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PROFESSOR: So we're going to
talk about crypto exchanges

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today, which very much relate
to blockchain technology.

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But it's not directly
an application

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of blockchain technology itself.

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But it is so much a part of the
ecosystem of crypto finance,

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with well over 90% and in some
cryptocurrencies 95% to 98%

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percent of the actual
transactions happening

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on crypto exchanges.

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So I thought that no course in
blockchain technology and money

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could really be complete without
talking about crypto exchanges.

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But I want to just dare
say not to be looking

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throughout these talk
today and even on Thursday

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when we'll also be talking
about crypto exchanges

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with some outside guests,
about, where are we lowering

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the cost of verification?

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Or where are we lowering
the networking costs?

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This is about basically
the secondary markets

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in this $200 billion ecosystem.

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And the first crypto exchanges
came about actually in 2000,

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late in 2010, I think it was.

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But it may have been early
'11, because just when there

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was one blockchain
application, bitcoin,

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people wanted to move bitcoin.

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It was like, well,
how can I do this?

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I can do it with another
individual on a blockchain.

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But there was even, how do I
find that other individual if I

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want to sell it or exchange it?

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And so there was a
business opportunity.

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Mt.

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Gox was one of the
first three or four.

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I don't think it was
literally the first one.

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But it was one of
the first handful

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that started to take off.

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We'll talk about Mt.

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Gox that failed.

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Dozens, if not hundreds
failed early on.

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But they were trying to provide
a user experience to trade

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initially just solely bitcoin.

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Bitcoin versus fiat
was really what it was.

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And it was providing
also a service

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to people that were not as
technologically adept as some

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of the MIT students.

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So I was going to
ask again and by show

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of hands, how many in the
room have ever owned a bit--

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of cryptocurrency or something
like that just to-- all right.

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So it's a third to a half.

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But you'll see
it's going to be--

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far fewer even in
this MIT community

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have done that directly
on a blockchain, as well.

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So is it Alin?

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Anybody else?

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So of the 30 hands that
went up, the other 29

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basically have done it
through a crypto exchange.

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So they provide a
service right there.

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Now, there's a central irony
that Satoshi Nakamoto's

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impetus, the motivation
that we've talked about

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was how to do peer-to-peer
movement of value

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on the internet without central
authorities, this failed

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attempt throughout the '90s
that finally he or she solved

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that riddle in 2008.

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Here is a decentralized way to
move value around the internet.

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And here, even at MIT,
the 30 or so of you

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or the 40 of you that have
owned a crypto asset, but one

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of you-- now, this is Sloan.

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And it's not computer
science and AI class.

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But I suspect even over in
the computer science class,

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it would be less
than half actually

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have gone and downloaded
the nodes, because there's

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a convenience factor.

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It's human nature.

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And so that even
started in 2010.

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So I wanted to talk a little
about crypto exchanges,

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some of their challenges, and
some of the opportunities.

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And it will set up also
for Thursday's discussion,

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where we'll be talking about how
a crypto exchange might be used

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for a payment solution
and how an entrepreneur,

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like Jeff Sprecher really
has looked at and said, no.

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This is where he can see value.

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You will hear Thursday
somebody, who is true to his--

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[LAUGHS]

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--entrepreneurial
skills is trying

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to find value in this whole
blockchain technology bitcoin

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world and has chosen a kind of
a mixture of a payment solution

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and a crypto exchange or both.

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Well, this might not be tied in.

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So I'll do it the
old-fashioned way.

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So we're going to talk, of
course, the readings, crypto

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exchanges, a little bit of
the public policy challenges,

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and then my thoughts
on path forward.

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Where do I see the crypto
exchange space moving forward

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in time?

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So Tom, you get to
answer another question.

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How has--

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[LAUGHS]

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--crypto exchanges become
critical gateways for--

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AUDIENCE: Yeah, I mean, so
obviously, the usability,

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the interface [INAUDIBLE]
discuss about how many people

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have downloaded digital wallets
and other versions of crypto

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exchanges.

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And this is still the--

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PROFESSOR: Right.

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So let's go to the
other side, because Alin

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was the one hand that went up
that you've downloaded nodes.

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Have you ever used
a crypto exchange,

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if you're willing to share?

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AUDIENCE: Well,
yeah, so I used--

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PROFESSOR: So you've done both.

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AUDIENCE: Yeah, I used Coinbase.

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I bought some bitcoin.

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And then, I transferred
some on my computer,

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because I was doing
a research project.

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And I thought I was
going to use it.

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But [INAUDIBLE] ended up
deciding that it's too valuable

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to sort of use it--

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[LAUGHTER]

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[INAUDIBLE]

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PROFESSOR: Right.

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Right.

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So if it were 2018 now and you
were to transact in bitcoin,

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would you prefer to use a crypto
exchange or the nodes that

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you've--

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just bitcoin?

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AUDIENCE: I guess it depends
on the security goal.

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So if I'm [INAUDIBLE],,
I'll use the node.

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If I want to send money to
my mom, I'll use [INAUDIBLE]..

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PROFESSOR: That's neat.

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Your mom uses bitcoin.

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AUDIENCE: No, but surprisingly
she's quite open to it.

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PROFESSOR: She is
quite open to it.

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OK.

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So even somebody who
is computer literate

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and has both the
nodes and the exchange

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is saying depends
on how tired I am

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and what my goals--
security's goals.

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Maybe you didn't say tired.

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But and anybody want to
hit the second question?

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AUDIENCE: [INAUDIBLE] the amount
of time, the amount of disputes

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00:07:03,340 --> 00:07:07,050
that arise [INAUDIBLE]
resolve these things

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[INAUDIBLE] that a regular
exchange could not [INAUDIBLE]

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PROFESSOR: Which type
of disputes then?

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AUDIENCE: Like, there was
money [INAUDIBLE] triple debits

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from accounts or you know,
[INAUDIBLE] money not taken out

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or too much and [INAUDIBLE].

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PROFESSOR: Right.

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And how do these
exchanges compare

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to traditional exchanges?

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So the New York Stock Exchange--

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how does Coinbase compare
to New York Stock Exchange?

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AUDIENCE: You must add it
to some kind of, like, user

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ready to buy some
bitcoin beforehand.

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And then, [INAUDIBLE].

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PROFESSOR: So you're
saying they have reserves.

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AUDIENCE: I mean, I don't
know if it's a reserve.

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But like, we buy from Coinbase.

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We don't buy from another user.

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PROFESSOR: So Coinbase itself--

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so one change difference--

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and I'm going to highlight
three and see if we can get off

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from this discussion.

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One is the exchange
itself might be

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on the other side of the
transaction from you.

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Alexis called that that
they had a reserve.

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Some might call
that market making.

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I'm sorry.

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AUDIENCE: Yeah, I [INAUDIBLE]
crypto exchange [INAUDIBLE]

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00:08:26,954 --> 00:08:27,910
as a broker.

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So they face the customers
instead of facing [INAUDIBLE]..

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PROFESSOR: Right.

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So a corollary to what
Alexis says that they

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00:08:33,990 --> 00:08:35,757
might be a market maker--

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00:08:35,757 --> 00:08:37,090
remind me your first name again.

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AUDIENCE: Zhongling

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PROFESSOR: What?

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00:08:38,220 --> 00:08:39,059
AUDIENCE: Zhongling

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PROFESSOR: Johnny-- is
that they take on brokerage

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responsibilities--

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in the world of finance
or on trading platforms,

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00:08:50,610 --> 00:08:54,900
trading platforms, by
and large, early on

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00:08:54,900 --> 00:08:58,220
did not allow the
public to transact.

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The New York Stock Exchange,
when it started in the late

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00:09:01,710 --> 00:09:08,400
18th century by an arrangement
between members in the south

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of Manhattan, you know,
near Wall Street--

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00:09:11,160 --> 00:09:13,580
the physical Wall
Street literally--

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00:09:13,580 --> 00:09:16,770
it was a membership society
or a membership club.

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00:09:16,770 --> 00:09:20,020
And you had to be a
member to transact.

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00:09:20,020 --> 00:09:21,950
Well, those
membership and clubs,

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00:09:21,950 --> 00:09:26,150
just like a golf club or a
tennis club, had a set of rules

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00:09:26,150 --> 00:09:29,780
well before governments
got involved.

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And they would transact.

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That became, well, what is now
known as intermediated access

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00:09:37,230 --> 00:09:40,490
that I don't think any of you
are members of the New York

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Stock Exchange, are you?

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I'm not either.

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So we can't actually transact
with the New York Stock

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00:09:45,600 --> 00:09:46,520
Exchange.

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00:09:46,520 --> 00:09:48,620
But we can use an
app, like Robinhood

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00:09:48,620 --> 00:09:51,650
and ask them to transact with
the New York Stock Exchange

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00:09:51,650 --> 00:09:55,410
or Goldman Sachs or
Vanguard or you know, whom--

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00:09:55,410 --> 00:09:57,170
so that's called
intermediated access.

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00:09:57,170 --> 00:10:00,710
So two things we've
had is 1, is Coinbase

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00:10:00,710 --> 00:10:02,240
might be the other side.

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00:10:02,240 --> 00:10:05,660
2, there's-- they don't-- they
lack intermediated access.

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00:10:05,660 --> 00:10:06,160
Eric?

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00:10:06,160 --> 00:10:08,470
AUDIENCE: They don't store
the [INAUDIBLE] that's being

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00:10:08,470 --> 00:10:09,112
[INAUDIBLE].

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00:10:09,112 --> 00:10:09,820
PROFESSOR: Right.

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00:10:09,820 --> 00:10:11,955
AUDIENCE: --in the [INAUDIBLE].

215
00:10:11,955 --> 00:10:14,780
The Coinbase actually
stores the currency.

216
00:10:14,780 --> 00:10:15,680
PROFESSOR: Right.

217
00:10:15,680 --> 00:10:18,600
So Eric says the
third big difference--

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00:10:18,600 --> 00:10:20,100
I mean, there are
other differences.

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00:10:20,100 --> 00:10:23,280
But the third big difference
is crypto exchanges

220
00:10:23,280 --> 00:10:25,310
store the value.

221
00:10:25,310 --> 00:10:28,640
The New York Stock Exchange
did not store the value.

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00:10:28,640 --> 00:10:31,970
Your value is
technically ultimately

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00:10:31,970 --> 00:10:37,100
on a ledger at the
Depository Trust Corp., DTCC.

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00:10:37,100 --> 00:10:40,940
And just like the payment
system has the central bank

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00:10:40,940 --> 00:10:44,420
and commercial banks,
securities ledgers

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00:10:44,420 --> 00:10:48,200
have a central ledger,
which is DTCC in the US

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00:10:48,200 --> 00:10:52,160
and in other countries, other
similar clearing organizations.

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00:10:52,160 --> 00:10:55,250
And underneath it
are the brokers

229
00:10:55,250 --> 00:10:59,910
that hold things-- it's
called in street name.

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00:10:59,910 --> 00:11:03,360
But whatever it's called,
know that most exchanges,

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00:11:03,360 --> 00:11:06,310
traditional securities markets--

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00:11:06,310 --> 00:11:09,630
those are the three big
difference-- custody,

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00:11:09,630 --> 00:11:14,690
intermediated access, and who's
making markets against you.

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00:11:14,690 --> 00:11:15,270
Please.

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00:11:15,270 --> 00:11:17,190
AUDIENCE: Maybe
just a question I

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00:11:17,190 --> 00:11:19,620
have is when I
click the exchange,

237
00:11:19,620 --> 00:11:23,200
every transaction is backed
by the [INAUDIBLE] right?

238
00:11:23,200 --> 00:11:25,630
So [INAUDIBLE] if
I sell bitcoin,

239
00:11:25,630 --> 00:11:28,540
I must have owned
the bitcoin before,

240
00:11:28,540 --> 00:11:31,450
whereas in the relative
exchange you can just

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00:11:31,450 --> 00:11:35,820
issue trade without owning
[INAUDIBLE] or money,

242
00:11:35,820 --> 00:11:36,480
just a promise.

243
00:11:36,480 --> 00:11:39,330
So you can create
the [INAUDIBLE]..

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00:11:39,330 --> 00:11:41,430
PROFESSOR: Well,
so you're raising

245
00:11:41,430 --> 00:11:43,980
a question of the
difference between cash

246
00:11:43,980 --> 00:11:49,410
markets and derivative markets,
which exist and have existed

247
00:11:49,410 --> 00:11:52,230
for a couple hundred years
so that in a cash market,

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00:11:52,230 --> 00:11:54,330
you're selling an
ownership right

249
00:11:54,330 --> 00:11:58,860
and buying an ownership right
in a stock and bond or even

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00:11:58,860 --> 00:12:00,270
in bitcoin.

251
00:12:00,270 --> 00:12:03,450
And then, in derivative
markets, you're

252
00:12:03,450 --> 00:12:06,210
entering into a contract--

253
00:12:06,210 --> 00:12:08,820
or sometimes people call them
contract for differences,

254
00:12:08,820 --> 00:12:12,210
but a contract that's going
to relate to a price--

255
00:12:12,210 --> 00:12:17,800
a pricing mechanism
from some of--

256
00:12:17,800 --> 00:12:19,395
oracle it can be called.

257
00:12:19,395 --> 00:12:21,020
In computer science,
they would call it

258
00:12:21,020 --> 00:12:24,440
an oracle but in the
commodities market

259
00:12:24,440 --> 00:12:28,470
by some index provider
or some pricing provider.

260
00:12:28,470 --> 00:12:32,330
That's the difference is
between cash and derivatives.

261
00:12:32,330 --> 00:12:35,060
But are you saying something
even in addition to that?

262
00:12:35,060 --> 00:12:37,352
AUDIENCE: Yeah, because I
was going to get to the point

263
00:12:37,352 --> 00:12:39,620
that [INAUDIBLE] launched
the bitcoin [INAUDIBLE]..

264
00:12:39,620 --> 00:12:40,328
PROFESSOR: Right.

265
00:12:40,328 --> 00:12:42,793
AUDIENCE: And I had
[INAUDIBLE] seems

266
00:12:42,793 --> 00:12:47,292
to always be the derivative in
[INAUDIBLE] cash [INAUDIBLE]..

267
00:12:47,292 --> 00:12:48,000
PROFESSOR: Right.

268
00:12:48,000 --> 00:12:50,325
So I ask you all to
go as deep as you can

269
00:12:50,325 --> 00:12:52,200
between now and Thursday,
because you'll have

270
00:12:52,200 --> 00:12:53,520
the founder of ICE with us.

271
00:12:53,520 --> 00:12:59,670
But ICE is a one-day futures
contract that literally you're

272
00:12:59,670 --> 00:13:03,680
buying a derivative of bitcoin.

273
00:13:03,680 --> 00:13:06,230
But it's a very unusual
futures contract,

274
00:13:06,230 --> 00:13:10,450
because it has to be
100% collateralized.

275
00:13:10,450 --> 00:13:11,650
So there's no margin.

276
00:13:11,650 --> 00:13:14,800
There's no ability to have
leverage or debt or credit

277
00:13:14,800 --> 00:13:16,240
extension.

278
00:13:16,240 --> 00:13:20,350
And one day later, you
get delivered the bitcoin.

279
00:13:20,350 --> 00:13:23,730
So one of the interesting
questions for Thursday

280
00:13:23,730 --> 00:13:25,690
that you can press
Jeff and Kelly on

281
00:13:25,690 --> 00:13:28,990
is, is this really a
derivatives contract?

282
00:13:28,990 --> 00:13:31,210
Or is it a form
of a cash contract

283
00:13:31,210 --> 00:13:34,420
that just starts as a
derivative, and 24 hours later

284
00:13:34,420 --> 00:13:39,190
it becomes cash, because
it's 100% collateralized.

285
00:13:39,190 --> 00:13:41,020
And it settles one day later--

286
00:13:41,020 --> 00:13:42,730
very unusual future contract.

287
00:13:42,730 --> 00:13:45,430
I'm not aware of any
other one-day future 100%

288
00:13:45,430 --> 00:13:47,500
collateralized contract.

289
00:13:47,500 --> 00:13:52,360
It feels to me that this is,
in essence, a cash contract

290
00:13:52,360 --> 00:13:55,450
by another name for one
day that facilitates

291
00:13:55,450 --> 00:14:00,040
being regulated by an official
regulator for derivatives.

292
00:14:00,040 --> 00:14:02,500
That's for that one.

293
00:14:02,500 --> 00:14:07,690
But I thought you were saying
one other thing is, can you

294
00:14:07,690 --> 00:14:10,150
sell short bitcoin?

295
00:14:10,150 --> 00:14:12,720
Has anybody-- Sean?

296
00:14:12,720 --> 00:14:15,540
I don't know how, but
I have shorted bitcoin

297
00:14:15,540 --> 00:14:18,830
before [INAUDIBLE].

298
00:14:18,830 --> 00:14:21,772
PROFESSOR: Sean has
shorted ether bitcoin and--

299
00:14:21,772 --> 00:14:22,730
AUDIENCE: Bitcoin cash.

300
00:14:22,730 --> 00:14:24,260
PROFESSOR: Bitcoin cash.

301
00:14:24,260 --> 00:14:25,140
So how did you do it?

302
00:14:25,140 --> 00:14:27,060
AUDIENCE: Well, there
is-- it's not organized,

303
00:14:27,060 --> 00:14:28,500
for instance [INAUDIBLE].

304
00:14:32,350 --> 00:14:36,600
PROFESSOR: Shorting is selling
something you don't own

305
00:14:36,600 --> 00:14:40,070
and taking the
opposite price risk--

306
00:14:40,070 --> 00:14:42,800
in essence, winning
when a price goes down

307
00:14:42,800 --> 00:14:45,650
and losing when a price goes up.

308
00:14:45,650 --> 00:14:47,520
And it's existed for
hundreds of years.

309
00:14:47,520 --> 00:14:48,490
It's not new.

310
00:14:48,490 --> 00:14:51,860
But it's-- to short
something, in most markets,

311
00:14:51,860 --> 00:14:54,560
you need to be able to
borrow the underlying.

312
00:14:54,560 --> 00:14:58,100
To sell a stock
that you don't own,

313
00:14:58,100 --> 00:15:00,620
there's a whole market
called stock borrow, where

314
00:15:00,620 --> 00:15:02,480
ultimately-- and we
debated this one day.

315
00:15:02,480 --> 00:15:04,340
And there are
experts in this room

316
00:15:04,340 --> 00:15:06,050
that have worked in
stock borrow, where

317
00:15:06,050 --> 00:15:07,430
you borrow the security.

318
00:15:07,430 --> 00:15:08,780
And then, you sell it.

319
00:15:08,780 --> 00:15:09,680
Or you sell it.

320
00:15:09,680 --> 00:15:12,620
And within the two days
that you have to deliver it,

321
00:15:12,620 --> 00:15:15,300
your broker borrows it for you.

322
00:15:15,300 --> 00:15:16,970
So I'm assuming,
Sean, that when you

323
00:15:16,970 --> 00:15:22,710
shorted bitcoin, what was
behind that app-- somebody

324
00:15:22,710 --> 00:15:23,210
borrowed it.

325
00:15:23,210 --> 00:15:25,122
AUDIENCE: Yeah,
[INAUDIBLE] borrowed it.

326
00:15:25,122 --> 00:15:28,290
And I think the
market [INAUDIBLE]..

327
00:15:33,680 --> 00:15:35,640
PROFESSOR: Right.

328
00:15:35,640 --> 00:15:38,607
And so just to move to
the third question--

329
00:15:38,607 --> 00:15:41,190
so three big differences-- and
we're going to dig into these--

330
00:15:41,190 --> 00:15:43,960
custody, intermediated broke--

331
00:15:43,960 --> 00:15:46,170
you know, basically, do
you have an intermediary?

332
00:15:46,170 --> 00:15:48,180
Or are you direct?

333
00:15:48,180 --> 00:15:50,940
And is the exchange
a market maker?

334
00:15:54,610 --> 00:15:59,140
What are all the hacks and
manipulation and so forth?

335
00:15:59,140 --> 00:16:02,710
Tell you about this state
of security at these

336
00:16:02,710 --> 00:16:05,860
and the state of
market integrity.

337
00:16:05,860 --> 00:16:12,470
AUDIENCE: It makes the crypto
exchange insecure and less

338
00:16:12,470 --> 00:16:16,057
[INAUDIBLE] and
[INAUDIBLE] less customers

339
00:16:16,057 --> 00:16:18,015
see the financial
institution or the mainstream

340
00:16:18,015 --> 00:16:19,476
financial institution.

341
00:16:19,476 --> 00:16:20,440
PROFESSOR: Right.

342
00:16:20,440 --> 00:16:23,800
So in essence, that
regardless of where

343
00:16:23,800 --> 00:16:27,670
you come out on pro-regulation
or anti-regulation or

344
00:16:27,670 --> 00:16:31,660
pro-business or anti-business
or pro-bitcoin or anti,

345
00:16:31,660 --> 00:16:33,610
it's a question of trust.

346
00:16:33,610 --> 00:16:36,670
When you're losing a
lot of assets to theft--

347
00:16:36,670 --> 00:16:39,340
and a hack is just another
word for stealing--

348
00:16:42,620 --> 00:16:47,540
or you're losing money
to market manipulation,

349
00:16:47,540 --> 00:16:49,370
then that tends
to have, you know,

350
00:16:49,370 --> 00:16:52,460
lower trust in
these institutions.

351
00:16:52,460 --> 00:16:54,290
I mean, we can debate
what to do about it.

352
00:16:54,290 --> 00:16:56,253
I publicly have a point of view.

353
00:16:56,253 --> 00:16:57,920
And I'm going to share
it with you as we

354
00:16:57,920 --> 00:16:59,660
go through this class today.

355
00:16:59,660 --> 00:17:02,330
But you don't need to share
the second part, which

356
00:17:02,330 --> 00:17:05,960
is where I am on how to
address that to recognize

357
00:17:05,960 --> 00:17:09,890
that the high level
of custody issues

358
00:17:09,890 --> 00:17:13,730
and the high level of
market manipulation issues

359
00:17:13,730 --> 00:17:15,829
probably is
associated with lower

360
00:17:15,829 --> 00:17:17,900
trust in these institutions.

361
00:17:17,900 --> 00:17:21,050
Even now, there's,
you know, 30 million

362
00:17:21,050 --> 00:17:23,390
plus people that have
used crypto exchanges

363
00:17:23,390 --> 00:17:26,390
and 30 or 40 people
in this class.

364
00:17:26,390 --> 00:17:28,130
So there is a level of trust.

365
00:17:28,130 --> 00:17:32,990
I'm just saying that
I think that's what's

366
00:17:32,990 --> 00:17:36,780
really at the middle of this.

367
00:17:36,780 --> 00:17:39,150
So let's have-- so we
had a bunch of readings.

368
00:17:39,150 --> 00:17:41,400
I'll skip over that.

369
00:17:41,400 --> 00:17:45,620
So crypto exchanges-- so this
is what a centralized exchange

370
00:17:45,620 --> 00:17:46,120
does.

371
00:17:46,120 --> 00:17:47,790
There's about 200 of them.

372
00:17:47,790 --> 00:17:51,210
Probably in the history of
bitcoin, there's 100 to 200

373
00:17:51,210 --> 00:17:53,790
that have already opened
and shut, you know.

374
00:17:53,790 --> 00:17:56,640
So somewhere in the history,
there's been 300 or 400.

375
00:17:56,640 --> 00:17:59,850
It's still pretty
darn decentralized

376
00:17:59,850 --> 00:18:03,770
in terms of the number of them.

377
00:18:03,770 --> 00:18:06,840
And I'll later say, I think one
of the things that will happen

378
00:18:06,840 --> 00:18:09,590
is we'll see more consolidation.

379
00:18:09,590 --> 00:18:10,940
There's just so many of them.

380
00:18:10,940 --> 00:18:13,880
That's an unusual
market structure.

381
00:18:13,880 --> 00:18:20,150
Markets usually coalesce around
some central pricing function.

382
00:18:20,150 --> 00:18:23,360
You want to buy and sell your
apples hundreds of years ago.

383
00:18:23,360 --> 00:18:25,028
You'd come into
the center market

384
00:18:25,028 --> 00:18:26,945
if you wanted to get the
best price discovery.

385
00:18:26,945 --> 00:18:28,612
AUDIENCE: Is there a
reason now, though,

386
00:18:28,612 --> 00:18:32,260
because you have [INAUDIBLE]
in different areas alone.

387
00:18:32,260 --> 00:18:35,180
So [INAUDIBLE] same
assets [INAUDIBLE]..

388
00:18:35,180 --> 00:18:36,680
PROFESSOR: So the
question is, do we

389
00:18:36,680 --> 00:18:40,270
have so many crypto exchanges
in part because of lots

390
00:18:40,270 --> 00:18:41,270
of different regulation?

391
00:18:41,270 --> 00:18:42,770
I think that contributes to it.

392
00:18:42,770 --> 00:18:45,920
I would say yes.

393
00:18:45,920 --> 00:18:48,040
But I don't think
that's the only reason.

394
00:18:48,040 --> 00:18:49,715
Yeah.

395
00:18:49,715 --> 00:18:53,110
AUDIENCE: I think another
reason might be [INAUDIBLE]..

396
00:19:01,935 --> 00:19:04,060
PROFESSOR: So you're saying
traditional exchanges--

397
00:19:04,060 --> 00:19:05,490
there was the--

398
00:19:05,490 --> 00:19:07,500
especially for
physical goods, apples,

399
00:19:07,500 --> 00:19:11,060
there was a locational advantage
of being in the central square.

400
00:19:11,060 --> 00:19:12,090
I agree with that.

401
00:19:12,090 --> 00:19:15,765
There was locational advantages
to be in New York or London.

402
00:19:15,765 --> 00:19:18,270
Do you know in the 19th
century the Philadelphia Stock

403
00:19:18,270 --> 00:19:20,640
Exchange was bigger than
the New York Stock Exchange

404
00:19:20,640 --> 00:19:23,160
until about the 1840s or '50s?

405
00:19:23,160 --> 00:19:26,250
Post-Civil War, New York took
off compared to Philadelphia,

406
00:19:26,250 --> 00:19:29,670
but there is
locational advantages.

407
00:19:29,670 --> 00:19:33,150
But in a digital age, there's
less locational advantages.

408
00:19:33,150 --> 00:19:35,130
I agree with that.

409
00:19:35,130 --> 00:19:38,580
I also think it's a very
early days in some regards.

410
00:19:38,580 --> 00:19:40,530
It doesn't take much.

411
00:19:40,530 --> 00:19:42,420
There's one software
provider that

412
00:19:42,420 --> 00:19:48,075
provides the software for
over 100 crypto exchanges.

413
00:19:48,075 --> 00:19:50,450
They're not the biggest ones,
because some of the biggest

414
00:19:50,450 --> 00:19:53,060
ones write their own software.

415
00:19:53,060 --> 00:19:56,360
But it's-- at least the
CEO that told me this,

416
00:19:56,360 --> 00:20:00,410
who runs this software company
said that it was over 20%

417
00:20:00,410 --> 00:20:02,730
and maybe 30% of the volume.

418
00:20:02,730 --> 00:20:05,150
So half of the crypto
exchanges, of that,

419
00:20:05,150 --> 00:20:08,940
a quarter of the volume,
all have the same software,

420
00:20:08,940 --> 00:20:11,900
meaning the software
for the order book,

421
00:20:11,900 --> 00:20:16,590
for the custody, solutions,
and things like that.

422
00:20:16,590 --> 00:20:19,280
You, too, could start
a crypto exchange.

423
00:20:19,280 --> 00:20:22,700
Please be compliant
with securities law

424
00:20:22,700 --> 00:20:24,920
if you're going to
operate here in the US--

425
00:20:24,920 --> 00:20:27,660
well, actually if you're going
to operate in any country,

426
00:20:27,660 --> 00:20:30,260
but particularly in the US.

427
00:20:30,260 --> 00:20:31,762
So it's not hard to start up.

428
00:20:31,762 --> 00:20:32,720
That's one other thing.

429
00:20:32,720 --> 00:20:34,873
It's not hard to start
up a crypto exchange

430
00:20:34,873 --> 00:20:37,040
right now if you've got a
software provider that can

431
00:20:37,040 --> 00:20:39,910
give you basically a package.

432
00:20:39,910 --> 00:20:41,510
And you put a new name on it.

433
00:20:41,510 --> 00:20:45,170
And off you're going.

434
00:20:45,170 --> 00:20:47,630
But they're matching agents,
meaning they're matching buys

435
00:20:47,630 --> 00:20:48,640
and sells.

436
00:20:48,640 --> 00:20:51,170
They are also counterparties,
which we talked about.

437
00:20:51,170 --> 00:20:52,670
And they're custodians.

438
00:20:52,670 --> 00:20:55,130
Traditional exchanges
do the first.

439
00:20:55,130 --> 00:20:58,910
But they tend not to do
the second and third.

440
00:20:58,910 --> 00:21:02,870
Decentralized exchanges--
decentralized exchanges

441
00:21:02,870 --> 00:21:05,060
are very small
part of the market.

442
00:21:05,060 --> 00:21:06,530
We'll see some
numbers later that

443
00:21:06,530 --> 00:21:08,420
estimate it's a little
less than one half

444
00:21:08,420 --> 00:21:15,160
of 1% of the volume right
now in October of 2018.

445
00:21:15,160 --> 00:21:18,550
But they're a computer algorithm
that allows you to trade peer

446
00:21:18,550 --> 00:21:22,620
to peer without a centralized.

447
00:21:22,620 --> 00:21:25,410
And there's a lot of variation
in the decentralized space.

448
00:21:25,410 --> 00:21:26,880
And I'll take any
questions on it.

449
00:21:26,880 --> 00:21:31,130
But it's an interesting
piece, where it's saying,

450
00:21:31,130 --> 00:21:33,750
Kelly and I don't
really need Coinbase

451
00:21:33,750 --> 00:21:36,840
to trade if there's
some application that

452
00:21:36,840 --> 00:21:38,610
can find each of us.

453
00:21:38,610 --> 00:21:39,870
And we can find each other.

454
00:21:43,720 --> 00:21:44,240
Ross.

455
00:21:44,240 --> 00:21:46,145
AUDIENCE: So it's really--

456
00:21:46,145 --> 00:21:49,908
the decentralized exchange is--

457
00:21:49,908 --> 00:21:52,200
I'm trying to understand what
you're saying correctly--

458
00:21:52,200 --> 00:21:55,125
centralized but only for
the matching agent function.

459
00:21:55,125 --> 00:21:56,000
PROFESSOR: Very good.

460
00:21:56,000 --> 00:21:56,255
Correct.

461
00:21:56,255 --> 00:21:56,510
AUDIENCE: Right.

462
00:21:56,510 --> 00:21:58,310
And it just doesn't
have the other two,

463
00:21:58,310 --> 00:21:59,908
because you can just trade--

464
00:21:59,908 --> 00:22:00,616
PROFESSOR: Right.

465
00:22:00,616 --> 00:22:01,908
AUDIENCE: --if you have a node.

466
00:22:01,908 --> 00:22:04,700
PROFESSOR: So Ross has
raised-- are decentralized

467
00:22:04,700 --> 00:22:09,170
really centralized for matching
and don't have the other two?

468
00:22:09,170 --> 00:22:11,420
Let me answer it in reverse.

469
00:22:11,420 --> 00:22:16,630
Decentralized exchanges do not
have any custody function--

470
00:22:16,630 --> 00:22:20,050
no custody function,
though I could envision

471
00:22:20,050 --> 00:22:22,750
that somehow they could set
up a decentralized escrow

472
00:22:22,750 --> 00:22:25,210
function through some multisig.

473
00:22:25,210 --> 00:22:28,570
You could technologically
even do that decentralized.

474
00:22:28,570 --> 00:22:33,040
But what I know now is none of
them have a custody solution.

475
00:22:33,040 --> 00:22:35,470
And none of them
are counterparties.

476
00:22:35,470 --> 00:22:38,530
That is accurate.

477
00:22:38,530 --> 00:22:42,010
It's not clear that all
of them are centralized.

478
00:22:42,010 --> 00:22:43,420
There's one developer.

479
00:22:43,420 --> 00:22:46,080
There's one set of
computer technologists.

480
00:22:46,080 --> 00:22:49,060
But you can actually,
if you wish,

481
00:22:49,060 --> 00:22:52,240
put that algorithm out and just
say, that was a fun project.

482
00:22:52,240 --> 00:22:54,220
I'm a computer scientist at MIT.

483
00:22:54,220 --> 00:22:55,330
And just put it out there.

484
00:22:55,330 --> 00:22:57,400
And Kelly and I could
find each other.

485
00:22:57,400 --> 00:23:00,310
But usually, there's an
economic model, where somebody

486
00:23:00,310 --> 00:23:03,640
is trying to make some money.

487
00:23:03,640 --> 00:23:07,600
And so then, there's some
centralization of the software.

488
00:23:07,600 --> 00:23:13,030
And the SEC just brought their
first legal action last week

489
00:23:13,030 --> 00:23:17,080
against a
decentralized exchange.

490
00:23:17,080 --> 00:23:20,080
And it was, in essence, against
the software developers.

491
00:23:20,080 --> 00:23:22,080
Now, there's the
First Amendment.

492
00:23:22,080 --> 00:23:24,160
Don't get me wrong.

493
00:23:24,160 --> 00:23:27,340
There is clearly a freedom
of speech and freedom

494
00:23:27,340 --> 00:23:29,200
of expression in this country.

495
00:23:29,200 --> 00:23:30,850
But you could be a
software developer

496
00:23:30,850 --> 00:23:33,580
and still be complicit
in some crime.

497
00:23:33,580 --> 00:23:38,440
And both the SEC and CFTC
have, in the past 12 months,

498
00:23:38,440 --> 00:23:41,410
brought in legal actions
against software developers.

499
00:23:41,410 --> 00:23:45,460
And it's interesting that
in the last week, the SEC--

500
00:23:45,460 --> 00:23:46,360
they settled.

501
00:23:46,360 --> 00:23:52,000
It was sort of a thing
where, EtherDelta

502
00:23:52,000 --> 00:23:56,470
had put a decentralized
trading platform for--

503
00:23:56,470 --> 00:24:00,530
what do you think the SEC
is most interested in?

504
00:24:00,530 --> 00:24:01,697
What type of-- what's that--

505
00:24:01,697 --> 00:24:02,322
AUDIENCE: ICOs.

506
00:24:02,322 --> 00:24:03,290
PROFESSOR: --Catalina?

507
00:24:03,290 --> 00:24:07,220
ICOs-- yeah, so it was
a decentralized platform

508
00:24:07,220 --> 00:24:12,810
to trade Ethereum-based, more
specifically, ERC-20 tokens.

509
00:24:12,810 --> 00:24:18,670
Decentralized-- Eilon and I
could trade our ERC-20 tokens.

510
00:24:18,670 --> 00:24:21,536
But they said, no, no,
that's a Securities Exchange.

511
00:24:25,420 --> 00:24:28,270
So and it's the first action
the Securities and Exchange

512
00:24:28,270 --> 00:24:30,555
Commission has brought
against any crypto exchange.

513
00:24:30,555 --> 00:24:32,680
Why they picked it
decentralized to be their first?

514
00:24:32,680 --> 00:24:34,930
That's a story I don't know.

515
00:24:34,930 --> 00:24:37,860
But they did.

516
00:24:37,860 --> 00:24:41,250
So that's decentralized-- so
less than 1/2% of the volume,

517
00:24:41,250 --> 00:24:44,710
but an interesting and
tough, you know, new area.

518
00:24:44,710 --> 00:24:48,030
And it brings you
back to maybe Nakamoto

519
00:24:48,030 --> 00:24:51,990
more vision decentralized.

520
00:24:51,990 --> 00:24:54,450
So as I said,
responsible, just like

521
00:24:54,450 --> 00:24:58,290
in this classroom for probably
95% percent of the bitcoin

522
00:24:58,290 --> 00:25:01,890
and ether transactions--

523
00:25:01,890 --> 00:25:05,100
who do you think the
biggest sellers are

524
00:25:05,100 --> 00:25:06,700
in bitcoin around the globe?

525
00:25:06,700 --> 00:25:08,020
AUDIENCE: Miners.

526
00:25:08,020 --> 00:25:09,000
PROFESSOR: What's that?

527
00:25:09,000 --> 00:25:09,708
AUDIENCE: Miners.

528
00:25:09,708 --> 00:25:12,860
PROFESSOR: Miners--
right-- miners.

529
00:25:12,860 --> 00:25:15,580
Who do you think the
biggest sellers of ether--

530
00:25:15,580 --> 00:25:17,884
ETH is?

531
00:25:17,884 --> 00:25:19,240
AUDIENCE: [INAUDIBLE]

532
00:25:19,240 --> 00:25:20,380
PROFESSOR: Anybody?

533
00:25:20,380 --> 00:25:21,380
AUDIENCE: ICOs.

534
00:25:21,380 --> 00:25:22,338
PROFESSOR: What's that?

535
00:25:22,338 --> 00:25:23,180
IC-- what'd you say?

536
00:25:23,180 --> 00:25:23,870
AUDIENCE: ICOs.

537
00:25:23,870 --> 00:25:26,720
PROFESSOR: ICOs,
yes, because ICOs--

538
00:25:26,720 --> 00:25:29,930
80% of ICOs are
done on Ethereum.

539
00:25:29,930 --> 00:25:31,490
And generally, in
the early days,

540
00:25:31,490 --> 00:25:34,970
they were selling
a token for bitcoin

541
00:25:34,970 --> 00:25:36,660
when Vitalik Buterin did his.

542
00:25:36,660 --> 00:25:40,190
And he sold ETH for bitcoin.

543
00:25:40,190 --> 00:25:42,500
But we've moved-- in
the last 12 months,

544
00:25:42,500 --> 00:25:45,380
it's basically selling for ETH.

545
00:25:45,380 --> 00:25:50,680
So then, you want to sell
it generally speaking.

546
00:25:50,680 --> 00:25:53,520
I mean, they might keep some.

547
00:25:53,520 --> 00:25:55,980
Over 30 million direct members--

548
00:25:55,980 --> 00:25:58,920
and as we talked about, they
lack intermediated access

549
00:25:58,920 --> 00:26:01,600
and as we'll see,
market integrity rules.

550
00:26:01,600 --> 00:26:04,620
So this is, you know,
the market as it is.

551
00:26:07,130 --> 00:26:10,130
The most important part of this
slide to me in this discussion

552
00:26:10,130 --> 00:26:12,210
is not the volatility,
which we now.

553
00:26:12,210 --> 00:26:14,720
And frankly,
actually, recently, we

554
00:26:14,720 --> 00:26:16,980
haven't had much
volatility for six months.

555
00:26:16,980 --> 00:26:19,430
But six months isn't enough
statistical relevance

556
00:26:19,430 --> 00:26:22,970
to say what the next six
years or 60 years will be.

557
00:26:22,970 --> 00:26:27,050
But 54% is bitcoin.

558
00:26:27,050 --> 00:26:29,420
Ethereum is, what, 16%.

559
00:26:29,420 --> 00:26:33,320
So between them, that's 70%.

560
00:26:33,320 --> 00:26:36,860
So we already know in the US
and in many other jurisdictions

561
00:26:36,860 --> 00:26:40,550
that 3/4 of the market
are not ICOs or not

562
00:26:40,550 --> 00:26:44,250
what would be called securities,
even in the US, Canada,

563
00:26:44,250 --> 00:26:46,310
and Taiwan, the three
jurisdictions that

564
00:26:46,310 --> 00:26:49,270
follow something similar
to the Howey Test

565
00:26:49,270 --> 00:26:50,570
that we've talked about.

566
00:26:50,570 --> 00:26:55,750
3/4 of the market
is non-securities.

567
00:26:55,750 --> 00:27:00,220
It's just a commodity,
a cash crypto.

568
00:27:00,220 --> 00:27:02,933
So you'll hear debates about
initial coin offerings.

569
00:27:02,933 --> 00:27:03,850
And what's a security?

570
00:27:03,850 --> 00:27:04,933
And what's not a security?

571
00:27:04,933 --> 00:27:07,870
Relevant-- relevant
and important debate,

572
00:27:07,870 --> 00:27:10,540
but for 3/4 of the
market, it's not

573
00:27:10,540 --> 00:27:14,620
particularly relevant as a legal
matter, as a regulatory matter.

574
00:27:14,620 --> 00:27:15,570
Brodish.

575
00:27:15,570 --> 00:27:17,030
AUDIENCE: I have a question.

576
00:27:17,030 --> 00:27:21,265
So which bitcoins will become
a stable value crypto currency?

577
00:27:21,265 --> 00:27:23,470
And what is the
relevance of an exchange?

578
00:27:23,470 --> 00:27:26,340
If it is not an asset,
what is [INAUDIBLE]??

579
00:27:26,340 --> 00:27:27,440
PROFESSOR: So is--

580
00:27:27,440 --> 00:27:29,740
Brotish, is your
question that if there's

581
00:27:29,740 --> 00:27:33,325
limited volatility, what's
the value of an exchange?

582
00:27:35,910 --> 00:27:37,620
The value is still
is that some people

583
00:27:37,620 --> 00:27:40,650
will want to sell that
asset or buy that asset.

584
00:27:40,650 --> 00:27:44,600
Some people might-- if
it's a store of value,

585
00:27:44,600 --> 00:27:47,390
I might still want to
sell that store of value

586
00:27:47,390 --> 00:27:51,720
so that I can buy a
car or go to school

587
00:27:51,720 --> 00:27:55,580
or pay for my medical bills.

588
00:27:55,580 --> 00:27:58,910
You don't think that's as
exciting as a volatile asset.

589
00:27:58,910 --> 00:28:00,425
Is that what you're
saying, Brodish?

590
00:28:00,425 --> 00:28:01,050
AUDIENCE: Yeah.

591
00:28:01,050 --> 00:28:02,925
PROFESSOR: Well, at
Goldman Sachs, for years,

592
00:28:02,925 --> 00:28:06,220
it used to be that I was taught
volatility is our friend.

593
00:28:06,220 --> 00:28:09,700
When you're an
investment banking

594
00:28:09,700 --> 00:28:16,760
business and making markets, a
market maker likes volatility.

595
00:28:16,760 --> 00:28:18,625
So you might be thinking
as a market maker

596
00:28:18,625 --> 00:28:19,840
or as an investment banker.

597
00:28:19,840 --> 00:28:25,330
But I still think that if
bitcoin or any of these

598
00:28:25,330 --> 00:28:29,360
became very stable
stores of value,

599
00:28:29,360 --> 00:28:33,340
people would still want
to trade in and out of it.

600
00:28:33,340 --> 00:28:35,860
But you're saying it's
just less exciting.

601
00:28:35,860 --> 00:28:38,359
For you or for the
market, you think?

602
00:28:38,359 --> 00:28:39,734
AUDIENCE: For the
market, maybe--

603
00:28:39,734 --> 00:28:40,776
I don't have any bitcoin.

604
00:28:40,776 --> 00:28:41,810
PROFESSOR: Oh, OK.

605
00:28:41,810 --> 00:28:44,240
I don't either.

606
00:28:44,240 --> 00:28:46,370
So here are the top
crypto exchanges.

607
00:28:46,370 --> 00:28:50,560
I caution-- this was
printed a week ago.

608
00:28:50,560 --> 00:29:00,410
It's only accurate to say that
a web group, CryptoCompare, puts

609
00:29:00,410 --> 00:29:02,200
out a monthly report.

610
00:29:02,200 --> 00:29:04,980
And I grabbed the
October report.

611
00:29:04,980 --> 00:29:08,550
But I would--
there's no confidence

612
00:29:08,550 --> 00:29:11,520
that these numbers are accurate,
except for I can tell you

613
00:29:11,520 --> 00:29:15,300
CryptoCompare has relationships
with about 140 exchanges.

614
00:29:15,300 --> 00:29:17,930
And those 140 exchanges
give their information

615
00:29:17,930 --> 00:29:20,190
to CryptoCompare.

616
00:29:20,190 --> 00:29:23,290
But here are the big ones.

617
00:29:23,290 --> 00:29:25,980
What do you take
from this slide when

618
00:29:25,980 --> 00:29:30,300
you look at either the average
trade side, the trades in 24

619
00:29:30,300 --> 00:29:32,600
hours, the volumes--

620
00:29:32,600 --> 00:29:33,240
anything?

621
00:29:33,240 --> 00:29:37,560
I mean, has anybody
traded on an exchange

622
00:29:37,560 --> 00:29:41,120
that's not listed there,
if you're willing to say?

623
00:29:41,120 --> 00:29:42,120
Eilon has, huh?

624
00:29:42,120 --> 00:29:42,550
AUDIENCE: In Coinbase.

625
00:29:42,550 --> 00:29:42,980
AUDIENCE: Coinbase.

626
00:29:42,980 --> 00:29:43,840
AUDIENCE: Coinbase.

627
00:29:43,840 --> 00:29:46,330
PROFESSOR: Coinbase isn't
listed in the top 14--

628
00:29:46,330 --> 00:29:51,610
look at that-- for the month
of October by CryptoCompare.

629
00:29:51,610 --> 00:29:52,510
Sabrina.

630
00:29:52,510 --> 00:29:53,350
AUDIENCE: KuCoin.

631
00:29:53,350 --> 00:29:53,790
PROFESSOR: What's that?

632
00:29:53,790 --> 00:29:54,605
AUDIENCE: KuCoin.

633
00:29:54,605 --> 00:29:55,480
PROFESSOR: True Coin?

634
00:29:55,480 --> 00:29:56,460
AUDIENCE: KuCoin.

635
00:29:56,460 --> 00:29:57,440
PROFESSOR: KuCoin.

636
00:29:57,440 --> 00:29:59,487
Oh, KuCoin.

637
00:29:59,487 --> 00:30:00,570
AUDIENCE: I used Poloniex.

638
00:30:00,570 --> 00:30:02,230
PROFESSOR: Poloniex
which is definitely

639
00:30:02,230 --> 00:30:04,278
smaller than this [INAUDIBLE].

640
00:30:04,278 --> 00:30:06,570
AUDIENCE: I was just going
to say [INAUDIBLE] motivated

641
00:30:06,570 --> 00:30:10,912
on selling [INAUDIBLE] is do
you know US-based exchanges?

642
00:30:10,912 --> 00:30:13,120
PROFESSOR: So the US-based
exchanges aren't up there.

643
00:30:13,120 --> 00:30:15,550
So we don't know if these
numbers are accurate.

644
00:30:15,550 --> 00:30:19,370
They are what CryptoCompare
collects from 140 exchanges.

645
00:30:19,370 --> 00:30:21,700
But it doesn't mean
they are accurate.

646
00:30:21,700 --> 00:30:24,220
One way they can be
inaccurate is an exchange

647
00:30:24,220 --> 00:30:27,410
can just outright lie.

648
00:30:27,410 --> 00:30:32,363
And if there's no rule or law
against it, they can do that.

649
00:30:32,363 --> 00:30:33,780
Another way they
can do it is they

650
00:30:33,780 --> 00:30:37,740
can be honest about the
numbers, but inflate

651
00:30:37,740 --> 00:30:40,890
the numbers through
something called wash trades.

652
00:30:40,890 --> 00:30:45,750
Wash trades are banned in
the US under securities laws

653
00:30:45,750 --> 00:30:48,380
and under Commodity Futures
Trading Commission laws.

654
00:30:48,380 --> 00:30:52,950
A wash trade is when I buy
something and sell something

655
00:30:52,950 --> 00:30:55,920
at the same time
basically to myself

656
00:30:55,920 --> 00:30:58,390
or my affiliate or my colleague.

657
00:30:58,390 --> 00:31:01,200
And if I have even--
if Alon and I are not

658
00:31:01,200 --> 00:31:05,760
even legally affiliated, but
if I sell something to Alon

659
00:31:05,760 --> 00:31:09,270
and he buys it, and we have
an agreement that we are just

660
00:31:09,270 --> 00:31:13,320
pumping the volume for some
reason, that's a wash sale.

661
00:31:13,320 --> 00:31:15,360
Why would somebody do
a wash sale between two

662
00:31:15,360 --> 00:31:17,870
unaffiliated parties?

663
00:31:17,870 --> 00:31:18,370
Come on.

664
00:31:18,370 --> 00:31:19,420
Think devious.

665
00:31:19,420 --> 00:31:21,193
Think like, you
know, a manipulator.

666
00:31:21,193 --> 00:31:22,693
AUDIENCE: If you're
starting a coin,

667
00:31:22,693 --> 00:31:23,919
you want to make
other people think

668
00:31:23,919 --> 00:31:25,150
other people are using it.

669
00:31:25,150 --> 00:31:27,310
PROFESSOR: Yeah, you wanted to
make sure somebody else thought

670
00:31:27,310 --> 00:31:28,210
something was used.

671
00:31:28,210 --> 00:31:29,500
What's the-- that's use--

672
00:31:29,500 --> 00:31:32,042
another reason?

673
00:31:32,042 --> 00:31:35,070
AUDIENCE: It will show
artificial liquidity

674
00:31:35,070 --> 00:31:36,330
[INAUDIBLE].

675
00:31:36,330 --> 00:31:38,580
PROFESSOR: So artificial
liquidity and one other thing

676
00:31:38,580 --> 00:31:41,093
that you might show--
an artificial--

677
00:31:41,093 --> 00:31:41,760
AUDIENCE: Price.

678
00:31:41,760 --> 00:31:42,427
AUDIENCE: Price.

679
00:31:42,427 --> 00:31:43,690
PROFESSOR: Price-- thank you.

680
00:31:43,690 --> 00:31:46,690
So wash sales for a
long time in markets

681
00:31:46,690 --> 00:31:49,510
was a good way for
manipulators to kind of, hey,

682
00:31:49,510 --> 00:31:50,530
look at this liquidity.

683
00:31:50,530 --> 00:31:51,580
Look at this price--

684
00:31:51,580 --> 00:31:53,410
pricing signals.

685
00:31:53,410 --> 00:31:55,870
So that's why in the US
Securities and Commodities

686
00:31:55,870 --> 00:31:57,610
markets-- we say no.

687
00:31:57,610 --> 00:32:03,100
It's one small core
thing that's not allowed.

688
00:32:03,100 --> 00:32:05,190
But there's no
ban on wash sales,

689
00:32:05,190 --> 00:32:06,875
though there's
academic literature.

690
00:32:06,875 --> 00:32:07,750
There's some studies.

691
00:32:07,750 --> 00:32:11,770
Some competitors, some exchanges
study other exchanges to say,

692
00:32:11,770 --> 00:32:14,590
they have a lot of
wash sales over there.

693
00:32:14,590 --> 00:32:19,055
So we don't know how real
these volume figures are.

694
00:32:19,055 --> 00:32:20,680
The other thing that
I find interesting

695
00:32:20,680 --> 00:32:23,200
is the average trade side--

696
00:32:23,200 --> 00:32:26,590
$200 to $1,000, couple of
them a couple thousand.

697
00:32:26,590 --> 00:32:28,570
I mean, these are not
large transactions.

698
00:32:28,570 --> 00:32:29,247
Kelly.

699
00:32:29,247 --> 00:32:31,330
AUDIENCE: So this isn't
really [INAUDIBLE] itself.

700
00:32:31,330 --> 00:32:33,010
But some of the
articles that we read

701
00:32:33,010 --> 00:32:38,050
compared exchanges to, say,
like Scottrade and Fidelity

702
00:32:38,050 --> 00:32:40,065
and some other
platforms like that

703
00:32:40,065 --> 00:32:41,190
for traditional securities.

704
00:32:41,190 --> 00:32:43,500
So I wonder-- and it basically
was saying, like, look,

705
00:32:43,500 --> 00:32:46,140
you know, I think Coinbase
or something has, like,

706
00:32:46,140 --> 00:32:48,130
30 billion registered--

707
00:32:48,130 --> 00:32:49,767
PROFESSOR: 20 million acount.

708
00:32:49,767 --> 00:32:52,100
AUDIENCE: 20 million-- so
that's obviously pretty good.

709
00:32:52,100 --> 00:32:55,650
I wonder how the other
metrics compare to--

710
00:32:55,650 --> 00:32:57,400
PROFESSOR: So I went
around trying to find

711
00:32:57,400 --> 00:32:58,840
a list of the membership.

712
00:32:58,840 --> 00:33:01,495
And I couldn't
find it for others.

713
00:33:01,495 --> 00:33:03,370
And maybe it's kind of--
it's a little harder

714
00:33:03,370 --> 00:33:06,830
than pumping your numbers
through wash trading.

715
00:33:06,830 --> 00:33:09,400
I mean, you could also
lie about your membership.

716
00:33:09,400 --> 00:33:11,740
And even Coinbase's
20 million doesn't

717
00:33:11,740 --> 00:33:13,035
mean they're active members.

718
00:33:13,035 --> 00:33:13,660
AUDIENCE: True.

719
00:33:17,980 --> 00:33:21,900
AUDIENCE: [INAUDIBLE] security
is [INAUDIBLE] Coinbase.

720
00:33:21,900 --> 00:33:24,830
PROFESSOR: Coinbase--
so here is another way

721
00:33:24,830 --> 00:33:28,090
to look at-- it is by legal
jurisdiction-- same database.

722
00:33:28,090 --> 00:33:32,780
You're going to have eight or 10
slides that are same database.

723
00:33:32,780 --> 00:33:34,520
Coinbase is in the US.

724
00:33:34,520 --> 00:33:39,570
And this would say that it was
a little less than 140,000--

725
00:33:39,570 --> 00:33:41,420
no, I can't quite see
where that line comes.

726
00:33:41,420 --> 00:33:45,030
Maybe it's $100 million a day.

727
00:33:45,030 --> 00:33:46,680
And this is just the
month of October.

728
00:33:46,680 --> 00:33:49,420
So that's where--

729
00:33:49,420 --> 00:33:50,075
Sean.

730
00:33:50,075 --> 00:33:51,283
AUDIENCE: I was just curious.

731
00:33:51,283 --> 00:33:54,054
Why is that the Chinese
crypto exchange [INAUDIBLE]

732
00:33:54,054 --> 00:33:55,497
listed up there?

733
00:33:55,497 --> 00:33:59,890
[INAUDIBLE] to me [INAUDIBLE]
actually quite vague.

734
00:33:59,890 --> 00:34:02,130
PROFESSOR: It's listed
there in the Seychelles

735
00:34:02,130 --> 00:34:07,410
at 300 [INAUDIBLE] I'm not sure
why it's not listed on this.

736
00:34:07,410 --> 00:34:08,760
It's the same database.

737
00:34:08,760 --> 00:34:09,550
It's not there.

738
00:34:09,550 --> 00:34:11,989
Yeah, there it is-- number 5--

739
00:34:11,989 --> 00:34:12,489
number 5.

740
00:34:15,230 --> 00:34:17,360
So what would you
take around this

741
00:34:17,360 --> 00:34:20,429
about the great financial
centers of the world?

742
00:34:20,429 --> 00:34:20,929
Yes.

743
00:34:20,929 --> 00:34:24,590
AUDIENCE: [INAUDIBLE] one
of the questions that I

744
00:34:24,590 --> 00:34:26,850
got to see in the
previous slide was

745
00:34:26,850 --> 00:34:29,429
if you sum up all the trades
that those [INAUDIBLE]

746
00:34:29,429 --> 00:34:33,170
are claiming that they are
doing on a 24-hour basis,

747
00:34:33,170 --> 00:34:36,620
isn't that a lot larger than the
capacity of the system itself?

748
00:34:36,620 --> 00:34:37,620
I can't remember-- what?

749
00:34:37,620 --> 00:34:40,815
It was like seven
transactions per second that--

750
00:34:40,815 --> 00:34:41,690
PROFESSOR: All right.

751
00:34:41,690 --> 00:34:45,860
So the question is, this looks
like a lot more volume that's

752
00:34:45,860 --> 00:34:48,880
actually happening.

753
00:34:48,880 --> 00:34:50,219
And I'm going to agree with you.

754
00:34:50,219 --> 00:34:52,070
Why do you think
that's possible--

755
00:34:52,070 --> 00:34:53,350
two reasons?

756
00:34:53,350 --> 00:34:56,718
AUDIENCE: Because they're just
doing the exchanges internally.

757
00:34:56,718 --> 00:34:59,408
So they're not actually
transacting on the blockchain,

758
00:34:59,408 --> 00:35:00,450
because they [INAUDIBLE].

759
00:35:00,450 --> 00:35:00,570
PROFESSOR: Right.

760
00:35:00,570 --> 00:35:01,600
And remind me of
your first name.

761
00:35:01,600 --> 00:35:01,990
AUDIENCE: Jack.

762
00:35:01,990 --> 00:35:03,782
PROFESSOR: Jack-- so
Jack's point is, well,

763
00:35:03,782 --> 00:35:06,180
maybe not all of this is
going to the blockchain.

764
00:35:06,180 --> 00:35:09,210
It's happening on
a spreadsheet--

765
00:35:09,210 --> 00:35:12,460
in some cases, an
Excel spreadsheet.

766
00:35:12,460 --> 00:35:14,430
But I'm not aware of
anybody storing it even

767
00:35:14,430 --> 00:35:20,280
on a blockchain within
the Coinbase or Kraken

768
00:35:20,280 --> 00:35:23,330
or [INAUDIBLE] system.

769
00:35:23,330 --> 00:35:25,148
Second reason?

770
00:35:25,148 --> 00:35:27,044
AUDIENCE: Like, I
would say [INAUDIBLE]

771
00:35:27,044 --> 00:35:29,890
because it's [INAUDIBLE]
the same second layer.

772
00:35:29,890 --> 00:35:32,500
PROFESSOR: So it might be
using a second layer solution

773
00:35:32,500 --> 00:35:34,720
or a lightning or second layer.

774
00:35:34,720 --> 00:35:37,120
That's quite possible,
even though I'm not aware

775
00:35:37,120 --> 00:35:38,500
if there's a lot of activity.

776
00:35:41,330 --> 00:35:42,980
Third reason?

777
00:35:42,980 --> 00:35:44,930
There's a lot of
currency crosses here.

778
00:35:44,930 --> 00:35:47,710
This is not just bitcoin.

779
00:35:47,710 --> 00:35:50,560
There's probably 2,000
to 3,000 different pairs

780
00:35:50,560 --> 00:35:52,420
that get traded on any day--

781
00:35:52,420 --> 00:35:55,780
bitcoin-ether, bitcoin-dollar,
bitcoin-tether.

782
00:35:55,780 --> 00:36:00,940
You can bitcoin bitcoin cash,
but a lot of the crosses--

783
00:36:00,940 --> 00:36:04,210
a cross in foreign currency
land is two currencies.

784
00:36:04,210 --> 00:36:06,370
It's often called
a currency pair.

785
00:36:06,370 --> 00:36:08,500
US dollar versus
euro or US dollar

786
00:36:08,500 --> 00:36:12,010
versus yen, these
were currency pairs.

787
00:36:12,010 --> 00:36:15,670
But now, if we can use
the same terminology here,

788
00:36:15,670 --> 00:36:20,830
there's thousands of crosses or
pairs, so it's not all Bitcoin.

789
00:36:20,830 --> 00:36:25,480
But the first reason's the
biggest one, what Jack said.

790
00:36:25,480 --> 00:36:31,750
Not all of these exchanges
will settle to a blockchain

791
00:36:31,750 --> 00:36:32,450
immediately.

792
00:36:32,450 --> 00:36:35,470
In fact, it's costly,
even for them.

793
00:36:35,470 --> 00:36:38,790
So they'll take some
price risk, and if they

794
00:36:38,790 --> 00:36:44,510
have enough customers
and their market making

795
00:36:44,510 --> 00:36:46,760
on the other side, they'll
take some price risk.

796
00:36:46,760 --> 00:36:51,630
And they might settle to the
blockchain multiple times a day

797
00:36:51,630 --> 00:36:54,050
but only settle when
there have exposure.

798
00:36:54,050 --> 00:36:56,330
And I don't know, their
risk management might be,

799
00:36:56,330 --> 00:37:00,500
I'll settle when I'm long 10
Bitcoin or short 10 Bitcoin,

800
00:37:00,500 --> 00:37:03,230
but take some price exposure.

801
00:37:03,230 --> 00:37:06,020
That risk management,
in essence,

802
00:37:06,020 --> 00:37:09,200
Coinbase or Cracken
or Gemini or Huobi

803
00:37:09,200 --> 00:37:11,390
are basically saying, I'll
take some price exposure

804
00:37:11,390 --> 00:37:14,240
and only settle to the
ultimate settlement

805
00:37:14,240 --> 00:37:18,600
finality, the
blockchain, several times

806
00:37:18,600 --> 00:37:24,300
a day which, of course, takes
10 to 60 minutes as well.

807
00:37:24,300 --> 00:37:26,700
So that's happened here.

808
00:37:26,700 --> 00:37:28,440
Good observation.

809
00:37:28,440 --> 00:37:28,940
Yes, Isabel.

810
00:37:28,940 --> 00:37:31,148
AUDIENCE: [INAUDIBLE] talks
a alot about how they key

811
00:37:31,148 --> 00:37:34,450
digital wallets off of the
network for added security.

812
00:37:34,450 --> 00:37:37,530
So do other exchanges
not do that?

813
00:37:37,530 --> 00:37:41,430
PROFESSOR: So Isabel has
raised that Coinbase promotes

814
00:37:41,430 --> 00:37:45,600
that they have a secure custody
solution, and part of it

815
00:37:45,600 --> 00:37:51,270
is keeping your Bitcoin
off of the network.

816
00:37:51,270 --> 00:37:54,530
The term is keeping
it in cold wallets

817
00:37:54,530 --> 00:37:56,040
instead of a hot wallet.

818
00:37:56,040 --> 00:37:59,400
Anybody know what
a hot wallet is?

819
00:37:59,400 --> 00:37:59,927
Eric?

820
00:37:59,927 --> 00:38:01,260
AUDIENCE: Software-based wallet.

821
00:38:04,760 --> 00:38:07,460
PROFESSOR: Software-based wallet
that's connected, currently

822
00:38:07,460 --> 00:38:10,820
connected, as opposed
to a wallet that's

823
00:38:10,820 --> 00:38:14,205
disconnected and not signed up.

824
00:38:14,205 --> 00:38:15,830
Let me hold that
question, because I've

825
00:38:15,830 --> 00:38:19,850
got a slide on that, but yes,
the answer is others also

826
00:38:19,850 --> 00:38:23,130
have cold storage.

827
00:38:23,130 --> 00:38:23,630
Mt.

828
00:38:23,630 --> 00:38:27,830
Gox five years ago didn't
have much cold storage,

829
00:38:27,830 --> 00:38:30,350
but what other
observation here about

830
00:38:30,350 --> 00:38:33,660
the great financial
centers of the world?

831
00:38:33,660 --> 00:38:34,190
James?

832
00:38:34,190 --> 00:38:35,603
AUDIENCE: They're
all tax havens.

833
00:38:35,603 --> 00:38:37,020
PROFESSOR: They're
all tax havens.

834
00:38:37,020 --> 00:38:41,150
Malta, Binance,
and OKX, now again,

835
00:38:41,150 --> 00:38:44,925
whether the Binance and
OKX numbers are legit.

836
00:38:48,230 --> 00:38:50,120
You're Hong Kong, right?

837
00:38:50,120 --> 00:38:50,660
Yeah?

838
00:38:50,660 --> 00:38:51,540
You're Hong Kong.

839
00:38:51,540 --> 00:38:53,540
Biggest tax haven of China.

840
00:38:53,540 --> 00:38:55,820
Yeah, the British
Virgin Islands,

841
00:38:55,820 --> 00:39:00,180
Seychelles, it's kind of--

842
00:39:00,180 --> 00:39:03,892
so there's some regulatory
arbitrage going on.

843
00:39:03,892 --> 00:39:06,100
And these are the countries
where they're registered,

844
00:39:06,100 --> 00:39:09,220
not necessarily the country
of the real operations.

845
00:39:09,220 --> 00:39:13,790
Some are-- Huobi is one
that started in the People's

846
00:39:13,790 --> 00:39:21,280
Republic, but in Beijing, but
they registered elsewhere.

847
00:39:21,280 --> 00:39:24,570
AUDIENCE: [INAUDIBLE]

848
00:39:26,920 --> 00:39:29,318
PROFESSOR: You mean
you don't know them?

849
00:39:29,318 --> 00:39:30,360
Does anybody want to say?

850
00:39:30,360 --> 00:39:31,064
Priya?

851
00:39:31,064 --> 00:39:31,727
AUDIENCE: Islands of
the South Pacific right?

852
00:39:31,727 --> 00:39:32,977
French Polynesia or something.

853
00:39:36,760 --> 00:39:38,377
PROFESSOR: There you go.

854
00:39:38,377 --> 00:39:39,960
I'm surprised that
you haven't learned

855
00:39:39,960 --> 00:39:43,700
about this financial center.

856
00:39:43,700 --> 00:39:46,317
OK.

857
00:39:46,317 --> 00:39:48,150
James is this going to
tell us more about it

858
00:39:48,150 --> 00:39:52,260
and how much it costs to go
on Expedia during sip week.

859
00:39:52,260 --> 00:39:55,230
I think Sloan should
benefit from a true trip.

860
00:39:55,230 --> 00:39:55,740
OK.

861
00:39:55,740 --> 00:39:57,448
So this is a different
way to measure it.

862
00:39:57,448 --> 00:39:58,485
This is not on volume.

863
00:39:58,485 --> 00:39:59,610
I'm going to take a second.

864
00:39:59,610 --> 00:40:02,100
This is just number
of major exchanges,

865
00:40:02,100 --> 00:40:04,125
and there's the eight
big ones in the US,

866
00:40:04,125 --> 00:40:05,250
starting with the biggest--

867
00:40:05,250 --> 00:40:09,030
Coinbase, Bittrex, Poloniex,
that we talked about,

868
00:40:09,030 --> 00:40:11,730
Cracken, Gemini, Itbit.

869
00:40:11,730 --> 00:40:13,920
Those are the ones
that are US-based,

870
00:40:13,920 --> 00:40:15,660
that some of you in
the US might have.

871
00:40:15,660 --> 00:40:17,910
I think on this chart, if
you don't find your exchange

872
00:40:17,910 --> 00:40:19,640
on this chart, I would be--

873
00:40:19,640 --> 00:40:21,870
all right, all right,
maybe, because it

874
00:40:21,870 --> 00:40:25,080
might have already failed,
whatever exchange you have.

875
00:40:25,080 --> 00:40:27,761
But Eric, who are
you looking for?

876
00:40:27,761 --> 00:40:29,755
AUDIENCE: [INAUDIBLE]

877
00:40:29,755 --> 00:40:30,630
PROFESSOR: All right.

878
00:40:30,630 --> 00:40:32,130
These slides will
all be on Canvas.

879
00:40:32,130 --> 00:40:34,505
I'm sorry, Joe,
you had a question?

880
00:40:34,505 --> 00:40:37,340
AUDIENCE: [INAUDIBLE]

881
00:40:42,240 --> 00:40:46,720
2 So what all of the
exchanges did very early on--

882
00:40:46,720 --> 00:40:50,930
this is starting right
in late '10 and in '11--

883
00:40:50,930 --> 00:40:55,550
they set up an account
structure literally

884
00:40:55,550 --> 00:40:57,500
on Excel spreadsheets,
but an account

885
00:40:57,500 --> 00:41:00,800
structure for all
of their customers.

886
00:41:00,800 --> 00:41:06,540
And let's say that you're buying
Bitcoin, and Kelly is selling.

887
00:41:06,540 --> 00:41:09,540
Maybe I could do that
transaction between you

888
00:41:09,540 --> 00:41:12,600
and Kelly right on--

889
00:41:12,600 --> 00:41:15,450
this is going to be called
the Gensler Exchange--

890
00:41:15,450 --> 00:41:17,490
right on the Gensler Exchange.

891
00:41:17,490 --> 00:41:21,630
So I don't need to move that
to the blockchain, because--

892
00:41:21,630 --> 00:41:23,040
oh, one really important thing.

893
00:41:23,040 --> 00:41:24,880
What happens when
you open an account?

894
00:41:24,880 --> 00:41:25,380
I'm sorry.

895
00:41:25,380 --> 00:41:27,005
It's a good question,
and now I realize

896
00:41:27,005 --> 00:41:28,350
I skipped over something.

897
00:41:28,350 --> 00:41:31,800
What happens when you open an
account at a crypto exchange?

898
00:41:31,800 --> 00:41:32,300
Alin.

899
00:41:32,300 --> 00:41:33,826
AUDIENCE: KYC and AML.

900
00:41:33,826 --> 00:41:36,600
GARY GENSLER: You
might do KYC and AML,

901
00:41:36,600 --> 00:41:38,430
but that's not what
we're looking for.

902
00:41:38,430 --> 00:41:40,657
AUDIENCE: Would you
be issued a key pair?

903
00:41:40,657 --> 00:41:41,740
GARY GENSLER: What's that?

904
00:41:41,740 --> 00:41:43,448
AUDIENCE: Would you
be issude a key pair?

905
00:41:43,448 --> 00:41:44,861
GARY GENSLER: What you--

906
00:41:44,861 --> 00:41:47,300
you might be, but
actually what I'm looking

907
00:41:47,300 --> 00:41:48,860
for is what happens to your--

908
00:41:48,860 --> 00:41:54,470
I have Bitcoin, and I open an
account, or I have US dollars

909
00:41:54,470 --> 00:41:56,790
and I open an account.

910
00:41:56,790 --> 00:41:59,250
I sign a user
agreement with them

911
00:41:59,250 --> 00:42:03,090
that they're going to store
any of my crypto in their name.

912
00:42:05,780 --> 00:42:08,390
Coinbase, Kraken,
Huobi-- they are not

913
00:42:08,390 --> 00:42:10,940
storing it in Alpha's name.

914
00:42:10,940 --> 00:42:12,440
I don't know if you
have an account,

915
00:42:12,440 --> 00:42:14,020
but I'm just using you.

916
00:42:14,020 --> 00:42:17,750
If Alpha has an account,
he signs a user agreement.

917
00:42:17,750 --> 00:42:22,320
He says, when I buy
Bitcoin, it's in a--

918
00:42:22,320 --> 00:42:23,992
at best, it's on this Excel--

919
00:42:23,992 --> 00:42:26,200
well, it's probably better
than an Excel spreadsheet,

920
00:42:26,200 --> 00:42:30,560
but it's in their
database in Alpha's name.

921
00:42:30,560 --> 00:42:33,490
But on the Bitcoin
blockchain, it's

922
00:42:33,490 --> 00:42:38,500
in a bunch of Bitcoin addresses
that Coinbase controls

923
00:42:38,500 --> 00:42:39,445
or Kraken controls.

924
00:42:39,445 --> 00:42:42,820
AUDIENCE: [INAUDIBLE]

925
00:42:52,540 --> 00:42:56,170
GARY GENSLER: It has a name
tag on a separate ledger.

926
00:42:56,170 --> 00:42:59,710
You have some legal rights
against Kraken or Gemini.

927
00:42:59,710 --> 00:43:01,180
I mean, you do.

928
00:43:01,180 --> 00:43:01,680
I mean--

929
00:43:01,680 --> 00:43:03,888
AUDIENCE: Yeah, but after,
I mean, is it centralized?

930
00:43:03,888 --> 00:43:04,940
GARY GENSLER: Correct.

931
00:43:04,940 --> 00:43:06,920
That's correct.

932
00:43:06,920 --> 00:43:10,300
And so because both
of you, Kelly and you,

933
00:43:10,300 --> 00:43:12,460
have signed some
agreement, they're

934
00:43:12,460 --> 00:43:16,390
moving Bitcoin to Kelly
and Bitcoin to you--

935
00:43:16,390 --> 00:43:19,280
or if you put US dollars in
and you're buying Bitcoin.

936
00:43:23,760 --> 00:43:27,200
But it's because the market, the
customers want it that way too.

937
00:43:30,960 --> 00:43:36,240
So decentralized exchanges--
again, based on CryptoCompare,

938
00:43:36,240 --> 00:43:38,670
these are the top five
in October by volume.

939
00:43:38,670 --> 00:43:41,340
But these are not the
five you read about most.

940
00:43:41,340 --> 00:43:44,860
The article that you
read talked about others.

941
00:43:44,860 --> 00:43:48,810
So I don't have a deep
confidence in these,

942
00:43:48,810 --> 00:43:51,120
but these are the numbers
that CryptoCompare

943
00:43:51,120 --> 00:43:52,440
could pull together.

944
00:43:52,440 --> 00:43:55,200
And you can see, they're
much smaller numbers.

945
00:43:55,200 --> 00:43:57,870
In aggregate, in
the crypto database,

946
00:43:57,870 --> 00:44:01,182
it's only 0.4% of the volume.

947
00:44:01,182 --> 00:44:03,637
AUDIENCE: [INAUDIBLE]
Robinhood, it

948
00:44:03,637 --> 00:44:06,820
said that they waived the fees.

949
00:44:06,820 --> 00:44:09,280
In terms of competition, I
didn't understand the business

950
00:44:09,280 --> 00:44:10,200
model--

951
00:44:10,200 --> 00:44:11,492
how they're making revenue.

952
00:44:11,492 --> 00:44:13,450
GARY GENSLER: So how many
of you have Robinhood

953
00:44:13,450 --> 00:44:16,270
app on your phones?

954
00:44:16,270 --> 00:44:18,480
Yeah, about 10 of you.

955
00:44:18,480 --> 00:44:20,797
Do you pay any fees for
securities transactions?

956
00:44:20,797 --> 00:44:21,630
Remind me your name.

957
00:44:21,630 --> 00:44:22,160
AUDIENCE: Erin.

958
00:44:22,160 --> 00:44:22,952
GARY GENSLER: Erin.

959
00:44:22,952 --> 00:44:23,880
No.

960
00:44:23,880 --> 00:44:26,020
Anybody pay any
fees to Robinhood?

961
00:44:26,020 --> 00:44:26,970
No.

962
00:44:26,970 --> 00:44:28,555
Isn't that kind of neat?

963
00:44:28,555 --> 00:44:29,455
AUDIENCE: I do.

964
00:44:29,455 --> 00:44:30,580
GARY GENSLER: Whoa, you do.

965
00:44:30,580 --> 00:44:31,480
You pay some fees?

966
00:44:31,480 --> 00:44:33,412
AUDIENCE: They sell your float.

967
00:44:33,412 --> 00:44:34,861
They sell your flow.

968
00:44:34,861 --> 00:44:36,310
They sell your data.

969
00:44:36,310 --> 00:44:37,752
[INAUDIBLE]

970
00:44:37,752 --> 00:44:39,210
GARY GENSLER: OK,
and your name is?

971
00:44:39,210 --> 00:44:39,960
AUDIENCE: Isaac.

972
00:44:39,960 --> 00:44:41,085
GARY GENSLER: Isaac, right.

973
00:44:41,085 --> 00:44:41,970
So Isaac's got it.

974
00:44:41,970 --> 00:44:45,720
They sell your data,
and they sell your flow.

975
00:44:45,720 --> 00:44:47,262
What was the third
thing you said?

976
00:44:47,262 --> 00:44:48,470
AUDIENCE: Float.

977
00:44:48,470 --> 00:44:51,633
I don't know exactly how their
custody of brokerage works,

978
00:44:51,633 --> 00:44:53,633
but I know that there's
an advantage to actually

979
00:44:53,633 --> 00:44:57,420
having the securities at
their brokerage [INAUDIBLE]..

980
00:44:57,420 --> 00:44:59,340
GARY GENSLER: OK, all right.

981
00:44:59,340 --> 00:45:02,040
So three things--
your data, your flow,

982
00:45:02,040 --> 00:45:05,220
and what Isaac called float,
but I would call that they have

983
00:45:05,220 --> 00:45:07,620
the securities system to lend--

984
00:45:07,620 --> 00:45:10,560
stock borrow or stock lend.

985
00:45:10,560 --> 00:45:12,390
And those are the three ways.

986
00:45:12,390 --> 00:45:13,890
How does Facebook make money?

987
00:45:13,890 --> 00:45:15,930
They have your data.

988
00:45:15,930 --> 00:45:21,090
So we live in a time where
platforms sell your data

989
00:45:21,090 --> 00:45:24,255
and use your data to
sell advertisement.

990
00:45:24,255 --> 00:45:26,130
AUDIENCE: I was going
to say, with Robinhood,

991
00:45:26,130 --> 00:45:30,240
you can also pay a premium
that's tiered to be [INAUDIBLE]

992
00:45:30,240 --> 00:45:31,175
margin.

993
00:45:31,175 --> 00:45:33,450
So instead of paying
interest in the margin,

994
00:45:33,450 --> 00:45:34,568
you play a flat fee.

995
00:45:34,568 --> 00:45:36,360
And then they also
advance your settlements

996
00:45:36,360 --> 00:45:37,568
instead of taking three days.

997
00:45:37,568 --> 00:45:38,820
They'll do it immediately.

998
00:45:38,820 --> 00:45:39,820
GARY GENSLER: All right.

999
00:45:39,820 --> 00:45:41,760
So there's a premium
service where you maybe

1000
00:45:41,760 --> 00:45:42,990
could get further.

1001
00:45:42,990 --> 00:45:44,070
They sell your flow.

1002
00:45:44,070 --> 00:45:48,850
What that means is there are
parties that will pay brokerage

1003
00:45:48,850 --> 00:45:53,530
houses payment for order flow.

1004
00:45:53,530 --> 00:45:55,310
Vanguard does it as well.

1005
00:45:55,310 --> 00:45:57,380
It's not-- Fidelity
probably does.

1006
00:45:57,380 --> 00:45:58,540
I'm not certain.

1007
00:45:58,540 --> 00:46:04,980
But many big brokerage firms,
when we all work with them--

1008
00:46:04,980 --> 00:46:08,070
and my account at Vanguard,
I have zero commissions,

1009
00:46:08,070 --> 00:46:10,500
but I know they're
selling my order flow.

1010
00:46:10,500 --> 00:46:13,190
AUDIENCE: But who would
be interested in the data?

1011
00:46:13,190 --> 00:46:15,440
GARY GENSLER: So who would
be interested in the data--

1012
00:46:15,440 --> 00:46:17,195
or who is interested
in the flow?

1013
00:46:17,195 --> 00:46:18,915
AUDIENCE: So Facebook,
I understand,

1014
00:46:18,915 --> 00:46:22,235
would be marketing companies,
so they were targeting,

1015
00:46:22,235 --> 00:46:27,350
but in this case, is it
federal agencies or--

1016
00:46:27,350 --> 00:46:28,500
GARY GENSLER: OK, no.

1017
00:46:28,500 --> 00:46:32,420
Who is interested in the
data or the actual order

1018
00:46:32,420 --> 00:46:37,310
flow of financial transactions?

1019
00:46:37,310 --> 00:46:37,810
Tom?

1020
00:46:37,810 --> 00:46:39,610
AUDIENCE: Hedge funds,
trading entities.

1021
00:46:39,610 --> 00:46:41,590
GARY GENSLER: Hedge funds.

1022
00:46:41,590 --> 00:46:43,000
What type of trading entities?

1023
00:46:43,000 --> 00:46:44,380
AUDIENCE:
High-frequency traders.

1024
00:46:44,380 --> 00:46:46,120
GARY GENSLER:
High-frequency traders.

1025
00:46:46,120 --> 00:46:54,190
So I believe that Robinhood
side contracts with initially,

1026
00:46:54,190 --> 00:46:59,600
I think, three and then five
high-frequency trading shops.

1027
00:46:59,600 --> 00:47:01,655
And I've been told a
number of those names.

1028
00:47:01,655 --> 00:47:04,280
I don't know if they're public,
so I'm not going to repeat them

1029
00:47:04,280 --> 00:47:07,640
on the camera, but big--

1030
00:47:07,640 --> 00:47:08,390
a couple of them--

1031
00:47:08,390 --> 00:47:11,540
US-based, high-frequency
trading shops.

1032
00:47:11,540 --> 00:47:14,220
Why would a high-frequency
trading shop pay for it?

1033
00:47:14,220 --> 00:47:14,720
Daniel?

1034
00:47:14,720 --> 00:47:15,512
AUDIENCE: Go ahead.

1035
00:47:15,512 --> 00:47:17,130
I had a question.

1036
00:47:17,130 --> 00:47:19,130
GARY GENSLER: Why would
a high-frequency trading

1037
00:47:19,130 --> 00:47:20,490
shop pay for it?

1038
00:47:20,490 --> 00:47:23,710
AUDIENCE: [INAUDIBLE]

1039
00:47:23,710 --> 00:47:26,760
GARY GENSLER: So they
think there's some value.

1040
00:47:26,760 --> 00:47:27,260
Isaac?

1041
00:47:27,260 --> 00:47:28,330
AUDIENCE: Or you can front run.

1042
00:47:28,330 --> 00:47:30,590
GARY GENSLER: Yeah, you
can-- right, right, right.

1043
00:47:30,590 --> 00:47:32,840
So anybody who's read, you
know, some of the books

1044
00:47:32,840 --> 00:47:34,280
on high-frequency trading--

1045
00:47:34,280 --> 00:47:36,560
you can front run, but
there's also value--

1046
00:47:36,560 --> 00:47:38,630
to answer Rahim's
question-- there's

1047
00:47:38,630 --> 00:47:41,940
value in the order
flow, because if you

1048
00:47:41,940 --> 00:47:43,830
can see that the
market's leaning

1049
00:47:43,830 --> 00:47:47,880
just a little bit this way
even for a few seconds,

1050
00:47:47,880 --> 00:47:52,380
you can optimize your algorithms
and make money off of that.

1051
00:47:52,380 --> 00:47:56,340
And the US equity markets--

1052
00:47:56,340 --> 00:47:59,760
well over 60% of the US equity
markets are trading with

1053
00:47:59,760 --> 00:48:02,160
high-frequency
trading right now--

1054
00:48:02,160 --> 00:48:03,780
any daily volume.

1055
00:48:03,780 --> 00:48:08,010
In the commodity markets
when I was at the CFDC,

1056
00:48:08,010 --> 00:48:12,810
some contracts we thought
it could be as much as 90%.

1057
00:48:12,810 --> 00:48:19,150
The S&P 500 Futures contract
or the interest rates contracts

1058
00:48:19,150 --> 00:48:20,470
vary significantly.

1059
00:48:20,470 --> 00:48:22,210
And they provide a service.

1060
00:48:22,210 --> 00:48:24,860
There's a market-making function
those high-frequency traders

1061
00:48:24,860 --> 00:48:28,510
do, and mostly,
they do it legally.

1062
00:48:28,510 --> 00:48:32,440
But there's a value
to that order flow.

1063
00:48:32,440 --> 00:48:36,130
And so payment for order
flow is a very critical part

1064
00:48:36,130 --> 00:48:39,130
of financial markets all
the way around the globe

1065
00:48:39,130 --> 00:48:42,700
in any highly-liquid currency
market, bond markets, equity

1066
00:48:42,700 --> 00:48:44,690
markets, and, yes, Bitcoin.

1067
00:48:44,690 --> 00:48:48,842
So Robinhood-- Erin, do
you trade Bitcoin on there

1068
00:48:48,842 --> 00:48:50,500
or do you trade regular equity?

1069
00:48:50,500 --> 00:48:51,838
AUDIENCE: Yeah, I actually
don't use it that much,

1070
00:48:51,838 --> 00:48:52,730
but it's on my phone.

1071
00:48:52,730 --> 00:48:54,563
GARY GENSLER: It's on
your phone, all right.

1072
00:48:54,563 --> 00:48:57,450
But the one or two times you
used it, you had zero fee,

1073
00:48:57,450 --> 00:49:01,410
because some trading
house in Chicago

1074
00:49:01,410 --> 00:49:08,450
has a contract with
Robinhood to do that.

1075
00:49:08,450 --> 00:49:11,510
And Jeff Sprecher, who
you'll meet Thursday,

1076
00:49:11,510 --> 00:49:14,200
will tell you Robinhood,
with five million accounts

1077
00:49:14,200 --> 00:49:21,540
now, that's a real threat
to the brokerage model.

1078
00:49:21,540 --> 00:49:25,140
Why would people mostly of your
generation-- or Millennials,

1079
00:49:25,140 --> 00:49:26,070
because you're not--

1080
00:49:26,070 --> 00:49:29,620
some of you're Gen
Xers, I think, but--

1081
00:49:29,620 --> 00:49:31,450
I'm a Baby Boomer.

1082
00:49:31,450 --> 00:49:32,640
I know where I am.

1083
00:49:32,640 --> 00:49:37,020
But Millennials, you get
so many services for free.

1084
00:49:37,020 --> 00:49:39,110
Robinhood saw an
opportunity, and they've

1085
00:49:39,110 --> 00:49:42,050
all of a sudden got
five million customers.

1086
00:49:42,050 --> 00:49:46,790
But that's how they--
it's a very good question.

1087
00:49:46,790 --> 00:49:50,240
And so moving a little
along just to give you--

1088
00:49:50,240 --> 00:49:53,450
So these are the main things
from this CryptoCompare

1089
00:49:53,450 --> 00:49:57,290
just in October to
give you a sense.

1090
00:49:57,290 --> 00:50:00,200
Two thirds of the volume they
measure, spot in one third

1091
00:50:00,200 --> 00:50:00,940
is derivatives.

1092
00:50:00,940 --> 00:50:03,440
And we're not talking about the
Chicago Mercantile Exchange.

1093
00:50:03,440 --> 00:50:04,160
$$$

1094
00:50:04,160 --> 00:50:06,920
The biggest derivatives
exchange actually in crypto

1095
00:50:06,920 --> 00:50:12,000
is BitMax that has
a perpetual Bitcoin

1096
00:50:12,000 --> 00:50:18,630
swap and a perpetual Eth
that has no settlement date.

1097
00:50:18,630 --> 00:50:24,290
Highly-leveraged-- you can put
1% margin down and 99% borrow.

1098
00:50:24,290 --> 00:50:28,320
And every 10 hours,
it reprices, but it's

1099
00:50:28,320 --> 00:50:31,843
a perpetual rolling
10-hour future.

1100
00:50:31,843 --> 00:50:33,510
And that's why it's
called a perpetual--

1101
00:50:33,510 --> 00:50:35,640
Ross, I saw you look quizzical.

1102
00:50:35,640 --> 00:50:38,580
It's made perpetual, because
it's rolling 10-hour pricing

1103
00:50:38,580 --> 00:50:40,740
settlements.

1104
00:50:40,740 --> 00:50:42,480
But you don't
settle at 10 hours.

1105
00:50:42,480 --> 00:50:44,760
You have to either
post more margin

1106
00:50:44,760 --> 00:50:47,263
or receive profit
every 10 hours.

1107
00:50:47,263 --> 00:50:48,930
AUDIENCE: Why isn't
it a 10-hour future?

1108
00:50:48,930 --> 00:50:49,380
GARY GENSLER: What's that?

1109
00:50:49,380 --> 00:50:51,390
AUDIENCE: Why isn't it
just a 10-hour future?

1110
00:50:51,390 --> 00:50:53,807
GARY GENSLER: Because at 10-hour
future might not have you

1111
00:50:53,807 --> 00:50:58,670
or may continue in the contract,
so they created a perpetual

1112
00:50:58,670 --> 00:50:59,330
rolling--

1113
00:50:59,330 --> 00:51:02,360
AUDIENCE: If I don't post,
I'm out 10 hours later.

1114
00:51:02,360 --> 00:51:04,346
GARY GENSLER: That's correct.

1115
00:51:04,346 --> 00:51:06,710
AUDIENCE: [INAUDIBLE]

1116
00:51:06,710 --> 00:51:12,230
GARY GENSLER: BitMax is
the largest in this volume.

1117
00:51:12,230 --> 00:51:14,810
They say they don't operate in
the US, because if they did,

1118
00:51:14,810 --> 00:51:16,910
it would definitely have
to register its commodity

1119
00:51:16,910 --> 00:51:18,313
futures trading commission.

1120
00:51:18,313 --> 00:51:19,730
But whether they
operate in the US

1121
00:51:19,730 --> 00:51:22,240
or not is probably for some
other people to figure out.

1122
00:51:24,920 --> 00:51:28,530
Crypto to crypto
versus Fiat to crypto--

1123
00:51:28,530 --> 00:51:32,783
70% of the volume is on
crypto to crypto exchanges.

1124
00:51:32,783 --> 00:51:34,200
Again, we don't
know if the volume

1125
00:51:34,200 --> 00:51:38,310
figures are accurate, but
just based on these figures.

1126
00:51:38,310 --> 00:51:43,750
So the ecosystem is still
2/3 crypto to crypto

1127
00:51:43,750 --> 00:51:45,760
rather than switching
out to some other--

1128
00:51:48,690 --> 00:51:51,160
Decentralized-- we
already talk about this.

1129
00:51:51,160 --> 00:51:53,210
Really important innovation.

1130
00:51:53,210 --> 00:51:55,690
I think we're going to see
more about decentralized,

1131
00:51:55,690 --> 00:51:59,200
but right now we're
still at the early days.

1132
00:51:59,200 --> 00:52:03,400
Bitcoin versus Fiat-- this
is just the month of October,

1133
00:52:03,400 --> 00:52:10,390
but 50% was versus US
dollar, 21% yen, Korea--

1134
00:52:10,390 --> 00:52:11,620
who's from Korea here?

1135
00:52:11,620 --> 00:52:14,550
Anybody, do we have anybody?

1136
00:52:14,550 --> 00:52:16,650
So tell us a little
bit about that figure.

1137
00:52:16,650 --> 00:52:19,520
Why 16% Korea?

1138
00:52:19,520 --> 00:52:20,180
Your views.

1139
00:52:20,180 --> 00:52:23,006
I know there's no
readings on it.

1140
00:52:23,006 --> 00:52:25,625
AUDIENCE: I am not
actually sure why.

1141
00:52:25,625 --> 00:52:29,330
But there were a lot
of articles about how

1142
00:52:29,330 --> 00:52:32,870
there are some people who just
put all the money that they

1143
00:52:32,870 --> 00:52:38,160
have invested over your lifetime
to cryptocurrency [INAUDIBLE]..

1144
00:52:38,160 --> 00:52:43,280
They didn't have any future
like making money by working.

1145
00:52:43,280 --> 00:52:46,400
I don't know like [INAUDIBLE].

1146
00:52:46,400 --> 00:52:48,060
So [INAUDIBLE].

1147
00:52:48,060 --> 00:52:49,236
PROFESSOR: Any other views?

1148
00:52:52,060 --> 00:52:52,560
Are you--

1149
00:52:52,560 --> 00:52:53,940
AUDIENCE: I think
psychologically

1150
00:52:53,940 --> 00:52:57,462
a lot of the speculators thought
that this was a very even thing

1151
00:52:57,462 --> 00:53:00,860
to just sort of speculating
on the stock market,

1152
00:53:00,860 --> 00:53:03,580
where you needed to have some
fundamental technical skill

1153
00:53:03,580 --> 00:53:04,770
sets.

1154
00:53:04,770 --> 00:53:06,430
Whereas, this is
just a very pure--

1155
00:53:06,430 --> 00:53:07,120
PROFESSOR: Pure.

1156
00:53:07,120 --> 00:53:08,855
AUDIENCE: --even keel.

1157
00:53:08,855 --> 00:53:11,880
Not here, but, you know,
just that you didn't require

1158
00:53:11,880 --> 00:53:15,100
any specific skill sets.

1159
00:53:15,100 --> 00:53:17,118
PROFESSOR: That's
just pure, up or down.

1160
00:53:17,118 --> 00:53:18,870
AUDIENCE: Getting
around capital controls.

1161
00:53:18,870 --> 00:53:22,060
PROFESSOR: Getting around
curious to us capital controls?

1162
00:53:22,060 --> 00:53:22,560
Yeah.

1163
00:53:22,560 --> 00:53:24,863
There's a kimchi premium
even that Bitcoin

1164
00:53:24,863 --> 00:53:26,030
sells for a little bit more.

1165
00:53:26,030 --> 00:53:28,310
And that's what it's called.

1166
00:53:28,310 --> 00:53:30,240
I didn't make that term up.

1167
00:53:30,240 --> 00:53:31,670
There's a little
bit of a premium.

1168
00:53:31,670 --> 00:53:33,110
And there's some
academic studies

1169
00:53:33,110 --> 00:53:37,010
on how that widens and narrows
sometimes depending upon what

1170
00:53:37,010 --> 00:53:38,510
the government's doing.

1171
00:53:38,510 --> 00:53:40,310
It's measured in
single digit percent.

1172
00:53:40,310 --> 00:53:43,550
But you might pay
3% or 4% premium.

1173
00:53:43,550 --> 00:53:45,350
Sometimes it's 1.5% premium.

1174
00:53:45,350 --> 00:53:49,310
But there's a premium
on the Korean exchanges.

1175
00:53:49,310 --> 00:53:53,990
But three years ago, what cross
do you think was the largest,

1176
00:53:53,990 --> 00:53:56,330
over 50% just three years ago?

1177
00:53:56,330 --> 00:53:58,410
It's not even on
that chart right now.

1178
00:53:58,410 --> 00:53:58,972
Tom?

1179
00:53:58,972 --> 00:53:59,680
AUDIENCE: Rem NB.

1180
00:53:59,680 --> 00:54:01,490
PROFESSOR: Rem NB.

1181
00:54:01,490 --> 00:54:05,605
In 2015 and 2016, over half
the market was Rem NB Bitcoin.

1182
00:54:08,460 --> 00:54:11,760
Kind of got the attention
from the Chinese central bank.

1183
00:54:11,760 --> 00:54:16,180
By 2017, that all changed.

1184
00:54:16,180 --> 00:54:20,010
And the US dollar thing then
kind of took that space.

1185
00:54:20,010 --> 00:54:21,540
And a lot of folks
that gets really

1186
00:54:21,540 --> 00:54:28,500
US dollar to tether to
Bitcoin or other ways.

1187
00:54:28,500 --> 00:54:29,490
This fluctuates.

1188
00:54:29,490 --> 00:54:31,210
These numbers aren't stable.

1189
00:54:31,210 --> 00:54:33,390
There's some months that
yen is the biggest number.

1190
00:54:36,130 --> 00:54:42,520
We talked about the country's
wonderful financial centers.

1191
00:54:42,520 --> 00:54:46,470
And then KYC, an
interesting statistic.

1192
00:54:46,470 --> 00:54:50,470
Now, this is about 140
exchanges that Crypto Compare

1193
00:54:50,470 --> 00:54:52,310
has in their database.

1194
00:54:52,310 --> 00:54:55,360
And they say only
half of them, 47%,

1195
00:54:55,360 --> 00:54:58,150
observe strict
know your customer.

1196
00:54:58,150 --> 00:55:02,004
1/4 partial and 28%
absolutely none, zero.

1197
00:55:05,660 --> 00:55:06,500
No.

1198
00:55:06,500 --> 00:55:09,920
That's just sort of the
state of play of crypto.

1199
00:55:09,920 --> 00:55:13,490
I hope none of those 28%
are operating in the US.

1200
00:55:13,490 --> 00:55:14,960
But they might be.

1201
00:55:17,560 --> 00:55:20,150
So what are the
policy challenges?

1202
00:55:20,150 --> 00:55:22,810
One is the markets are
readily susceptible to fraud

1203
00:55:22,810 --> 00:55:24,550
and manipulation.

1204
00:55:24,550 --> 00:55:26,440
Any market-- it's human nature.

1205
00:55:26,440 --> 00:55:29,500
I don't think we're going to
take the human out of human.

1206
00:55:29,500 --> 00:55:32,200
It's going to look for
angles, look for ways to make

1207
00:55:32,200 --> 00:55:35,470
opportunities, even
the best meaning folks.

1208
00:55:35,470 --> 00:55:39,760
If you hold the assets in
custody and you might make

1209
00:55:39,760 --> 00:55:43,630
the markets, because you're
not settling to the blockchain,

1210
00:55:43,630 --> 00:55:46,450
even for short whiles
, this market model,

1211
00:55:46,450 --> 00:55:50,710
this business model is
to make markets maybe.

1212
00:55:50,710 --> 00:55:52,540
There's inherent
conflicts of interest.

1213
00:55:52,540 --> 00:55:55,930
There's conflicts of interest
in pretty much all of finance.

1214
00:55:55,930 --> 00:55:57,280
But then we try to manage.

1215
00:55:57,280 --> 00:55:59,080
We either manage
conflicts of interest

1216
00:55:59,080 --> 00:56:02,530
by certain rules about
transparency or certain

1217
00:56:02,530 --> 00:56:05,240
prohibitions about,
in the custody world,

1218
00:56:05,240 --> 00:56:07,480
banks hold custody as well.

1219
00:56:07,480 --> 00:56:10,630
But we prohibit them
from using your assets

1220
00:56:10,630 --> 00:56:12,910
unless you permission
them to use your assets,

1221
00:56:12,910 --> 00:56:14,630
and things like that.

1222
00:56:14,630 --> 00:56:17,140
So what we try to
use usually is build

1223
00:56:17,140 --> 00:56:22,330
some system of transparency and
affirmative responsibilities

1224
00:56:22,330 --> 00:56:25,870
or prohibitive actions, those
three buckets, transparency,

1225
00:56:25,870 --> 00:56:27,940
some affirmative
responsibilities,

1226
00:56:27,940 --> 00:56:31,570
and prohibited actions
around conflicts.

1227
00:56:31,570 --> 00:56:34,150
But this space has the
conflicts without much

1228
00:56:34,150 --> 00:56:36,640
of those three
things, transparency,

1229
00:56:36,640 --> 00:56:41,050
either obligations or
prohibitive actions.

1230
00:56:41,050 --> 00:56:43,460
So inevitably, I think
it's human nature.

1231
00:56:43,460 --> 00:56:48,100
You're going to have some
kind of games going on.

1232
00:56:48,100 --> 00:56:52,300
The custodial arrangements we
talked about, big challenge.

1233
00:56:52,300 --> 00:56:55,530
We're going to see a
little bit more about that.

1234
00:56:55,530 --> 00:56:58,380
Complying with anti-money
laundering, KYC,

1235
00:56:58,380 --> 00:57:00,750
and implementing tax reporting.

1236
00:57:00,750 --> 00:57:05,120
In the US, at least,
in the US, brokers

1237
00:57:05,120 --> 00:57:08,810
have to report to the
government when you buy and sell

1238
00:57:08,810 --> 00:57:10,510
something.

1239
00:57:10,510 --> 00:57:13,030
This was not true
30 and 50 years ago.

1240
00:57:13,030 --> 00:57:15,850
But we've come to
a place where I

1241
00:57:15,850 --> 00:57:20,050
think it was in the last 15
to 20 years, laws changed.

1242
00:57:20,050 --> 00:57:22,010
Ross, maybe you know
on your legal work.

1243
00:57:22,010 --> 00:57:25,240
But laws change where brokerage
houses have to report.

1244
00:57:25,240 --> 00:57:29,240
And those reports go into the US
government and other countries.

1245
00:57:29,240 --> 00:57:33,730
So the brokers say James
sold this many shares of this

1246
00:57:33,730 --> 00:57:35,430
and had a basis of that.

1247
00:57:35,430 --> 00:57:38,350
And there's more tax compliance.

1248
00:57:38,350 --> 00:57:39,410
Here, there's no broker.

1249
00:57:39,410 --> 00:57:43,720
So it's hard to
attach something.

1250
00:57:43,720 --> 00:57:48,880
And some of the exchanges
are rather slow when

1251
00:57:48,880 --> 00:57:50,200
the IRS comes knocking.

1252
00:57:50,200 --> 00:57:55,510
Coinbase and the IRS
had a little kerfluffle,

1253
00:57:55,510 --> 00:57:59,560
I'd call it, when the IRS
asked for data on their then 13

1254
00:57:59,560 --> 00:58:00,640
million customers.

1255
00:58:00,640 --> 00:58:02,530
And they settled,
because the IRS

1256
00:58:02,530 --> 00:58:04,135
was bringing an
action against them

1257
00:58:04,135 --> 00:58:06,010
when they wouldn't give
them any information.

1258
00:58:06,010 --> 00:58:08,427
And they settled and gave them
information on their 10,000

1259
00:58:08,427 --> 00:58:12,730
or 20,000 most active accounts.

1260
00:58:12,730 --> 00:58:15,460
But for a while, right
now, the coin basis

1261
00:58:15,460 --> 00:58:20,200
can act like they're
Swiss bank accounts.

1262
00:58:20,200 --> 00:58:22,440
Is anybody from Switzerland?

1263
00:58:22,440 --> 00:58:24,060
All right, then I can say it.

1264
00:58:24,060 --> 00:58:26,150
But, you know, for decades--

1265
00:58:26,150 --> 00:58:26,650
wait.

1266
00:58:26,650 --> 00:58:28,430
Who?

1267
00:58:28,430 --> 00:58:30,287
AUDIENCE: [INAUDIBLE]
But I lived there.

1268
00:58:30,287 --> 00:58:31,370
PROFESSOR: You live there?

1269
00:58:31,370 --> 00:58:33,800
Well, what did for
decades, maybe centuries,

1270
00:58:33,800 --> 00:58:35,930
Swiss bank accounts
been known for?

1271
00:58:35,930 --> 00:58:36,680
AUDIENCE: Secrecy.

1272
00:58:36,680 --> 00:58:37,700
PROFESSOR: Secrecy.

1273
00:58:37,700 --> 00:58:38,270
Secrecy.

1274
00:58:38,270 --> 00:58:41,930
That was their-- they had a lot
of other good things going on.

1275
00:58:41,930 --> 00:58:46,670
But that was one of their
marketing points, secrecy.

1276
00:58:46,670 --> 00:58:47,880
It's a little harder now.

1277
00:58:47,880 --> 00:58:52,340
But it's still relative to a
German bank or a French bank,

1278
00:58:52,340 --> 00:58:55,810
probably a little bit
more secret, right?

1279
00:58:55,810 --> 00:58:57,040
AUDIENCE: Yes, it's less.

1280
00:58:57,040 --> 00:58:59,730
A lot because of US
pressure [INAUDIBLE]..

1281
00:58:59,730 --> 00:59:00,630
PROFESSOR: Right.

1282
00:59:00,630 --> 00:59:01,320
Right.

1283
00:59:01,320 --> 00:59:04,290
AUDIENCE: Still more secret than
some of European [INAUDIBLE]..

1284
00:59:04,290 --> 00:59:05,080
PROFESSOR: Yeah.

1285
00:59:05,080 --> 00:59:09,670
But crypto exchanges are
still thinking, oh, well,

1286
00:59:09,670 --> 00:59:11,560
how can we give up secrecy?

1287
00:59:11,560 --> 00:59:15,770
Because competitively, other
exchanges aren't doing it.

1288
00:59:15,770 --> 00:59:19,210
So I think Coinbase was
trying to be good citizens,

1289
00:59:19,210 --> 00:59:23,950
but also not give everything
to the IRS the IRS wanted.

1290
00:59:26,227 --> 00:59:28,060
There's a big question
of what's a security?

1291
00:59:28,060 --> 00:59:28,870
What's a commodity?

1292
00:59:28,870 --> 00:59:30,730
What's a derivative?

1293
00:59:30,730 --> 00:59:34,630
And in every legal
jurisdiction around the globe,

1294
00:59:34,630 --> 00:59:37,600
securities exchanges are
regulated pretty much

1295
00:59:37,600 --> 00:59:40,050
in every jurisdiction.

1296
00:59:40,050 --> 00:59:42,590
So what is a security
and what's not a security

1297
00:59:42,590 --> 00:59:47,120
does relate to what's currently
regulated under current law.

1298
00:59:47,120 --> 00:59:48,830
I've testified in
the US Congress.

1299
00:59:48,830 --> 00:59:52,970
And I'd say regardless of that,
if it's even just a commodity,

1300
00:59:52,970 --> 00:59:56,360
like Bitcoin under US law
is considered a commodity,

1301
00:59:56,360 --> 00:59:59,180
you probably want these
exchanges regulated.

1302
00:59:59,180 --> 01:00:02,060
And if it's a derivative,
in most jurisdictions,

1303
01:00:02,060 --> 01:00:03,990
it also is regulated.

1304
01:00:03,990 --> 01:00:06,020
So the first and the
third in that list,

1305
01:00:06,020 --> 01:00:09,620
securities and derivatives,
exchanges are regulated.

1306
01:00:09,620 --> 01:00:15,080
In most jurisdictions, commodity
exchanges are not, but not all.

1307
01:00:15,080 --> 01:00:20,670
So the definitional thing
also relates to what comes in.

1308
01:00:20,670 --> 01:00:23,630
So in the US, there are
a number of exchanges

1309
01:00:23,630 --> 01:00:25,993
that will, I would predict
in the next 18 months,

1310
01:00:25,993 --> 01:00:28,160
register with the Securities
and Exchange Commission

1311
01:00:28,160 --> 01:00:30,890
as broker-dealers under
regulation alternative trading

1312
01:00:30,890 --> 01:00:33,460
system Reg ATS.

1313
01:00:33,460 --> 01:00:38,200
But I think that they will only
do it if they're category one.

1314
01:00:38,200 --> 01:00:41,020
They have a bunch of
initial coin tokens

1315
01:00:41,020 --> 01:00:45,370
that are so clearly
securities, they register.

1316
01:00:45,370 --> 01:00:49,420
But what if you're only
trading Bitcoin, only trading

1317
01:00:49,420 --> 01:00:52,270
Bitcoin and Eth and so forth?

1318
01:00:52,270 --> 01:00:56,200
Those might say, I don't want
to have all those added costs.

1319
01:00:56,200 --> 01:00:59,950
So question for Thursday is,
why did the Intercontinental

1320
01:00:59,950 --> 01:01:02,800
Exchange create
a one day future,

1321
01:01:02,800 --> 01:01:07,090
which appears to be like it was
like walking into and saying,

1322
01:01:07,090 --> 01:01:09,550
I want a regulated exchange?

1323
01:01:09,550 --> 01:01:12,430
As a business
proposition, that's

1324
01:01:12,430 --> 01:01:14,352
what it feels like to me.

1325
01:01:14,352 --> 01:01:19,050
That that was part
of that decision set.

1326
01:01:19,050 --> 01:01:20,835
But you can ask on Thursday.

1327
01:01:24,270 --> 01:01:26,873
Tracking beneficial ownership.

1328
01:01:26,873 --> 01:01:29,040
We've tracked beneficial
ownership in the securities

1329
01:01:29,040 --> 01:01:33,450
markets for a long time,
from the first joint stock

1330
01:01:33,450 --> 01:01:34,680
companies.

1331
01:01:34,680 --> 01:01:37,110
Because you track
beneficial ownership

1332
01:01:37,110 --> 01:01:39,550
to ensure that somebody
gets their dividends.

1333
01:01:39,550 --> 01:01:42,420
And if they're voting once a
year on the board of directors

1334
01:01:42,420 --> 01:01:43,770
and things like that.

1335
01:01:43,770 --> 01:01:46,620
But somewhere in the
last 30 or 40 years,

1336
01:01:46,620 --> 01:01:49,230
law enforcement agencies
said that's a good way

1337
01:01:49,230 --> 01:01:51,810
to track against money
laundering and track

1338
01:01:51,810 --> 01:01:53,700
against other things.

1339
01:01:53,700 --> 01:01:57,694
So layered on top
of securities laws,

1340
01:01:57,694 --> 01:01:59,740
law enforcement agencies
around the globe

1341
01:01:59,740 --> 01:02:03,330
said, we want to
know who owns what.

1342
01:02:03,330 --> 01:02:06,060
For the prior 50
to 100 years, it

1343
01:02:06,060 --> 01:02:08,520
was just securities law
that cared about tracking

1344
01:02:08,520 --> 01:02:10,615
beneficial ownership.

1345
01:02:10,615 --> 01:02:12,240
But there's some
international treaty--

1346
01:02:12,240 --> 01:02:13,615
I can't remember
the name of it--

1347
01:02:13,615 --> 01:02:15,540
that says all securities
regulators have

1348
01:02:15,540 --> 01:02:18,120
to do something
extra and make sure

1349
01:02:18,120 --> 01:02:20,100
that there's transfer agents.

1350
01:02:20,100 --> 01:02:22,440
And there's this whole
regime of keeping

1351
01:02:22,440 --> 01:02:26,010
ledgers of who owns what.

1352
01:02:26,010 --> 01:02:28,470
In addition to this
anti-money laundering stuff,

1353
01:02:28,470 --> 01:02:34,070
securities laws have this
embedded in most jurisdictions,

1354
01:02:34,070 --> 01:02:35,980
This is a tough
one for this space,

1355
01:02:35,980 --> 01:02:41,440
not only because it comes
from a libertarian basis.

1356
01:02:41,440 --> 01:02:44,500
But it's also a tough
one just technologically,

1357
01:02:44,500 --> 01:02:46,690
just the technical solutions.

1358
01:02:46,690 --> 01:02:49,330
The crypto exchanges,
half of them

1359
01:02:49,330 --> 01:02:53,980
have what Crypto Compare says
is strict anti-money laundering.

1360
01:02:53,980 --> 01:02:57,370
But 1/4 don't have any,
which means they're not

1361
01:02:57,370 --> 01:03:00,590
tracking beneficial ownership.

1362
01:03:00,590 --> 01:03:05,120
I think that will
slowly get ramped up.

1363
01:03:05,120 --> 01:03:10,940
But if you see a lot of
registered exchanges leaving

1364
01:03:10,940 --> 01:03:13,310
one country for another,
they're probably

1365
01:03:13,310 --> 01:03:16,440
going to a place that
has lower regulation.

1366
01:03:19,820 --> 01:03:23,270
Oh, and how do you remediate
a noncompliant exchange?

1367
01:03:23,270 --> 01:03:25,190
There's a bunch of
exchanges here in the US

1368
01:03:25,190 --> 01:03:27,080
that will register.

1369
01:03:27,080 --> 01:03:28,580
Securities and
Exchange Commission

1370
01:03:28,580 --> 01:03:32,665
can do, look, we're
not going to fine you.

1371
01:03:32,665 --> 01:03:34,790
We're not going to give
you penalties for the past.

1372
01:03:34,790 --> 01:03:36,410
Can you just come
into compliance

1373
01:03:36,410 --> 01:03:38,690
in the next 12 to 18 months?

1374
01:03:38,690 --> 01:03:41,570
That's probably what's
going to happen.

1375
01:03:41,570 --> 01:03:43,520
But like the Ether
Delta situation

1376
01:03:43,520 --> 01:03:46,610
just last week, they
come to some settlement.

1377
01:03:46,610 --> 01:03:49,460
They say, you've been violating
the law for the last X

1378
01:03:49,460 --> 01:03:51,180
number of months.

1379
01:03:51,180 --> 01:03:52,935
But how do you come
into compliance?

1380
01:03:52,935 --> 01:03:54,560
And so that will be
an interesting sort

1381
01:03:54,560 --> 01:04:00,710
of what level of regulatory
forbearance will there be?

1382
01:04:00,710 --> 01:04:02,480
I think that at
some point in time,

1383
01:04:02,480 --> 01:04:05,550
there will be fines
and penalties.

1384
01:04:05,550 --> 01:04:09,840
But I think in the US context,
they'll bring a half a dozen,

1385
01:04:09,840 --> 01:04:13,110
or eight, or 10 into regulation.

1386
01:04:13,110 --> 01:04:18,090
And then they'll bring
down a heavier footprint,

1387
01:04:18,090 --> 01:04:22,710
bring down the hammer, if
you wish, in 2019 or 2020.

1388
01:04:22,710 --> 01:04:24,810
I don't think that's
going to be in 2018.

1389
01:04:24,810 --> 01:04:25,665
Kelly?

1390
01:04:25,665 --> 01:04:28,387
AUDIENCE: So maybe this is
a question for Thursday,

1391
01:04:28,387 --> 01:04:33,090
but what is the thought on
the side of the exchanges?

1392
01:04:33,090 --> 01:04:36,555
Do you think that there
will be a huge cost to them

1393
01:04:36,555 --> 01:04:38,040
to come into compliance?

1394
01:04:38,040 --> 01:04:41,010
Or do they think that
they're going to lose members

1395
01:04:41,010 --> 01:04:44,600
or maybe even it would increase
because it's [INAUDIBLE]??

1396
01:04:44,600 --> 01:04:47,730
PROFESSOR: So a
very good question.

1397
01:04:47,730 --> 01:04:52,230
What does being compliant with
some broad public policy norms

1398
01:04:52,230 --> 01:04:52,730
do?

1399
01:04:52,730 --> 01:04:55,370
And I think there's probably
different business models.

1400
01:04:55,370 --> 01:04:57,350
If you're an incumbent,
like NASDAQ--

1401
01:04:57,350 --> 01:04:59,080
and there was a
brief article when

1402
01:04:59,080 --> 01:05:00,920
Adena Friedman who
runs NASDAQ said

1403
01:05:00,920 --> 01:05:02,550
she wanted to be in this space.

1404
01:05:02,550 --> 01:05:04,970
If you're NASDAQ, if
you're CME, if you're

1405
01:05:04,970 --> 01:05:08,660
Deutsche Borse in
Germany, if you're ICE,

1406
01:05:08,660 --> 01:05:11,880
you really already know
how to be compliant.

1407
01:05:11,880 --> 01:05:16,340
It's probably advantageous
to be registered

1408
01:05:16,340 --> 01:05:19,130
and for all those
startups to be registered.

1409
01:05:19,130 --> 01:05:21,470
In some ways, it creates
a barrier to entry.

1410
01:05:21,470 --> 01:05:23,270
But you want to do it.

1411
01:05:23,270 --> 01:05:26,340
If you're a startup, you
could go one of two paths.

1412
01:05:26,340 --> 01:05:30,350
So Gemini here in the US and
Coinbase, at least publicly,

1413
01:05:30,350 --> 01:05:32,097
are saying we want
to be compliant.

1414
01:05:32,097 --> 01:05:32,930
How do we get there?

1415
01:05:32,930 --> 01:05:34,550
Coinbase may be,
because now they're

1416
01:05:34,550 --> 01:05:37,190
almost like an incumbent.

1417
01:05:37,190 --> 01:05:42,770
And so they might want to keep
the next round of startups out.

1418
01:05:42,770 --> 01:05:45,320
But I think around
the globe, there's

1419
01:05:45,320 --> 01:05:47,540
no doubt that it
would raise costs.

1420
01:05:47,540 --> 01:05:51,860
The question is whether it would
either secure your market share

1421
01:05:51,860 --> 01:05:55,660
or flush out some competitors.

1422
01:05:55,660 --> 01:05:57,520
I would contend that
it would increase

1423
01:05:57,520 --> 01:05:59,740
the overall size of the market.

1424
01:05:59,740 --> 01:06:02,260
Because more people
would be interested.

1425
01:06:02,260 --> 01:06:05,080
But some fear that it
would shrink the market.

1426
01:06:05,080 --> 01:06:09,070
Because if you had known
beneficial ownership,

1427
01:06:09,070 --> 01:06:10,660
if you tracked
beneficial ownership

1428
01:06:10,660 --> 01:06:16,000
for 100% of this market, some
worry the market would shrink.

1429
01:06:16,000 --> 01:06:18,290
That's from a
commercial concept.

1430
01:06:18,290 --> 01:06:21,470
Meaning, if you're tracking
beneficial ownership.

1431
01:06:21,470 --> 01:06:22,220
Question Riham?

1432
01:06:22,220 --> 01:06:25,670
AUDIENCE: [INAUDIBLE] the whole
essence of Bitcoin, all of this

1433
01:06:25,670 --> 01:06:32,270
is deregulation, being away from
the government, and transaction

1434
01:06:32,270 --> 01:06:34,310
between individuals
without having

1435
01:06:34,310 --> 01:06:36,920
regulations, this
more libertarian

1436
01:06:36,920 --> 01:06:41,362
view of exchanges [INAUDIBLE].

1437
01:06:41,362 --> 01:06:43,070
PROFESSOR: So the
nature of your question

1438
01:06:43,070 --> 01:06:48,230
is, isn't Bitcoin and crypto
about some off the rails,

1439
01:06:48,230 --> 01:06:51,800
libertarian, pro
libertarian, peer to peer?

1440
01:06:51,800 --> 01:06:53,150
I think it's genesis.

1441
01:06:53,150 --> 01:06:54,610
Eric, you want to answer?

1442
01:06:54,610 --> 01:06:56,456
AUDIENCE: [INAUDIBLE]
there's common theme

1443
01:06:56,456 --> 01:06:59,220
in the reading
about Coinbase where

1444
01:06:59,220 --> 01:07:02,660
[INAUDIBLE] the fact
that more and more people

1445
01:07:02,660 --> 01:07:04,610
with that libertarian
point of view

1446
01:07:04,610 --> 01:07:07,550
are constantly reminded
[INAUDIBLE] that it's

1447
01:07:07,550 --> 01:07:09,860
kind of betraying that ideal.

1448
01:07:09,860 --> 01:07:13,750
But you don't have
to believe me.

1449
01:07:13,750 --> 01:07:17,220
I mean, he's trying to make
a business out of this.

1450
01:07:17,220 --> 01:07:19,650
So being compliant
with that is actually

1451
01:07:19,650 --> 01:07:22,070
trying to broaden
the base of customers

1452
01:07:22,070 --> 01:07:26,640
and make the business more
profitable and growth.

1453
01:07:26,640 --> 01:07:31,170
PROFESSOR: I think that to
go from a $200 billion market

1454
01:07:31,170 --> 01:07:33,480
to $2 trillion or
$10 trillion, it's

1455
01:07:33,480 --> 01:07:36,330
got to come inside the
public policy envelope.

1456
01:07:36,330 --> 01:07:41,810
I just don't see particularly,
lowering the risk

1457
01:07:41,810 --> 01:07:44,270
of manipulation and fraud.

1458
01:07:44,270 --> 01:07:48,320
Then you're going to have a
broader societal acceptance.

1459
01:07:48,320 --> 01:07:50,900
And investor protection matters.

1460
01:07:50,900 --> 01:07:54,950
But there are others on
the other side of that.

1461
01:07:54,950 --> 01:07:56,040
These are on the numbers.

1462
01:07:56,040 --> 01:07:57,207
I'm not going to stay on it.

1463
01:07:57,207 --> 01:07:59,630
But this is just
to say one thing

1464
01:07:59,630 --> 01:08:03,170
Crypto Compare does is
average daily visitors

1465
01:08:03,170 --> 01:08:04,870
versus their volume.

1466
01:08:04,870 --> 01:08:07,880
Coinbase's average
daily visitors

1467
01:08:07,880 --> 01:08:10,400
is you can see that
a highest read chart

1468
01:08:10,400 --> 01:08:11,990
compared to their volume.

1469
01:08:11,990 --> 01:08:14,920
They probably have
legitimate use.

1470
01:08:14,920 --> 01:08:19,890
The two, ZB and EXX,
almost have no visitors.

1471
01:08:19,890 --> 01:08:22,840
And they report a lot of volume.

1472
01:08:22,840 --> 01:08:25,325
So it's just an interesting
statistic to sort of say--

1473
01:08:27,930 --> 01:08:30,930
and it might well be that
Binance's volume statistics

1474
01:08:30,930 --> 01:08:32,420
are accurate.

1475
01:08:32,420 --> 01:08:35,340
They're just a crypto
to crypto exchange.

1476
01:08:35,340 --> 01:08:37,996
But they also, their ratio
of visitors to volume

1477
01:08:37,996 --> 01:08:39,329
is very different than Coinbase.

1478
01:08:42,439 --> 01:08:46,370
Just to give you a little flavor
for the craziness out there.

1479
01:08:46,370 --> 01:08:47,359
Investor protection.

1480
01:08:47,359 --> 01:08:50,399
I sort of said investor
protection is critical.

1481
01:08:50,399 --> 01:08:52,910
We're going to talk about
this in a week or so

1482
01:08:52,910 --> 01:08:54,420
about initial coin offerings.

1483
01:08:54,420 --> 01:08:57,710
But it's further than
consumer protection.

1484
01:08:57,710 --> 01:09:00,560
And importantly,
because we address.

1485
01:09:00,560 --> 01:09:01,130
We know.

1486
01:09:01,130 --> 01:09:01,742
We are honest.

1487
01:09:01,742 --> 01:09:02,700
We're earnest about it.

1488
01:09:02,700 --> 01:09:04,575
We say, yes, there are
conflicts of interest.

1489
01:09:04,575 --> 01:09:06,290
How can we address
conflicts of interest?

1490
01:09:06,290 --> 01:09:08,160
You don't ban
conflicts of interest.

1491
01:09:08,160 --> 01:09:11,180
But you sort of say, is
there ways to manage it?

1492
01:09:11,180 --> 01:09:13,189
How do we promote
market integrity

1493
01:09:13,189 --> 01:09:16,970
through transparency and
rules of anti-manipulation?

1494
01:09:16,970 --> 01:09:20,740
So it's kind of those, you
know, the realities of humanity.

1495
01:09:20,740 --> 01:09:23,930
And we say, well, how can we
sort of put some traffic lights

1496
01:09:23,930 --> 01:09:29,460
and speed limits in the system
to give people confidence

1497
01:09:29,460 --> 01:09:30,720
that drive the roads?

1498
01:09:30,720 --> 01:09:33,155
And by the way, Rahim,
I can't tell you,

1499
01:09:33,155 --> 01:09:35,530
because I wasn't there around
the debates in the nineteen

1500
01:09:35,530 --> 01:09:37,145
teens and the 1920s.

1501
01:09:37,145 --> 01:09:38,520
But you can be
assured there were

1502
01:09:38,520 --> 01:09:44,990
debates in whether to put
the first traffic light out.

1503
01:09:44,990 --> 01:09:46,700
Literally, you know?

1504
01:09:46,700 --> 01:09:49,040
Whether to put the
first crosswalks.

1505
01:09:49,040 --> 01:09:51,350
And do traffic
lights and crosswalks

1506
01:09:51,350 --> 01:09:54,260
restrict the use of automobiles?

1507
01:09:54,260 --> 01:09:56,590
Absolutely.

1508
01:09:56,590 --> 01:09:58,240
Absolutely.

1509
01:09:58,240 --> 01:09:59,990
But think about this.

1510
01:09:59,990 --> 01:10:03,430
Did they promote the
sales of automobiles?

1511
01:10:03,430 --> 01:10:05,290
And I would contend
they also promoted

1512
01:10:05,290 --> 01:10:07,300
the sales of automobiles.

1513
01:10:07,300 --> 01:10:10,780
That simple regulatory
intervention

1514
01:10:10,780 --> 01:10:14,020
meant that people could
feel a little bit more safe

1515
01:10:14,020 --> 01:10:15,490
having their neighbors drive.

1516
01:10:15,490 --> 01:10:17,350
Because most people
didn't drive.

1517
01:10:17,350 --> 01:10:19,530
But having their
neighbors come down

1518
01:10:19,530 --> 01:10:23,560
pass there walking on the
street, the pedestrians.

1519
01:10:23,560 --> 01:10:25,610
Pedestrians felt safer.

1520
01:10:25,610 --> 01:10:28,650
So I think it's a bit of both.

1521
01:10:28,650 --> 01:10:32,310
All right, I might be
disclosing my point of view.

1522
01:10:32,310 --> 01:10:35,460
I think investor protection
bolsters investor confidence

1523
01:10:35,460 --> 01:10:36,600
in capital markets.

1524
01:10:36,600 --> 01:10:37,890
And that everybody benefits.

1525
01:10:37,890 --> 01:10:40,590
But you've got to get
the balance right.

1526
01:10:40,590 --> 01:10:42,510
And I'd respect if
half of you say,

1527
01:10:42,510 --> 01:10:45,180
no, it should be less
regulation, and have said more.

1528
01:10:45,180 --> 01:10:47,580
I'm disclosing more
where I am and at least

1529
01:10:47,580 --> 01:10:51,240
the logic behind it.

1530
01:10:51,240 --> 01:10:53,195
You know what the Howey Test is.

1531
01:10:53,195 --> 01:10:54,570
We'll come back
to this in a week

1532
01:10:54,570 --> 01:10:57,780
when we do initial
coin offerings.

1533
01:10:57,780 --> 01:10:59,700
In the center of
crypto exchanges,

1534
01:10:59,700 --> 01:11:03,330
it's an important issue as to
which crypto exchanges have

1535
01:11:03,330 --> 01:11:05,190
an ICO token.

1536
01:11:05,190 --> 01:11:09,990
Then they've got to kind
of do a little bit more.

1537
01:11:09,990 --> 01:11:11,640
Hacks.

1538
01:11:11,640 --> 01:11:13,920
These are the biggest
hacks I could find.

1539
01:11:13,920 --> 01:11:15,180
These are reported hacks.

1540
01:11:15,180 --> 01:11:17,370
Who knows what's
not been reported?

1541
01:11:17,370 --> 01:11:21,750
Coincheck and Mount Gox
each about a half a billion.

1542
01:11:21,750 --> 01:11:26,750
A couple of 50 to 100, 200.

1543
01:11:26,750 --> 01:11:30,130
And here's a bunch of
tiny ones that I've put.

1544
01:11:30,130 --> 01:11:31,480
I mean, they'll be on Canvas.

1545
01:11:31,480 --> 01:11:34,240
But there's a
bunch of basically,

1546
01:11:34,240 --> 01:11:38,590
steal somebody else's coins,
because they're [INAUDIBLE]..

1547
01:11:38,590 --> 01:11:42,230
Earlier question, cold storage.

1548
01:11:42,230 --> 01:11:46,510
This again, thanks to the
friends at Crypto Compare.

1549
01:11:46,510 --> 01:11:49,130
Isabella, that was your
question earlier, right?

1550
01:11:49,130 --> 01:11:52,430
So I can't really tell
you why BitFlyer only

1551
01:11:52,430 --> 01:11:56,760
has 80% in cold storage.

1552
01:11:56,760 --> 01:12:01,080
And some of these others,
like Bit for Nexus 96% or 97%.

1553
01:12:01,080 --> 01:12:04,450
But I think that if you have
a high volume and high flow,

1554
01:12:04,450 --> 01:12:07,980
you could maybe keep
more in cold storage.

1555
01:12:07,980 --> 01:12:11,340
Or if your model is more about
custody than transactions,

1556
01:12:11,340 --> 01:12:12,960
you could have more
in cold storage.

1557
01:12:12,960 --> 01:12:17,370
You do need something, you
know, probably connected

1558
01:12:17,370 --> 01:12:21,390
to give your customer
base liquidity.

1559
01:12:21,390 --> 01:12:23,520
And somewhat depends
how long it takes

1560
01:12:23,520 --> 01:12:27,740
you to move something from
cold storage to hot storage.

1561
01:12:27,740 --> 01:12:29,372
AUDIENCE: [INAUDIBLE]

1562
01:12:29,372 --> 01:12:30,330
PROFESSOR: What's that?

1563
01:12:30,330 --> 01:12:33,450
AUDIENCE: At least they used
their own capital [INAUDIBLE]??

1564
01:12:33,450 --> 01:12:35,020
PROFESSOR: So they self-insure.

1565
01:12:35,020 --> 01:12:36,640
And Gemini announced
that they just

1566
01:12:36,640 --> 01:12:39,760
signed a contract with Aion
one of the world's largest

1567
01:12:39,760 --> 01:12:44,830
insurance companies, to
insure against loss of that

1568
01:12:44,830 --> 01:12:46,990
which they're having custody.

1569
01:12:46,990 --> 01:12:49,390
But don't confuse it
for 100% insurance.

1570
01:12:49,390 --> 01:12:52,930
The insurance companies
are charging significantly,

1571
01:12:52,930 --> 01:12:56,260
somewhere around 1.5% a quarter.

1572
01:12:56,260 --> 01:12:58,250
So there's some
crypto exchanges,

1573
01:12:58,250 --> 01:13:01,320
which will allow you to
pay for the insurance.

1574
01:13:04,770 --> 01:13:07,340
And Gemini says they've
signed a contract with Aion.

1575
01:13:07,340 --> 01:13:09,840
And I can't quite tell whether
that's just because Gemini is

1576
01:13:09,840 --> 01:13:11,550
going to pay for the insurance.

1577
01:13:11,550 --> 01:13:13,710
Or they're going
to allow you to pay

1578
01:13:13,710 --> 01:13:19,167
for the insurance in
that custody solution.

1579
01:13:19,167 --> 01:13:20,000
Let's see what else.

1580
01:13:20,000 --> 01:13:22,080
Oh, we're almost wrapping.

1581
01:13:22,080 --> 01:13:23,400
So here's what I think.

1582
01:13:23,400 --> 01:13:26,040
Custody, I think
the custody duties

1583
01:13:26,040 --> 01:13:28,500
either have to be
fixed or spun off.

1584
01:13:28,500 --> 01:13:30,510
I think from a public
policy perspective,

1585
01:13:30,510 --> 01:13:32,310
they're better spun off.

1586
01:13:32,310 --> 01:13:35,640
And that's because there's
such an inherent conflict.

1587
01:13:35,640 --> 01:13:37,590
I think if you're
holding somebody's funds

1588
01:13:37,590 --> 01:13:41,790
and also transacting, it's just
too sweet a honeypot not just

1589
01:13:41,790 --> 01:13:44,940
to be stolen, but for
the operator to say,

1590
01:13:44,940 --> 01:13:48,390
I want to use it in my own--

1591
01:13:48,390 --> 01:13:52,140
lend it, borrow it,
transact around it.

1592
01:13:52,140 --> 01:13:53,880
But that's my thought.

1593
01:13:53,880 --> 01:13:59,100
Fix it or spin it off
would be the custody.

1594
01:13:59,100 --> 01:14:02,910
Illicit activity, I think we're
going to have to get to a place

1595
01:14:02,910 --> 01:14:07,950
where if not 100%, close to
100% are actually complying.

1596
01:14:07,950 --> 01:14:11,610
And if 1/4 of them aren't
even doing AML and KYC,

1597
01:14:11,610 --> 01:14:14,820
there's still a lot of--
there's some road ahead here.

1598
01:14:14,820 --> 01:14:20,310
I know it might not fit, Rahim,
with the libertarian soul

1599
01:14:20,310 --> 01:14:22,560
of the genesis of all this.

1600
01:14:22,560 --> 01:14:24,750
I won't say you
maybe personally.

1601
01:14:28,410 --> 01:14:30,900
I think that's going to
be the path for our--

1602
01:14:30,900 --> 01:14:32,490
if we're still two
and three years

1603
01:14:32,490 --> 01:14:35,730
from now 1/4 of the
market not doing it.

1604
01:14:35,730 --> 01:14:37,470
I think that the
market integrity

1605
01:14:37,470 --> 01:14:38,820
piece is the toughest one.

1606
01:14:38,820 --> 01:14:41,160
And it's maybe where
my own personal views

1607
01:14:41,160 --> 01:14:42,480
shouldn't cloud my judgment.

1608
01:14:42,480 --> 01:14:45,360
My own personal views is
we need market integrity,

1609
01:14:45,360 --> 01:14:49,290
anti-manipulation, no front
running, things like that.

1610
01:14:49,290 --> 01:14:50,930
But realistically,
it's probably going

1611
01:14:50,930 --> 01:14:52,890
to be done by
individual exchanges

1612
01:14:52,890 --> 01:14:55,470
or self-regulatory
organizations.

1613
01:14:55,470 --> 01:14:57,240
Gemini and others
in the UK, there's

1614
01:14:57,240 --> 01:14:59,610
some self-regulatory
organizations.

1615
01:14:59,610 --> 01:15:02,260
I don't think that's sufficient.

1616
01:15:02,260 --> 01:15:04,298
It's a step really in
the right direction.

1617
01:15:04,298 --> 01:15:06,090
But I think somewhere,
if this gets bigger,

1618
01:15:06,090 --> 01:15:09,690
it needs to be the official
sector putting some traffic

1619
01:15:09,690 --> 01:15:14,490
lights and stop signs in.

1620
01:15:14,490 --> 01:15:16,740
Registration and remediation.

1621
01:15:16,740 --> 01:15:18,840
First, to determine whether
you have to register

1622
01:15:18,840 --> 01:15:20,220
and then comply.

1623
01:15:20,220 --> 01:15:23,460
And that's a multiple
month or year period.

1624
01:15:23,460 --> 01:15:26,670
In Japan, they started
registering in late 2017.

1625
01:15:26,670 --> 01:15:28,890
They started with
16 and another 16.

1626
01:15:28,890 --> 01:15:31,610
Some had to shut down in Japan.

1627
01:15:31,610 --> 01:15:33,710
South Korea is registering.

1628
01:15:33,710 --> 01:15:35,550
Now, some of those
registration regimes

1629
01:15:35,550 --> 01:15:39,530
are really just about
custody and Bank Secrecy Act.

1630
01:15:39,530 --> 01:15:42,020
They're not going as far
as I would like to go,

1631
01:15:42,020 --> 01:15:44,240
which is into market integrity.

1632
01:15:44,240 --> 01:15:46,760
But I think you're going to
see a bunch more jurisdictions,

1633
01:15:46,760 --> 01:15:51,860
registration, remediation,
some closing, and the like.

1634
01:15:51,860 --> 01:15:55,640
Margin and fee compression,
I think that's inevitable,

1635
01:15:55,640 --> 01:15:59,400
whether it comes from the Robin
Hoods or the Intercontinental

1636
01:15:59,400 --> 01:16:00,650
Exchange.

1637
01:16:00,650 --> 01:16:03,540
But the juice is
so much right now.

1638
01:16:03,540 --> 01:16:06,620
I mean, some of these
are charging 1% to 3%.

1639
01:16:06,620 --> 01:16:07,730
You all transact.

1640
01:16:07,730 --> 01:16:09,260
You know your fee
structures better.

1641
01:16:09,260 --> 01:16:12,910
But I think there'll be
margin and fee compression.

1642
01:16:12,910 --> 01:16:14,810
And I think there'll
be some consolidation.

1643
01:16:14,810 --> 01:16:19,580
There's not enough room
here for 200 plus exchanges.

1644
01:16:19,580 --> 01:16:21,860
So those are my predictions.

1645
01:16:21,860 --> 01:16:24,470
And I think the
decentralized exchanges,

1646
01:16:24,470 --> 01:16:26,910
once they have
enhanced customer UI,

1647
01:16:26,910 --> 01:16:28,220
there will be more adoption.

1648
01:16:28,220 --> 01:16:33,890
But right now, not that easy
to use for most regular people,

1649
01:16:33,890 --> 01:16:36,605
the non-computer scientists.

1650
01:16:36,605 --> 01:16:38,480
Two questions and then
we might have to wrap.

1651
01:16:38,480 --> 01:16:40,135
AUDIENCE: Is there
any indication

1652
01:16:40,135 --> 01:16:42,188
that crypto exchanges
are profitable?

1653
01:16:42,188 --> 01:16:43,980
PROFESSOR: Crypto
exchanges, profitability,

1654
01:16:43,980 --> 01:16:46,200
they're enormously profitable.

1655
01:16:46,200 --> 01:16:52,570
Coinbase did a venture round
at an $8 billion valuation.

1656
01:16:52,570 --> 01:16:55,410
One crypto exchange just
sold itself for $400 million.

1657
01:16:55,410 --> 01:16:58,560
And Coincheck that
lost the half a billion

1658
01:16:58,560 --> 01:17:03,000
of Nam, the 27-year-old
who ran that in Japan

1659
01:17:03,000 --> 01:17:04,765
did not declare bankruptcy.

1660
01:17:04,765 --> 01:17:06,390
Because he had already
made over a half

1661
01:17:06,390 --> 01:17:08,730
a billion dollars in
the previous 12 months.

1662
01:17:08,730 --> 01:17:11,960
They are enormously profitable.