:26:09,470
from one Thomas
Jefferson account

613
00:26:09,470 --> 00:26:12,110
to another Thomas
Jefferson account.

614
00:26:12,110 --> 00:26:15,030
But it's a payment instruction.

615
00:26:15,030 --> 00:26:17,860
It didn't actually
move the money.

616
00:26:17,860 --> 00:26:19,680
It's just a payment instruction.

617
00:26:19,680 --> 00:26:21,170
This is a Western
Union Telegram.

618
00:26:23,980 --> 00:26:28,030
The telegraph came along in
the 1840's, if I remember.

619
00:26:28,030 --> 00:26:31,600
But Western Union took several
decades to come along and say,

620
00:26:31,600 --> 00:26:38,080
we can send instructions to
move value using the telegraph.

621
00:26:38,080 --> 00:26:42,160
And the Telex machine, which
was post-world War II-- and yes,

622
00:26:42,160 --> 00:26:44,380
I'm old enough to say
that there were still

623
00:26:44,380 --> 00:26:46,660
telex machines at
Goldman Sachs when

624
00:26:46,660 --> 00:26:50,620
I started in 1979
that you would type

625
00:26:50,620 --> 00:26:53,110
in to type in an instruction.

626
00:26:53,110 --> 00:26:55,570
So Alin, you're asking
where did it come from.

627
00:26:55,570 --> 00:27:01,130
It came from technology
move from first authorizing.

628
00:27:01,130 --> 00:27:04,540
Does that party have
the legal rights

629
00:27:04,540 --> 00:27:07,060
to move something, move value?

630
00:27:07,060 --> 00:27:09,280
Do they have enough
of the value?

631
00:27:09,280 --> 00:27:12,140
Is there enough
in their account?

632
00:27:12,140 --> 00:27:12,840
And so forth.

633
00:27:12,840 --> 00:27:15,140
That's the authorization phase.

634
00:27:15,140 --> 00:27:17,690
Now you'd say, well, can't that
all be done simultaneously?

635
00:27:17,690 --> 00:27:18,648
And the answer is, yes.

636
00:27:18,648 --> 00:27:19,820
Maybe.

637
00:27:19,820 --> 00:27:22,130
But most of the
payments system is still

638
00:27:22,130 --> 00:27:28,460
based on authorization,
clearing, and then settlement.

639
00:27:28,460 --> 00:27:30,530
Financial ledgers that
are also the reason.

640
00:27:30,530 --> 00:27:33,080
Ledgers record
economic activity.

641
00:27:33,080 --> 00:27:37,010
We've talked about this
earlier in the semester.

642
00:27:37,010 --> 00:27:39,770
They record transactions
or accounts.

643
00:27:39,770 --> 00:27:42,970
Bitcoin is a transaction ledger.

644
00:27:42,970 --> 00:27:47,220
Ethereum and others
are account ledgers.

645
00:27:47,220 --> 00:27:48,530
But they're both ledgers.

646
00:27:48,530 --> 00:27:53,690
They're both forms of recording
something that has a right.

647
00:27:53,690 --> 00:27:59,660
The data is usually used
around some right or a token.

648
00:27:59,660 --> 00:28:03,110
But the first ledgers were
thousands of years ago.

649
00:28:03,110 --> 00:28:05,210
And I think on those
ledgers, I don't

650
00:28:05,210 --> 00:28:07,400
know how they split
authorization, clearing,

651
00:28:07,400 --> 00:28:08,630
and settling.

652
00:28:08,630 --> 00:28:10,185
But they were a
form of a ledger.

653
00:28:13,350 --> 00:28:15,850
I like presidents, I
like American history.

654
00:28:15,850 --> 00:28:17,370
So I pulled--

655
00:28:17,370 --> 00:28:22,200
George Washington used to use
a personal ledger, single entry

656
00:28:22,200 --> 00:28:24,050
ledger.

657
00:28:24,050 --> 00:28:30,190
But the IBM 360 came
along in the early 1960s.

658
00:28:30,190 --> 00:28:34,280
And it revolutionized the
world of finance and ledgers.

659
00:28:34,280 --> 00:28:37,910
It still took about 14 years.

660
00:28:37,910 --> 00:28:40,470
I think it was in
the early 1970s

661
00:28:40,470 --> 00:28:43,710
after big paperwork crash
on Wall Street, meaning

662
00:28:43,710 --> 00:28:45,650
literal, physical
pieces of paper

663
00:28:45,650 --> 00:28:48,000
were moving around
the late 1960s.

664
00:28:48,000 --> 00:28:50,370
And they had to shut the New
York Stock Exchange down,

665
00:28:50,370 --> 00:28:52,800
I think, for a day or
two, because they'd

666
00:28:52,800 --> 00:28:57,310
gotten weeks or months
behind in clearing the paper.

667
00:28:57,310 --> 00:28:58,560
They had passed authorization.

668
00:28:58,560 --> 00:29:01,320
It was all in clearing
securities trends,

669
00:29:01,320 --> 00:29:04,440
and was created by
an act of Congress

670
00:29:04,440 --> 00:29:07,320
that there would be central
clearing and settling.

671
00:29:07,320 --> 00:29:13,100
And DTCC was in essence
created to solve and get out

672
00:29:13,100 --> 00:29:14,890
of that huge mess and a problem.

673
00:29:14,890 --> 00:29:16,760
But it was on the
backs of technology

674
00:29:16,760 --> 00:29:18,830
that it could even
be done, that there

675
00:29:18,830 --> 00:29:20,020
would be a central ledger.

676
00:29:20,020 --> 00:29:22,253
Is it helping to answer
your question yet?

677
00:29:22,253 --> 00:29:24,410
AUDIENCE: I think my
question kind of changed.

678
00:29:24,410 --> 00:29:26,330
So I'll talk to you
after the class.

679
00:29:26,330 --> 00:29:27,120
GARY GENSLER: OK.

680
00:29:27,120 --> 00:29:27,620
You're good.

681
00:29:27,620 --> 00:29:29,210
Do you have a question?

682
00:29:29,210 --> 00:29:30,650
AUDIENCE: Yeah.

683
00:29:30,650 --> 00:29:33,530
So one thing that came out
of the readings for me,

684
00:29:33,530 --> 00:29:35,550
I guess it's kind
of solved by checks.

685
00:29:35,550 --> 00:29:39,440
But like, how are cash transfers
captured in all of this?

686
00:29:39,440 --> 00:29:41,150
GARY GENSLER: How are cash--

687
00:29:41,150 --> 00:29:41,900
cash, cash.

688
00:29:41,900 --> 00:29:42,780
AUDIENCE: Cash cash.

689
00:29:42,780 --> 00:29:42,980
Right.

690
00:29:42,980 --> 00:29:44,930
Because now they have
digital everything.

691
00:29:44,930 --> 00:29:48,670
Everything is really
easy to track.

692
00:29:48,670 --> 00:29:53,030
And you talked about
confidential transactions

693
00:29:53,030 --> 00:29:55,940
or private transactions,
if you give me $10,

694
00:29:55,940 --> 00:29:59,480
nobody else in the world knows
that you gave me $10 back.

695
00:29:59,480 --> 00:30:01,830
GARY GENSLER: Well, right
now this is being recorded.

696
00:30:01,830 --> 00:30:02,880
It's being seen.

697
00:30:02,880 --> 00:30:04,410
And so you'll give
it back to me.

698
00:30:04,410 --> 00:30:05,500
AUDIENCE: 100%.

699
00:30:05,500 --> 00:30:06,300
GARY GENSLER: No,
you can take it.

700
00:30:06,300 --> 00:30:07,000
You can take it.

701
00:30:07,000 --> 00:30:07,875
AUDIENCE: [INAUDIBLE]

702
00:30:07,875 --> 00:30:08,690
GARY GENSLER: Now!

703
00:30:08,690 --> 00:30:09,320
Yeah, yeah.

704
00:30:09,320 --> 00:30:10,400
Remember.

705
00:30:10,400 --> 00:30:11,880
What lawsuit was that?

706
00:30:11,880 --> 00:30:15,168
The Scottish lawsuit?

707
00:30:15,168 --> 00:30:16,210
AUDIENCE: Can't remember.

708
00:30:16,210 --> 00:30:17,168
GARY GENSLER: Crawford.

709
00:30:19,060 --> 00:30:24,078
But that bill, what's
it say on the top?

710
00:30:24,078 --> 00:30:25,370
AUDIENCE: Federal Reserve note.

711
00:30:25,370 --> 00:30:27,750
GARY GENSLER: So it's
a Federal Reserve note.

712
00:30:27,750 --> 00:30:29,270
It is a Federal
Reserve note, which

713
00:30:29,270 --> 00:30:32,660
literally means it is a
liability of the central bank

714
00:30:32,660 --> 00:30:33,610
the US government.

715
00:30:33,610 --> 00:30:35,310
Now that's a social construct.

716
00:30:35,310 --> 00:30:39,620
We talked about it's not that
there is a room full of gold

717
00:30:39,620 --> 00:30:41,990
or a room full of
wheat behind it.

718
00:30:41,990 --> 00:30:45,120
There's some gold in Fort Knox.

719
00:30:45,120 --> 00:30:50,220
But that is a form of
a ledger transaction.

720
00:30:50,220 --> 00:30:52,020
If you read a little
bit more closely,

721
00:30:52,020 --> 00:30:54,437
can you see on the upper right
there's something in there?

722
00:30:57,810 --> 00:30:59,550
AUDIENCE: United
States of America.

723
00:30:59,550 --> 00:31:00,550
GARY GENSLER: All right.

724
00:31:00,550 --> 00:31:02,350
Is there a serial number?

725
00:31:02,350 --> 00:31:09,990
There is a unique serial number
on every Federal Reserve note.

726
00:31:09,990 --> 00:31:12,540
That unique serial
number is, in essence,

727
00:31:12,540 --> 00:31:15,990
tying it to a ledger, a
liability of the Federal

728
00:31:15,990 --> 00:31:17,660
Reserve.

729
00:31:17,660 --> 00:31:21,560
But it's a tokenized
ledger receipt.

730
00:31:21,560 --> 00:31:22,610
I've handed it to you.

731
00:31:22,610 --> 00:31:24,680
It's anonymous-- well,
it's not anonymous,

732
00:31:24,680 --> 00:31:26,570
because it was
captured on the film.

733
00:31:26,570 --> 00:31:30,830
But it was anonymous because
it's a tokenized paper.

734
00:31:30,830 --> 00:31:32,915
It's actually linen,
it's not really paper.

735
00:31:36,260 --> 00:31:39,440
Anybody know who
is the sole source

736
00:31:39,440 --> 00:31:42,290
manufacturer of the linen
that goes into Federal Reserve

737
00:31:42,290 --> 00:31:43,780
notes?

738
00:31:43,780 --> 00:31:44,886
AUDIENCE: [INAUDIBLE]?

739
00:31:44,886 --> 00:31:45,280
GARY GENSLER: No.

740
00:31:45,280 --> 00:31:45,900
Crane.

741
00:31:45,900 --> 00:31:52,340
C-R-A-N-E is the name of the
company that has the contract.

742
00:31:52,340 --> 00:31:53,900
But to answer your
question, it's

743
00:31:53,900 --> 00:31:58,430
a tokenized form of a
specific serialized ledger

744
00:31:58,430 --> 00:31:59,720
on the Federal Reserve.

745
00:31:59,720 --> 00:32:03,530
AUDIENCE: So that
only gets triggered

746
00:32:03,530 --> 00:32:07,010
if it goes into and
out of institutions.

747
00:32:07,010 --> 00:32:07,550
Right?

748
00:32:07,550 --> 00:32:10,270
If this bill comes to me, and
then goes to somebody else

749
00:32:10,270 --> 00:32:10,860
and goes to somebody else--

750
00:32:10,860 --> 00:32:11,600
GARY GENSLER: Like, James.

751
00:32:11,600 --> 00:32:11,810
Yeah.

752
00:32:11,810 --> 00:32:13,110
AUDIENCE: --before
it goes on to a bank.

753
00:32:13,110 --> 00:32:14,020
GARY GENSLER: Yeah.

754
00:32:14,020 --> 00:32:16,430
AUDIENCE: Then none of those
transactions are tracked.

755
00:32:16,430 --> 00:32:17,320
GARY GENSLER: That's correct.

756
00:32:17,320 --> 00:32:19,150
AUDIENCE: But on something
like Venmo, they are.

757
00:32:19,150 --> 00:32:20,510
So something like
Bitcoin, they are too.

758
00:32:20,510 --> 00:32:21,760
GARY GENSLER: So we're moving.

759
00:32:21,760 --> 00:32:24,170
There's a big trend that's
happening over these last 50

760
00:32:24,170 --> 00:32:26,210
years.

761
00:32:26,210 --> 00:32:30,680
And if you go back 200
years, it was all anonymous.

762
00:32:30,680 --> 00:32:32,540
But once you get into
the 20th century,

763
00:32:32,540 --> 00:32:35,480
it starts to be more
or more digitized,

764
00:32:35,480 --> 00:32:38,840
even early 20th century,
commerce-- big commerce--

765
00:32:38,840 --> 00:32:41,570
was starting to be in
the banking system.

766
00:32:41,570 --> 00:32:45,860
But in the last 50 years, and
certainly the last 20 years,

767
00:32:45,860 --> 00:32:50,630
we're almost fully digitized
in developed countries, not

768
00:32:50,630 --> 00:32:52,210
middle economic countries.

769
00:32:52,210 --> 00:32:54,180
But that's correct.

770
00:32:54,180 --> 00:32:56,330
But this still ties
back to a ledger.

771
00:32:56,330 --> 00:32:58,220
I'll get that back later.

772
00:32:58,220 --> 00:33:00,110
Credit cards.

773
00:33:00,110 --> 00:33:03,110
The first big write-up
of credit cards

774
00:33:03,110 --> 00:33:06,500
was a book from the 1880s that
said, what would the world be

775
00:33:06,500 --> 00:33:08,600
like in the year 2000?

776
00:33:08,600 --> 00:33:13,280
And 15 or 20 times in the book
it used the word "credit card."

777
00:33:13,280 --> 00:33:18,530
They fictionalized the
future of credit cards.

778
00:33:18,530 --> 00:33:20,360
I haven't read the
book, but I just

779
00:33:20,360 --> 00:33:24,500
love that it was
written in the 1880s.

780
00:33:24,500 --> 00:33:27,980
But the actual start of
the use of credit tokens,

781
00:33:27,980 --> 00:33:31,130
if not credit cards,
started actually

782
00:33:31,130 --> 00:33:33,380
in the late 19th century.

783
00:33:33,380 --> 00:33:35,960
And the idea is that you
could have a token that

784
00:33:35,960 --> 00:33:37,640
was for as particular merchant.

785
00:33:37,640 --> 00:33:42,020
And by the 1920s you had them
for getting your gasoline

786
00:33:42,020 --> 00:33:44,660
when automobiles started to
be popular, and so forth.

787
00:33:44,660 --> 00:33:47,300
But they were not
generalized credit tokens.

788
00:33:47,300 --> 00:33:50,010
They were a credit token
really by one merchant.

789
00:33:50,010 --> 00:33:53,540
So think of them as a
merchant-specific token.

790
00:33:53,540 --> 00:33:58,040
In the 1940s in Brooklyn,
New York, somebody--

791
00:33:58,040 --> 00:34:02,900
in essence the innovation was
to have a more generalized token

792
00:34:02,900 --> 00:34:07,120
that could give you credit
at more than one merchant.

793
00:34:07,120 --> 00:34:10,810
And once that happened, of
course, credit cards took off.

794
00:34:10,810 --> 00:34:13,300
First in the US, Diner's Card.

795
00:34:13,300 --> 00:34:15,659
American Express
was in the mid '50s.

796
00:34:15,659 --> 00:34:17,949
And then Bank of
America figured out,

797
00:34:17,949 --> 00:34:23,560
maybe we will even extend
credit multiple banks.

798
00:34:23,560 --> 00:34:25,150
And they created a network.

799
00:34:25,150 --> 00:34:27,250
Bank of America was
a California bank.

800
00:34:27,250 --> 00:34:29,139
It's not the bank
you think of now.

801
00:34:29,139 --> 00:34:32,469
In those days it was
California based.

802
00:34:32,469 --> 00:34:35,110
But maybe we can have a
network across the whole US.

803
00:34:35,110 --> 00:34:39,070
And that network is actually
the network that became Visa.

804
00:34:39,070 --> 00:34:42,250
It was a shared
ownership service

805
00:34:42,250 --> 00:34:46,659
amongst a bunch of banks across.

806
00:34:46,659 --> 00:34:50,170
But the cards had
to be processed.

807
00:34:50,170 --> 00:34:52,960
Does anybody even ever
see the processing

808
00:34:52,960 --> 00:34:54,610
that's in the left,
in the middle,

809
00:34:54,610 --> 00:34:57,170
any longer in the US and Europe?

810
00:34:57,170 --> 00:34:59,005
No, you probably--

811
00:34:59,005 --> 00:35:00,950
ALIN DRAGOS: The
imprinters still exist.

812
00:35:00,950 --> 00:35:03,310
There are some cab
drivers who will still

813
00:35:03,310 --> 00:35:05,710
take out, like, one of those--

814
00:35:05,710 --> 00:35:06,647
one of those machines.

815
00:35:06,647 --> 00:35:07,480
So they still exist.

816
00:35:07,480 --> 00:35:08,897
GARY GENSLER: So
they still exist.

817
00:35:08,897 --> 00:35:11,180
So technology has
moved us in advance.

818
00:35:11,180 --> 00:35:13,810
So here we're going to do
modern payment systems.

819
00:35:13,810 --> 00:35:16,390
I think Alin's going
to help me out here.

820
00:35:16,390 --> 00:35:18,550
You've got a customer.

821
00:35:18,550 --> 00:35:19,720
You'll see this play out.

822
00:35:19,720 --> 00:35:23,020
But this is complex system.

823
00:35:23,020 --> 00:35:25,300
The customer has
an issuing bank.

824
00:35:25,300 --> 00:35:26,650
I'm going to say it's me.

825
00:35:26,650 --> 00:35:30,640
And I'm Gary Gensler,
and it's Bank of America.

826
00:35:30,640 --> 00:35:33,970
And I might use a credit
card to instruct my bank,

827
00:35:33,970 --> 00:35:36,430
I might use a check, I
might use a debit card.

828
00:35:36,430 --> 00:35:38,810
I actually have all three--

829
00:35:38,810 --> 00:35:42,860
credit card, debit
card, and checks.

830
00:35:42,860 --> 00:35:45,530
I could instruct them in
any of those three ways,

831
00:35:45,530 --> 00:35:47,360
but there's other ways
I can instruct them.

832
00:35:47,360 --> 00:35:50,540
I can instruct them and ask
Bank of America to send a wire.

833
00:35:50,540 --> 00:35:54,470
I can in the US ask them to
send an automated clearing house

834
00:35:54,470 --> 00:35:55,060
payment--

835
00:35:55,060 --> 00:35:56,510
ACH.

836
00:35:56,510 --> 00:35:58,220
Wires are more real time.

837
00:35:58,220 --> 00:36:00,650
ACH take up to two days--

838
00:36:00,650 --> 00:36:02,053
is it now?

839
00:36:02,053 --> 00:36:03,720
ALIN DRAGOS: That's
in the longest form.

840
00:36:03,720 --> 00:36:05,000
GARY GENSLER: OK.

841
00:36:05,000 --> 00:36:07,640
ALIN DRAGOS: The ACH has been
suffering some pressures,

842
00:36:07,640 --> 00:36:09,040
and now they actually offer--

843
00:36:09,040 --> 00:36:09,440
GARY GENSLER: Real time.

844
00:36:09,440 --> 00:36:10,850
ALIN DRAGOS: --almost
real time [INAUDIBLE]..

845
00:36:10,850 --> 00:36:12,433
GARY GENSLER: But
traditionally, wires

846
00:36:12,433 --> 00:36:15,220
were something that you did
which were more immediate,

847
00:36:15,220 --> 00:36:19,440
and what's called
ACH, more slowly.

848
00:36:19,440 --> 00:36:21,230
So there's actually
five ways I could

849
00:36:21,230 --> 00:36:25,430
have my Bank of America
send something of value.

850
00:36:25,430 --> 00:36:27,560
It has to go through
some network.

851
00:36:27,560 --> 00:36:31,970
It's too small to see, but the
first little blue arrow there

852
00:36:31,970 --> 00:36:33,450
is Visa MasterCard.

853
00:36:33,450 --> 00:36:36,560
It might be going across
a credit card network.

854
00:36:36,560 --> 00:36:41,410
The second arrow there is
where this guy used to work,

855
00:36:41,410 --> 00:36:42,970
First Data stripe.

856
00:36:42,970 --> 00:36:48,250
There's dozens and dozens of
payment processors or payment

857
00:36:48,250 --> 00:36:49,630
system processors--

858
00:36:49,630 --> 00:36:51,400
PSPs.

859
00:36:51,400 --> 00:36:53,560
So you have a credit
card, but you might also

860
00:36:53,560 --> 00:36:56,890
have somebody call it a PSP.

861
00:36:56,890 --> 00:36:59,170
Has anybody started a
business in this room?

862
00:36:59,170 --> 00:37:00,460
A merchant?

863
00:37:00,460 --> 00:37:02,470
I'm sure somebody-- has anybody?

864
00:37:02,470 --> 00:37:03,310
All right.

865
00:37:03,310 --> 00:37:05,890
Did you have to hire a
payment system processor?

866
00:37:05,890 --> 00:37:06,665
Who'd you hire?

867
00:37:06,665 --> 00:37:07,540
AUDIENCE: First Data.

868
00:37:07,540 --> 00:37:08,858
GARY GENSLER: First Data.

869
00:37:08,858 --> 00:37:10,900
When I was chief financial
officer of the Hillary

870
00:37:10,900 --> 00:37:14,100
campaign, we had to hire a
payment system processor.

871
00:37:14,100 --> 00:37:16,230
It was Stripe.

872
00:37:16,230 --> 00:37:19,350
So all the donations
that were coming in,

873
00:37:19,350 --> 00:37:21,090
somebody could use
a MasterCard, could

874
00:37:21,090 --> 00:37:23,280
use a Visa, could use
an American Express.

875
00:37:23,280 --> 00:37:26,940
We didn't have any
legal contract.

876
00:37:26,940 --> 00:37:27,780
We were a merchant--

877
00:37:27,780 --> 00:37:30,030
I mean, you might think of
it as a political campaign,

878
00:37:30,030 --> 00:37:30,988
but we were a merchant.

879
00:37:30,988 --> 00:37:33,490
You were a merchant,
you hired first data.

880
00:37:33,490 --> 00:37:35,320
So when you start
your businesses,

881
00:37:35,320 --> 00:37:39,210
whether it's a grocery store,
a bar, a political campaign,

882
00:37:39,210 --> 00:37:41,130
or something else,
you're a merchant.

883
00:37:41,130 --> 00:37:44,640
You don't want to deal with a
bunch of credit card companies.

884
00:37:44,640 --> 00:37:47,840
You want one payment
system processor.

885
00:37:47,840 --> 00:37:49,350
And you chose First Data.

886
00:37:49,350 --> 00:37:55,540
We chose Stripe in
that circumstance.

887
00:37:55,540 --> 00:37:58,710
So those are the networks.

888
00:37:58,710 --> 00:38:01,590
Then on the other side
there's the merchant bank.

889
00:38:01,590 --> 00:38:04,950
For the Hillary campaign
it was Amalgamated Bank.

890
00:38:04,950 --> 00:38:05,830
Who is your bank?

891
00:38:05,830 --> 00:38:07,350
Do you care [INAUDIBLE]?

892
00:38:07,350 --> 00:38:08,510
AUDIENCE: It was in Korea.

893
00:38:08,510 --> 00:38:09,090
GARY GENSLER: It was in Korea?

894
00:38:09,090 --> 00:38:09,715
AUDIENCE: Yeah.

895
00:38:09,715 --> 00:38:12,570
GARY GENSLER: Korea
Bank One, let's call it.

896
00:38:12,570 --> 00:38:13,600
Korea Bank One.

897
00:38:16,410 --> 00:38:19,410
But the customer is all of a
sudden, it's at five layers

898
00:38:19,410 --> 00:38:22,770
before it gets to your bank.

899
00:38:22,770 --> 00:38:24,750
And then, of course,
you have access

900
00:38:24,750 --> 00:38:26,830
and so forth, and
you're the customer.

901
00:38:26,830 --> 00:38:29,250
So all of these steps
are in this chain.

902
00:38:29,250 --> 00:38:34,050
This is modern payment
systems, pretty detailed.

903
00:38:34,050 --> 00:38:35,383
Digital wallets we talked about.

904
00:38:35,383 --> 00:38:37,842
We're going to say a little
bit more about digital wallets.

905
00:38:37,842 --> 00:38:39,960
And the big question is
whether cryptocurrency

906
00:38:39,960 --> 00:38:41,490
is going to have something.

907
00:38:41,490 --> 00:38:44,010
But before you get
to digital wallets,

908
00:38:44,010 --> 00:38:45,810
this is the payment stream.

909
00:38:45,810 --> 00:38:47,520
And part of the
answer, Alin, too

910
00:38:47,520 --> 00:38:51,180
is why you need authorization,
clearing, and settlement

911
00:38:51,180 --> 00:38:53,250
is there's a lot
of steps in this,

912
00:38:53,250 --> 00:38:56,720
in the traditional
movement of money.

913
00:38:56,720 --> 00:38:59,410
And this is just domestic.

914
00:38:59,410 --> 00:39:03,510
You can add digital wallets,
and you could add Bitcoin.

915
00:39:03,510 --> 00:39:05,210
And the question is,
does cryptocurrency

916
00:39:05,210 --> 00:39:07,520
skip all this stuff
in the middle?

917
00:39:07,520 --> 00:39:11,990
And can digital wallets jump
start over some of these?

918
00:39:11,990 --> 00:39:13,670
And the answer is,
digital wallets

919
00:39:13,670 --> 00:39:16,460
need to do all these things
if they're going to jump.

920
00:39:16,460 --> 00:39:18,140
They have to store
the value; they

921
00:39:18,140 --> 00:39:22,480
have to do some authorization;
the equivalent of clearing,

922
00:39:22,480 --> 00:39:24,760
if there's any
clearing; and then move

923
00:39:24,760 --> 00:39:28,140
it, which is settlement.

924
00:39:28,140 --> 00:39:29,838
So these are the fees.

925
00:39:29,838 --> 00:39:30,380
You want to--

926
00:39:30,380 --> 00:39:32,040
ALIN DRAGOS: Can I
add a few things?

927
00:39:32,040 --> 00:39:32,700
GARY GENSLER: Yeah, please.

928
00:39:32,700 --> 00:39:33,360
ALIN DRAGOS: A few minutes.

929
00:39:33,360 --> 00:39:34,940
GARY GENSLER: No, take more.

930
00:39:34,940 --> 00:39:35,520
ALIN DRAGOS: I wanted to
say a couple of things.

931
00:39:35,520 --> 00:39:36,090
Right?

932
00:39:36,090 --> 00:39:40,320
First of all, you'll have
to appreciate the fact

933
00:39:40,320 --> 00:39:43,750
that this is a system
created by banks for banks.

934
00:39:43,750 --> 00:39:44,250
Right?

935
00:39:44,250 --> 00:39:45,540
And I think that--

936
00:39:45,540 --> 00:39:47,100
it shows, right?

937
00:39:47,100 --> 00:39:48,960
This entire value
chain, which we're

938
00:39:48,960 --> 00:39:50,910
going to go through
right afterwards,

939
00:39:50,910 --> 00:39:55,260
basically relies on
consumer using this process

940
00:39:55,260 --> 00:39:57,030
to pay a recipient.

941
00:39:57,030 --> 00:39:59,010
It can be a merchant
or another person.

942
00:39:59,010 --> 00:40:00,180
Right?

943
00:40:00,180 --> 00:40:03,420
Merchants like the fact
that they get value.

944
00:40:03,420 --> 00:40:05,860
They don't have the type that
have to pay a lot of money.

945
00:40:05,860 --> 00:40:08,250
So there's an inner
intention there.

946
00:40:08,250 --> 00:40:10,998
And that intention manifests
itself in a number of ways.

947
00:40:10,998 --> 00:40:11,790
But it's important.

948
00:40:11,790 --> 00:40:12,290
Right.

949
00:40:12,290 --> 00:40:14,370
So just the dynamics
are [INAUDIBLE]

950
00:40:14,370 --> 00:40:19,017
to where this black box out
here getting money over here

951
00:40:19,017 --> 00:40:20,850
automatically have kind
of a [INAUDIBLE] way

952
00:40:20,850 --> 00:40:22,750
to the banks for the merchants.

953
00:40:22,750 --> 00:40:24,050
Right?

954
00:40:24,050 --> 00:40:26,580
The interesting piece here
is that this access method

955
00:40:26,580 --> 00:40:30,390
is probably the most underrated
aspect of this entire bank

956
00:40:30,390 --> 00:40:31,020
chain.

957
00:40:31,020 --> 00:40:33,180
If you think of anytime
you go up to a merchant

958
00:40:33,180 --> 00:40:36,570
or to a website or
whatever, whoever

959
00:40:36,570 --> 00:40:38,112
manages that access
point is probably

960
00:40:38,112 --> 00:40:39,153
the most important thing.

961
00:40:39,153 --> 00:40:41,160
You may have the best
solution out there.

962
00:40:41,160 --> 00:40:43,306
If you're not in
that access method,

963
00:40:43,306 --> 00:40:44,810
might as well not have it.

964
00:40:44,810 --> 00:40:46,560
And that, I think, is
something to import.

965
00:40:46,560 --> 00:40:49,770
Cause as you're going to
go through [INAUDIBLE]

966
00:40:49,770 --> 00:40:52,470
where does value accumulate in
this value chain, what you're

967
00:40:52,470 --> 00:40:55,053
going to see is more often than
not [INAUDIBLE] methods aren't

968
00:40:55,053 --> 00:40:57,807
going to [INAUDIBLE] point to
actually any meaningful change.

969
00:40:57,807 --> 00:40:59,390
Because those are
hard changes, right?

970
00:40:59,390 --> 00:41:02,860
For a large merchant, changing
anything at access point,

971
00:41:02,860 --> 00:41:03,480
it's hard.

972
00:41:03,480 --> 00:41:04,980
So that's something
to keep in mind.

973
00:41:04,980 --> 00:41:05,550
Right?

974
00:41:05,550 --> 00:41:07,680
The other thing I
would say is one

975
00:41:07,680 --> 00:41:09,870
of the things where
we talked about how

976
00:41:09,870 --> 00:41:11,970
exactly to get big
change at scale,

977
00:41:11,970 --> 00:41:13,830
and you have to have two things.

978
00:41:13,830 --> 00:41:17,015
You have to have technology,
which is this is OK.

979
00:41:17,015 --> 00:41:17,640
It's not great.

980
00:41:17,640 --> 00:41:17,930
Right?

981
00:41:17,930 --> 00:41:18,640
This is kind of old.

982
00:41:18,640 --> 00:41:21,057
It used to be really great
about two or three decades ago,

983
00:41:21,057 --> 00:41:22,770
but this is not [INAUDIBLE].

984
00:41:22,770 --> 00:41:25,920
But this is an unbelievable
business model.

985
00:41:25,920 --> 00:41:28,430
And if you look at the way
the business model operates,

986
00:41:28,430 --> 00:41:29,430
consumer love it.

987
00:41:29,430 --> 00:41:30,210
Consumers love it.

988
00:41:30,210 --> 00:41:31,090
So consumer gets--

989
00:41:31,090 --> 00:41:31,920
I can pay wherever.

990
00:41:31,920 --> 00:41:32,420
It's great.

991
00:41:32,420 --> 00:41:33,700
Right?

992
00:41:33,700 --> 00:41:34,640
Banks love it.

993
00:41:34,640 --> 00:41:36,515
You know, they make a
lot of money out of it.

994
00:41:36,515 --> 00:41:38,550
They get what's
called [INAUDIBLE]..

995
00:41:38,550 --> 00:41:41,810
All these other vendors out
here exist because of it.

996
00:41:41,810 --> 00:41:45,840
Merchants, I would say
are kind of neutral to it.

997
00:41:45,840 --> 00:41:49,350
They dislike many aspects of
it, but then processing cash

998
00:41:49,350 --> 00:41:50,410
is also expensive.

999
00:41:50,410 --> 00:41:51,000
Right?

1000
00:41:51,000 --> 00:41:53,062
So if you're trying
to understand where do

1001
00:41:53,062 --> 00:41:54,270
I want to change things here?

1002
00:41:54,270 --> 00:41:56,370
A lot of the folks in
the actual payment space

1003
00:41:56,370 --> 00:41:58,370
will tell you, well,
payments is kind of-- you

1004
00:41:58,370 --> 00:41:59,370
know-- it kind of works.

1005
00:41:59,370 --> 00:41:59,870
Right?

1006
00:41:59,870 --> 00:42:02,160
It really doesn't work
if you're on the fringes.

1007
00:42:02,160 --> 00:42:04,540
But if you're in the
middle, it kind of works.

1008
00:42:04,540 --> 00:42:06,120
It's a pretty good system.

1009
00:42:06,120 --> 00:42:08,915
And the beauty of the existing
model we have right now

1010
00:42:08,915 --> 00:42:11,040
is actually the business
model on the way it works.

1011
00:42:11,040 --> 00:42:12,995
So I'll pause right
there [INAUDIBLE]..

1012
00:42:12,995 --> 00:42:14,370
GARY GENSLER: But
it's expensive.

1013
00:42:14,370 --> 00:42:15,330
ALIN DRAGOS: It's
expensive [INAUDIBLE]..

1014
00:42:15,330 --> 00:42:17,038
GARY GENSLER: It's
got a lot of friction.

1015
00:42:19,650 --> 00:42:21,870
World Bank statistics
say payment systems

1016
00:42:21,870 --> 00:42:27,290
around the globe take a half
a percent to 1% of economies.

1017
00:42:27,290 --> 00:42:28,748
Now economies would
be much smaller

1018
00:42:28,748 --> 00:42:31,082
if we didn't have payment
systems, because we would have

1019
00:42:31,082 --> 00:42:32,950
never probably come
out of the dark ages

1020
00:42:32,950 --> 00:42:35,800
without some form
of payment systems.

1021
00:42:35,800 --> 00:42:38,230
And in the last 50
years I think it's

1022
00:42:38,230 --> 00:42:42,650
been part of how economic
growth has continued

1023
00:42:42,650 --> 00:42:44,550
in the internet phase.

1024
00:42:44,550 --> 00:42:49,480
You know, how we all
transact on the internet.

1025
00:42:49,480 --> 00:42:52,920
But if you take nothing
other than, it's complicated

1026
00:42:52,920 --> 00:42:55,990
and there's a lot of
points of friction,

1027
00:42:55,990 --> 00:42:57,240
then I've done my job.

1028
00:42:57,240 --> 00:43:00,240
You don't need to know all the
individual pieces unless you

1029
00:43:00,240 --> 00:43:02,430
actually personally
want to compete

1030
00:43:02,430 --> 00:43:11,200
with PayPal or Venmo or
Zelle or Alipay, which

1031
00:43:11,200 --> 00:43:13,247
is what you might do one day.

1032
00:43:13,247 --> 00:43:14,330
ALIN DRAGOS: I don't know.

1033
00:43:14,330 --> 00:43:16,715
GARY GENSLER: Yeah,
just a rumor has it.

1034
00:43:16,715 --> 00:43:19,657
ALIN DRAGOS: Well, the funny
thing is, as you'll see,

1035
00:43:19,657 --> 00:43:21,740
every now and then there
comes a player that says,

1036
00:43:21,740 --> 00:43:23,270
we're going to disrupt payments.

1037
00:43:23,270 --> 00:43:26,990
And it is one of the
hardest products to disrupt.

1038
00:43:26,990 --> 00:43:29,930
GARY GENSLER: It's a hard place
to disrupt, largely, I think,

1039
00:43:29,930 --> 00:43:32,690
because of the
collective action issues.

1040
00:43:32,690 --> 00:43:34,910
There's millions
of merchants that

1041
00:43:34,910 --> 00:43:38,510
rely on dozens of payment
system providers that, yes,

1042
00:43:38,510 --> 00:43:43,160
only rely on three to six credit
card or debit card companies.

1043
00:43:43,160 --> 00:43:46,030
In any country there's
usually two to three dominant.

1044
00:43:46,030 --> 00:43:49,100
It's not always Visa and
MasterCard, of course,

1045
00:43:49,100 --> 00:43:50,930
not in China, for instance.

1046
00:43:50,930 --> 00:43:56,920
But the merchant end has such
a huge collective action.

1047
00:43:56,920 --> 00:43:59,845
And that's why Alin focused
on the access points.

1048
00:43:59,845 --> 00:44:01,470
If you're going to
disrupt this, you've

1049
00:44:01,470 --> 00:44:05,880
got to figure out some way to
get adoption-- broad adoption--

1050
00:44:05,880 --> 00:44:08,220
on the merchant class.

1051
00:44:08,220 --> 00:44:09,570
The money.

1052
00:44:09,570 --> 00:44:14,640
This was from the Bloomberg
article, the Bloomberg article

1053
00:44:14,640 --> 00:44:17,510
that was reviewing China.

1054
00:44:17,510 --> 00:44:23,150
$2.75 in the US on average comes
out of every $100 purchase.

1055
00:44:23,150 --> 00:44:27,980
And by the way, if you make
$1,000 purchase, it's $27.

1056
00:44:27,980 --> 00:44:31,550
And I used to think when I
was on the CFO of the Hillary

1057
00:44:31,550 --> 00:44:33,470
campaign, if somebody
was generous enough

1058
00:44:33,470 --> 00:44:36,740
to give us $2,700, which
was the legal limit

1059
00:44:36,740 --> 00:44:41,570
to a political candidate
during that cycle,

1060
00:44:41,570 --> 00:44:48,320
we were paying 70
US dollars to this,

1061
00:44:48,320 --> 00:44:53,280
to that, to help
elect a president.

1062
00:44:53,280 --> 00:45:01,200
Or in a billion dollar
campaign, 2.7% is $27 million.

1063
00:45:01,200 --> 00:45:03,240
Now I'm not saying
we spent $27 million

1064
00:45:03,240 --> 00:45:05,580
on this, because we
were able to encourage

1065
00:45:05,580 --> 00:45:09,690
some donors to give us checks.

1066
00:45:09,690 --> 00:45:12,900
But I will tell you,
even being recorded,

1067
00:45:12,900 --> 00:45:16,410
in the modern economy it's
hard to convince somebody

1068
00:45:16,410 --> 00:45:18,810
to give you a check, even
somebody who is generously

1069
00:45:18,810 --> 00:45:20,910
giving their support to
a political candidate

1070
00:45:20,910 --> 00:45:22,500
to win the presidency.

1071
00:45:22,500 --> 00:45:26,520
And you say, well, we
actually get $70 more

1072
00:45:26,520 --> 00:45:28,730
if you give us a check.

1073
00:45:28,730 --> 00:45:31,800
Yeah, but I got my
credit card here.

1074
00:45:31,800 --> 00:45:32,970
So, yes.

1075
00:45:32,970 --> 00:45:35,860
AUDIENCE: How would that
work if say, you gave 27.70?

1076
00:45:35,860 --> 00:45:38,700
And so the political
campaign actually

1077
00:45:38,700 --> 00:45:41,745
ended up with $2,700
in the bucket.

1078
00:45:41,745 --> 00:45:45,030
GARY GENSLER: So this is a
legal question for the Federal

1079
00:45:45,030 --> 00:45:47,340
Election Commission lawyers.

1080
00:45:47,340 --> 00:45:49,170
But we asked that question.

1081
00:45:49,170 --> 00:45:50,790
We did ask that question.

1082
00:45:50,790 --> 00:45:52,500
And it's not allowed.

1083
00:45:52,500 --> 00:45:56,100
It's not allowed, because it's
going beyond the legal limit

1084
00:45:56,100 --> 00:45:58,710
under our federal laws for
campaign contributions.

1085
00:45:58,710 --> 00:46:05,200
That would be deemed to be
a 2,770 dollar contribution.

1086
00:46:05,200 --> 00:46:09,390
Even if somehow the donor
is paying the $70 directly,

1087
00:46:09,390 --> 00:46:10,680
we weren't able to solve--

1088
00:46:10,680 --> 00:46:14,430
by the way, we were not able to
solve that, because the payment

1089
00:46:14,430 --> 00:46:19,860
system provider, in our
case, Stripe or First Data,

1090
00:46:19,860 --> 00:46:23,970
is actually a vendor
for the merchant.

1091
00:46:23,970 --> 00:46:27,240
And the political campaign
in essence is the merchant.

1092
00:46:27,240 --> 00:46:27,740
You with me?

1093
00:46:27,740 --> 00:46:28,525
Shawn.

1094
00:46:28,525 --> 00:46:30,900
AUDIENCE: Well, when you make
a, for instance, $1 million

1095
00:46:30,900 --> 00:46:32,350
donation, it's not that--

1096
00:46:32,350 --> 00:46:33,600
GARY GENSLER: A what donation?

1097
00:46:33,600 --> 00:46:34,740
AUDIENCE: If you
make a $1 million--

1098
00:46:34,740 --> 00:46:35,730
GARY GENSLER: A
million dollars, that's

1099
00:46:35,730 --> 00:46:36,938
breaking the law right there.

1100
00:46:36,938 --> 00:46:38,970
But OK.

1101
00:46:38,970 --> 00:46:39,903
I'm big filmed.

1102
00:46:39,903 --> 00:46:40,570
I just want to--

1103
00:46:40,570 --> 00:46:41,430
AUDIENCE: Yeah.

1104
00:46:41,430 --> 00:46:43,380
You're not actually
making a million,

1105
00:46:43,380 --> 00:46:47,760
because you get perhaps
1.5% or 2% of the points

1106
00:46:47,760 --> 00:46:48,962
back on your credit.

1107
00:46:48,962 --> 00:46:49,670
GARY GENSLER: Oh.

1108
00:46:49,670 --> 00:46:50,940
Yeah, right.

1109
00:46:50,940 --> 00:46:54,000
So Sean is just observing
that well, actually the donor

1110
00:46:54,000 --> 00:46:56,140
is getting some points back.

1111
00:46:56,140 --> 00:46:59,660
So this is just averages, and
averages sometimes mask things.

1112
00:46:59,660 --> 00:47:06,430
But $2.20 of the $2.75 actually
goes back to the quote--

1113
00:47:06,430 --> 00:47:08,870
"issuing bank."

1114
00:47:08,870 --> 00:47:11,820
So if you're doing something
on Bank of America,

1115
00:47:11,820 --> 00:47:14,390
Bank of America might
then give you points

1116
00:47:14,390 --> 00:47:16,010
and share generously.

1117
00:47:16,010 --> 00:47:18,560
And a lot of the bank
programs will share maybe up

1118
00:47:18,560 --> 00:47:20,060
to half of that.

1119
00:47:20,060 --> 00:47:25,520
You might get $1 per every $100
or one point for every 100.

1120
00:47:25,520 --> 00:47:26,840
But they're getting $2.20.

1121
00:47:26,840 --> 00:47:29,295
But you're right.

1122
00:47:29,295 --> 00:47:30,920
There were some donors
that said, well,

1123
00:47:30,920 --> 00:47:32,780
I'm using my American
Express card.

1124
00:47:32,780 --> 00:47:34,310
I'm getting my points back.

1125
00:47:34,310 --> 00:47:36,080
And if they gave $1,000--

1126
00:47:36,080 --> 00:47:38,510
not a million-- you know,
that they would maybe

1127
00:47:38,510 --> 00:47:42,750
get the equivalent of
$10 of points back.

1128
00:47:42,750 --> 00:47:44,480
That is correct.

1129
00:47:44,480 --> 00:47:48,620
So merchants aren't
enthusiastic about this split.

1130
00:47:48,620 --> 00:47:50,960
This is the US model.

1131
00:47:50,960 --> 00:47:54,450
It does not cost
this much in India.

1132
00:47:54,450 --> 00:47:57,700
It does not cost
this much in China.

1133
00:47:57,700 --> 00:47:59,460
So in many other
countries the jump

1134
00:47:59,460 --> 00:48:03,270
started around the credit
card payment systems.

1135
00:48:03,270 --> 00:48:04,510
It costs a lot less.

1136
00:48:04,510 --> 00:48:06,720
But in the US,
our payment system

1137
00:48:06,720 --> 00:48:10,440
is significantly built
on credit card rails--

1138
00:48:10,440 --> 00:48:15,750
rails like tracks-- it's called.

1139
00:48:15,750 --> 00:48:16,455
So cross-border.

1140
00:48:16,455 --> 00:48:18,330
I'm not going to go
through these two charts.

1141
00:48:18,330 --> 00:48:20,257
These were-- Shimon were you--

1142
00:48:20,257 --> 00:48:22,590
AUDIENCE: I think the US is
somewhat unique in the sense

1143
00:48:22,590 --> 00:48:26,160
that there's bundling of
the payment as a service,

1144
00:48:26,160 --> 00:48:27,380
and the credit.

1145
00:48:27,380 --> 00:48:27,880
Right?

1146
00:48:27,880 --> 00:48:28,360
GARY GENSLER: Right.

1147
00:48:28,360 --> 00:48:30,193
AUDIENCE: And those are
being unbundled now.

1148
00:48:30,193 --> 00:48:32,410
But doesn't have to be the case.

1149
00:48:32,410 --> 00:48:33,630
And it's not always the case.

1150
00:48:33,630 --> 00:48:34,040
Right.

1151
00:48:34,040 --> 00:48:36,540
GARY GENSLER: So Shimon's point
is that we, in this country,

1152
00:48:36,540 --> 00:48:39,450
have bundled the credit
provision with the payment

1153
00:48:39,450 --> 00:48:40,770
provision.

1154
00:48:40,770 --> 00:48:45,450
And there are many of us that
when the merchant says, give me

1155
00:48:45,450 --> 00:48:47,700
your payment data, we
give him a credit card,

1156
00:48:47,700 --> 00:48:54,810
even though we might, in fact,
regularly pay off our credit

1157
00:48:54,810 --> 00:48:55,920
card on a monthly.

1158
00:48:55,920 --> 00:48:57,780
I mean, many Americans don't.

1159
00:48:57,780 --> 00:48:59,460
But many Americans do.

1160
00:48:59,460 --> 00:49:02,880
So it's this bundling of
payment and credit services.

1161
00:49:02,880 --> 00:49:05,580
And you're absolutely right,
because when the internet came

1162
00:49:05,580 --> 00:49:10,560
along in our country, we had
established credit card payment

1163
00:49:10,560 --> 00:49:11,970
rails.

1164
00:49:11,970 --> 00:49:14,130
And most of the internet
payments, whether it

1165
00:49:14,130 --> 00:49:16,830
was for your mortgage--

1166
00:49:16,830 --> 00:49:18,690
well, usually not
mortgage, but whether it

1167
00:49:18,690 --> 00:49:23,820
was for your utilities or
your small dollar payments

1168
00:49:23,820 --> 00:49:26,250
were built on top of
the credit card rails.

1169
00:49:26,250 --> 00:49:29,370
Your mortgage-- most mortgage
lenders would say, no.

1170
00:49:29,370 --> 00:49:32,850
I don't want to pay the 2.7%.

1171
00:49:36,490 --> 00:49:38,290
We didn't have
enough market power

1172
00:49:38,290 --> 00:49:40,060
even as a political
campaign to get

1173
00:49:40,060 --> 00:49:42,790
people to give it
to us in checks,

1174
00:49:42,790 --> 00:49:46,780
or to Zelle payment to us.

1175
00:49:46,780 --> 00:49:49,540
But this 2.7 is economic rents.

1176
00:49:49,540 --> 00:49:52,540
This is a form of
economic rents.

1177
00:49:52,540 --> 00:49:53,050
Fraud.

1178
00:49:53,050 --> 00:49:56,905
Does anybody know the figures
for frauds in this country?

1179
00:49:56,905 --> 00:49:58,780
I went and looked at it
in the last two days.

1180
00:49:58,780 --> 00:50:01,180
So it was not in the readings.

1181
00:50:01,180 --> 00:50:05,060
Total fraud is about
10 to 20 basis points.

1182
00:50:05,060 --> 00:50:10,150
So of this 270 basis
points-- or 2.7%--

1183
00:50:10,150 --> 00:50:13,460
less than 10% of it's really
going to pay for fraud.

1184
00:50:13,460 --> 00:50:17,000
Now fraud is a really big
thing, don't get me wrong.

1185
00:50:17,000 --> 00:50:20,980
But it's a small
portion of this.

1186
00:50:20,980 --> 00:50:24,160
It's not the dominant
feature here.

1187
00:50:24,160 --> 00:50:26,930
AUDIENCE: What is the credit
risk cost that's covered

1188
00:50:26,930 --> 00:50:29,335
by that 2.20?

1189
00:50:29,335 --> 00:50:32,726
So the bank is-- there's
typical losses on credit cards,

1190
00:50:32,726 --> 00:50:34,510
[INAUDIBLE].

1191
00:50:34,510 --> 00:50:36,010
AUDIENCE: So one
thing I would say--

1192
00:50:36,010 --> 00:50:37,660
I think that point
that was just made

1193
00:50:37,660 --> 00:50:39,380
was-- it was really just right.

1194
00:50:39,380 --> 00:50:41,360
You do want to just
conceptually think

1195
00:50:41,360 --> 00:50:43,600
about payments--
digital payments--

1196
00:50:43,600 --> 00:50:45,040
and credit as different.

1197
00:50:45,040 --> 00:50:47,690
They're just different products.

1198
00:50:47,690 --> 00:50:51,160
So typically, extending
credit to someone,

1199
00:50:51,160 --> 00:50:52,660
it's a very personal
relationship.

1200
00:50:52,660 --> 00:50:53,420
Right?

1201
00:50:53,420 --> 00:50:56,380
You cannot really-- you can look
at [INAUDIBLE] and basically

1202
00:50:56,380 --> 00:50:56,950
make a guess.

1203
00:50:56,950 --> 00:50:59,020
Right?

1204
00:50:59,020 --> 00:51:01,438
[INAUDIBLE] there's
so-- some type

1205
00:51:01,438 --> 00:51:02,980
of [INAUDIBLE] called
debit payments.

1206
00:51:02,980 --> 00:51:03,480
Right?

1207
00:51:03,480 --> 00:51:05,230
When you're using
money you already have.

1208
00:51:05,230 --> 00:51:07,850
Well, that credit risk is much,
much smaller than the money

1209
00:51:07,850 --> 00:51:10,210
that you're not going to
pay me back if [INAUDIBLE]..

1210
00:51:10,210 --> 00:51:14,350
So I would say the big thing
that I would encourage everyone

1211
00:51:14,350 --> 00:51:15,730
is to separate the two.

1212
00:51:15,730 --> 00:51:18,550
And more to the point of
a what is the credit risk.

1213
00:51:22,138 --> 00:51:23,680
I would say it's
probably [? half. ?]

1214
00:51:23,680 --> 00:51:25,388
GARY GENSLER: So I
don't know the number,

1215
00:51:25,388 --> 00:51:26,500
and I'll research it.

1216
00:51:26,500 --> 00:51:31,960
But I would caution to say
the compensation for credit

1217
00:51:31,960 --> 00:51:33,520
doesn't only come out of this.

1218
00:51:33,520 --> 00:51:35,860
It also comes out
of the anywhere

1219
00:51:35,860 --> 00:51:39,610
from 18% to 27% interest
rates they're charging.

1220
00:51:39,610 --> 00:51:47,100
So when you think about it
like, it's a dual model.

1221
00:51:47,100 --> 00:51:51,280
It's this, which is not
solely for the payment,

1222
00:51:51,280 --> 00:51:55,330
but I'm saying this is largely
for using the credit card rails

1223
00:51:55,330 --> 00:51:57,820
as a payment rail.

1224
00:51:57,820 --> 00:52:00,400
And then you charge an
interest rate spread,

1225
00:52:00,400 --> 00:52:04,390
which is over 1,000
basis points, usually.

1226
00:52:04,390 --> 00:52:08,540
The spread versus
underlying bank borrowing

1227
00:52:08,540 --> 00:52:12,360
tends to be anywhere from
1,000 to 1,800 basis points

1228
00:52:12,360 --> 00:52:14,480
on some of these.

1229
00:52:14,480 --> 00:52:17,270
But I'm not saying
it's separate.

1230
00:52:17,270 --> 00:52:18,860
It's two business models.

1231
00:52:18,860 --> 00:52:20,630
Let me churn on.

1232
00:52:20,630 --> 00:52:23,330
AUDIENCE: I'm just going to
[INAUDIBLE] a brief question.

1233
00:52:23,330 --> 00:52:24,710
Is that just for credit cards?

1234
00:52:24,710 --> 00:52:26,520
Or is it debit cards as well?

1235
00:52:26,520 --> 00:52:29,190
GARY GENSLER: So this
is for credit cards.

1236
00:52:29,190 --> 00:52:33,350
Debit cards tended
to be about the same.

1237
00:52:33,350 --> 00:52:37,490
But after the Dodd-Frank Act--
the regulatory reform bill here

1238
00:52:37,490 --> 00:52:38,990
in the US--

1239
00:52:38,990 --> 00:52:40,610
and the Durbin Amendment--

1240
00:52:40,610 --> 00:52:42,890
Senator Dick Durbin of
Illinois had an amendment

1241
00:52:42,890 --> 00:52:47,680
where debit cards had to be
priced closer to cost plus--

1242
00:52:47,680 --> 00:52:50,920
I can't remember if it said
reasonable return on capital.

1243
00:52:50,920 --> 00:52:53,840
And there was a Federal
Reserve rule making on that.

1244
00:52:53,840 --> 00:52:57,080
Debit card numbers came down
significantly from this.

1245
00:52:57,080 --> 00:52:58,650
I just don't know
the exact figures.

1246
00:52:58,650 --> 00:53:01,100
But it's over 100 basis
points still on debit cards.

1247
00:53:01,100 --> 00:53:04,230
But it's not 270.

1248
00:53:04,230 --> 00:53:05,280
Good question.

1249
00:53:05,280 --> 00:53:07,170
So I'm not going to go
through the details.

1250
00:53:07,170 --> 00:53:10,818
But cross-border payments
have more complexity.

1251
00:53:10,818 --> 00:53:12,610
I'm not going to go
through, but the paym--

1252
00:53:12,610 --> 00:53:15,330
this is the what I'll
call the front end.

1253
00:53:15,330 --> 00:53:18,570
You have a payer on the left
and a payee on the right.

1254
00:53:18,570 --> 00:53:21,000
Think of somebody in the US
sending money to somebody

1255
00:53:21,000 --> 00:53:23,970
in the Philippines, maybe.

1256
00:53:23,970 --> 00:53:27,990
I need on my side a
payment system processor.

1257
00:53:27,990 --> 00:53:29,400
That's the bubble on the top.

1258
00:53:29,400 --> 00:53:32,490
I need them to have some
payment system processor.

1259
00:53:32,490 --> 00:53:35,250
They're both ends
on the front end.

1260
00:53:35,250 --> 00:53:41,760
So just think more complexity,
more friction in the system.

1261
00:53:41,760 --> 00:53:45,270
And really the reason is, is
because you're jumping from one

1262
00:53:45,270 --> 00:53:47,033
money to another money.

1263
00:53:47,033 --> 00:53:49,200
Or another way you can think
of it as you're usually

1264
00:53:49,200 --> 00:53:52,950
jumping from one ledger system
to another ledger system,

1265
00:53:52,950 --> 00:53:57,060
if you're thinking like the
computers and recording.

1266
00:53:57,060 --> 00:54:00,570
And the back end--

1267
00:54:00,570 --> 00:54:03,630
I should have called this back
end, but I labeled both of them

1268
00:54:03,630 --> 00:54:05,910
front end, sorry--

1269
00:54:05,910 --> 00:54:09,138
has a bunch of
things inside of it.

1270
00:54:09,138 --> 00:54:10,680
And the one I'm just
going to mention

1271
00:54:10,680 --> 00:54:13,440
is correspondent banking.

1272
00:54:13,440 --> 00:54:18,330
It is a feature that came
out of centuries of banking.

1273
00:54:18,330 --> 00:54:21,370
Arguably, you might not
need it as much now.

1274
00:54:21,370 --> 00:54:25,680
But the concept was, I'm a
small regional bank in the US.

1275
00:54:25,680 --> 00:54:30,900
I'm sending something to
somebody in the Philippines.

1276
00:54:30,900 --> 00:54:32,880
The Philippines
doesn't recognize

1277
00:54:32,880 --> 00:54:35,730
this small regional bank,
let's say, in Kansas.

1278
00:54:35,730 --> 00:54:38,880
I need a correspondent
bank that they can trust.

1279
00:54:38,880 --> 00:54:43,380
So it's a cost of trust that
it could go from one country's

1280
00:54:43,380 --> 00:54:50,630
bank through a bank called
a correspondent bank, which

1281
00:54:50,630 --> 00:54:53,630
had trust, to the
other country's bank.

1282
00:54:53,630 --> 00:54:55,610
Or maybe you even had
correspondent banks

1283
00:54:55,610 --> 00:54:56,420
in both countries.

1284
00:54:56,420 --> 00:55:01,850
But usually you had one
international bank in between.

1285
00:55:01,850 --> 00:55:03,480
Hugo.

1286
00:55:03,480 --> 00:55:08,130
AUDIENCE: Hypothetically,
if there became enough trust

1287
00:55:08,130 --> 00:55:10,200
in the Bitcoin
network, could that

1288
00:55:10,200 --> 00:55:12,900
act as the correspondent bank?

1289
00:55:12,900 --> 00:55:16,290
Where like you're in the US,
you go to a Chase or whatever.

1290
00:55:16,290 --> 00:55:18,450
They transfer your US
dollars to Bitcoin.

1291
00:55:18,450 --> 00:55:20,398
You go over to the
Philippines, they transfer

1292
00:55:20,398 --> 00:55:21,440
your Bitcoin [INAUDIBLE].

1293
00:55:21,440 --> 00:55:23,430
There is no need for that.

1294
00:55:23,430 --> 00:55:25,410
GARY GENSLER: So Hugo's
asking whether Bitcoin

1295
00:55:25,410 --> 00:55:28,650
or any cryptocurrency could play
that role of a correspondent

1296
00:55:28,650 --> 00:55:33,580
bank, or effectively play the
bridge currency between fiat

1297
00:55:33,580 --> 00:55:37,270
to crypto, US dollar
to Bitcoin, you said.

1298
00:55:37,270 --> 00:55:39,210
And what was the other country?

1299
00:55:39,210 --> 00:55:40,780
The Philippines.

1300
00:55:40,780 --> 00:55:43,190
Which is a peso?

1301
00:55:43,190 --> 00:55:45,070
What's that?

1302
00:55:45,070 --> 00:55:45,570
Peso.

1303
00:55:45,570 --> 00:55:46,080
Yeah.

1304
00:55:46,080 --> 00:55:51,450
So US dollar fiat to crypto
Bitcoin to Philippine peso.

1305
00:55:51,450 --> 00:55:54,720
That is called a bridge
crypto or bridge currency.

1306
00:55:54,720 --> 00:55:59,010
That's, in fact, what Ripple
is trying to do with XRP.

1307
00:55:59,010 --> 00:56:04,950
So Ripple is a company that
started as a payment messaging

1308
00:56:04,950 --> 00:56:08,730
service to compete with Swift.

1309
00:56:08,730 --> 00:56:12,270
And that messaging
service, which

1310
00:56:12,270 --> 00:56:16,110
we'll talk about more Thursday,
has been adopted by many banks.

1311
00:56:16,110 --> 00:56:19,410
More recently in 2018 they
rolled out a prototype

1312
00:56:19,410 --> 00:56:22,950
of using a crypto token--

1313
00:56:22,950 --> 00:56:26,160
XRP-- as a bridge currency.

1314
00:56:26,160 --> 00:56:28,530
I would say yes,
that is possible.

1315
00:56:28,530 --> 00:56:33,990
I think there's an issue
also about volatility.

1316
00:56:33,990 --> 00:56:41,510
So if you're moving fiat
dollar to crypto Bitcoin XRP

1317
00:56:41,510 --> 00:56:47,920
to fiat, if you have
a lot of volatility,

1318
00:56:47,920 --> 00:56:51,630
that means it's a less--

1319
00:56:51,630 --> 00:56:53,560
it could be costly.

1320
00:56:53,560 --> 00:56:56,110
But if it's stable
value, so you can

1321
00:56:56,110 --> 00:56:58,900
you can lower the
cost two ways--

1322
00:56:58,900 --> 00:57:04,160
lowering the volatility of
the crypto or lower the time.

1323
00:57:04,160 --> 00:57:06,770
And XRP believes they
have a solution that

1324
00:57:06,770 --> 00:57:09,120
can be down to seconds.

1325
00:57:09,120 --> 00:57:12,290
And thus, even if it's
volatility, that in seconds

1326
00:57:12,290 --> 00:57:13,385
it won't move as much.

1327
00:57:13,385 --> 00:57:14,760
And the friction
will be that you

1328
00:57:14,760 --> 00:57:21,360
have to sell dollars to buy XRP,
and then sell XRP to buy peso.

1329
00:57:21,360 --> 00:57:25,110
Or you can interpose
any bridge currency.

1330
00:57:25,110 --> 00:57:28,830
One of the most significant
opportunities for stable value

1331
00:57:28,830 --> 00:57:31,830
tokens that we'll talk about
in a few classes is maybe

1332
00:57:31,830 --> 00:57:34,170
is what we can call it
is a bridge currency

1333
00:57:34,170 --> 00:57:36,017
for cross-border.

1334
00:57:36,017 --> 00:57:36,600
AUDIENCE: Yes.

1335
00:57:36,600 --> 00:57:38,960
The question is, what
will be the fees?

1336
00:57:38,960 --> 00:57:43,120
And if it makes sense from
an economic [INAUDIBLE]..

1337
00:57:43,120 --> 00:57:46,620
GARY GENSLER: So Western Union
and other remittance companies

1338
00:57:46,620 --> 00:57:49,500
can sometimes charge
as much as 9% or 10%,

1339
00:57:49,500 --> 00:57:52,860
especially for small
dollar remittances.

1340
00:57:52,860 --> 00:57:56,610
And I don't know if any of you
do cross-border remittances,

1341
00:57:56,610 --> 00:58:01,230
but if it's small dollar, it
can be very significant fees.

1342
00:58:01,230 --> 00:58:05,370
If it's large multi-million
dollar transactions,

1343
00:58:05,370 --> 00:58:08,490
you're getting into
corporate treasury functions.

1344
00:58:08,490 --> 00:58:13,055
So on the blockchain
payment solutions side,

1345
00:58:13,055 --> 00:58:14,680
you have to always
think about, is this

1346
00:58:14,680 --> 00:58:17,650
targeted for the retail
small dollar transactional

1347
00:58:17,650 --> 00:58:20,920
side where you're trying to
get inside of an 8% to 10%

1348
00:58:20,920 --> 00:58:22,900
fee structure?

1349
00:58:22,900 --> 00:58:25,920
But again, if it's
only on $50 to $200

1350
00:58:25,920 --> 00:58:28,920
US dollar sort of
transactions, you'd

1351
00:58:28,920 --> 00:58:32,460
have to figure out how to get
your cost structure down there.

1352
00:58:32,460 --> 00:58:34,710
Or is it for the
multi-million dollar treasury

1353
00:58:34,710 --> 00:58:38,520
function, for the
Fortune 500 or the World

1354
00:58:38,520 --> 00:58:41,790
1,000 or whatever
treasury function,

1355
00:58:41,790 --> 00:58:43,860
where they're really
talking about frictions

1356
00:58:43,860 --> 00:58:46,480
which are in basis points.

1357
00:58:46,480 --> 00:58:50,740
But still, the bridge currency--
crypto bridge currencies--

1358
00:58:50,740 --> 00:58:54,640
might still help in the
treasury function side--

1359
00:58:54,640 --> 00:58:57,460
I'll call the corporate treasury
function side all the way

1360
00:58:57,460 --> 00:59:00,820
to the retail remittance side.

1361
00:59:00,820 --> 00:59:03,012
The percentage
fees are different.

1362
00:59:03,012 --> 00:59:05,470
And you just have to be able
to say, well, can I get inside

1363
00:59:05,470 --> 00:59:07,900
of those inefficiencies.

1364
00:59:07,900 --> 00:59:10,990
And on the retail side
it takes two to five days

1365
00:59:10,990 --> 00:59:12,920
to do a remittance.

1366
00:59:12,920 --> 00:59:14,690
So can you get
inside the timing?

1367
00:59:14,690 --> 00:59:15,190
Alin.

1368
00:59:15,190 --> 00:59:16,565
ALIN DRAGOS: So
one of the things

1369
00:59:16,565 --> 00:59:19,070
that I think I found useful
when I was doing remittances

1370
00:59:19,070 --> 00:59:22,210
is trying to distinguish
between getting remittances

1371
00:59:22,210 --> 00:59:23,510
from an account to an account.

1372
00:59:23,510 --> 00:59:26,740
So account to account remittance
versus person to person.

1373
00:59:26,740 --> 00:59:28,740
And I know they sound the
same, but they're not.

1374
00:59:28,740 --> 00:59:29,240
Right.

1375
00:59:29,240 --> 00:59:30,740
A person means,
hey, you know what?

1376
00:59:30,740 --> 00:59:33,100
My mother out there doesn't
have a bank account.

1377
00:59:33,100 --> 00:59:34,362
She's a person.

1378
00:59:34,362 --> 00:59:36,070
If she were to have
an account, then that

1379
00:59:36,070 --> 00:59:37,420
would be a fairly
easy transaction.

1380
00:59:37,420 --> 00:59:37,920
Right.

1381
00:59:37,920 --> 00:59:41,100
But is she doesn't have a bank
account, that's not that easy.

1382
00:59:41,100 --> 00:59:43,030
Right?

1383
00:59:43,030 --> 00:59:46,000
Most of the value that
all of these Western Union

1384
00:59:46,000 --> 00:59:47,860
or whatever, they've
been valued by the fact

1385
00:59:47,860 --> 00:59:49,150
that they have a
lot of locations,

1386
00:59:49,150 --> 00:59:51,310
that people can walk in,
get their money, get out.

1387
00:59:51,310 --> 00:59:52,090
Right?

1388
00:59:52,090 --> 00:59:53,920
A lot of the folks that are
coming [INAUDIBLE] right now,

1389
00:59:53,920 --> 00:59:56,170
they're trying to address this
account-to-acocunt problem.

1390
00:59:56,170 --> 00:59:57,462
As in like, hey, you know what?

1391
00:59:57,462 --> 00:59:59,230
If you have a bank
account here and a bank

1392
00:59:59,230 --> 01:00:03,340
account in South Korea, that's
not that complicated, right?

1393
01:00:03,340 --> 01:00:05,140
And cryptocurrency
can probably actually

1394
01:00:05,140 --> 01:00:06,570
compete fairly well there.

1395
01:00:06,570 --> 01:00:09,820
However, if you're trying
to say, hey, you know what?

1396
01:00:09,820 --> 01:00:11,440
I have a bank account here.

1397
01:00:11,440 --> 01:00:14,720
But my mother, who doesn't have
a bank account in South Korea,

1398
01:00:14,720 --> 01:00:16,290
how do I get the money to her?

1399
01:00:16,290 --> 01:00:18,597
If I send her cryptocurrency,
she's like, fine.

1400
01:00:18,597 --> 01:00:19,930
What am I going to do with this?

1401
01:00:19,930 --> 01:00:20,672
Right?

1402
01:00:20,672 --> 01:00:22,630
So the real problem is,
you have to think about

1403
01:00:22,630 --> 01:00:24,700
if you [INAUDIBLE]
the remittances, OK,

1404
01:00:24,700 --> 01:00:27,922
where are the exit
ramps on both ends?

1405
01:00:27,922 --> 01:00:30,130
How exactly are you going
to get that to actually use

1406
01:00:30,130 --> 01:00:30,765
those funds?

1407
01:00:30,765 --> 01:00:32,140
GARY GENSLER: And
also, right now

1408
01:00:32,140 --> 01:00:37,750
because there's no
economy-wide use of crypto,

1409
01:00:37,750 --> 01:00:42,080
if you're trying to move
value around the globe,

1410
01:00:42,080 --> 01:00:46,060
on the other end it's probably
fiat to crypto, crypto to fiat.

1411
01:00:46,060 --> 01:00:48,890
So it's probably
two money exchanges.

1412
01:00:48,890 --> 01:00:52,130
If it's to be stored value,
if it's stored value,

1413
01:00:52,130 --> 01:00:54,380
a lot of people are still
willing to store value

1414
01:00:54,380 --> 01:00:54,980
in crypto.

1415
01:00:54,980 --> 01:00:58,730
But until it grows
larger it's not

1416
01:00:58,730 --> 01:01:02,840
a medium of exchange in
any economy-wide solution.

1417
01:01:02,840 --> 01:01:05,252
So this is a slide
you've seen before.

1418
01:01:05,252 --> 01:01:06,710
We're not going to
spend much time.

1419
01:01:06,710 --> 01:01:09,950
But in payments some of
these matter and some don't.

1420
01:01:09,950 --> 01:01:12,050
And I think if I did
my little thing--

1421
01:01:12,050 --> 01:01:12,920
some will grow.

1422
01:01:12,920 --> 01:01:13,460
All right.

1423
01:01:13,460 --> 01:01:14,120
Yeah.

1424
01:01:14,120 --> 01:01:15,170
There you go.

1425
01:01:15,170 --> 01:01:16,800
All the illicit activity.

1426
01:01:16,800 --> 01:01:19,490
Remember in public
policy there's

1427
01:01:19,490 --> 01:01:21,650
something called the
Bank Secrecy Act.

1428
01:01:21,650 --> 01:01:25,700
If you're thinking about
anything in the payment space,

1429
01:01:25,700 --> 01:01:28,130
you're probably moving
something of value.

1430
01:01:28,130 --> 01:01:30,020
And in almost every
country you have

1431
01:01:30,020 --> 01:01:32,600
to comply with some form
of anti-money laundering,

1432
01:01:32,600 --> 01:01:36,090
know your customer, Bank
Secrecy type of thing.

1433
01:01:36,090 --> 01:01:40,370
The US Department
Treasury said so in 2013.

1434
01:01:40,370 --> 01:01:44,520
You probably also have to deal
with some consumer protection.

1435
01:01:44,520 --> 01:01:47,172
That's why that box on
the bottom sort of grew.

1436
01:01:47,172 --> 01:01:49,130
Like, you're just not
going to lose their money

1437
01:01:49,130 --> 01:01:50,880
or steal their money.

1438
01:01:50,880 --> 01:01:53,270
And maybe something
about privacy,

1439
01:01:53,270 --> 01:01:57,035
whether it's GDPR type of
privacy in Europe or elsewhere.

1440
01:01:57,035 --> 01:01:58,910
You're not worried about
investor protection.

1441
01:01:58,910 --> 01:02:00,860
But in this country,
you have to worry

1442
01:02:00,860 --> 01:02:04,800
about how to register as
a money service provider.

1443
01:02:04,800 --> 01:02:08,360
And other countries
similarly register.

1444
01:02:08,360 --> 01:02:10,460
So I just raise that.

1445
01:02:10,460 --> 01:02:12,983
And as we go through
use cases in H2,

1446
01:02:12,983 --> 01:02:14,900
I'm going to constantly
kind of use this start

1447
01:02:14,900 --> 01:02:17,300
and say, well, what
public policy issues?

1448
01:02:17,300 --> 01:02:21,980
You don't have to worry
about the SEC, probably.

1449
01:02:21,980 --> 01:02:24,020
But maybe some
stable value token

1450
01:02:24,020 --> 01:02:26,240
might be an exchange
traded fund.

1451
01:02:26,240 --> 01:02:28,940
So it's possible you
might be blurring up

1452
01:02:28,940 --> 01:02:32,960
against that regulatory state.

1453
01:02:32,960 --> 01:02:36,230
So technology is affecting us.

1454
01:02:36,230 --> 01:02:39,582
And this is a slide I think
I've used before with everybody.

1455
01:02:39,582 --> 01:02:41,040
But I thought,
well, wait a minute.

1456
01:02:41,040 --> 01:02:42,740
What of these
eight-- and there's

1457
01:02:42,740 --> 01:02:44,690
more technology affecting
finance-- but what

1458
01:02:44,690 --> 01:02:47,180
are these main eight
are really hitting

1459
01:02:47,180 --> 01:02:49,160
payments, when I add payments.

1460
01:02:49,160 --> 01:02:51,650
Well, I'd say there's kind
of four or five of them.

1461
01:02:51,650 --> 01:02:55,190
Blockchain is
affecting payments.

1462
01:02:55,190 --> 01:02:57,650
But biometrics, we talked
about that earlier.

1463
01:02:57,650 --> 01:02:58,730
Biometrics, definitely.

1464
01:02:58,730 --> 01:03:03,320
Mobile telephony, open API,
which is the UK initiative

1465
01:03:03,320 --> 01:03:08,880
where they're saying that UK
banks must allow merchants

1466
01:03:08,880 --> 01:03:14,670
an ability to get inside of
those bank accounts, basically.

1467
01:03:14,670 --> 01:03:18,510
It's called open API, because
they have an interface directly

1468
01:03:18,510 --> 01:03:20,100
into the bank accounts.

1469
01:03:20,100 --> 01:03:23,380
And even robotic
scraping of data--

1470
01:03:23,380 --> 01:03:24,383
RPA.

1471
01:03:24,383 --> 01:03:26,550
I think they're all related
to payments in some way.

1472
01:03:26,550 --> 01:03:27,780
Or maybe everything.

1473
01:03:27,780 --> 01:03:30,220
Maybe cloud and AI
and machine learning.

1474
01:03:30,220 --> 01:03:31,230
But I kind of think--

1475
01:03:31,230 --> 01:03:33,390
I think that these
five are the ones.

1476
01:03:33,390 --> 01:03:36,180
So blockchain is amongst
the things changing payment.

1477
01:03:36,180 --> 01:03:40,980
It's not the only thing
changing payments.

1478
01:03:40,980 --> 01:03:46,650
And then remember a bunch
of attempts in the '90s?

1479
01:03:46,650 --> 01:03:49,110
A bunch of ways to do
digital cash in the '90s?

1480
01:03:49,110 --> 01:03:52,110
We talked about this in the
first or section lecture

1481
01:03:52,110 --> 01:03:54,290
of the course.

1482
01:03:54,290 --> 01:03:56,750
Fundamentally, why
did they all fail?

1483
01:03:56,750 --> 01:03:59,110
Anybody remember
why they failed?

1484
01:03:59,110 --> 01:04:01,318
AUDIENCE: They didn't solve
the double spend problem.

1485
01:04:01,318 --> 01:04:03,890
GARY GENSLER: They didn't
solve the double spend problem.

1486
01:04:03,890 --> 01:04:10,160
So bitcoin and blockchain
technology, Nakamoto consensus,

1487
01:04:10,160 --> 01:04:14,170
is a solution to
the double spend.

1488
01:04:14,170 --> 01:04:17,060
Nothing's 100% solution,
it has some challenges too.

1489
01:04:17,060 --> 01:04:21,710
But it's a solution to
the double spend issue.

1490
01:04:21,710 --> 01:04:28,900
So then before Bitcoin we had
a bunch of mobile payment,

1491
01:04:28,900 --> 01:04:30,780
and now afterwards.

1492
01:04:30,780 --> 01:04:32,980
And I want to spend
our last minutes

1493
01:04:32,980 --> 01:04:36,700
kind of just chatting about
what are the lessons learning.

1494
01:04:36,700 --> 01:04:39,370
So first, Alipay and WeChat.

1495
01:04:39,370 --> 01:04:40,840
Who wants to tell
me a little bit?

1496
01:04:40,840 --> 01:04:43,630
There's probably somebody--
who has Alipay and WeChat

1497
01:04:43,630 --> 01:04:46,570
on their phones?

1498
01:04:46,570 --> 01:04:48,440
Thalita, you want
to tell us about it?

1499
01:04:48,440 --> 01:04:49,342
No?

1500
01:04:49,342 --> 01:04:50,146
AUDIENCE: Go ahead.

1501
01:04:50,146 --> 01:04:50,646
[INAUDIBLE]

1502
01:04:50,646 --> 01:04:51,645
GARY GENSLER: Chris.

1503
01:04:51,645 --> 01:04:52,270
AUDIENCE: Yeah.

1504
01:04:52,270 --> 01:04:56,770
So WeChat was started
as just a chat service.

1505
01:04:56,770 --> 01:04:59,290
So they built out
a huge user base,

1506
01:04:59,290 --> 01:05:02,890
which is the key to the
similarity between WeChat

1507
01:05:02,890 --> 01:05:03,975
and Alipay.

1508
01:05:03,975 --> 01:05:06,100
And so essentially once
they had that chatter base,

1509
01:05:06,100 --> 01:05:07,990
they wanted to
start monetizing it.

1510
01:05:07,990 --> 01:05:11,560
And that's where the payment
system was added on top.

1511
01:05:11,560 --> 01:05:14,710
GARY GENSLER: So when
WeChat and Alipay started,

1512
01:05:14,710 --> 01:05:19,450
they started one, out of
communications, basically.

1513
01:05:19,450 --> 01:05:20,940
Chat, text.

1514
01:05:20,940 --> 01:05:22,120
Right?

1515
01:05:22,120 --> 01:05:24,646
And Alipay was off of like--

1516
01:05:24,646 --> 01:05:26,950
is it appropriate,
Shawn, to call it like,

1517
01:05:26,950 --> 01:05:32,050
China's mixture of
eBay and Amazon.

1518
01:05:32,050 --> 01:05:32,830
AUDIENCE: Yeah.

1519
01:05:32,830 --> 01:05:33,810
P2P.

1520
01:05:33,810 --> 01:05:34,720
GARY GENSLER: P2P.

1521
01:05:34,720 --> 01:05:36,123
AUDIENCE: Or B2B.

1522
01:05:36,123 --> 01:05:36,970
GARY GENSLER: B?

1523
01:05:36,970 --> 01:05:38,428
AUDIENCE: Alibaba
is a B2B platform

1524
01:05:38,428 --> 01:05:40,660
and combines an
e-commerce platform.

1525
01:05:40,660 --> 01:05:43,840
So [INAUDIBLE]
combination service.

1526
01:05:43,840 --> 01:05:46,210
GARY GENSLER: And those
payment channels--

1527
01:05:46,210 --> 01:05:48,100
I don't think it's a surprise.

1528
01:05:48,100 --> 01:05:52,330
China was not as developed in
terms of a credit card rails

1529
01:05:52,330 --> 01:05:57,640
as the US, and had
far fewer banked.

1530
01:05:57,640 --> 01:06:02,510
So these two companies
solved a problem that kind of

1531
01:06:02,510 --> 01:06:04,160
existed because there was not--

1532
01:06:04,160 --> 01:06:08,930
as it developed, banking
system and credit card systems.

1533
01:06:08,930 --> 01:06:12,710
Overall, those systems
cost less than in the US

1534
01:06:12,710 --> 01:06:15,760
then 270 basis points.

1535
01:06:15,760 --> 01:06:17,720
And you had an article
in the readings

1536
01:06:17,720 --> 01:06:21,430
that maybe the US payment
system is going to get shook up.

1537
01:06:21,430 --> 01:06:22,430
I don't know the answer.

1538
01:06:22,430 --> 01:06:26,330
But you know, maybe they'll
get shaken up by these two.

1539
01:06:26,330 --> 01:06:28,490
How about the M-Pesa story?

1540
01:06:28,490 --> 01:06:30,790
Anybody have any
M-Pesa on their phones?

1541
01:06:30,790 --> 01:06:31,290
No.

1542
01:06:33,940 --> 01:06:37,120
Who wants to give
a crack at M-Pesa?

1543
01:06:37,120 --> 01:06:41,820
It's basically telephone,
mobile minutes.

1544
01:06:41,820 --> 01:06:45,330
In all three of these,
the central banks

1545
01:06:45,330 --> 01:06:49,080
saw a traditional
banking function--

1546
01:06:49,080 --> 01:06:52,230
payments, and a second
traditional banking

1547
01:06:52,230 --> 01:06:57,882
function-- the store of value,
being done by non-banks.

1548
01:06:57,882 --> 01:06:59,340
What do you think
the central banks

1549
01:06:59,340 --> 01:07:03,440
in the official sector did?

1550
01:07:03,440 --> 01:07:05,270
AUDIENCE: They
came in and started

1551
01:07:05,270 --> 01:07:07,760
to regulate those [INAUDIBLE].

1552
01:07:07,760 --> 01:07:10,700
For example, we now are
reading, they talk about M-Pesa.

1553
01:07:10,700 --> 01:07:14,030
Actually, the Kenya
government oversaw the trust

1554
01:07:14,030 --> 01:07:18,290
so that even Vodaphone
ran out of the business,

1555
01:07:18,290 --> 01:07:21,608
people can still use the
money stored with the M-Pesa.

1556
01:07:21,608 --> 01:07:23,150
GARY GENSLER: So
let's break it down.

1557
01:07:23,150 --> 01:07:26,510
So one is, the official
sector said, whoa.

1558
01:07:26,510 --> 01:07:30,790
We've got to bring this inside
the public policy framework.

1559
01:07:30,790 --> 01:07:33,290
Regulate it.

1560
01:07:33,290 --> 01:07:37,820
And then two, they
said in the Kenya case,

1561
01:07:37,820 --> 01:07:41,630
it's gotta be set up as a trust.

1562
01:07:41,630 --> 01:07:44,540
And the value--
the stored value--

1563
01:07:44,540 --> 01:07:48,410
has to be in the banking
system, literally.

1564
01:07:48,410 --> 01:07:51,050
So all those little--

1565
01:07:51,050 --> 01:07:52,050
Eric?

1566
01:07:52,050 --> 01:07:55,310
AUDIENCE: Yeah, I just
wanted to add one example

1567
01:07:55,310 --> 01:07:58,340
to your list that actually
is the opposite of what

1568
01:07:58,340 --> 01:07:59,760
[INAUDIBLE] described.

1569
01:07:59,760 --> 01:08:02,175
[INAUDIBLE] which is Peru modal.

1570
01:08:02,175 --> 01:08:03,800
And it's the initiative
[INAUDIBLE]----

1571
01:08:03,800 --> 01:08:05,090
GARY GENSLER: Peru--

1572
01:08:05,090 --> 01:08:06,177
AUDIENCE: Peru modal.

1573
01:08:06,177 --> 01:08:07,010
GARY GENSLER: Modal.

1574
01:08:07,010 --> 01:08:07,635
AUDIENCE: Yeah.

1575
01:08:07,635 --> 01:08:14,030
And it was tackled or begun
by a former production

1576
01:08:14,030 --> 01:08:16,550
minister in Peru,
who actually thought

1577
01:08:16,550 --> 01:08:18,920
about that potential issue.

1578
01:08:18,920 --> 01:08:25,250
And she started reaching
out to all local banks

1579
01:08:25,250 --> 01:08:29,450
and all local telcos,
brought them all together

1580
01:08:29,450 --> 01:08:33,520
and created a whole
model that's called

1581
01:08:33,520 --> 01:08:38,330
[SPANISH] which is
mobile wallet in Spanish.

1582
01:08:38,330 --> 01:08:44,000
And it's been growing
since 2016 as a means

1583
01:08:44,000 --> 01:08:47,960
of financial inclusion for
underserved populations

1584
01:08:47,960 --> 01:08:51,560
and people that don't
have bank accounts.

1585
01:08:51,560 --> 01:08:53,779
Because banks see
that as an opportunity

1586
01:08:53,779 --> 01:08:55,707
to get more customers.

1587
01:08:55,707 --> 01:08:58,040
GARY GENSLER: So Eric, can I
ask you a couple questions?

1588
01:08:58,040 --> 01:09:01,130
Do you know, was it a
means for just payment?

1589
01:09:01,130 --> 01:09:04,840
Or did they actually store
value in this system?

1590
01:09:04,840 --> 01:09:05,810
AUDIENCE: It's both.

1591
01:09:05,810 --> 01:09:07,000
Yeah.

1592
01:09:07,000 --> 01:09:11,260
You can use your mobile
to pay to another person,

1593
01:09:11,260 --> 01:09:14,439
to a merchant, for
example, a small store

1594
01:09:14,439 --> 01:09:16,630
with another mobile.

1595
01:09:16,630 --> 01:09:19,509
Or you can actually
cash it out to a--

1596
01:09:20,521 --> 01:09:22,229
GARY GENSLER: Has it
been brought inside?

1597
01:09:22,229 --> 01:09:24,776
Is it now being regulated
as a financial firm?

1598
01:09:24,776 --> 01:09:26,109
AUDIENCE: We got them regulated.

1599
01:09:26,109 --> 01:09:28,590
And begun with a--

1600
01:09:28,590 --> 01:09:31,149
it's now a spinoff as a--

1601
01:09:31,149 --> 01:09:32,790
what we call sociedad
anonima, which

1602
01:09:32,790 --> 01:09:35,500
is some sort of private company.

1603
01:09:35,500 --> 01:09:40,540
But it's basically a consortium
of all the banks in Peru.

1604
01:09:40,540 --> 01:09:43,120
GARY GENSLER: So if you can
send me an email with its name,

1605
01:09:43,120 --> 01:09:43,740
I'd love that.

1606
01:09:43,740 --> 01:09:46,359
And maybe I'll put something
on Canvas about it.

1607
01:09:46,359 --> 01:09:49,240
But in all these circumstances,
they were payments.

1608
01:09:49,240 --> 01:09:51,790
But they also had--

1609
01:09:51,790 --> 01:09:53,290
they started storing value.

1610
01:09:53,290 --> 01:09:56,530
The other one I want to
mention is Starbucks.

1611
01:09:56,530 --> 01:09:57,290
Starbucks.

1612
01:09:57,290 --> 01:09:59,530
How many people have
Starbucks on their phone?

1613
01:09:59,530 --> 01:10:01,900
And they have-- right?

1614
01:10:01,900 --> 01:10:03,820
So wait a minute.

1615
01:10:03,820 --> 01:10:04,330
Wait.

1616
01:10:04,330 --> 01:10:05,900
I saw a hand back there.

1617
01:10:05,900 --> 01:10:06,810
Larry.

1618
01:10:06,810 --> 01:10:07,310
Geez.

1619
01:10:07,310 --> 01:10:09,460
I'm going to call on you, then.

1620
01:10:09,460 --> 01:10:10,180
Who knew?

1621
01:10:10,180 --> 01:10:10,780
All right.

1622
01:10:10,780 --> 01:10:12,695
Does it store value?

1623
01:10:12,695 --> 01:10:13,320
AUDIENCE: Yeah.

1624
01:10:13,320 --> 01:10:14,380
It steals value.

1625
01:10:14,380 --> 01:10:17,340
Like, you have a minimum
amount you have to deposit.

1626
01:10:17,340 --> 01:10:19,270
So $20, for example.

1627
01:10:19,270 --> 01:10:21,670
Whenever it goes below the
minimum, it kicks another 20

1628
01:10:21,670 --> 01:10:22,170
in.

1629
01:10:22,170 --> 01:10:24,310
So you never-- so they've
basically taken $20

1630
01:10:24,310 --> 01:10:26,440
and held it permanently.

1631
01:10:26,440 --> 01:10:29,050
GARY GENSLER: So they're taking
it out of your bank account.

1632
01:10:29,050 --> 01:10:29,550
Right?

1633
01:10:29,550 --> 01:10:31,630
You gave them authorization--
back to that word

1634
01:10:31,630 --> 01:10:33,220
"authorization"--

1635
01:10:33,220 --> 01:10:36,490
to just take money out
of your bank account.

1636
01:10:36,490 --> 01:10:40,270
So this is a form
of what used to be

1637
01:10:40,270 --> 01:10:42,250
when Larry and I were kids.

1638
01:10:42,250 --> 01:10:46,990
you could have physical
prepaid cards, gift cards.

1639
01:10:46,990 --> 01:10:49,196
I got them on my birthday.

1640
01:10:49,196 --> 01:10:50,620
It's a gift card.

1641
01:10:50,620 --> 01:10:57,380
But now it's sort of prepaid
cards on your mobile |

1642
01:10:57,380 --> 01:11:01,790
I think if Starbucks
had billions of dollars

1643
01:11:01,790 --> 01:11:06,380
in everybody's $20, that
the US Federal Reserve might

1644
01:11:06,380 --> 01:11:09,020
knock on their door
and say, you've

1645
01:11:09,020 --> 01:11:11,740
got to register as a
bank, or you've got to--

1646
01:11:11,740 --> 01:11:18,080
In China, basically, that's
what happened to Alibaba.

1647
01:11:18,080 --> 01:11:22,400
The largest money market
fund in the whole world

1648
01:11:22,400 --> 01:11:24,970
is at And Financial Alipay.

1649
01:11:24,970 --> 01:11:25,610
Largest.

1650
01:11:25,610 --> 01:11:27,950
About $300 billion US dollars.

1651
01:11:27,950 --> 01:11:32,090
But I think the same would
happen with Starbucks,

1652
01:11:32,090 --> 01:11:34,400
because they're storing value.

1653
01:11:34,400 --> 01:11:37,550
And Kenya, they said you've
got to put it in a trust.

1654
01:11:37,550 --> 01:11:40,550
And by the way, we want
you to make deposits

1655
01:11:40,550 --> 01:11:43,620
with 100% of this in
the banking system.

1656
01:11:43,620 --> 01:11:45,650
And that official
sector said, we

1657
01:11:45,650 --> 01:11:48,900
don't want to dis-intermediate
the commercial banks.

1658
01:11:48,900 --> 01:11:51,350
Now, they didn't write
that in a statement.

1659
01:11:51,350 --> 01:11:55,190
They probably couched it
all in consumer protection.

1660
01:11:55,190 --> 01:11:58,150
But at the essence,
the outcome was,

1661
01:11:58,150 --> 01:11:59,900
they were keeping their
commercial banking

1662
01:11:59,900 --> 01:12:03,140
system alive by doing it.

1663
01:12:03,140 --> 01:12:05,510
Starbucks, I don't know
what they're doing,

1664
01:12:05,510 --> 01:12:06,545
Larry, with your $20.

1665
01:12:09,330 --> 01:12:11,560
But you don't, either.

1666
01:12:11,560 --> 01:12:12,060
No.

1667
01:12:12,060 --> 01:12:13,435
But I don't think
it's a surprise

1668
01:12:13,435 --> 01:12:19,200
that Starbucks has partnered
with Intercontinental Exchange.

1669
01:12:19,200 --> 01:12:21,510
And you should
ask Jeff and Kelly

1670
01:12:21,510 --> 01:12:24,010
when they're with us, well,
why is that connection?

1671
01:12:24,010 --> 01:12:24,510
I'm sorry.

1672
01:12:24,510 --> 01:12:25,718
There were a couple of hands.

1673
01:12:25,718 --> 01:12:27,428
I saw Jihee And I saw Alin.

1674
01:12:27,428 --> 01:12:29,220
AUDIENCE: Well, we just
wanted to point out

1675
01:12:29,220 --> 01:12:32,510
that you probably had set--

1676
01:12:32,510 --> 01:12:34,955
set the auto subscriber, or--

1677
01:12:34,955 --> 01:12:35,773
OK.

1678
01:12:35,773 --> 01:12:37,440
GARY GENSLER: You can
tell Larry advice.

1679
01:12:37,440 --> 01:12:39,072
How did he set his
auto subscriber?

1680
01:12:39,072 --> 01:12:39,780
Oh, that's right.

1681
01:12:39,780 --> 01:12:42,250
I mean, I could physically
have to go through every time I

1682
01:12:42,250 --> 01:12:43,160
want to reload.

1683
01:12:43,160 --> 01:12:45,650
But obviously, that's
just wasting my time.

1684
01:12:45,650 --> 01:12:47,570
So.

1685
01:12:47,570 --> 01:12:48,900
It's like the internet.

1686
01:12:48,900 --> 01:12:51,490
That I'm losing is
probably worth my time.

1687
01:12:51,490 --> 01:12:53,280
So I'm not saying
I have [INAUDIBLE]..

1688
01:12:53,280 --> 01:12:54,090
But it is amazing.

1689
01:12:54,090 --> 01:12:56,947
There must be an extraordinary
amount of money [INAUDIBLE]

1690
01:12:56,947 --> 01:12:57,780
GARY GENSLER: Oh no.

1691
01:12:57,780 --> 01:12:59,130
They're doing you a service.

1692
01:12:59,130 --> 01:13:00,420
I'm not saying they're
not doing you a service.

1693
01:13:00,420 --> 01:13:01,962
Let me take one
more, Priya, then I'm

1694
01:13:01,962 --> 01:13:03,510
going to go to [INAUDIBLE].

1695
01:13:03,510 --> 01:13:07,290
AUDIENCE: Interesting back story
to the M-Pesa Safaricom fees.

1696
01:13:07,290 --> 01:13:09,870
I used to work for
one of the NGOs

1697
01:13:09,870 --> 01:13:14,160
that pioneered the savings and
loans concept in all of Africa,

1698
01:13:14,160 --> 01:13:15,300
really.

1699
01:13:15,300 --> 01:13:17,610
And what happened in
Kenya was that you

1700
01:13:17,610 --> 01:13:21,000
had these groups, like
hundreds of thousands of them,

1701
01:13:21,000 --> 01:13:23,070
in very remote places.

1702
01:13:23,070 --> 01:13:25,758
And these groups, you know,
they had annual saving cycles.

1703
01:13:25,758 --> 01:13:28,300
And eventually, you know, they
were saving very little money.

1704
01:13:28,300 --> 01:13:29,850
But they were saving.

1705
01:13:29,850 --> 01:13:33,540
And they didn't have
a way to then move

1706
01:13:33,540 --> 01:13:34,862
into the formal economy.

1707
01:13:34,862 --> 01:13:36,570
You know, so the money
just stayed there.

1708
01:13:36,570 --> 01:13:39,300
And it literally was money
stored in a box with three

1709
01:13:39,300 --> 01:13:41,280
locks, and they were--

1710
01:13:41,280 --> 01:13:44,070
And you know, it was a way
that even without literacy you

1711
01:13:44,070 --> 01:13:45,090
could do it.

1712
01:13:45,090 --> 01:13:49,410
At that time, DFID, the British
overseas development agency,

1713
01:13:49,410 --> 01:13:53,170
was sponsoring a few of
these NGOs to do this work.

1714
01:13:53,170 --> 01:13:55,080
And the consortium's
biggest problem

1715
01:13:55,080 --> 01:13:58,980
was, now how did we-- the next
step up is to transition them

1716
01:13:58,980 --> 01:14:01,835
into the formal economy
and gain access to credit.

1717
01:14:01,835 --> 01:14:03,210
It was like the
opposite approach

1718
01:14:03,210 --> 01:14:05,070
of the micro [INAUDIBLE].

1719
01:14:05,070 --> 01:14:07,890
And that's the point when
in Kenya this breakthrough

1720
01:14:07,890 --> 01:14:11,920
happened is when these savings
groups finally had some money.

1721
01:14:11,920 --> 01:14:14,820
And the first thing that
happened at their villages--

1722
01:14:14,820 --> 01:14:17,610
like, no bank was
going to open a branch.

1723
01:14:17,610 --> 01:14:20,340
There was a movement
around mobile branches.

1724
01:14:20,340 --> 01:14:23,220
But even that was very expensive
for the amount of money

1725
01:14:23,220 --> 01:14:25,630
that each of these
scripts was saving.

1726
01:14:25,630 --> 01:14:28,740
And so then these first
operators came up.

1727
01:14:28,740 --> 01:14:31,230
It was almost like an act
of frustration, you know.

1728
01:14:31,230 --> 01:14:32,130
Like, OK.

1729
01:14:32,130 --> 01:14:35,577
We have this cash in this
box that cannot be stored.

1730
01:14:35,577 --> 01:14:36,910
So now we're just going to move.

1731
01:14:36,910 --> 01:14:38,480
GARY GENSLER: So
let me capture it.

1732
01:14:38,480 --> 01:14:43,170
So some of the themes is that
where there is a market gap,

1733
01:14:43,170 --> 01:14:47,040
there is a gap in
Kenya with unbanked.

1734
01:14:47,040 --> 01:14:49,770
And by the way, half
of sub-Saharan Africa

1735
01:14:49,770 --> 01:14:52,470
is still unbanked.

1736
01:14:52,470 --> 01:14:56,760
But half of that unbanked
have mobile phones.

1737
01:14:56,760 --> 01:14:59,790
But there is a gap in China.

1738
01:14:59,790 --> 01:15:04,590
And so Alipay and WeChat and
so forth started to fill it.

1739
01:15:04,590 --> 01:15:10,710
What gaps are there today
that you all can fill.

1740
01:15:10,710 --> 01:15:14,190
And then secondly, does a
blockchain technology solution

1741
01:15:14,190 --> 01:15:17,350
help fill that gap?

1742
01:15:17,350 --> 01:15:20,890
There might be big gaps
created by 275 basis

1743
01:15:20,890 --> 01:15:25,000
points in the US,
the 2 and 3/4 percent

1744
01:15:25,000 --> 01:15:27,790
using the credit card
rails for payments.

1745
01:15:27,790 --> 01:15:30,490
There might be gaps
of the unbanked.

1746
01:15:30,490 --> 01:15:35,860
There might be big gaps in
customer user interface,

1747
01:15:35,860 --> 01:15:37,450
because a lot of
the customer user

1748
01:15:37,450 --> 01:15:42,340
interface in current
banking isn't that great

1749
01:15:42,340 --> 01:15:44,680
as we move to mobile phones.

1750
01:15:44,680 --> 01:15:45,655
QR codes.

1751
01:15:49,270 --> 01:15:51,630
There was a nice comment--

1752
01:15:51,630 --> 01:15:55,090
see, if you do comment, I
remember what you say online.

1753
01:15:55,090 --> 01:15:57,460
But there was a nice
comment about QR codes.

1754
01:15:57,460 --> 01:16:00,790
Where are QR codes used in
payment most dominantly?

1755
01:16:00,790 --> 01:16:01,750
Two countries.

1756
01:16:01,750 --> 01:16:02,650
What?

1757
01:16:02,650 --> 01:16:04,600
China and India.

1758
01:16:07,260 --> 01:16:10,500
The US, and I would
even contend Europe,

1759
01:16:10,500 --> 01:16:14,600
are no longer at the
forefront of payments.

1760
01:16:14,600 --> 01:16:18,110
Because we're sort of had
existing big legacy systems.

1761
01:16:18,110 --> 01:16:21,380
But that might mean that there
is big legacy systems built

1762
01:16:21,380 --> 01:16:23,660
on the credit card
rails dominantly,

1763
01:16:23,660 --> 01:16:25,170
might be vulnerable.

1764
01:16:25,170 --> 01:16:29,090
A quick thing just
on the methods.

1765
01:16:29,090 --> 01:16:31,700
This was out of a report
you had, but I just thought

1766
01:16:31,700 --> 01:16:35,300
in 2016, 29% stole credit card.

1767
01:16:35,300 --> 01:16:39,410
Estimate, five years from
now worldwide down to 15%.

1768
01:16:39,410 --> 01:16:42,500
eWallet is 18% to 46%.

1769
01:16:42,500 --> 01:16:45,650
Those trends, if they're
right, and of course,

1770
01:16:45,650 --> 01:16:48,710
they won't be exactly
right, but those trends

1771
01:16:48,710 --> 01:16:51,380
creates opportunity.

1772
01:16:51,380 --> 01:16:55,250
When you have huge changes,
and people are changing the way

1773
01:16:55,250 --> 01:16:57,410
they're doing things,
that's usually where

1774
01:16:57,410 --> 01:17:00,020
business opportunities are.

1775
01:17:00,020 --> 01:17:03,810
You had-- this is too detailed.

1776
01:17:03,810 --> 01:17:05,690
But I think it's
sort of fascinating

1777
01:17:05,690 --> 01:17:09,590
that the Federal Reserve
puts this out once a year.

1778
01:17:09,590 --> 01:17:11,250
It's always old, stale data.

1779
01:17:11,250 --> 01:17:13,850
But the big things
I took away is

1780
01:17:13,850 --> 01:17:15,650
that we've got a
huge change that's

1781
01:17:15,650 --> 01:17:19,970
happening here even in the US.

1782
01:17:19,970 --> 01:17:24,290
And card payments still
growing, of course.

1783
01:17:24,290 --> 01:17:26,210
But not like they once were.

1784
01:17:26,210 --> 01:17:27,800
Mobile payments
are big changing.

1785
01:17:27,800 --> 01:17:30,470
Half of all card payments
are done online, by the way,

1786
01:17:30,470 --> 01:17:33,740
not in person now.

1787
01:17:33,740 --> 01:17:35,350
So those statistics,
if you're going

1788
01:17:35,350 --> 01:17:37,790
to build a real business
and not just a business

1789
01:17:37,790 --> 01:17:41,780
for a final project
for Gensler's course,

1790
01:17:41,780 --> 01:17:44,450
you're going to want to
dive into these statistics.

1791
01:17:44,450 --> 01:17:46,500
You want to see where
are the opportunities.

1792
01:17:46,500 --> 01:17:50,720
What are the trends
in the statistics.

1793
01:17:50,720 --> 01:17:52,720
And then Bitcoin came along.

1794
01:17:52,720 --> 01:17:54,860
And we're not
going to chat more,

1795
01:17:54,860 --> 01:18:00,360
but I'm going to just say,
just as the two minutes left,

1796
01:18:00,360 --> 01:18:02,160
don't forget the economics.

1797
01:18:02,160 --> 01:18:04,410
And I say this again
coming back to having read

1798
01:18:04,410 --> 01:18:07,050
50 papers over the weekend.

1799
01:18:07,050 --> 01:18:11,370
When you're writing for
the rest of the semester,

1800
01:18:11,370 --> 01:18:12,290
whatever section--

1801
01:18:12,290 --> 01:18:14,040
whether you write on
payments, whether you

1802
01:18:14,040 --> 01:18:17,610
write on central bank, whatever
you write one, remember

1803
01:18:17,610 --> 01:18:21,690
about thinking about what
are the benefits of block J.

1804
01:18:21,690 --> 01:18:23,280
What are the real specifics?

1805
01:18:23,280 --> 01:18:25,770
And particularly, how
does it lower verification

1806
01:18:25,770 --> 01:18:26,890
or networking costs?

1807
01:18:26,890 --> 01:18:28,890
Like Christian
Catalini wrote about,

1808
01:18:28,890 --> 01:18:30,720
but just we talked about it.

1809
01:18:30,720 --> 01:18:32,070
Coming to my office.

1810
01:18:32,070 --> 01:18:33,120
Ask for office hours.

1811
01:18:33,120 --> 01:18:34,140
Say, wait a minute.

1812
01:18:34,140 --> 01:18:38,530
How does-- does it really
need to happen this way?

1813
01:18:38,530 --> 01:18:42,000
And most importantly,
what are the net benefits?

1814
01:18:42,000 --> 01:18:44,040
And I keep coming to
my friend Brotish.

1815
01:18:44,040 --> 01:18:46,860
No, don't do a
traditional database.

1816
01:18:46,860 --> 01:18:50,710
You gotta get to a
private blockchain.

1817
01:18:50,710 --> 01:18:53,540
This is not a traditional
database course.

1818
01:18:53,540 --> 01:18:55,740
We're about permission
blockchains or permissionless

1819
01:18:55,740 --> 01:18:56,890
blockchain.

1820
01:18:56,890 --> 01:19:01,250
And remember, blockchains
are about append-only logs

1821
01:19:01,250 --> 01:19:04,130
with some consensus
with multiple parties

1822
01:19:04,130 --> 01:19:08,690
having the right to change
the state of the ledger.

1823
01:19:08,690 --> 01:19:11,140
So it's sort of like,
when does that valuable?

1824
01:19:11,140 --> 01:19:13,640
I believe there
is value to that.

1825
01:19:13,640 --> 01:19:15,700
But not in every circumstance.

1826
01:19:15,700 --> 01:19:18,040
And certainly if there
is a native token,

1827
01:19:18,040 --> 01:19:19,540
why do you need a native token?

1828
01:19:19,540 --> 01:19:22,360
Is it there to jump
start a network?

1829
01:19:22,360 --> 01:19:25,120
Is it to help with
token economics?

1830
01:19:25,120 --> 01:19:28,300
Remembering that there is
great network effects to having

1831
01:19:28,300 --> 01:19:31,620
one currency per jurisdiction.

1832
01:19:31,620 --> 01:19:35,310
But let's not forget that
certain multi-jurisdiction

1833
01:19:35,310 --> 01:19:37,560
currencies have failed.

1834
01:19:37,560 --> 01:19:39,870
The history of
multi-jurisdiction currencies

1835
01:19:39,870 --> 01:19:42,000
is they almost always fail.

1836
01:19:42,000 --> 01:19:44,700
We still have not
seen the end or what's

1837
01:19:44,700 --> 01:19:46,350
going to happen with the URL.

1838
01:19:46,350 --> 01:19:48,510
I mean, decades from
now, I'm saying.

1839
01:19:48,510 --> 01:19:52,240
And don't forget the skins
and the swords as well.

1840
01:19:52,240 --> 01:19:54,175
So we're back together
again on Thursday.

1841
01:19:54,175 --> 01:19:55,800
We're going to do
payments on that day.

1842
01:19:55,800 --> 01:19:59,100
We're going to dive more into
payments-- actual blockchain

1843
01:19:59,100 --> 01:20:01,260
technology stuff and payments.

1844
01:20:01,260 --> 01:20:02,830
Thank you, Alin.

1845
01:20:02,830 --> 01:20:06,480
[APPLAUSE]