1 00:00:01,010 --> 00:00:03,350 The following content is provided under a Creative 2 00:00:03,350 --> 00:00:04,740 Commons license. 3 00:00:04,740 --> 00:00:06,950 Your support will help MIT OpenCourseWare 4 00:00:06,950 --> 00:00:11,040 continue to offer high quality educational resources for free. 5 00:00:11,040 --> 00:00:13,610 To make a donation or to view additional materials 6 00:00:13,610 --> 00:00:17,570 from hundreds of MIT courses, visit MIT OpenCourseWare 7 00:00:17,570 --> 00:00:18,463 at ocw.mit.edu. 8 00:00:23,080 --> 00:00:27,720 GARY GENSLER: Welcome, hello again. 9 00:00:27,720 --> 00:00:30,070 Yeah, Yeah. 10 00:00:30,070 --> 00:00:31,490 I put my jacket back on. 11 00:00:31,490 --> 00:00:35,690 I figured I was doing public policy today, had to look 12 00:00:35,690 --> 00:00:37,340 a little official. 13 00:00:37,340 --> 00:00:40,130 So let's talk a little bit about public policy 14 00:00:40,130 --> 00:00:43,280 and some of the challenges that we're going to do. 15 00:00:43,280 --> 00:00:44,890 And the overview of today-- 16 00:00:44,890 --> 00:00:48,380 we're going to chat a little bit about the readings, of course. 17 00:00:48,380 --> 00:00:53,360 And then I want to set it up a bit on crypto finance, just 18 00:00:53,360 --> 00:00:57,800 a simple term of this $200 or $250 billion dollar space, 19 00:00:57,800 --> 00:01:02,140 because a lot of the public policy is about crypto finance, 20 00:01:02,140 --> 00:01:05,000 though there are some public policy about underlying 21 00:01:05,000 --> 00:01:07,060 blockchain technology. 22 00:01:07,060 --> 00:01:11,090 It's both, but most of it's about the financial markets 23 00:01:11,090 --> 00:01:15,900 around cryptocurrencies and crypto tokens. 24 00:01:15,900 --> 00:01:19,310 Give an overall public policy framework, 25 00:01:19,310 --> 00:01:22,130 talk about the three guardrails, the big rails 26 00:01:22,130 --> 00:01:28,000 of illicit activity, financial stability, and the public. 27 00:01:28,000 --> 00:01:29,800 And then I'm going to share a little bit 28 00:01:29,800 --> 00:01:33,100 of some slides and some thoughts on public policy development. 29 00:01:33,100 --> 00:01:35,590 As many of you know, I've spent the last 20 30 00:01:35,590 --> 00:01:38,860 years kicking around politics and public policy. 31 00:01:38,860 --> 00:01:44,260 And as two or three of you know, in this spring, Simon Johnson 32 00:01:44,260 --> 00:01:46,870 and I stood up a course called Public Policy 33 00:01:46,870 --> 00:01:47,950 and the Private Sector. 34 00:01:47,950 --> 00:01:50,620 So it's maybe my little advertisement for next spring, 35 00:01:50,620 --> 00:01:55,640 because we're going to stand it up again as well. 36 00:01:55,640 --> 00:02:02,820 So the study questions which was basically around public policy, 37 00:02:02,820 --> 00:02:07,550 as you remember these questions. 38 00:02:07,550 --> 00:02:11,050 And I'm sorry, because Talita didn't give me my friendly list 39 00:02:11,050 --> 00:02:14,540 as to who hasn't spoken up yet. 40 00:02:14,540 --> 00:02:15,560 So that's Talita. 41 00:02:15,560 --> 00:02:18,450 So you're saved, you're saved, because now I can't 42 00:02:18,450 --> 00:02:20,340 remember anybody that's not-- 43 00:02:20,340 --> 00:02:21,090 AUDIENCE: I can send it to a printer. 44 00:02:21,090 --> 00:02:22,016 GARY GENSLER: What's that? 45 00:02:22,016 --> 00:02:22,910 AUDIENCE: I can send it to a printer. 46 00:02:22,910 --> 00:02:25,035 GARY GENSLER: Yeah, you can send it to a printer. 47 00:02:28,050 --> 00:02:31,380 It's hard to remember with 85 registered students 48 00:02:31,380 --> 00:02:35,550 as to who hasn't spoken and who has spoken. 49 00:02:35,550 --> 00:02:37,820 But you're all going, here now, he's 50 00:02:37,820 --> 00:02:40,920 going to do cold calling now. 51 00:02:40,920 --> 00:02:44,550 But the main study questions that we're going through 52 00:02:44,550 --> 00:02:47,790 are basically around the public policy framework 53 00:02:47,790 --> 00:02:51,090 and how it relates to blockchain technology. 54 00:02:51,090 --> 00:02:54,585 But Catalina, what did you take from the readings? 55 00:02:57,250 --> 00:02:59,830 AUDIENCE: What I took from the readings 56 00:02:59,830 --> 00:03:03,840 is that for blockchain to further develop, 57 00:03:03,840 --> 00:03:06,510 it has to be embedded in the regulatory system 58 00:03:06,510 --> 00:03:10,635 and in the policy system. 59 00:03:10,635 --> 00:03:14,430 In that way, for example, investors will be better off. 60 00:03:14,430 --> 00:03:17,010 They will have protections, they will 61 00:03:17,010 --> 00:03:21,420 feel better because they will have some degree of certainty 62 00:03:21,420 --> 00:03:24,595 that someone is taking care of them. 63 00:03:24,595 --> 00:03:26,220 GARY GENSLER: And so Catalina is saying 64 00:03:26,220 --> 00:03:30,150 she took from the readings that for further adoption, 65 00:03:30,150 --> 00:03:32,680 investor protection, and the confidence in the markets 66 00:03:32,680 --> 00:03:35,970 are important. 67 00:03:35,970 --> 00:03:37,673 Lauren, did I see that you're-- 68 00:03:37,673 --> 00:03:38,590 AUDIENCE: Sorry, yeah. 69 00:03:38,590 --> 00:03:40,297 So I was going to say-- 70 00:03:40,297 --> 00:03:42,130 I mean, one of the readings was a little bit 71 00:03:42,130 --> 00:03:43,150 the opposite of this. 72 00:03:43,150 --> 00:03:47,680 But to build on that, the mention of regulations 73 00:03:47,680 --> 00:03:50,440 and validating blockchain a little bit 74 00:03:50,440 --> 00:03:53,295 will help the players that are already in the markets 75 00:03:53,295 --> 00:03:55,420 explore in that space, just because they tend to be 76 00:03:55,420 --> 00:03:57,100 a little more risk averse. 77 00:03:57,100 --> 00:03:59,650 So they haven't really dabbled in startups and things 78 00:03:59,650 --> 00:04:00,695 that have the advantage. 79 00:04:00,695 --> 00:04:02,570 GARY GENSLER: So in essence, that some people 80 00:04:02,570 --> 00:04:06,310 were risk averse, the incumbents are a bit risk averse. 81 00:04:06,310 --> 00:04:11,860 And why would incumbent, big-- oh, this is my fun list. 82 00:04:11,860 --> 00:04:12,970 It's not your fun list. 83 00:04:12,970 --> 00:04:17,230 But really, there's still 35 of you that have not even 84 00:04:17,230 --> 00:04:20,529 spoken up in this class. 85 00:04:20,529 --> 00:04:21,519 Don't be so shy. 86 00:04:25,150 --> 00:04:27,350 Watch this. 87 00:04:27,350 --> 00:04:29,220 Watch this. 88 00:04:29,220 --> 00:04:30,220 Ariel Brito. 89 00:04:33,120 --> 00:04:35,370 Not even here. 90 00:04:35,370 --> 00:04:37,660 Even better, even better. 91 00:04:37,660 --> 00:04:40,165 Talita, we have a sign up sheet, too, that's going around? 92 00:04:40,165 --> 00:04:40,790 AUDIENCE: Yeah. 93 00:04:40,790 --> 00:04:43,110 GARY GENSLER: All right, that's fun. 94 00:04:47,170 --> 00:04:50,440 Watch, I'll just say David, and then see which David speaks up. 95 00:04:55,900 --> 00:05:00,370 This is going to be a really interesting. 96 00:05:00,370 --> 00:05:02,620 So you mean there's no David Martin here. 97 00:05:02,620 --> 00:05:04,930 Right here. 98 00:05:04,930 --> 00:05:06,140 Oh. 99 00:05:06,140 --> 00:05:10,930 AUDIENCE: So to your first question, 100 00:05:10,930 --> 00:05:14,050 this relates to the current public policy frameworks 101 00:05:14,050 --> 00:05:17,660 in my mind in two ways. 102 00:05:17,660 --> 00:05:23,020 One, this technology sits, in some ways, 103 00:05:23,020 --> 00:05:25,810 in gaps in the current regulatory framework. 104 00:05:25,810 --> 00:05:29,960 It's not clear, for example, that the CFTC-- 105 00:05:29,960 --> 00:05:32,050 because this could be a commodity-- 106 00:05:32,050 --> 00:05:36,970 has as broad regulatory authority as the SEC 107 00:05:36,970 --> 00:05:40,570 does, for example, with respect to the securities markets. 108 00:05:40,570 --> 00:05:42,760 It's in a gap. 109 00:05:42,760 --> 00:05:48,510 But the second thing is, even if those gaps were closed, 110 00:05:48,510 --> 00:05:50,450 for certain kinds of blockchain technology, 111 00:05:50,450 --> 00:05:54,100 the anonymity and secrecy of it just prevents regulation 112 00:05:54,100 --> 00:05:55,630 almost entirely. 113 00:05:55,630 --> 00:05:56,630 So there's two things. 114 00:05:56,630 --> 00:06:00,130 There's a gap question, and then there's the impact of secrecy 115 00:06:00,130 --> 00:06:02,310 and whether regulation can find it. 116 00:06:02,310 --> 00:06:03,310 GARY GENSLER: All right. 117 00:06:03,310 --> 00:06:07,050 So there's a gap because of the technology. 118 00:06:07,050 --> 00:06:12,530 But are there other gaps also-- 119 00:06:12,530 --> 00:06:14,643 and your first name is? 120 00:06:14,643 --> 00:06:15,310 AUDIENCE: James. 121 00:06:15,310 --> 00:06:16,670 GARY GENSLER: Jim. 122 00:06:16,670 --> 00:06:18,421 AUDIENCE: James, yeah. 123 00:06:18,421 --> 00:06:24,000 So I think that another problem with regulating blockchain 124 00:06:24,000 --> 00:06:28,320 technology in general is because the lack of intermediaries. 125 00:06:28,320 --> 00:06:30,880 The way that traditional regulation works 126 00:06:30,880 --> 00:06:36,190 is that they try to have more close access to intermediaries, 127 00:06:36,190 --> 00:06:38,410 so that they can control the intermediaries. 128 00:06:38,410 --> 00:06:40,410 But now, there's no intermediary. 129 00:06:40,410 --> 00:06:43,007 So it's very hard for you to control. 130 00:06:43,007 --> 00:06:44,590 GARY GENSLER: So what James is raising 131 00:06:44,590 --> 00:06:48,610 is there might be a whole change in this ecosystem, a little bit 132 00:06:48,610 --> 00:06:52,150 of the business model that there's fewer intermediaries. 133 00:06:52,150 --> 00:06:54,130 And a lot of regulation, whether that 134 00:06:54,130 --> 00:06:57,850 be tax, or investor protection, or even 135 00:06:57,850 --> 00:07:01,120 around illicit activity, centers around intermediaries. 136 00:07:01,120 --> 00:07:04,390 Why do you think it is that so much of the law 137 00:07:04,390 --> 00:07:07,260 centers around intermediaries? 138 00:07:07,260 --> 00:07:08,980 It wasn't specific in the readings. 139 00:07:08,980 --> 00:07:12,130 But just why do you think that that-- 140 00:07:12,130 --> 00:07:12,700 Isabella? 141 00:07:12,700 --> 00:07:14,770 AUDIENCE: Well, I would assume that if intermediaries 142 00:07:14,770 --> 00:07:16,687 are going to be eliminated by this technology, 143 00:07:16,687 --> 00:07:18,580 then a lot of those players would not really 144 00:07:18,580 --> 00:07:20,900 want this technology to be pushed forward. 145 00:07:20,900 --> 00:07:21,407 So that's-- 146 00:07:21,407 --> 00:07:22,990 GARY GENSLER: All right, so Isabella's 147 00:07:22,990 --> 00:07:26,230 raising a point that maybe intermediaries would 148 00:07:26,230 --> 00:07:29,200 be threatened about this technology. 149 00:07:29,200 --> 00:07:34,170 But I'm also asking, why do you think the law historically-- 150 00:07:34,170 --> 00:07:35,500 Adian? 151 00:07:35,500 --> 00:07:41,020 Why the law has attached requirements on intermediaries. 152 00:07:41,020 --> 00:07:42,520 AUDIENCE: I think it's just easier 153 00:07:42,520 --> 00:07:44,960 to manage a group of intermediaries that 154 00:07:44,960 --> 00:07:46,940 are regulated by law, so you can actually 155 00:07:46,940 --> 00:07:48,440 look at the transactions that happen 156 00:07:48,440 --> 00:07:51,360 at the intermediary level. 157 00:07:51,360 --> 00:07:53,100 GARY GENSLER: So Adian's saying-- 158 00:07:53,100 --> 00:07:54,670 and in the red jersey in the back, 159 00:07:54,670 --> 00:07:56,020 I can't remember your name. 160 00:07:56,020 --> 00:07:57,910 Dan. 161 00:07:57,910 --> 00:08:01,900 AUDIENCE: So I just think that if any of these intermediaries 162 00:08:01,900 --> 00:08:04,360 experience something that caused them to fail, 163 00:08:04,360 --> 00:08:06,130 then you're bringing down a lot more 164 00:08:06,130 --> 00:08:08,200 than just that institution. 165 00:08:08,200 --> 00:08:09,680 GARY GENSLER: So two ideas. 166 00:08:09,680 --> 00:08:12,220 One is this attachment point that 167 00:08:12,220 --> 00:08:16,030 has some leverage to it in the system. 168 00:08:16,030 --> 00:08:19,000 You can exert some public policy influence. 169 00:08:19,000 --> 00:08:21,130 And one is that there might be a point of failure 170 00:08:21,130 --> 00:08:23,800 and you need to protect the system from failure. 171 00:08:23,800 --> 00:08:25,010 Other reasons back here? 172 00:08:26,908 --> 00:08:28,450 AUDIENCE: The government just doesn't 173 00:08:28,450 --> 00:08:31,630 have the manpower or the resources to look at everyone. 174 00:08:31,630 --> 00:08:33,400 And these intermediaries actually 175 00:08:33,400 --> 00:08:36,830 make money by collecting this data. 176 00:08:36,830 --> 00:08:39,700 And so the government can just use that. 177 00:08:39,700 --> 00:08:42,070 GARY GENSLER: So Jake's raising a variation 178 00:08:42,070 --> 00:08:43,570 of the force multiplying. 179 00:08:43,570 --> 00:08:46,870 It's not only a node to apply, but they have the resources. 180 00:08:46,870 --> 00:08:49,870 So you're tapping into JP Morgan's back office, 181 00:08:49,870 --> 00:08:50,620 so to speak. 182 00:08:50,620 --> 00:08:53,510 And back here, I'll take. 183 00:08:53,510 --> 00:08:54,828 Sorry, your first name? 184 00:08:54,828 --> 00:08:55,704 AUDIENCE: Adam. 185 00:08:55,704 --> 00:08:56,142 GARY GENSLER: Adam. 186 00:08:56,142 --> 00:08:57,892 AUDIENCE: So the intermediaries are also-- 187 00:08:57,892 --> 00:09:02,740 they're a mechanism for trust to allow trading between parties. 188 00:09:02,740 --> 00:09:06,130 So the regulation then would be placed in like a consumer 189 00:09:06,130 --> 00:09:11,290 protection role to ensure that those intermediaries are 190 00:09:11,290 --> 00:09:12,790 someone to trust. 191 00:09:12,790 --> 00:09:14,860 GARY GENSLER: So it's for a collection of reasons 192 00:09:14,860 --> 00:09:18,670 that public policy officials around the globe 193 00:09:18,670 --> 00:09:22,180 often attach requirements to intermediaries, 194 00:09:22,180 --> 00:09:25,090 because it's a node to get it done, it's a resource, 195 00:09:25,090 --> 00:09:28,000 they have deep pockets sometimes. 196 00:09:28,000 --> 00:09:30,590 Sometimes, it's because they might fail. 197 00:09:30,590 --> 00:09:32,170 And one thing that wasn't mentioned 198 00:09:32,170 --> 00:09:34,990 is sometimes actually institutions 199 00:09:34,990 --> 00:09:38,740 want to be regulated over time, because it creates barriers 200 00:09:38,740 --> 00:09:40,160 to entry. 201 00:09:40,160 --> 00:09:43,300 It's usually not in an early stage. 202 00:09:43,300 --> 00:09:47,660 But later on, it's actually the incumbents that often-- 203 00:09:47,660 --> 00:09:49,570 it creates some barriers to entry 204 00:09:49,570 --> 00:09:51,430 and they collect some economic rents. 205 00:09:51,430 --> 00:09:52,290 Hugo? 206 00:09:52,290 --> 00:09:56,880 AUDIENCE: You can see that starting now with the OG's 207 00:09:56,880 --> 00:10:00,780 in the crypto space, like Coinbase or like the Bittrex, 208 00:10:00,780 --> 00:10:03,550 like the American institutions that started 209 00:10:03,550 --> 00:10:05,380 their exchange early on. 210 00:10:05,380 --> 00:10:07,120 And now, they're working with regulators 211 00:10:07,120 --> 00:10:10,550 to see how they can capture the market 212 00:10:10,550 --> 00:10:12,120 to be the easy place to go. 213 00:10:12,120 --> 00:10:14,120 GARY GENSLER: So what were the letters you said? 214 00:10:14,120 --> 00:10:14,845 OD? 215 00:10:14,845 --> 00:10:15,710 AUDIENCE: OG. 216 00:10:15,710 --> 00:10:16,580 GARY GENSLER: OG. 217 00:10:16,580 --> 00:10:17,665 AUDIENCE: I don't know. 218 00:10:20,350 --> 00:10:23,060 GARY GENSLER: Does OG stand for something? 219 00:10:23,060 --> 00:10:24,837 AUDIENCE: Original gangster. 220 00:10:24,837 --> 00:10:26,170 GARY GENSLER: Original gangster. 221 00:10:26,170 --> 00:10:28,060 Thank you, thank you. 222 00:10:28,060 --> 00:10:31,540 My daughters will be glad I know this now. 223 00:10:31,540 --> 00:10:32,440 That's very good. 224 00:10:32,440 --> 00:10:36,400 So it's moving from the disruptor phase 225 00:10:36,400 --> 00:10:38,260 to the near-incumbent phase. 226 00:10:38,260 --> 00:10:43,210 And where is a firm Hugo's raised like Coinbase or others? 227 00:10:43,210 --> 00:10:46,120 Are they now the incumbent in this only six 228 00:10:46,120 --> 00:10:50,870 or 10-year-old field, in essence? 229 00:10:50,870 --> 00:10:53,530 We're going to talk a lot about tax and bank 230 00:10:53,530 --> 00:10:55,210 secrecy and the Howey Test. 231 00:10:55,210 --> 00:10:58,090 And I'm going to save you from the cold calls on the Howey 232 00:10:58,090 --> 00:11:01,480 Test yet, but be prepared when we get to that slide. 233 00:11:01,480 --> 00:11:03,210 We'll talk a little bit more. 234 00:11:03,210 --> 00:11:06,910 And then, of course, my favorite, the Duck Test. 235 00:11:06,910 --> 00:11:11,700 So anybody know who the American poet-- 236 00:11:11,700 --> 00:11:13,850 AUDIENCE: W. Riley? 237 00:11:13,850 --> 00:11:15,100 GARY GENSLER: Oh, really good. 238 00:11:15,100 --> 00:11:15,820 Where's he from? 239 00:11:18,650 --> 00:11:19,460 Didn't say? 240 00:11:19,460 --> 00:11:21,420 Anybody where Riley's from? 241 00:11:21,420 --> 00:11:22,400 No, it's not in-- 242 00:11:22,400 --> 00:11:24,720 I don't think it's in the-- is it in the testimony? 243 00:11:24,720 --> 00:11:25,630 AUDIENCE: Indiana. 244 00:11:25,630 --> 00:11:28,020 GARY GENSLER: Indiana, good. 245 00:11:28,020 --> 00:11:28,940 You're right. 246 00:11:28,940 --> 00:11:32,090 Seems like a good Midwestern saying, you know? 247 00:11:32,090 --> 00:11:35,630 AUDIENCE: If it walks like a duck, talks like a duck, 248 00:11:35,630 --> 00:11:38,420 and quacks like a duck, it's a damn duck. 249 00:11:38,420 --> 00:11:41,830 GARY GENSLER: There you go, there you go. 250 00:11:41,830 --> 00:11:43,330 No, no-- 251 00:11:43,330 --> 00:11:48,250 AUDIENCE: What if it's a robotic duck or a computer 252 00:11:48,250 --> 00:11:52,430 screen walking and talking like a duck? 253 00:11:52,430 --> 00:11:54,830 GARY GENSLER: So Christopher's raising the question, 254 00:11:54,830 --> 00:11:58,400 if it's a robotic duck, a robotic duck that's 255 00:11:58,400 --> 00:12:00,770 walking like a duck, quacking like a duck, 256 00:12:00,770 --> 00:12:05,110 and waddling like a duck, is it a darn duck? 257 00:12:05,110 --> 00:12:09,190 For purposes of public policy, maybe it is, right? 258 00:12:09,190 --> 00:12:12,970 If it's a smart contract that's waddling like a duck 259 00:12:12,970 --> 00:12:16,180 and quacking like a duck, maybe it still 260 00:12:16,180 --> 00:12:19,720 has the influence over society like a duck. 261 00:12:19,720 --> 00:12:21,130 And this Duck Test-- 262 00:12:21,130 --> 00:12:24,640 I didn't originated it, Riley did 100 plus years ago. 263 00:12:24,640 --> 00:12:27,850 But it is something that regulators and public policy 264 00:12:27,850 --> 00:12:29,290 people actually talk about. 265 00:12:29,290 --> 00:12:32,230 It's one of those things, if you're in Washington. 266 00:12:32,230 --> 00:12:37,000 Well, other people might call it different things, but the Duck 267 00:12:37,000 --> 00:12:37,960 Test. 268 00:12:37,960 --> 00:12:44,050 It's use common sense, and then answer the question. 269 00:12:44,050 --> 00:12:46,990 Oh my gosh, I assigned one of my own writings as a reading. 270 00:12:46,990 --> 00:12:48,550 So we'll skip over that. 271 00:12:48,550 --> 00:12:51,305 So crypto, the world of crypto finance, 272 00:12:51,305 --> 00:12:52,930 you've seen this slide before, but it's 273 00:12:52,930 --> 00:12:58,630 been quite volatile, about $220 billion in the last few days. 274 00:12:58,630 --> 00:13:02,650 And a little over 50%, 54% is Bitcoin 275 00:13:02,650 --> 00:13:06,340 and the other big currencies right now 276 00:13:06,340 --> 00:13:11,050 on market value, Ethereum, Ripple, and the like. 277 00:13:11,050 --> 00:13:13,900 We'll talk a lot about initial coin offerings. 278 00:13:13,900 --> 00:13:16,000 And are they securities or are they not? 279 00:13:16,000 --> 00:13:19,270 But I would note, in terms of market value, 280 00:13:19,270 --> 00:13:22,910 probably three quarters of this space 281 00:13:22,910 --> 00:13:25,760 has already been determined by the Securities and Exchange 282 00:13:25,760 --> 00:13:27,530 Commission not to be a security. 283 00:13:27,530 --> 00:13:33,990 Bitcoin's 54%, Ether's about 15 points or something like that. 284 00:13:33,990 --> 00:13:36,740 So you're all of a sudden up to about 70 points, 285 00:13:36,740 --> 00:13:39,080 and then there's a bunch of other things that add up. 286 00:13:39,080 --> 00:13:42,560 So about three quarters of the market value 287 00:13:42,560 --> 00:13:49,960 right now is what one might call a cash, or a commodity, 288 00:13:49,960 --> 00:13:52,750 but not a security in this world. 289 00:13:52,750 --> 00:13:56,400 And that's just relevant for some of the debates that go on. 290 00:13:59,000 --> 00:14:00,980 We talked about this a little bit. 291 00:14:00,980 --> 00:14:04,130 Like the lioness the corner, incumbents 292 00:14:04,130 --> 00:14:06,110 are starting to eye crypto finance. 293 00:14:06,110 --> 00:14:10,220 So it's raising some of the challenges. 294 00:14:10,220 --> 00:14:13,690 Why are they interested in this? 295 00:14:13,690 --> 00:14:20,830 Why are incumbents interested in getting into this place? 296 00:14:20,830 --> 00:14:21,330 EG Wang? 297 00:14:24,910 --> 00:14:26,530 Oh, come on. 298 00:14:26,530 --> 00:14:27,910 I can't be this bad off. 299 00:14:27,910 --> 00:14:31,140 Am I? 300 00:14:31,140 --> 00:14:33,680 Really, all these people haven't even said a word, huh. 301 00:14:36,760 --> 00:14:37,800 Is EG here. 302 00:14:40,900 --> 00:14:41,990 No, so look at this. 303 00:14:41,990 --> 00:14:42,920 This is even easier. 304 00:14:42,920 --> 00:14:47,770 Now, I'll find out if somebody's signing in for other people. 305 00:14:47,770 --> 00:14:49,955 How about Nikita? 306 00:14:49,955 --> 00:14:51,555 AUDIENCE: Yes? 307 00:14:51,555 --> 00:14:53,930 GARY GENSLER: Why do you think incumbents want to get in? 308 00:14:57,830 --> 00:15:01,580 AUDIENCE: It's a risky transaction. 309 00:15:01,580 --> 00:15:05,240 From the viewpoint [INAUDIBLE] it's 310 00:15:05,240 --> 00:15:09,730 difficult to do this crypto finance. 311 00:15:13,085 --> 00:15:14,952 GARY GENSLER: You said it's difficult to do? 312 00:15:14,952 --> 00:15:16,010 AUDIENCE: For incumbents. 313 00:15:16,010 --> 00:15:16,790 GARY GENSLER: Yeah, but why did they 314 00:15:16,790 --> 00:15:18,360 want to get into this space? 315 00:15:18,360 --> 00:15:20,310 Why do they want to be in crypto finance? 316 00:15:23,060 --> 00:15:25,310 AUDIENCE: Part of it is that it's highly volatile. 317 00:15:25,310 --> 00:15:28,065 And how do you make money largely off of volatility? 318 00:15:28,065 --> 00:15:29,690 And then there's also a lot of people-- 319 00:15:29,690 --> 00:15:32,210 I think it's what, like 20 million Coinbase accounts. 320 00:15:32,210 --> 00:15:33,390 GARY GENSLER: Right, right. 321 00:15:33,390 --> 00:15:35,098 So when I was at Goldman Sachs for years, 322 00:15:35,098 --> 00:15:36,200 we used to have a saying. 323 00:15:36,200 --> 00:15:38,600 Volatility is our friend. 324 00:15:38,600 --> 00:15:42,620 It's often not the friend of many people in the markets. 325 00:15:42,620 --> 00:15:44,270 But if you're in the world of finance 326 00:15:44,270 --> 00:15:47,450 or you're in the world of inter mediating risk and holding 327 00:15:47,450 --> 00:15:47,960 risks-- 328 00:15:47,960 --> 00:15:51,060 so volatility is a form of risk. 329 00:15:51,060 --> 00:15:53,030 So volatility was always our friend. 330 00:15:53,030 --> 00:15:54,980 It was also our friend, because often 331 00:15:54,980 --> 00:15:57,380 if it was really volatile, sometimes some 332 00:15:57,380 --> 00:16:01,070 of our competitors would not manage that risk as well. 333 00:16:01,070 --> 00:16:02,780 And they would lose market share, 334 00:16:02,780 --> 00:16:04,540 and we would gain market share. 335 00:16:04,540 --> 00:16:07,940 In fact, maybe they went out of business, too. 336 00:16:07,940 --> 00:16:11,080 But people like the volatility. 337 00:16:11,080 --> 00:16:14,480 Startups can beg for forgiveness afterwards. 338 00:16:14,480 --> 00:16:17,180 Incumbents feel more often, not always, 339 00:16:17,180 --> 00:16:19,130 that they need to ask for permission. 340 00:16:19,130 --> 00:16:22,430 And so there's a little bit of an asymmetric reputational risk 341 00:16:22,430 --> 00:16:25,590 that goes on business-wise. 342 00:16:25,590 --> 00:16:27,760 Now, once you're at a big incumbent, 343 00:16:27,760 --> 00:16:31,390 if you work for one of the big places, 344 00:16:31,390 --> 00:16:35,010 you'll feel that little bit more constraint, a little bit 345 00:16:35,010 --> 00:16:36,630 more compliance officers. 346 00:16:36,630 --> 00:16:39,360 You're more lawyered, you have more accountants. 347 00:16:39,360 --> 00:16:41,560 But you should still have the same values. 348 00:16:41,560 --> 00:16:43,560 I say this sincerely. 349 00:16:43,560 --> 00:16:45,690 Don't break the law. 350 00:16:45,690 --> 00:16:47,370 No, no, sincerely. 351 00:16:47,370 --> 00:16:49,360 But when you're at a startup, you tend-- 352 00:16:49,360 --> 00:16:51,810 there's always some ambiguity, and you take a little bit 353 00:16:51,810 --> 00:16:54,940 more reputational risk. 354 00:16:54,940 --> 00:16:57,690 You tend to. 355 00:16:57,690 --> 00:16:59,790 So there's a bunch of incumbents that 356 00:16:59,790 --> 00:17:03,360 are trying to get in the Chicago Mercantile Exchange, Eurex, 357 00:17:03,360 --> 00:17:05,760 Intercontinental Exchange, which owns the New York Stock 358 00:17:05,760 --> 00:17:06,260 Exchange. 359 00:17:06,260 --> 00:17:09,930 We'll do a whole class on what they're doing 360 00:17:09,930 --> 00:17:12,900 there later in the semester. 361 00:17:12,900 --> 00:17:15,210 Fidelity, that's spending significant amount 362 00:17:15,210 --> 00:17:19,310 of money looking at it and others. 363 00:17:19,310 --> 00:17:21,450 So the framework that we've talked about, 364 00:17:21,450 --> 00:17:24,329 about guarding against illicit activity, stability, 365 00:17:24,329 --> 00:17:26,220 and the investing public-- 366 00:17:26,220 --> 00:17:28,230 I'm going to sort through each of these, 367 00:17:28,230 --> 00:17:29,700 but it's tax compliance. 368 00:17:29,700 --> 00:17:34,810 No government wants to shrink their tax base. 369 00:17:34,810 --> 00:17:38,410 Now, some governments want to attract activity 370 00:17:38,410 --> 00:17:43,010 that shrinks the other jurisdiction's tax base, 371 00:17:43,010 --> 00:17:47,150 but it's not about shrinking your own tax base usually. 372 00:17:47,150 --> 00:17:50,090 I mean, you might by law lower taxes, 373 00:17:50,090 --> 00:17:53,090 but you're not really looking to-- 374 00:17:53,090 --> 00:17:54,530 generally, governments don't want 375 00:17:54,530 --> 00:17:57,890 to promote whatever the definition of illicit activity. 376 00:17:57,890 --> 00:17:59,840 We don't need to define that in this class. 377 00:17:59,840 --> 00:18:03,570 It's a normative thing that happens culture by culture, 378 00:18:03,570 --> 00:18:05,750 jurisdiction by jurisdiction. 379 00:18:05,750 --> 00:18:10,010 But there tends to be something that's prohibited-- 380 00:18:10,010 --> 00:18:14,330 drug running, for instance, child trafficking. 381 00:18:14,330 --> 00:18:16,640 I mean, there are certain things that are broadly 382 00:18:16,640 --> 00:18:18,200 defined as illicit, and then there's 383 00:18:18,200 --> 00:18:23,180 some that changes depending upon the culture and the society 384 00:18:23,180 --> 00:18:25,730 and the times we're living in. 385 00:18:25,730 --> 00:18:28,940 Terrorism financing, clearly. 386 00:18:28,940 --> 00:18:32,440 And then sanctions, it's a tool of foreign policy 387 00:18:32,440 --> 00:18:35,180 that countries like our own, but Europe and elsewhere 388 00:18:35,180 --> 00:18:37,560 often use sanctions to try to-- 389 00:18:37,560 --> 00:18:39,320 it's centuries old. 390 00:18:39,320 --> 00:18:43,670 It's called blockades in an earlier century with the ships. 391 00:18:43,670 --> 00:18:46,010 But now, we do it more electronically 392 00:18:46,010 --> 00:18:48,170 and commercially. 393 00:18:48,170 --> 00:18:52,520 Financial stability tends to be about the stability 394 00:18:52,520 --> 00:18:56,780 of the overall economy or the Fiat currency. 395 00:18:56,780 --> 00:18:59,630 Or I put a little second picture there, 396 00:18:59,630 --> 00:19:02,780 the stability of the commercial banking system. 397 00:19:02,780 --> 00:19:05,990 So financial stability can mean a lot of different things, 398 00:19:05,990 --> 00:19:09,620 but it's usually about the currency, the economy, 399 00:19:09,620 --> 00:19:14,690 or the central bank system and commercial bank system. 400 00:19:14,690 --> 00:19:17,660 But to some countries, not a majority, 401 00:19:17,660 --> 00:19:19,280 some countries' financial stability 402 00:19:19,280 --> 00:19:21,590 is about capital controls. 403 00:19:21,590 --> 00:19:25,970 If a country is controlling somewhere the valuation 404 00:19:25,970 --> 00:19:27,740 of their Fiat currency-- remember, 405 00:19:27,740 --> 00:19:30,320 we talked a lot about money. 406 00:19:30,320 --> 00:19:33,230 But if some don't want to flood and they 407 00:19:33,230 --> 00:19:36,410 want to control the value of their Fiat currency, 408 00:19:36,410 --> 00:19:39,260 then they often have capital controls. 409 00:19:39,260 --> 00:19:44,240 And for those countries, this whole world of crypto finance 410 00:19:44,240 --> 00:19:45,680 touches on that. 411 00:19:45,680 --> 00:19:49,070 And then the investing public, the consuming public, 412 00:19:49,070 --> 00:19:51,470 we'll talk about investor protection and consumer 413 00:19:51,470 --> 00:19:54,660 protection are not exactly the same. 414 00:19:54,660 --> 00:19:57,830 The two words market integrity means basically 415 00:19:57,830 --> 00:20:01,820 we promote economic activity if you can have confidence 416 00:20:01,820 --> 00:20:04,740 in central market structures. 417 00:20:04,740 --> 00:20:07,700 Whether that's the pricing of apples 418 00:20:07,700 --> 00:20:11,380 or the pricing of Apple stock, it's 419 00:20:11,380 --> 00:20:14,020 in essence that there's not fraud and manipulation 420 00:20:14,020 --> 00:20:15,960 in that market. 421 00:20:15,960 --> 00:20:18,090 And the more transparent the prices 422 00:20:18,090 --> 00:20:22,140 are both before you do a transaction and after-- 423 00:20:22,140 --> 00:20:23,745 what's called pre-trade transparency 424 00:20:23,745 --> 00:20:28,140 and post-trade transparency-- the more transparent 425 00:20:28,140 --> 00:20:31,490 and the more you can root out manipulation and fraud, 426 00:20:31,490 --> 00:20:32,680 there's more integrity. 427 00:20:32,680 --> 00:20:37,000 Usually very simply-- and this is a lot of economic study goes 428 00:20:37,000 --> 00:20:37,810 into it-- 429 00:20:37,810 --> 00:20:40,990 you lower the risk premium in that market. 430 00:20:40,990 --> 00:20:44,050 In essence, you can have more confidence in that market. 431 00:20:44,050 --> 00:20:46,180 And secondly, you have more competition 432 00:20:46,180 --> 00:20:48,780 in the price discovery function. 433 00:20:48,780 --> 00:20:49,420 Aline? 434 00:20:49,420 --> 00:20:51,253 AUDIENCE: It's really a very silly question. 435 00:20:51,253 --> 00:20:54,310 But you said pre-transaction transparency. 436 00:20:54,310 --> 00:20:56,830 So how does that relate to the United States 437 00:20:56,830 --> 00:20:58,390 when you go to the doctor and you 438 00:20:58,390 --> 00:21:00,140 have no idea how much you're going to pay? 439 00:21:02,332 --> 00:21:04,540 It seems like there's no pre-transaction transparency 440 00:21:04,540 --> 00:21:06,638 when you go to the doctor. 441 00:21:06,638 --> 00:21:08,680 GARY GENSLER: I tend to agree with you that there 442 00:21:08,680 --> 00:21:10,900 are many markets, not just health care, 443 00:21:10,900 --> 00:21:13,570 but there are many markets where there's 444 00:21:13,570 --> 00:21:17,320 limited pre-transaction transparency. 445 00:21:17,320 --> 00:21:20,650 I feel there's only limited pre-transaction transparency 446 00:21:20,650 --> 00:21:24,500 when I take my car in to get worked on. 447 00:21:24,500 --> 00:21:26,720 Now, of course, then they give you some pricing 448 00:21:26,720 --> 00:21:31,190 and the car is already up on the platform. 449 00:21:31,190 --> 00:21:34,520 And they're telling you need your new brakes. 450 00:21:34,520 --> 00:21:36,680 So yes, that's true. 451 00:21:36,680 --> 00:21:40,250 Lots of different markets operate in different ways. 452 00:21:40,250 --> 00:21:42,680 And health care is probably less transparent, 453 00:21:42,680 --> 00:21:45,380 partly because it's such a hybrid market 454 00:21:45,380 --> 00:21:48,200 where we have third party payment providers, insurance 455 00:21:48,200 --> 00:21:50,960 companies, and governments providing and paying 456 00:21:50,960 --> 00:21:54,530 for a lot of our health care. 457 00:21:54,530 --> 00:21:59,600 So economic activity has a range. 458 00:21:59,600 --> 00:22:02,960 In the financial markets, market integrity 459 00:22:02,960 --> 00:22:08,732 is boosted by a lot of pre-trade transparency. 460 00:22:08,732 --> 00:22:13,190 Does that help a little? 461 00:22:13,190 --> 00:22:15,860 So Mark Carney-- what did you all 462 00:22:15,860 --> 00:22:19,040 take from Mark Carney's paper? 463 00:22:19,040 --> 00:22:22,250 Anybody wants to volunteer, or I can keep going down my list. 464 00:22:22,250 --> 00:22:24,590 Rahim? 465 00:22:24,590 --> 00:22:26,420 Did I get your name right? 466 00:22:26,420 --> 00:22:27,830 What's that? 467 00:22:27,830 --> 00:22:29,185 Riham. 468 00:22:29,185 --> 00:22:31,060 AUDIENCE: I'm talking about the [INAUDIBLE].. 469 00:22:33,268 --> 00:22:35,060 GARY GENSLER: So one thing that Mark Carney 470 00:22:35,060 --> 00:22:36,590 said is he didn't really consider 471 00:22:36,590 --> 00:22:39,680 cryptocurrencies currencies, but they were an asset. 472 00:22:39,680 --> 00:22:42,176 What else did Mark say? 473 00:22:42,176 --> 00:22:44,293 AUDIENCE: My name's Matt Doherty. 474 00:22:44,293 --> 00:22:45,460 GARY GENSLER: Thalita, Matt. 475 00:22:49,040 --> 00:22:50,540 AUDIENCE: One of the reasons he said 476 00:22:50,540 --> 00:22:54,140 it wasn't a currency was because of the extreme volatility that 477 00:22:54,140 --> 00:22:57,900 meant it had no intrinsic value, which I disagreed with. 478 00:22:57,900 --> 00:23:00,410 I didn't think that volatility should equate 479 00:23:00,410 --> 00:23:01,630 to a lack of intrinsic value. 480 00:23:01,630 --> 00:23:02,630 GARY GENSLER: All right. 481 00:23:02,630 --> 00:23:06,380 So Matt's raising that Mark Carney says, well, volatility 482 00:23:06,380 --> 00:23:08,270 can't be a currency. 483 00:23:08,270 --> 00:23:11,830 I tend to agree with Matt. 484 00:23:11,830 --> 00:23:14,665 And if Mark were here, I'd say it to him directly. 485 00:23:14,665 --> 00:23:16,040 AUDIENCE: [INAUDIBLE] stocks that 486 00:23:16,040 --> 00:23:18,230 are extremely volatile, but yet still 487 00:23:18,230 --> 00:23:20,605 haven't been devalued [INAUDIBLE].. 488 00:23:20,605 --> 00:23:21,980 GARY GENSLER: I would say there's 489 00:23:21,980 --> 00:23:27,260 even some Fiat currencies that have been pretty volatile. 490 00:23:27,260 --> 00:23:31,280 AUDIENCE: So I think that it does have intrinsic value, 491 00:23:31,280 --> 00:23:33,830 but maybe not necessarily be a currency if it's not 492 00:23:33,830 --> 00:23:36,550 a dependable unit of account, if it's always fluctuating. 493 00:23:36,550 --> 00:23:38,890 And that was my take anyway. 494 00:23:38,890 --> 00:23:42,720 So I agree, but it's just a different line of reasoning 495 00:23:42,720 --> 00:23:43,555 why I don't think-- 496 00:23:43,555 --> 00:23:45,090 GARY GENSLER: So you think it's a different reason 497 00:23:45,090 --> 00:23:46,257 that it has intrinsic value. 498 00:23:46,257 --> 00:23:48,215 AUDIENCE: Yeah, I think it has intrinsic value, 499 00:23:48,215 --> 00:23:50,760 I just think that it should be called a digital asset, not 500 00:23:50,760 --> 00:23:52,530 because it doesn't have intrinsic value, 501 00:23:52,530 --> 00:23:54,963 but because it's not a dependable unit of account. 502 00:23:54,963 --> 00:23:56,380 GARY GENSLER: And your first name? 503 00:23:56,380 --> 00:23:57,005 I'm sorry. 504 00:23:57,005 --> 00:23:57,380 AUDIENCE: Kyle. 505 00:23:57,380 --> 00:23:58,172 GARY GENSLER: Kyle. 506 00:23:58,172 --> 00:24:00,240 So Kyle's saying that it's because it's not 507 00:24:00,240 --> 00:24:02,100 a dependable unit of account. 508 00:24:02,100 --> 00:24:05,520 And very few places have used it as a unit of account 509 00:24:05,520 --> 00:24:07,900 at this point in time. 510 00:24:07,900 --> 00:24:11,820 Matt-- it's good, we're going to have a debate here. 511 00:24:11,820 --> 00:24:13,985 AUDIENCE: But the fact that places have used it 512 00:24:13,985 --> 00:24:18,290 as a unit of account should make it so that it is a currency. 513 00:24:18,290 --> 00:24:20,820 It has been used as a currency in the past. 514 00:24:20,820 --> 00:24:24,685 And whether five people use it or a million people use it, 515 00:24:24,685 --> 00:24:26,060 shouldn't the fact that it can be 516 00:24:26,060 --> 00:24:28,580 used qualify it to be a currency, whether it's 517 00:24:28,580 --> 00:24:31,288 to a certain amount of people shouldn't necessarily matter. 518 00:24:31,288 --> 00:24:33,080 GARY GENSLER: And so who wants to arbitrate 519 00:24:33,080 --> 00:24:37,310 between Matt and Kyle? 520 00:24:37,310 --> 00:24:38,727 Leonardo. 521 00:24:38,727 --> 00:24:41,060 AUDIENCE: Yeah, I wanted to give an example of countries 522 00:24:41,060 --> 00:24:43,950 where there is super high inflation, where 523 00:24:43,950 --> 00:24:48,120 their domestic currencies lose what it's really worth. 524 00:24:48,120 --> 00:24:49,820 So people actually automatically start 525 00:24:49,820 --> 00:24:53,360 to use dollars, for example, as their reference account. 526 00:24:53,360 --> 00:24:55,730 So it can be functional in the sense 527 00:24:55,730 --> 00:24:58,640 that people can still exchange, but you can't really 528 00:24:58,640 --> 00:25:01,107 measure until you peg to something else. 529 00:25:01,107 --> 00:25:03,440 And actually, Bitcoin's pegged to the value of something 530 00:25:03,440 --> 00:25:04,320 else today. 531 00:25:04,320 --> 00:25:08,490 And that's where I think the value of accounts-- 532 00:25:08,490 --> 00:25:12,053 I'll be on the left side camp. 533 00:25:12,053 --> 00:25:13,220 GARY GENSLER: So it depends. 534 00:25:13,220 --> 00:25:16,670 And if it's in a country with hyperinflation, and I don't-- 535 00:25:16,670 --> 00:25:18,650 I hope not-- have any of you lived 536 00:25:18,650 --> 00:25:22,320 in a country with hyperinflation in your lifetimes? 537 00:25:22,320 --> 00:25:24,340 So five or six of you have. 538 00:25:24,340 --> 00:25:30,030 So you know what it is like when you go into a restaurant 539 00:25:30,030 --> 00:25:31,380 there's one set of pricing. 540 00:25:31,380 --> 00:25:34,110 But if you eat for too long and linger at the table, 541 00:25:34,110 --> 00:25:35,940 it's different level of pricing. 542 00:25:35,940 --> 00:25:37,303 Literally, right? 543 00:25:37,303 --> 00:25:38,970 AUDIENCE: You get your paycheck one day, 544 00:25:38,970 --> 00:25:41,760 then you have to spend it as fast as you can, because 545 00:25:41,760 --> 00:25:47,505 in a week, that's basically a fraction of what you were paid. 546 00:25:47,505 --> 00:25:49,880 GARY GENSLER: But from the view from the top, what Mark-- 547 00:25:49,880 --> 00:25:53,600 one quote from the paper that I took was that authorities, 548 00:25:53,600 --> 00:25:54,680 thinking about-- 549 00:25:54,680 --> 00:25:57,620 this is from a public policy perspective. 550 00:25:57,620 --> 00:25:59,360 Authorities need to decide, are you 551 00:25:59,360 --> 00:26:04,460 going to isolate this world, regulate it, integrate it? 552 00:26:04,460 --> 00:26:06,510 Now, some countries-- I don't think anybody's 553 00:26:06,510 --> 00:26:07,800 fully isolated it. 554 00:26:07,800 --> 00:26:09,330 But some countries, in a sense, have 555 00:26:09,330 --> 00:26:12,210 said, let's ban a lot of this activity. 556 00:26:12,210 --> 00:26:14,043 And Kelly? 557 00:26:14,043 --> 00:26:15,460 AUDIENCE: Can I ask to what extent 558 00:26:15,460 --> 00:26:17,740 are other countries looking to comments like this 559 00:26:17,740 --> 00:26:21,353 to decide what stance they're going to take? 560 00:26:21,353 --> 00:26:22,770 GARY GENSLER: Kelly's question is, 561 00:26:22,770 --> 00:26:26,220 so to what extent to comments from a Mark Carney who's 562 00:26:26,220 --> 00:26:28,128 the governor of the Bank of England, 563 00:26:28,128 --> 00:26:30,420 but heads the Financial Stability Board-- how much does 564 00:26:30,420 --> 00:26:35,670 that influence the rest of the official sector community? 565 00:26:35,670 --> 00:26:36,880 And it's a great question. 566 00:26:36,880 --> 00:26:39,030 I think that it all goes into the mix. 567 00:26:39,030 --> 00:26:46,620 I think that there's probably in any public policy sphere 568 00:26:46,620 --> 00:26:51,030 six to a dozen countries that really 569 00:26:51,030 --> 00:26:57,120 take the lead, not legally. 570 00:26:57,120 --> 00:26:58,620 They're not taking the lead legally, 571 00:26:58,620 --> 00:27:01,110 they're just taking the lead because others 572 00:27:01,110 --> 00:27:07,090 follow that which is said in the US, the European Union, China, 573 00:27:07,090 --> 00:27:08,010 Japan. 574 00:27:08,010 --> 00:27:13,050 I mean, we know the usual and the normal countries. 575 00:27:13,050 --> 00:27:17,010 But part of it is because the depth and breadth 576 00:27:17,010 --> 00:27:21,730 of their economies, part of it in this world 577 00:27:21,730 --> 00:27:24,370 the depth and breadth of their financial markets. 578 00:27:24,370 --> 00:27:27,130 But it's also because often their opinion 579 00:27:27,130 --> 00:27:31,720 leaders and their opinions are somewhat respected. 580 00:27:31,720 --> 00:27:34,600 But we have 180 or 190 countries. 581 00:27:34,600 --> 00:27:37,030 And each one of them has a different culture, 582 00:27:37,030 --> 00:27:39,130 and each has a different political system, 583 00:27:39,130 --> 00:27:43,690 and a different history, and different economic well-being. 584 00:27:43,690 --> 00:27:48,760 So I went into the international arena doing regulation thinking 585 00:27:48,760 --> 00:27:53,890 it would it is a dystopian view that there's 586 00:27:53,890 --> 00:27:58,540 going to be one worldwide regime for almost any public policy 587 00:27:58,540 --> 00:28:01,120 issue. 588 00:28:01,120 --> 00:28:04,790 I mean, I don't know if it exists in almost any place. 589 00:28:04,790 --> 00:28:06,880 But when you get to financial services, 590 00:28:06,880 --> 00:28:10,690 it's pretty unlikely because of all those different cultures 591 00:28:10,690 --> 00:28:14,260 and histories and political systems and economies 592 00:28:14,260 --> 00:28:15,680 clashing up against each other. 593 00:28:15,680 --> 00:28:16,310 Yes? 594 00:28:16,310 --> 00:28:18,560 AUDIENCE: I was just wondering if you can explain more 595 00:28:18,560 --> 00:28:22,480 about what you mean by China leading the effort-- 596 00:28:22,480 --> 00:28:23,620 GARY GENSLER: China's-- 597 00:28:23,620 --> 00:28:26,800 AUDIENCE: Is leading the effort in regulating the blockchain, 598 00:28:26,800 --> 00:28:30,130 because China has banned the exchange of Fiat 599 00:28:30,130 --> 00:28:31,550 money [INAUDIBLE]. 600 00:28:31,550 --> 00:28:34,400 GARY GENSLER: So the question is China. 601 00:28:34,400 --> 00:28:40,930 So how many in the room think China would be in the isolate-- 602 00:28:40,930 --> 00:28:43,540 dominantly in the isolate category rather than 603 00:28:43,540 --> 00:28:47,350 the integrate category? 604 00:28:47,350 --> 00:28:49,170 So a quarter or a third. 605 00:28:49,170 --> 00:28:49,890 It's interesting. 606 00:28:49,890 --> 00:28:50,970 It's really a hybrid. 607 00:28:50,970 --> 00:28:56,800 China came pretty strongly saying no to a lot of activity. 608 00:28:56,800 --> 00:29:00,390 And yet, two of the biggest mining poles for Bitcoin 609 00:29:00,390 --> 00:29:02,430 are in China. 610 00:29:02,430 --> 00:29:05,340 Some of the crypto exchanges left China, 611 00:29:05,340 --> 00:29:09,180 but those miners are the biggest sellers of Bitcoin, 612 00:29:09,180 --> 00:29:10,890 because they're collecting the Bitcoin 613 00:29:10,890 --> 00:29:14,790 and need to sell them, have to find some crypto exchange 614 00:29:14,790 --> 00:29:18,390 somewhere that is no longer in China. 615 00:29:18,390 --> 00:29:20,610 I'm going to mispronounce the name of the exchange. 616 00:29:20,610 --> 00:29:28,320 But Huobi, H-U-O-B-I, is still very much a Chinese crypto 617 00:29:28,320 --> 00:29:29,160 exchange. 618 00:29:29,160 --> 00:29:31,980 I think it's now registered in Malta 619 00:29:31,980 --> 00:29:34,940 if I'm not mistaken maybe. 620 00:29:34,940 --> 00:29:39,390 So there's a love-hate hybrid. 621 00:29:39,390 --> 00:29:43,680 The Central Bank of China has very active projects 622 00:29:43,680 --> 00:29:46,620 with regard to blockchain technology. 623 00:29:46,620 --> 00:29:50,290 And they have a whole lab and it's public. 624 00:29:50,290 --> 00:29:52,170 That which is public is public. 625 00:29:52,170 --> 00:29:54,150 That which is private probably is bigger 626 00:29:54,150 --> 00:29:55,960 and we just don't know about it. 627 00:29:55,960 --> 00:30:01,560 So there's a bit of a mixed approach even in China, 628 00:30:01,560 --> 00:30:05,370 if that answers your question. 629 00:30:05,370 --> 00:30:07,770 So let me just go-- 630 00:30:07,770 --> 00:30:10,200 I've spent a lot of time in the last six months 631 00:30:10,200 --> 00:30:11,850 traveling around the globe and speaking 632 00:30:11,850 --> 00:30:17,760 at different conferences, OECD, in Japan, and here in the US. 633 00:30:17,760 --> 00:30:20,940 What I see-- guarding against illicit activity, 634 00:30:20,940 --> 00:30:22,470 broad consensus. 635 00:30:22,470 --> 00:30:26,190 180-190 countries, yeah, we've got to do it. 636 00:30:26,190 --> 00:30:30,560 Really choppy performance on implementation, 637 00:30:30,560 --> 00:30:34,310 and sometimes a little bit of a head fake from one jurisdiction 638 00:30:34,310 --> 00:30:36,080 to another, because some actually 639 00:30:36,080 --> 00:30:38,690 are fine with tax evasion as long as it's 640 00:30:38,690 --> 00:30:43,090 tax evasion in the other person's jurisdiction. 641 00:30:43,090 --> 00:30:46,270 Usually, low population centers are 642 00:30:46,270 --> 00:30:49,720 more comfortable promoting being tax havens, 643 00:30:49,720 --> 00:30:53,480 trying to take economic activity from elsewhere. 644 00:30:53,480 --> 00:30:55,720 But there's general broad consensus 645 00:30:55,720 --> 00:30:58,390 and it's usually centered on finance ministries 646 00:30:58,390 --> 00:31:01,690 and central bank authorities and the equivalent 647 00:31:01,690 --> 00:31:04,930 of law enforcement, our Justice Department. 648 00:31:04,930 --> 00:31:05,650 Think of those. 649 00:31:05,650 --> 00:31:09,930 That's where the nexus is happening country by country. 650 00:31:09,930 --> 00:31:14,100 Financial stability, general consensus to monitor-- 651 00:31:14,100 --> 00:31:17,130 there's not a deep worry right now, 652 00:31:17,130 --> 00:31:21,270 because the space is only a quarter of a trillion dollars. 653 00:31:21,270 --> 00:31:23,880 And the worldwide capital markets-- 654 00:31:23,880 --> 00:31:26,820 the worldwide debt markets are $250 trillion, 655 00:31:26,820 --> 00:31:29,760 nearly 1,000 times bigger. 656 00:31:29,760 --> 00:31:33,960 And the worldwide equity markets are about $90 trillion. 657 00:31:33,960 --> 00:31:38,700 And even the worldwide stock of gold, at $7 trillion, 658 00:31:38,700 --> 00:31:42,450 is nearly 30 times as large. 659 00:31:42,450 --> 00:31:48,540 It just gives you a sense of the relationship right now why 660 00:31:48,540 --> 00:31:53,790 let's monitor, but it's probably not systemic destabilizing. 661 00:31:53,790 --> 00:31:55,860 However, there's different perspectives, 662 00:31:55,860 --> 00:31:58,920 particularly in countries that have capital controls, 663 00:31:58,920 --> 00:32:02,400 because it could be destabilizing to a currency 664 00:32:02,400 --> 00:32:03,720 in that way. 665 00:32:03,720 --> 00:32:05,940 And then thirdly, the investing public-- 666 00:32:05,940 --> 00:32:07,470 protecting investing public, I would 667 00:32:07,470 --> 00:32:10,050 say the views are wide ranging. 668 00:32:10,050 --> 00:32:12,720 In the US and Canada, more forward 669 00:32:12,720 --> 00:32:16,560 leaning, more a lot of this stuff-- 670 00:32:16,560 --> 00:32:18,900 maybe these initial coin offerings 671 00:32:18,900 --> 00:32:23,340 are securities that need to be protected. 672 00:32:23,340 --> 00:32:24,960 And in a bunch of other countries, 673 00:32:24,960 --> 00:32:28,590 it's like let 1,000 flowers bloom. 674 00:32:28,590 --> 00:32:30,960 Let's promote innovation and so forth. 675 00:32:30,960 --> 00:32:34,470 And it's a pretty wide view. 676 00:32:34,470 --> 00:32:37,860 My personal view is, and I've said this at some conferences, 677 00:32:37,860 --> 00:32:48,020 if this grew from a quarter of a to five and 10 and 20 times 678 00:32:48,020 --> 00:32:52,070 the size, or if the ICO marketplace, which has raised 679 00:32:52,070 --> 00:32:57,130 about $20 to $25 billion today, kept raising that 680 00:32:57,130 --> 00:33:00,140 but went to like $100 billion a year raise, 681 00:33:00,140 --> 00:33:01,860 then a bunch of countries would probably 682 00:33:01,860 --> 00:33:04,020 want more investor protection. 683 00:33:04,020 --> 00:33:07,330 I think-- this is just my personal view-- 684 00:33:07,330 --> 00:33:11,970 we will never have uniform jurisdiction, uniform laws. 685 00:33:11,970 --> 00:33:14,610 But part of what's going on is this is so new 686 00:33:14,610 --> 00:33:19,150 and it's still relatively small versus the capital markets. 687 00:33:19,150 --> 00:33:22,110 If it grew, I think more countries 688 00:33:22,110 --> 00:33:24,633 would want some protection. 689 00:33:24,633 --> 00:33:27,050 AUDIENCE: I have a question regarding the illicit equities 690 00:33:27,050 --> 00:33:28,505 and financial stability. 691 00:33:28,505 --> 00:33:29,880 As you traveled to other country, 692 00:33:29,880 --> 00:33:34,050 what metrics were they using to measure their success 693 00:33:34,050 --> 00:33:36,215 or monitor on those fronts? 694 00:33:36,215 --> 00:33:38,340 GARY GENSLER: So the question is what are countries 695 00:33:38,340 --> 00:33:40,377 doing to measure for success. 696 00:33:40,377 --> 00:33:42,210 I'm going to use one example, and then we'll 697 00:33:42,210 --> 00:33:44,220 keep going into the details. 698 00:33:44,220 --> 00:33:49,350 Japan had some of the earliest crypto exchanges, Mt. 699 00:33:49,350 --> 00:33:51,660 Gox, G-O-X. Mt. 700 00:33:51,660 --> 00:33:56,190 Gox was an early exchange that the promoters, the owners 701 00:33:56,190 --> 00:34:01,080 moved to Tokyo, even though they weren't Japanese nationals. 702 00:34:01,080 --> 00:34:04,530 So it was it was centered in Tokyo. 703 00:34:04,530 --> 00:34:08,760 And it went down when about half a billion dollars of value 704 00:34:08,760 --> 00:34:09,960 was lost. 705 00:34:09,960 --> 00:34:14,460 It was supposedly a hack, stolen crypto. 706 00:34:14,460 --> 00:34:16,480 It was aan interesting case. 707 00:34:16,480 --> 00:34:18,929 It was actually being stolen over many months. 708 00:34:18,929 --> 00:34:21,480 It wasn't one specific hack. 709 00:34:21,480 --> 00:34:27,659 So Japan in 2017 finally got around and changed their laws. 710 00:34:27,659 --> 00:34:33,100 And they put in a whole regime to regulate crypto exchanges, 711 00:34:33,100 --> 00:34:37,530 particularly around this customer protection custody 712 00:34:37,530 --> 00:34:40,139 issue and around illicit activity. 713 00:34:40,139 --> 00:34:43,020 And they actually have gone in and asked exchanges 714 00:34:43,020 --> 00:34:44,250 to register. 715 00:34:44,250 --> 00:34:49,350 They go in and actually do examinations. 716 00:34:49,350 --> 00:34:51,540 And earlier this year, of the, I think, 717 00:34:51,540 --> 00:34:54,449 30 some registered exchanges, five 718 00:34:54,449 --> 00:34:57,780 or 10 had to cease operations. 719 00:34:57,780 --> 00:35:01,420 How do they measure success or failure? 720 00:35:01,420 --> 00:35:03,630 Another exchange in January of this year 721 00:35:03,630 --> 00:35:07,770 lost another half a billion dollars to a hack. 722 00:35:07,770 --> 00:35:12,030 Their principal executive, their prime minister, 723 00:35:12,030 --> 00:35:14,340 got a question in a news conference. 724 00:35:14,340 --> 00:35:18,670 If you're a regulator, that's not a good thing. 725 00:35:18,670 --> 00:35:22,980 So sometimes, you measure success or failure 726 00:35:22,980 --> 00:35:28,440 as to whether your boss gets a question in a news conference 727 00:35:28,440 --> 00:35:30,390 about why it's not working. 728 00:35:30,390 --> 00:35:32,760 The Japanese have been terrific, by the way, 729 00:35:32,760 --> 00:35:35,110 in terms of what they're doing. 730 00:35:35,110 --> 00:35:38,400 But I'm just using that as an example of sometimes. 731 00:35:40,980 --> 00:35:44,060 So let me just chat about a deep dive into each of these 732 00:35:44,060 --> 00:35:46,800 in probably five or 10 minutes each, 733 00:35:46,800 --> 00:35:49,800 which you could do a whole course on each of these. 734 00:35:49,800 --> 00:35:51,990 But let me just deep dive a little bit. 735 00:35:51,990 --> 00:35:55,590 Guarding against illicit activity-- 736 00:35:55,590 --> 00:35:59,550 so tax compliance and reporting, what do you 737 00:35:59,550 --> 00:36:02,100 think the first big question that the US government 738 00:36:02,100 --> 00:36:04,980 or any government-- this sounds US-centric. 739 00:36:04,980 --> 00:36:06,750 And Kelly, I thank you for your paper, 740 00:36:06,750 --> 00:36:08,925 because Kelly-- is it all right if I 741 00:36:08,925 --> 00:36:11,175 call you out-- wrote a paper for today, which I happen 742 00:36:11,175 --> 00:36:14,400 to read earlier today and said Gensler's work was 743 00:36:14,400 --> 00:36:15,345 too US-centric. 744 00:36:17,657 --> 00:36:18,615 I thought it was gutsy. 745 00:36:18,615 --> 00:36:19,760 I thought it was gutsy. 746 00:36:19,760 --> 00:36:20,580 But you're right. 747 00:36:20,580 --> 00:36:21,780 It was US-centric. 748 00:36:21,780 --> 00:36:25,050 I was speaking to the US Congress. 749 00:36:25,050 --> 00:36:27,270 So that was this thing you learn in politics, too. 750 00:36:27,270 --> 00:36:29,780 You try to gauge your audience. 751 00:36:29,780 --> 00:36:31,230 But you were right. 752 00:36:31,230 --> 00:36:33,330 But what do you think the first thing 753 00:36:33,330 --> 00:36:35,600 whether it's the US government or any government's got 754 00:36:35,600 --> 00:36:40,800 to figure out in terms of this world came along in 2010, 2011, 755 00:36:40,800 --> 00:36:44,910 2012-- what was that first question, which 756 00:36:44,910 --> 00:36:46,740 you may have teased out of the readings, 757 00:36:46,740 --> 00:36:49,670 but as a policy question? 758 00:36:49,670 --> 00:36:53,610 Anybody want to take a guess? 759 00:36:53,610 --> 00:36:56,505 AUDIENCE: How do you treat it for tax purposes? 760 00:36:56,505 --> 00:36:58,630 GARY GENSLER: How do you treat it for tax purposes? 761 00:36:58,630 --> 00:37:04,130 How do you treat Bitcoin at the time for tax purposes? 762 00:37:04,130 --> 00:37:06,620 And so that central question was the first thing 763 00:37:06,620 --> 00:37:08,060 that really came up. 764 00:37:08,060 --> 00:37:09,170 Is it a currency? 765 00:37:09,170 --> 00:37:10,640 Is it a form of property? 766 00:37:10,640 --> 00:37:12,350 Is it something else? 767 00:37:12,350 --> 00:37:16,460 What did the US government say back in, I think it was 2013? 768 00:37:16,460 --> 00:37:19,580 But it would it be in the testimony. 769 00:37:19,580 --> 00:37:20,090 What is it? 770 00:37:20,090 --> 00:37:22,130 Is it a currency or property? 771 00:37:22,130 --> 00:37:22,940 AUDIENCE: Property. 772 00:37:22,940 --> 00:37:23,720 GARY GENSLER: Property. 773 00:37:23,720 --> 00:37:25,137 AUDIENCE: It makes for a pain when 774 00:37:25,137 --> 00:37:27,740 you're filling out your taxes and you do any sort of trading. 775 00:37:27,740 --> 00:37:28,865 GARY GENSLER: That's right. 776 00:37:28,865 --> 00:37:31,453 So the result of that is-- you want to say it again? 777 00:37:31,453 --> 00:37:32,870 AUDIENCE: You have to-- basically, 778 00:37:32,870 --> 00:37:36,140 every time you exchange to another currency 779 00:37:36,140 --> 00:37:40,660 or you spend it, you have to record the cost basis. 780 00:37:40,660 --> 00:37:43,240 And yeah, if you do any sort of my tax return, 781 00:37:43,240 --> 00:37:44,860 was 600 pages this year. 782 00:37:44,860 --> 00:37:46,940 it's pretty brutal. 783 00:37:46,940 --> 00:37:50,690 So any time it changes at all, you can't consolidate-- 784 00:37:50,690 --> 00:37:53,360 I think it's like with stocks you can consolidate. 785 00:37:53,360 --> 00:37:55,820 If it's the same security being traded over the year, 786 00:37:55,820 --> 00:37:59,390 you can consolidate to show your beginning and ending 787 00:37:59,390 --> 00:38:01,050 and just pay tax on the delta. 788 00:38:01,050 --> 00:38:03,952 But you have to report every single trade. 789 00:38:03,952 --> 00:38:05,660 GARY GENSLER: So these types of questions 790 00:38:05,660 --> 00:38:08,900 were not known in 2008 when Satoshi Nakamoto wrote 791 00:38:08,900 --> 00:38:09,440 his paper. 792 00:38:09,440 --> 00:38:13,550 But 10 years later, is it currency, is it property? 793 00:38:13,550 --> 00:38:17,300 Some jurisdictions around the globe, very few but some, 794 00:38:17,300 --> 00:38:20,040 have said its currency. 795 00:38:20,040 --> 00:38:22,840 But almost dominantly around the globe, 796 00:38:22,840 --> 00:38:26,340 it's some form of property, and then within the laws 797 00:38:26,340 --> 00:38:27,990 triggers, like it does in the US, 798 00:38:27,990 --> 00:38:31,210 capital gains and so forth like that. 799 00:38:31,210 --> 00:38:34,000 The next quote set of questions was, 800 00:38:34,000 --> 00:38:38,110 what's the tax treatment of mining, exchanges, and forks? 801 00:38:38,110 --> 00:38:40,120 Anybody want to tell me-- 802 00:38:40,120 --> 00:38:45,580 if you're mining and you receive Bitcoin or any other crypto, 803 00:38:45,580 --> 00:38:50,290 Ether, and so forth-- 804 00:38:50,290 --> 00:38:52,130 anybody want to take a guess? 805 00:38:52,130 --> 00:38:53,070 It's not a guess. 806 00:38:53,070 --> 00:38:55,660 I think it was even in the testimony I wrote. 807 00:38:55,660 --> 00:38:57,455 You had 600 pages. 808 00:38:57,455 --> 00:38:58,955 AUDIENCE: I know with a fork anyway, 809 00:38:58,955 --> 00:39:00,780 you basically pay tax on the whole thing. 810 00:39:00,780 --> 00:39:06,040 So a Bitcoin cash fork, basically the cost basis 811 00:39:06,040 --> 00:39:09,650 is zero, and whatever its value at the time you sell it. 812 00:39:09,650 --> 00:39:11,650 GARY GENSLER: You're saying you had to pay taxes 813 00:39:11,650 --> 00:39:13,190 on both sides of the fork? 814 00:39:13,190 --> 00:39:13,930 AUDIENCE: Yeah. 815 00:39:13,930 --> 00:39:16,540 GARY GENSLER: So that's rougher than a stock split. 816 00:39:16,540 --> 00:39:19,360 A stock split, you just carryover basis. 817 00:39:19,360 --> 00:39:20,610 How about Bitcoin mining? 818 00:39:20,610 --> 00:39:21,110 Anybody? 819 00:39:21,110 --> 00:39:22,722 Zan, you want to take it? 820 00:39:22,722 --> 00:39:24,430 AUDIENCE: I actually don't know this one, 821 00:39:24,430 --> 00:39:27,235 but I would assume they treat it like income. 822 00:39:27,235 --> 00:39:28,110 GARY GENSLER: Income. 823 00:39:28,110 --> 00:39:28,960 Zan's right. 824 00:39:28,960 --> 00:39:30,160 It's income. 825 00:39:30,160 --> 00:39:32,620 You mine, you get income. 826 00:39:32,620 --> 00:39:37,660 So each of these had to be addressed in the tax law. 827 00:39:37,660 --> 00:39:40,140 The next thing is something called the Bank Secrecy Act. 828 00:39:40,140 --> 00:39:43,870 Anybody want to tell me what the Bank Secrecy Act is? 829 00:39:43,870 --> 00:39:46,030 Is it Nicholas? 830 00:39:46,030 --> 00:39:49,763 See, I can read your name there and see how that worked. 831 00:39:49,763 --> 00:39:51,180 AUDIENCE: I'm not sure what it is. 832 00:39:51,180 --> 00:39:52,638 GARY GENSLER: OK, that's all right. 833 00:39:52,638 --> 00:39:56,490 Bank Secrecy Act was passed a few decades ago so probably 834 00:39:56,490 --> 00:39:58,320 before most of us in this room-- 835 00:39:58,320 --> 00:40:00,870 after I was born, but most of you were born. 836 00:40:00,870 --> 00:40:05,370 Anybody want to say what the Bank Secrecy Act is? 837 00:40:05,370 --> 00:40:06,060 Daniel? 838 00:40:06,060 --> 00:40:09,020 AUDIENCE: Is it the Bank Secrecy Act that deals with KYC and AML 839 00:40:09,020 --> 00:40:10,610 and essentially knowing the parties 840 00:40:10,610 --> 00:40:11,920 that you're interacting with? 841 00:40:11,920 --> 00:40:12,570 GARY GENSLER: Correct. 842 00:40:12,570 --> 00:40:13,195 That's correct. 843 00:40:13,195 --> 00:40:17,220 It's really trying to protect against secret transactions 844 00:40:17,220 --> 00:40:20,640 or what's often called money laundering. 845 00:40:20,640 --> 00:40:22,740 And behind the money laundering laws 846 00:40:22,740 --> 00:40:25,290 is knowing who the customer is of a bank. 847 00:40:25,290 --> 00:40:29,750 So you'll hear these letters, KYC, know your customer; 848 00:40:29,750 --> 00:40:33,430 AML, anti-money laundering. 849 00:40:33,430 --> 00:40:35,710 And the Bank Secrecy Act, underneath it then, 850 00:40:35,710 --> 00:40:38,110 has reporting obligations that anyone 851 00:40:38,110 --> 00:40:41,350 who has to report under the Bank Secrecy Act 852 00:40:41,350 --> 00:40:45,040 has to report when there's large transactions. 853 00:40:45,040 --> 00:40:49,060 If you go into the bank and you ask them, can you please-- 854 00:40:49,060 --> 00:40:54,190 I want to take a withdraw of $11,000 of US currency. 855 00:40:54,190 --> 00:40:56,560 They have to fill out a report, because I 856 00:40:56,560 --> 00:40:59,470 believe the triggers $10,000. 857 00:40:59,470 --> 00:41:03,630 You walk in and you get $500, no report. 858 00:41:03,630 --> 00:41:06,960 But there's various suspicious activity reporting 859 00:41:06,960 --> 00:41:09,510 and other large transaction reporting 860 00:41:09,510 --> 00:41:12,085 that gets triggered in the US Bank Secrecy Act. 861 00:41:12,085 --> 00:41:13,710 But you will hear over and over again-- 862 00:41:13,710 --> 00:41:16,830 even if you never invest or work in a blockchain company, 863 00:41:16,830 --> 00:41:20,100 you will hear something called KYC and AML. 864 00:41:20,100 --> 00:41:25,920 And it's these two regimes that kind of work. 865 00:41:25,920 --> 00:41:29,430 They're not the best, but they do their job 866 00:41:29,430 --> 00:41:32,470 to give the official sector and the banking sector 867 00:41:32,470 --> 00:41:36,430 a sense of who owns the accounts and when there's 868 00:41:36,430 --> 00:41:40,300 suspicious activity that there's a reporting obligation 869 00:41:40,300 --> 00:41:41,890 into the authorities. 870 00:41:41,890 --> 00:41:42,390 Aline? 871 00:41:42,390 --> 00:41:45,310 AUDIENCE: So how do anonymous cryptocurrencies fit in here? 872 00:41:45,310 --> 00:41:48,750 I suppose at the exchange level you do KYC and AML. 873 00:41:48,750 --> 00:41:52,520 GARY GENSLER: So Aline is asking how does everything fit in. 874 00:41:52,520 --> 00:41:55,150 So how does money transmission laws-- money transmission 875 00:41:55,150 --> 00:41:58,930 laws are the laws that were just mentioned by Daniel, 876 00:41:58,930 --> 00:42:00,520 the anti-money laundering. 877 00:42:00,520 --> 00:42:04,090 CTF is counter-terrorism finance. 878 00:42:04,090 --> 00:42:08,170 I mean, Washington is a world full of these letters 879 00:42:08,170 --> 00:42:10,750 and jargon and everything. 880 00:42:10,750 --> 00:42:11,980 So how does it fit in? 881 00:42:11,980 --> 00:42:16,600 It first is one of the things in the US Department of Treasury-- 882 00:42:16,600 --> 00:42:18,640 but again, to internationalize it-- 883 00:42:18,640 --> 00:42:21,970 other departments of treasury and so forth around the globe 884 00:42:21,970 --> 00:42:27,330 define when do you come under the similar laws. 885 00:42:27,330 --> 00:42:30,760 When are you just a user of this property, 886 00:42:30,760 --> 00:42:32,470 because it's not a currency? 887 00:42:32,470 --> 00:42:35,140 But to confuse matters, the US Department of treasury 888 00:42:35,140 --> 00:42:39,670 said it was a virtual currency, a virtual currency which 889 00:42:39,670 --> 00:42:42,580 happens to be property for tax law. 890 00:42:42,580 --> 00:42:44,500 This is two parts of the same department. 891 00:42:44,500 --> 00:42:46,600 The US Department of treasury said it's property 892 00:42:46,600 --> 00:42:47,800 not currency. 893 00:42:47,800 --> 00:42:51,410 Another part of the US Treasury said it's virtual currency. 894 00:42:51,410 --> 00:42:54,010 And the reason they had to say it was virtual currency 895 00:42:54,010 --> 00:42:58,780 is they wanted it to come under this law, the Bank Secrecy Act, 896 00:42:58,780 --> 00:43:01,950 without going probably to Congress to have it be amended. 897 00:43:01,950 --> 00:43:04,050 Hugo? 898 00:43:04,050 --> 00:43:05,560 AUDIENCE: So cryptocurrency is given 899 00:43:05,560 --> 00:43:09,610 a bad rap for money laundering, but what 900 00:43:09,610 --> 00:43:14,410 about [INAUDIBLE] this year, I think 901 00:43:14,410 --> 00:43:18,490 some bank was fined for money laundering over $200 billion. 902 00:43:18,490 --> 00:43:20,740 And the amount of money going through crypto exchanges 903 00:43:20,740 --> 00:43:22,617 is in the maybe $10 million. 904 00:43:22,617 --> 00:43:24,450 GARY GENSLER: So Hugo's asking the question, 905 00:43:24,450 --> 00:43:27,430 well, wait, crypto is getting a bad rap for money laundering, 906 00:43:27,430 --> 00:43:28,820 what about everything else? 907 00:43:28,820 --> 00:43:31,300 And I'd say, yes, what Hugo is reminding us 908 00:43:31,300 --> 00:43:35,290 of is criminals don't change, just the technologies they 909 00:43:35,290 --> 00:43:36,460 use do change. 910 00:43:36,460 --> 00:43:40,870 But they're still using bags of cash in some jurisdictions 911 00:43:40,870 --> 00:43:46,010 and there's still suitcases and cast drops around the globe. 912 00:43:46,010 --> 00:43:50,440 I'm told that there's even now some trafficking between crypto 913 00:43:50,440 --> 00:43:53,260 and physical cash where couriers can 914 00:43:53,260 --> 00:43:58,660 be paid a certain percentage to take suitcases of cash 915 00:43:58,660 --> 00:44:02,450 from, let's say, drug runners on the one hand 916 00:44:02,450 --> 00:44:05,800 and exchange them a thumb drive or a private key with Bitcoin 917 00:44:05,800 --> 00:44:09,700 on the other, so just new means and methods. 918 00:44:09,700 --> 00:44:10,600 Sorry? 919 00:44:10,600 --> 00:44:12,740 AUDIENCE: I would just reply that I 920 00:44:12,740 --> 00:44:15,770 would say that the amount that that bank was charged 921 00:44:15,770 --> 00:44:17,660 was probably a small portion of it, 922 00:44:17,660 --> 00:44:22,100 whereas there is probably a higher proportion potentially 923 00:44:22,100 --> 00:44:26,387 of cryptocurrency that has illicit uses. 924 00:44:26,387 --> 00:44:28,220 GARY GENSLER: So Christopher is saying maybe 925 00:44:28,220 --> 00:44:30,860 there's a higher percentage of crypto 926 00:44:30,860 --> 00:44:35,060 that's being used for illicit than the percent of Fiat. 927 00:44:35,060 --> 00:44:37,700 That may well be correct, because the world's stock 928 00:44:37,700 --> 00:44:41,150 of Fiat is measured in the tens of trillions. 929 00:44:41,150 --> 00:44:44,460 But that may be, but it's still something that concerns, 930 00:44:44,460 --> 00:44:51,200 because like water wants to find the lowest level 931 00:44:51,200 --> 00:44:55,610 and will drain up wherever the leak is, 932 00:44:55,610 --> 00:44:59,570 illicit activity will flow to wherever the lowest level. 933 00:44:59,570 --> 00:45:02,500 So the challenges, the key challenges-- you all 934 00:45:02,500 --> 00:45:05,330 have raised many of these, so I'm not going to ask questions. 935 00:45:05,330 --> 00:45:07,880 But the pseudonymous addresses, that is 936 00:45:07,880 --> 00:45:11,660 a real challenge for law enforcement around the globe. 937 00:45:11,660 --> 00:45:16,400 Privacy coins, like what we talked about Zcash and Monaro 938 00:45:16,400 --> 00:45:21,830 and so forth, that have a cryptographic method 939 00:45:21,830 --> 00:45:24,440 to make it harder to track. 940 00:45:27,030 --> 00:45:29,540 And then compliance and reporting, 941 00:45:29,540 --> 00:45:32,030 there just isn't a lot of-- even well meaning 942 00:45:32,030 --> 00:45:36,020 people don't often comply and put in the 600 pages. 943 00:45:36,020 --> 00:45:36,960 The US government. 944 00:45:36,960 --> 00:45:38,130 Thanks you. 945 00:45:38,130 --> 00:45:40,310 AUDIENCE: I'm waiting for my audit to come. 946 00:45:40,310 --> 00:45:41,393 GARY GENSLER: What's that? 947 00:45:41,393 --> 00:45:43,250 You're waiting for your audit to come. 948 00:45:43,250 --> 00:45:47,030 I would say the other challenges are also-- 949 00:45:47,030 --> 00:45:49,310 these are the things that the regulators and law 950 00:45:49,310 --> 00:45:50,720 enforcement talk about. 951 00:45:50,720 --> 00:45:52,910 Crypto to crypto transactions are 952 00:45:52,910 --> 00:45:56,000 a little bit more challenging than crypto to Fiat. 953 00:45:56,000 --> 00:45:59,440 Does anybody want to-- 954 00:45:59,440 --> 00:46:00,810 Zan, why? 955 00:46:00,810 --> 00:46:03,510 AUDIENCE: It seems to me that, from a regulator perspective, 956 00:46:03,510 --> 00:46:07,800 it's fairly easy to regulate and monitor the on-ramps 957 00:46:07,800 --> 00:46:08,780 and off-ramps, right? 958 00:46:08,780 --> 00:46:11,460 So when you're dealing with financial intermediaries, 959 00:46:11,460 --> 00:46:13,530 you're essentially bringing Fiat into crypto 960 00:46:13,530 --> 00:46:14,940 and you can monitor a transaction 961 00:46:14,940 --> 00:46:15,857 or if it's coming out. 962 00:46:15,857 --> 00:46:18,960 But what happens within the ecosystem, especially when you 963 00:46:18,960 --> 00:46:21,420 bring in Monaro and some of these privacy coins, 964 00:46:21,420 --> 00:46:22,470 regulators have no idea. 965 00:46:22,470 --> 00:46:24,240 So it's really hard. 966 00:46:24,240 --> 00:46:27,510 GARY GENSLER: So this term, on-ramps and off-ramps 967 00:46:27,510 --> 00:46:32,100 I've heard a lot, not just from Zan, but that's 968 00:46:32,100 --> 00:46:34,350 how law enforcement thinks about it. 969 00:46:34,350 --> 00:46:37,950 Because they're regulating the intermediary caught-backs, 970 00:46:37,950 --> 00:46:41,840 back to the discussion we had about 30 minutes ago, 971 00:46:41,840 --> 00:46:46,220 regulated intermediaries give the official sector 972 00:46:46,220 --> 00:46:49,940 a node to influence behavior. 973 00:46:49,940 --> 00:46:54,500 They have the banks, the JP Morgans and the small community 974 00:46:54,500 --> 00:47:00,080 banks, in this system of Bank Secrecy Act compliance. 975 00:47:00,080 --> 00:47:03,920 And even though some are doing sloppy work, as Hugo pointed 976 00:47:03,920 --> 00:47:07,080 out, they're in the system. 977 00:47:07,080 --> 00:47:11,750 And so crypto to crypto is harder for the official sector, 978 00:47:11,750 --> 00:47:16,110 because they don't need any commercial bank. 979 00:47:16,110 --> 00:47:18,350 Or in a sense, crypto to crypto is 980 00:47:18,350 --> 00:47:23,270 easier for somebody that wants to stay off the tax base, 981 00:47:23,270 --> 00:47:26,820 because there's not the same reporting. 982 00:47:26,820 --> 00:47:31,060 So it depends on which side of the lens you're on as well. 983 00:47:31,060 --> 00:47:34,220 Decentralized exchanges we're going to talk about 984 00:47:34,220 --> 00:47:37,430 in about five or six classes. 985 00:47:37,430 --> 00:47:41,740 But trust me, they're harder for the official sector. 986 00:47:41,740 --> 00:47:44,050 Decentralized exchanges are basically-- 987 00:47:44,050 --> 00:47:48,390 think of an algorithm that is decentralized, 988 00:47:48,390 --> 00:47:50,310 no central intermediary. 989 00:47:50,310 --> 00:47:53,880 But through an algorithm, Ilan and I 990 00:47:53,880 --> 00:47:58,360 could trade Bitcoin versus Ether, Ether versus Bitcoin. 991 00:47:58,360 --> 00:48:02,030 And this decentralized exchange allows it to happen. 992 00:48:02,030 --> 00:48:08,620 Most of them right now are between two tokens that 993 00:48:08,620 --> 00:48:14,610 are on Ethereum, so Ethereum token into Ethereum, token two 994 00:48:14,610 --> 00:48:16,570 ICO tokens. 995 00:48:16,570 --> 00:48:20,410 But they're a real challenge and we'll get to them later. 996 00:48:20,410 --> 00:48:23,470 Anybody know what a dark market is? 997 00:48:23,470 --> 00:48:25,960 I'm not going to ask if anybody's used a dark market. 998 00:48:25,960 --> 00:48:27,040 Don't worry. 999 00:48:27,040 --> 00:48:28,318 Does anybody know? 1000 00:48:28,318 --> 00:48:29,950 AUDIENCE: I think like the Silk Road. 1001 00:48:29,950 --> 00:48:31,040 GARY GENSLER: Silk Road. 1002 00:48:31,040 --> 00:48:32,260 It is Silk Road. 1003 00:48:32,260 --> 00:48:34,435 But what is Silk Road? 1004 00:48:34,435 --> 00:48:38,350 AUDIENCE: It was somebody using the deep web. 1005 00:48:38,350 --> 00:48:40,960 The guy's in jail right now. 1006 00:48:40,960 --> 00:48:44,410 And he had the idea of free trade 1007 00:48:44,410 --> 00:48:48,790 and it was used for drugs mainly. 1008 00:48:48,790 --> 00:48:51,400 GARY GENSLER: So it's basically a website where 1009 00:48:51,400 --> 00:48:54,700 you can buy and sell illegal things, 1010 00:48:54,700 --> 00:48:58,120 not just drugs but primarily drugs. 1011 00:48:58,120 --> 00:49:03,340 And the payments were generally in Bitcoin, 1012 00:49:03,340 --> 00:49:06,850 even though some have moved on from Bitcoin now. 1013 00:49:06,850 --> 00:49:09,460 And the technology they were using 1014 00:49:09,460 --> 00:49:15,670 was a TOR, T-O-R, which is a way that you could 1015 00:49:15,670 --> 00:49:18,370 do communications on the web and not be tracked, 1016 00:49:18,370 --> 00:49:21,850 I mean broadly speaking. 1017 00:49:21,850 --> 00:49:23,230 So that was Silk Road. 1018 00:49:23,230 --> 00:49:25,640 And dark markets exist. 1019 00:49:25,640 --> 00:49:28,390 Again, before Bitcoin, dark markets exist. 1020 00:49:28,390 --> 00:49:30,190 They might have been called black markets. 1021 00:49:30,190 --> 00:49:31,320 So they have a new name. 1022 00:49:31,320 --> 00:49:33,160 They're a new technology. 1023 00:49:33,160 --> 00:49:36,100 And then state actors-- 1024 00:49:36,100 --> 00:49:39,880 and no one should doubt that state actors are always 1025 00:49:39,880 --> 00:49:43,910 in some competition with each other. 1026 00:49:43,910 --> 00:49:45,670 And even if we're not in a hot war, 1027 00:49:45,670 --> 00:49:49,700 sometimes you're in other types of competition. 1028 00:49:49,700 --> 00:49:52,690 And so state actors are also using-- 1029 00:49:52,690 --> 00:49:57,580 and not just like the Mueller investigation saw that-- 1030 00:49:57,580 --> 00:50:00,580 they alleged that Russians were using Bitcoin 1031 00:50:00,580 --> 00:50:04,010 to mess in our elections. 1032 00:50:04,010 --> 00:50:06,340 But in a more broad sense, state actors 1033 00:50:06,340 --> 00:50:09,040 could play in this space. 1034 00:50:09,040 --> 00:50:10,950 I just thought this chart was interesting. 1035 00:50:10,950 --> 00:50:13,140 I found it on a website. 1036 00:50:13,140 --> 00:50:14,020 Diar did a report. 1037 00:50:14,020 --> 00:50:18,070 But this is US Agency Contracts for Blockchain Analysis. 1038 00:50:18,070 --> 00:50:21,430 There's companies out there that will go in and do 1039 00:50:21,430 --> 00:50:23,700 the forensics and analysis. 1040 00:50:23,700 --> 00:50:26,260 And here is the highest agencies. 1041 00:50:26,260 --> 00:50:29,440 These numbers aren't terribly relevant 1042 00:50:29,440 --> 00:50:32,890 that it's $2 million or $2.5 million, but it's interesting. 1043 00:50:32,890 --> 00:50:38,560 It's the IRS, it's the customs, FBI, and the Fiscal Services, 1044 00:50:38,560 --> 00:50:40,660 and the Drug Enforcement Agency. 1045 00:50:40,660 --> 00:50:43,960 That's the parts of the US that have publicly 1046 00:50:43,960 --> 00:50:48,730 done requests for contracts so this outside service could 1047 00:50:48,730 --> 00:50:49,370 track it. 1048 00:50:49,370 --> 00:50:52,060 But it just gives a flavor for who's chasing 1049 00:50:52,060 --> 00:50:55,000 after Bitcoin usage in the US. 1050 00:50:55,000 --> 00:50:58,110 It's wonderful transparency. 1051 00:50:58,110 --> 00:50:59,437 That's illicit activity. 1052 00:50:59,437 --> 00:51:01,020 Let me move on to financial stability, 1053 00:51:01,020 --> 00:51:04,110 because we're going to run out of time. 1054 00:51:04,110 --> 00:51:07,350 Financial stability-- the initial assessment 1055 00:51:07,350 --> 00:51:12,580 of the Financial Stability Board is not big enough yet. 1056 00:51:12,580 --> 00:51:15,430 I would say though, again, capital control companies 1057 00:51:15,430 --> 00:51:17,620 are worried about maintaining stability. 1058 00:51:17,620 --> 00:51:22,420 That's if it could undermine your currency value. 1059 00:51:22,420 --> 00:51:26,410 In essence, a capital control country, 1060 00:51:26,410 --> 00:51:29,510 where China has some capital controls for instance, 1061 00:51:29,510 --> 00:51:33,010 you can't get a lot of the currency out. 1062 00:51:33,010 --> 00:51:40,530 But if you can go Renminbi to Bitcoin, Bitcoin to dollar, 1063 00:51:40,530 --> 00:51:42,990 then it's basically a bridge currency 1064 00:51:42,990 --> 00:51:45,060 to avoid capital controls. 1065 00:51:45,060 --> 00:51:47,400 And one of the things I understand the Bank of China 1066 00:51:47,400 --> 00:51:52,200 is focused on is that with the big miners in China 1067 00:51:52,200 --> 00:51:54,900 that, in essence, the mining operations are a way 1068 00:51:54,900 --> 00:51:57,270 to get around capital controls. 1069 00:51:57,270 --> 00:52:02,490 It's a way to change Renminbi into electricity, electricity 1070 00:52:02,490 --> 00:52:06,825 into Bitcoin, Bitcoin into dollars or euros. 1071 00:52:10,480 --> 00:52:13,810 But it may also be why some local officials in China 1072 00:52:13,810 --> 00:52:17,750 apparently are allowing the mining to continue. 1073 00:52:17,750 --> 00:52:21,380 And while I don't have any documented proof, 1074 00:52:21,380 --> 00:52:23,540 it's why some people think that there's probably 1075 00:52:23,540 --> 00:52:27,560 some arrangements with these local officials. 1076 00:52:31,620 --> 00:52:34,440 I mentioned three other areas in the testimony 1077 00:52:34,440 --> 00:52:38,190 that I think are on the horizon that are worth thinking about. 1078 00:52:38,190 --> 00:52:41,400 Crypto leverage-- a lot of the crypto exchanges 1079 00:52:41,400 --> 00:52:42,850 provide a lot of leverage. 1080 00:52:42,850 --> 00:52:48,000 You can buy Bitcoin, in some cases 100 to 1 levered. 1081 00:52:48,000 --> 00:52:53,180 Most or not at 100 to 1, but almost all are at least 10 to 1 1082 00:52:53,180 --> 00:52:55,370 says our trader, right? 1083 00:52:55,370 --> 00:52:58,040 So leverage often is where you can 1084 00:52:58,040 --> 00:53:02,300 get more acceleration of a crisis 1085 00:53:02,300 --> 00:53:07,220 if it's already happening, more systemic risk. 1086 00:53:07,220 --> 00:53:09,290 This still is a rather small market, 1087 00:53:09,290 --> 00:53:11,030 but the leverages, probably something 1088 00:53:11,030 --> 00:53:15,140 could propagate any crisis if it were to happen. 1089 00:53:15,140 --> 00:53:16,940 The market infrastructure itself, 1090 00:53:16,940 --> 00:53:20,870 like Australia is using blockchain technology 1091 00:53:20,870 --> 00:53:24,663 to do their clearing and settlement of stocks. 1092 00:53:24,663 --> 00:53:26,330 They haven't adopted it yet, but they're 1093 00:53:26,330 --> 00:53:29,630 rolling it out next year and into 2020, 1094 00:53:29,630 --> 00:53:33,260 so just making sure the infrastructure works. 1095 00:53:33,260 --> 00:53:35,370 And then central bank digital currency-- 1096 00:53:35,370 --> 00:53:38,660 so we're going to do two lectures on central bank 1097 00:53:38,660 --> 00:53:39,680 digital currencies. 1098 00:53:39,680 --> 00:53:42,510 And I probably should've just skip this slide. 1099 00:53:42,510 --> 00:53:46,280 But here are some of the concerns around central bank 1100 00:53:46,280 --> 00:53:47,820 digital currencies. 1101 00:53:47,820 --> 00:53:49,880 It could be pro cyclical. 1102 00:53:49,880 --> 00:53:51,920 A central bank digital currency means 1103 00:53:51,920 --> 00:53:57,180 the central bank says Joaquin does not 1104 00:53:57,180 --> 00:53:59,730 have to deposit at a bank to have US dollars. 1105 00:53:59,730 --> 00:54:03,580 He can deposit straight with the Federal Reserve. 1106 00:54:03,580 --> 00:54:06,010 Or in Sweden, it's close enough to do it. 1107 00:54:06,010 --> 00:54:09,310 You can deposit straight with the Swedish central bank. 1108 00:54:09,310 --> 00:54:11,450 We'll talk about this more in a couple of weeks. 1109 00:54:11,450 --> 00:54:15,670 But that could lead to runs away from commercial banks 1110 00:54:15,670 --> 00:54:16,890 to central banks. 1111 00:54:16,890 --> 00:54:20,680 AUDIENCE: I think my key question is, if you do so, 1112 00:54:20,680 --> 00:54:24,280 you run the central bank digital currency on parallel 1113 00:54:24,280 --> 00:54:25,730 to its Fiat currency. 1114 00:54:25,730 --> 00:54:28,120 And that would jeopardize the ability 1115 00:54:28,120 --> 00:54:30,550 that the central bank would be able to carry out 1116 00:54:30,550 --> 00:54:34,280 monetary policy, especially if you use Bitcoin in a way 1117 00:54:34,280 --> 00:54:39,010 that the supply is rigid, the ability for you to actually 1118 00:54:39,010 --> 00:54:44,580 carry out for the likes of [INAUDIBLE]?? 1119 00:54:44,580 --> 00:54:46,630 GARY GENSLER: Remind me your first name? 1120 00:54:46,630 --> 00:54:47,380 Sean. 1121 00:54:47,380 --> 00:54:49,810 So Sean, I agree with Sean. 1122 00:54:49,810 --> 00:54:51,392 Can you hold that for about two weeks 1123 00:54:51,392 --> 00:54:52,600 when we're going to go deep-- 1124 00:54:52,600 --> 00:54:56,840 we're going to do a deep dive on all of these. 1125 00:54:56,840 --> 00:55:00,820 But basically, Sean's point is if a central bank issues 1126 00:55:00,820 --> 00:55:03,700 currency directly to the public digitally, 1127 00:55:03,700 --> 00:55:07,610 could it also undermine monetary policy? 1128 00:55:07,610 --> 00:55:10,840 And there's a bunch of neat trade-offs there. 1129 00:55:10,840 --> 00:55:12,520 I leave it for you just to say we're 1130 00:55:12,520 --> 00:55:14,650 going to come back to that. 1131 00:55:14,650 --> 00:55:17,620 The investing public-- so we've talked 1132 00:55:17,620 --> 00:55:21,710 about that the markets are readily susceptible to fraud 1133 00:55:21,710 --> 00:55:22,540 manipulation. 1134 00:55:22,540 --> 00:55:24,740 And we're going to spend a couple of lectures 1135 00:55:24,740 --> 00:55:28,410 on crypto exchanges. 1136 00:55:28,410 --> 00:55:33,310 But they're not regulated for market integrity. 1137 00:55:33,310 --> 00:55:35,800 So a simple thing like-- 1138 00:55:35,800 --> 00:55:37,095 remind me your first name. 1139 00:55:37,095 --> 00:55:38,020 AUDIENCE: Michael. 1140 00:55:38,020 --> 00:55:38,937 GARY GENSLER: Michael. 1141 00:55:38,937 --> 00:55:40,420 Michael has trades. 1142 00:55:40,420 --> 00:55:43,000 And I'm assuming some of those are on crypto exchanges? 1143 00:55:43,000 --> 00:55:43,770 AUDIENCE: Yes. 1144 00:55:43,770 --> 00:55:44,770 GARY GENSLER: All right. 1145 00:55:44,770 --> 00:55:48,010 So when Michael puts an order on a crypto exchange, 1146 00:55:48,010 --> 00:55:51,670 there's currently no rules in the rule books, 1147 00:55:51,670 --> 00:55:55,270 no law in the law that says that exchange 1148 00:55:55,270 --> 00:55:56,980 can't front-run Michael. 1149 00:55:56,980 --> 00:56:01,840 So Michael says he wants to buy Bitcoin at $6,400 1150 00:56:01,840 --> 00:56:05,620 and the crypto exchange could buy some in front of him 1151 00:56:05,620 --> 00:56:07,680 at $6,490-- 1152 00:56:07,680 --> 00:56:09,790 or $6,390. 1153 00:56:09,790 --> 00:56:11,830 Yeah, sorry. 1154 00:56:11,830 --> 00:56:13,790 That's called front running. 1155 00:56:13,790 --> 00:56:17,260 So there are many, many ways to make money 1156 00:56:17,260 --> 00:56:22,440 on Michael's order that can just be goofed around. 1157 00:56:22,440 --> 00:56:24,630 Kyle, is that a question? 1158 00:56:24,630 --> 00:56:28,020 AUDIENCE: I thought that front-running [INAUDIBLE] 1159 00:56:28,020 --> 00:56:30,480 were criminal activities if they weren't 1160 00:56:30,480 --> 00:56:35,740 covered in a particular law or regulation by FINRA. 1161 00:56:35,740 --> 00:56:37,410 Is that not correct? 1162 00:56:37,410 --> 00:56:38,880 GARY GENSLER: So Kyle is raising-- 1163 00:56:38,880 --> 00:56:42,780 well, maybe if it's not covered by investor protection laws, 1164 00:56:42,780 --> 00:56:45,120 might it be covered by other laws? 1165 00:56:45,120 --> 00:56:46,740 You mentioned FINRA. 1166 00:56:46,740 --> 00:56:49,980 FINRA, which is the self-regulatory organization 1167 00:56:49,980 --> 00:56:53,460 in the US for investments, would be investment law. 1168 00:56:53,460 --> 00:56:54,910 But Kyle, you're right. 1169 00:56:54,910 --> 00:57:00,060 Certain things are still against consumer laws. 1170 00:57:00,060 --> 00:57:02,490 I don't think front-running is one of them, 1171 00:57:02,490 --> 00:57:05,630 but you might be right about that. 1172 00:57:05,630 --> 00:57:07,195 I would contend-- 1173 00:57:07,195 --> 00:57:12,110 I'm an advocate that Western societies early on 1174 00:57:12,110 --> 00:57:14,390 and many developing countries in Asia, 1175 00:57:14,390 --> 00:57:18,380 elsewhere benefited by layering investor protection 1176 00:57:18,380 --> 00:57:20,540 over consumer protection. 1177 00:57:20,540 --> 00:57:24,770 That consumer protection is about transacting and the fraud 1178 00:57:24,770 --> 00:57:27,530 that can happen in a transaction-- selling 1179 00:57:27,530 --> 00:57:30,080 an automobile, selling a baby's crib, 1180 00:57:30,080 --> 00:57:33,620 and so forth, selling a bottle of milk. 1181 00:57:33,620 --> 00:57:38,090 Investor protection also layers on something else which has 1182 00:57:38,090 --> 00:57:41,690 to do with issuers having information asymmetries, 1183 00:57:41,690 --> 00:57:43,760 that the issuer knows something-- 1184 00:57:43,760 --> 00:57:45,800 the person raising money-- 1185 00:57:45,800 --> 00:57:48,690 and the purchaser does not know that information. 1186 00:57:48,690 --> 00:57:51,740 There's a lot of information asymmetries 1187 00:57:51,740 --> 00:57:55,220 that you're trying to address in the market. 1188 00:57:55,220 --> 00:57:58,550 And then secondly around exchanges 1189 00:57:58,550 --> 00:58:01,400 the concepts of pre-trade transparency, 1190 00:58:01,400 --> 00:58:05,420 post-trade transparency, trying to bring transparency 1191 00:58:05,420 --> 00:58:08,610 and saying we're going to promote economic activity. 1192 00:58:08,610 --> 00:58:11,600 So in the US, there were two laws passed in 1933 1193 00:58:11,600 --> 00:58:15,722 and '34, the Exchange Act and-- 1194 00:58:15,722 --> 00:58:17,930 sorry, I'm going to have to remember-- the Securities 1195 00:58:17,930 --> 00:58:18,972 Act and the Exchange Act. 1196 00:58:18,972 --> 00:58:21,470 But one was for issuers, which was the first one, 1197 00:58:21,470 --> 00:58:25,490 and the second was for exchanges in '33 and '34. 1198 00:58:25,490 --> 00:58:28,140 And I think those are the key things. 1199 00:58:28,140 --> 00:58:30,050 Let me just mention-- the key question, 1200 00:58:30,050 --> 00:58:31,850 the definition that we will be wrestling 1201 00:58:31,850 --> 00:58:34,070 with for the next several weeks is 1202 00:58:34,070 --> 00:58:37,310 when is something is security, when is it a commodity, when 1203 00:58:37,310 --> 00:58:39,080 is it a derivative. 1204 00:58:39,080 --> 00:58:42,530 We don't have to answer these today, but those will be-- 1205 00:58:42,530 --> 00:58:43,890 is it a security? 1206 00:58:43,890 --> 00:58:45,050 Is it a commodity? 1207 00:58:45,050 --> 00:58:47,280 Is it a derivative? 1208 00:58:47,280 --> 00:58:51,360 Not only are there different laws for each, 1209 00:58:51,360 --> 00:58:53,370 but there's different public policies 1210 00:58:53,370 --> 00:58:57,240 and different normative behavior that's implicated. 1211 00:58:57,240 --> 00:59:00,540 Securities are when there is an issuer. 1212 00:59:00,540 --> 00:59:03,150 And fundamentally, just from a public policy point of view, 1213 00:59:03,150 --> 00:59:06,210 there's an information asymmetry. 1214 00:59:06,210 --> 00:59:09,060 That person raising money knows more information 1215 00:59:09,060 --> 00:59:12,750 than the person investing, they probably always will. 1216 00:59:12,750 --> 00:59:17,085 So you get to, what's the fair exchange of information? 1217 00:59:19,500 --> 00:59:21,000 I'm going to skip a couple of things 1218 00:59:21,000 --> 00:59:24,660 just to say why investor protection to Kyle's question. 1219 00:59:24,660 --> 00:59:25,560 It goes beyond. 1220 00:59:25,560 --> 00:59:29,790 And here are what are the Gary Gensler four bullet points. 1221 00:59:29,790 --> 00:59:32,310 This you will not see in a textbook somewhere. 1222 00:59:32,310 --> 00:59:35,040 But these are the key things I think investor protection 1223 00:59:35,040 --> 00:59:37,490 layers on top of consumer protection. 1224 00:59:37,490 --> 00:59:40,710 One, investors get full and fair disclosure. 1225 00:59:40,710 --> 00:59:43,530 You can debate what full and fair disclosure is, 1226 00:59:43,530 --> 00:59:46,080 but it's something more than I'm selling 1227 00:59:46,080 --> 00:59:47,280 you this carton of milk. 1228 00:59:49,960 --> 00:59:53,710 Fraud and deceptive practices are prohibited. 1229 00:59:53,710 --> 00:59:55,660 Now, fraud is supposedly prohibited even 1230 00:59:55,660 --> 00:59:57,760 when you buy a carton of milk, but there's 1231 00:59:57,760 --> 01:00:00,010 some added bits to it. 1232 01:00:00,010 --> 01:00:02,770 And then this thing I said about the secondary markets, 1233 01:00:02,770 --> 01:00:05,330 promoting price transparency. 1234 01:00:05,330 --> 01:00:07,300 And then lastly one that I hadn't talked about, 1235 01:00:07,300 --> 01:00:10,750 that the advisors usually have a lot of conflicts 1236 01:00:10,750 --> 01:00:12,342 in the financial markets. 1237 01:00:12,342 --> 01:00:14,050 There's almost always, in most countries, 1238 01:00:14,050 --> 01:00:17,710 some additional responsibilities around the advisors, 1239 01:00:17,710 --> 01:00:20,350 whether it's what's called a fiduciary responsibility 1240 01:00:20,350 --> 01:00:22,450 or some other responsibility. 1241 01:00:22,450 --> 01:00:25,000 Sometimes, it's just a best efforts, 1242 01:00:25,000 --> 01:00:28,660 but there's usually some additional responsibilities 1243 01:00:28,660 --> 01:00:29,980 on advisors. 1244 01:00:29,980 --> 01:00:31,930 And those four bullet points-- 1245 01:00:31,930 --> 01:00:34,810 I don't mean to teach a whole securities law 1246 01:00:34,810 --> 01:00:37,090 course in three minutes or less, but those 1247 01:00:37,090 --> 01:00:38,560 are how I quite summarize it. 1248 01:00:38,560 --> 01:00:39,060 Tom? 1249 01:00:39,060 --> 01:00:40,560 AUDIENCE: That first bullet, is that 1250 01:00:40,560 --> 01:00:43,750 from insurers or from issuers? 1251 01:00:43,750 --> 01:00:45,490 GARY GENSLER: Issuers. 1252 01:00:45,490 --> 01:00:46,630 Thank you. 1253 01:00:46,630 --> 01:00:49,240 Issuers, yes. 1254 01:00:49,240 --> 01:00:49,857 Sorry. 1255 01:00:49,857 --> 01:00:50,357 Emily? 1256 01:00:50,357 --> 01:00:51,857 AUDIENCE: Is there any consideration 1257 01:00:51,857 --> 01:00:57,340 for how to prioritize between investor and consumer 1258 01:00:57,340 --> 01:01:00,310 protection versus, say, tax enforcement? 1259 01:01:00,310 --> 01:01:04,020 In that I can imagine that if there was increased protection, 1260 01:01:04,020 --> 01:01:05,710 it would incentivize more investment, 1261 01:01:05,710 --> 01:01:09,850 which then could, without prior tax coverage, 1262 01:01:09,850 --> 01:01:11,310 make it so that [INAUDIBLE]. 1263 01:01:11,310 --> 01:01:13,407 GARY GENSLER: Is that word tax or hacks? 1264 01:01:13,407 --> 01:01:13,990 AUDIENCE: Tax. 1265 01:01:13,990 --> 01:01:14,823 GARY GENSLER: T-A-X. 1266 01:01:14,823 --> 01:01:15,958 AUDIENCE: Yeah. 1267 01:01:15,958 --> 01:01:18,250 So I would imagine that more protection would encourage 1268 01:01:18,250 --> 01:01:20,560 more investment, but then more people potentially 1269 01:01:20,560 --> 01:01:24,100 would be evading taxes if there wasn't already 1270 01:01:24,100 --> 01:01:27,620 that tax framework in place. 1271 01:01:27,620 --> 01:01:30,690 GARY GENSLER: So Emily raises the question, 1272 01:01:30,690 --> 01:01:32,550 how does any society, in a sense, 1273 01:01:32,550 --> 01:01:37,500 make some trade-offs between tax and investor protection 1274 01:01:37,500 --> 01:01:40,080 regimes? 1275 01:01:40,080 --> 01:01:42,840 And ultimately, if I can take it one step back, 1276 01:01:42,840 --> 01:01:44,800 that's what some countries are doing now, 1277 01:01:44,800 --> 01:01:47,370 but they've been doing it for a couple of centuries. 1278 01:01:47,370 --> 01:01:49,260 How do you promote innovation that might 1279 01:01:49,260 --> 01:01:51,140 promote economic activity? 1280 01:01:51,140 --> 01:01:53,730 So I'm broadening your question. 1281 01:01:53,730 --> 01:01:56,500 How do you promote economic activity 1282 01:01:56,500 --> 01:01:59,820 while in the midst still promoting whatever social goods 1283 01:01:59,820 --> 01:02:04,260 you're trying to achieve in some regulatory framework? 1284 01:02:04,260 --> 01:02:06,360 Investor protection, so I made it 1285 01:02:06,360 --> 01:02:10,290 the broadest, because that's what you'll hear often 1286 01:02:10,290 --> 01:02:11,690 around blockchain and Bitcoin. 1287 01:02:11,690 --> 01:02:13,920 But it was true when the railroads came along. 1288 01:02:13,920 --> 01:02:17,370 It was true more recently when the internet came along, 1289 01:02:17,370 --> 01:02:19,170 how to promote this new technology 1290 01:02:19,170 --> 01:02:23,100 of the internet while actually still promoting broadly 1291 01:02:23,100 --> 01:02:26,420 the social goods that we're trying to achieve. 1292 01:02:26,420 --> 01:02:30,110 I'm one in the camp that says protecting 1293 01:02:30,110 --> 01:02:32,870 against illicit activity, financial stability 1294 01:02:32,870 --> 01:02:37,640 of investor protection do, in and of themselves, 1295 01:02:37,640 --> 01:02:41,060 promote society and economic well-being. 1296 01:02:41,060 --> 01:02:43,910 I don't think-- this is Gary Gensler. 1297 01:02:43,910 --> 01:02:46,610 I don't think they're necessarily in conflict. 1298 01:02:46,610 --> 01:02:49,430 There are others who say no, no, no, no, you 1299 01:02:49,430 --> 01:02:52,850 can't promote economic activity or taxes 1300 01:02:52,850 --> 01:02:57,040 and also promote investor protection. 1301 01:02:57,040 --> 01:02:59,150 I believe that's more short sighted. 1302 01:02:59,150 --> 01:03:02,650 I think the regimes and reforms of the 1930s in this country 1303 01:03:02,650 --> 01:03:04,150 and other decades in other countries 1304 01:03:04,150 --> 01:03:08,590 are part of why we have had such a prosperous last 70 or 80 1305 01:03:08,590 --> 01:03:09,850 years. 1306 01:03:09,850 --> 01:03:11,500 That investor protection actually 1307 01:03:11,500 --> 01:03:15,910 lowers the risk to issuers. 1308 01:03:15,910 --> 01:03:18,670 Thank you for correcting, issuers. 1309 01:03:18,670 --> 01:03:22,810 It lowers the risk of issuers and lowers the cost of capital. 1310 01:03:22,810 --> 01:03:25,850 If you have good investor protection, 1311 01:03:25,850 --> 01:03:32,220 I believe ultimately it lowers the cost of capital, 1312 01:03:32,220 --> 01:03:34,640 which is what I said and those two bullet points. 1313 01:03:34,640 --> 01:03:36,650 So US securities law, did anybody 1314 01:03:36,650 --> 01:03:38,510 want to tell me what the Howey test was? 1315 01:03:41,100 --> 01:03:44,610 What are those arches right there? 1316 01:03:44,610 --> 01:03:47,120 Well, we'll take somebody new. 1317 01:03:47,120 --> 01:03:49,304 First name? 1318 01:03:49,304 --> 01:03:51,200 AUDIENCE: Actually, the Howey Test 1319 01:03:51,200 --> 01:03:57,810 is coming from a Supreme Court case which was in 1946. 1320 01:03:57,810 --> 01:04:00,860 And at that time, the Supreme Court 1321 01:04:00,860 --> 01:04:04,520 was about to make a decision on, as far as I remember, 1322 01:04:04,520 --> 01:04:06,640 citrus groves. 1323 01:04:06,640 --> 01:04:11,090 And at the end of the day, they decided that citrus groves 1324 01:04:11,090 --> 01:04:12,800 are securities. 1325 01:04:12,800 --> 01:04:17,800 And right after that, there's a kind of agreement 1326 01:04:17,800 --> 01:04:21,140 to be able to define something as a security. 1327 01:04:21,140 --> 01:04:23,790 It has to meet four criteria. 1328 01:04:23,790 --> 01:04:25,290 GARY GENSLER: Let's pause you there. 1329 01:04:25,290 --> 01:04:25,940 All right. 1330 01:04:25,940 --> 01:04:28,730 So citrus groves in Florida somehow 1331 01:04:28,730 --> 01:04:30,410 are securities, absolutely right. 1332 01:04:30,410 --> 01:04:33,890 A man named William Howey, he ran for governor actually 1333 01:04:33,890 --> 01:04:35,610 in Florida a couple of times and lost, 1334 01:04:35,610 --> 01:04:39,140 but he had a real estate venture and he had those arches 1335 01:04:39,140 --> 01:04:41,360 by his real estate venture. 1336 01:04:41,360 --> 01:04:44,600 And he figured he could sell part of his land 1337 01:04:44,600 --> 01:04:46,310 as citrus groves. 1338 01:04:46,310 --> 01:04:49,370 So the question was, when he was selling that land could that 1339 01:04:49,370 --> 01:04:53,510 be, actually technically an investment contract? 1340 01:04:53,510 --> 01:04:57,140 Because in 1933, the Congress of the United States 1341 01:04:57,140 --> 01:04:59,660 included in the definition of security 1342 01:04:59,660 --> 01:05:03,730 these two words, investment contract. 1343 01:05:03,730 --> 01:05:06,850 It said equity, stock, options. 1344 01:05:06,850 --> 01:05:08,750 It kept having a bunch of commas. 1345 01:05:08,750 --> 01:05:11,630 There was a comma, investment contract, comma, 1346 01:05:11,630 --> 01:05:12,830 and it kept going. 1347 01:05:12,830 --> 01:05:15,230 So the real legal question that went to the Supreme Court 1348 01:05:15,230 --> 01:05:20,540 was not whether Bill Howey's citrus groves were securities. 1349 01:05:20,540 --> 01:05:24,920 It was whether Bill Howey's citrus groves were investment 1350 01:05:24,920 --> 01:05:26,930 contracts, because Congress had already 1351 01:05:26,930 --> 01:05:30,890 decided by putting the two words and a couple of columns 1352 01:05:30,890 --> 01:05:32,330 that it was a security. 1353 01:05:32,330 --> 01:05:34,760 And that separates us from the European Union 1354 01:05:34,760 --> 01:05:37,820 and many other jurisdictions, because Congress 1355 01:05:37,820 --> 01:05:41,240 put those two words in there, investment contracts, which 1356 01:05:41,240 --> 01:05:43,250 had to do with a lot of scams and frauds 1357 01:05:43,250 --> 01:05:47,530 from the 1890s to the 1920s. 1358 01:05:47,530 --> 01:05:51,730 And to meet the investment contract test 1359 01:05:51,730 --> 01:05:53,560 is this for part test. 1360 01:05:53,560 --> 01:05:56,980 Is it an investment of money or assets? 1361 01:05:56,980 --> 01:06:02,030 Basically, the SEC has said that if you're giving Ether-- 1362 01:06:02,030 --> 01:06:04,190 or you're giving Bitcoin to buy Ether, 1363 01:06:04,190 --> 01:06:11,330 you're giving Bitcoin to buy some Amanda token, all right? 1364 01:06:11,330 --> 01:06:13,580 That's an investment of money or assets. 1365 01:06:13,580 --> 01:06:14,900 That's what the SEC has said. 1366 01:06:14,900 --> 01:06:17,810 And most lawyers kind of agree with that. 1367 01:06:17,810 --> 01:06:20,810 Is it an investment in a common enterprise? 1368 01:06:20,810 --> 01:06:25,840 So is there a group of developers that-- 1369 01:06:25,840 --> 01:06:28,230 or is this like a common enterprise? 1370 01:06:28,230 --> 01:06:29,610 Some people debate that. 1371 01:06:29,610 --> 01:06:31,650 Some people say, well, we weren't-- really, 1372 01:06:31,650 --> 01:06:32,640 it's an open source. 1373 01:06:32,640 --> 01:06:34,320 If you're an open source software, 1374 01:06:34,320 --> 01:06:36,030 that's not going to be enough to get away 1375 01:06:36,030 --> 01:06:39,070 from being a common enterprise. 1376 01:06:39,070 --> 01:06:41,830 Is there a reasonable expectation of profits? 1377 01:06:41,830 --> 01:06:45,050 Most people think of profits coming from dividends 1378 01:06:45,050 --> 01:06:49,540 or interest on your bond. 1379 01:06:49,540 --> 01:06:52,840 The SEC has said, and there's relevant court cases 1380 01:06:52,840 --> 01:06:55,780 that say profits could be just the expectation 1381 01:06:55,780 --> 01:06:58,400 of the appreciation of the asset. 1382 01:06:58,400 --> 01:07:01,630 So I buy a token today for six Ether 1383 01:07:01,630 --> 01:07:05,180 and tomorrow I think it might be worth 10 Eth. 1384 01:07:05,180 --> 01:07:09,470 That's a reasonable expectation of profits. 1385 01:07:09,470 --> 01:07:13,630 And the efforts of others, is it reliant 1386 01:07:13,630 --> 01:07:14,630 on the efforts of other? 1387 01:07:14,630 --> 01:07:17,160 This four part test. 1388 01:07:17,160 --> 01:07:20,300 Jay Clayton, the head of the SEC said earlier this year, 1389 01:07:20,300 --> 01:07:22,730 in essence, he hadn't met an ICO that he 1390 01:07:22,730 --> 01:07:24,650 didn't think was a security. 1391 01:07:24,650 --> 01:07:26,780 His words were a little bit cleaner than that, 1392 01:07:26,780 --> 01:07:30,710 but it was basically saying this initial coin offering market is 1393 01:07:30,710 --> 01:07:32,330 probably mostly securities. 1394 01:07:32,330 --> 01:07:34,520 Again, it's probably less than a quarter 1395 01:07:34,520 --> 01:07:36,540 of the whole crypto finance market. 1396 01:07:36,540 --> 01:07:39,020 It's a very relevant issue if any of you 1397 01:07:39,020 --> 01:07:41,540 are trying to do a startup. 1398 01:07:41,540 --> 01:07:46,070 But I would contend it's not the largest public policy issue. 1399 01:07:46,070 --> 01:07:50,280 But borders and boundaries make a difference. 1400 01:07:50,280 --> 01:07:55,700 The Duck Test, this is basically how I think about it. 1401 01:07:55,700 --> 01:07:59,280 Christopher, you want to say it again? 1402 01:07:59,280 --> 01:08:01,790 AUDIENCE: If you see a bird that walks like a duck, 1403 01:08:01,790 --> 01:08:04,340 swims like a duck, and quacks like a duck, 1404 01:08:04,340 --> 01:08:07,304 I think that's a damn duck. 1405 01:08:07,304 --> 01:08:10,730 GARY GENSLER: So if you have a public policy question, 1406 01:08:10,730 --> 01:08:14,150 like, do I have to file under the Bank Secrecy Act? 1407 01:08:14,150 --> 01:08:16,279 Do I have to be a security? 1408 01:08:16,279 --> 01:08:17,990 Do I have to be that? 1409 01:08:17,990 --> 01:08:22,700 And before you pay that law firm $1,000 or $1,500 an hour-- 1410 01:08:22,700 --> 01:08:26,450 and there are many lawyers that, I guess, are worth that-- 1411 01:08:26,450 --> 01:08:29,359 ask yourself this question. 1412 01:08:29,359 --> 01:08:33,569 And I'm trying to impart a value judgment to all of you, too, 1413 01:08:33,569 --> 01:08:36,109 not only to save you legal fees, but there 1414 01:08:36,109 --> 01:08:38,390 are many lawyers who are going to try to help 1415 01:08:38,390 --> 01:08:40,412 you solve your problems. 1416 01:08:40,412 --> 01:08:41,870 But when you feel like they're just 1417 01:08:41,870 --> 01:08:44,660 trying to get between the wallpaper and the wall 1418 01:08:44,660 --> 01:08:47,420 with the narrowness and the thinness of the slice 1419 01:08:47,420 --> 01:08:50,630 of their legal judgment, remember how Christopher 1420 01:08:50,630 --> 01:08:53,390 just gave us the Duck Test. 1421 01:08:53,390 --> 01:08:55,370 And then step away and say, well, maybe there's 1422 01:08:55,370 --> 01:08:59,069 another business solution to what you're trying to do, 1423 01:08:59,069 --> 01:09:01,250 because if it doesn't pass the Duck 1424 01:09:01,250 --> 01:09:04,310 Test at some point in time, you're probably 1425 01:09:04,310 --> 01:09:09,109 going to have your friends from the IRS, 1426 01:09:09,109 --> 01:09:11,359 or your friends from the Justice Department, 1427 01:09:11,359 --> 01:09:15,200 or the friends from the SEC knocking on your door. 1428 01:09:15,200 --> 01:09:16,760 And those are the friends you usually 1429 01:09:16,760 --> 01:09:20,840 don't want to have knocking on your door. 1430 01:09:20,840 --> 01:09:24,529 There's still 200 to 300 ICOs a month. 1431 01:09:24,529 --> 01:09:28,870 I just wanted to say that the market has not gone away. 1432 01:09:28,870 --> 01:09:30,819 And the Initial Coin Offering Market, 1433 01:09:30,819 --> 01:09:33,399 which we're going to talk about in a couple weeks, 1434 01:09:33,399 --> 01:09:36,830 has all these attributes of the Howey Test. 1435 01:09:36,830 --> 01:09:39,729 They're raising proceeds and they're usually 1436 01:09:39,729 --> 01:09:41,050 trying to be functional. 1437 01:09:41,050 --> 01:09:43,149 I want to skip ahead a little bit to something 1438 01:09:43,149 --> 01:09:45,149 on public policy. 1439 01:09:45,149 --> 01:09:46,779 And we're going to do crypto exchanges, 1440 01:09:46,779 --> 01:09:49,000 so I apologize I'm running tight on time. 1441 01:09:49,000 --> 01:09:55,030 But I want to do something that Lauren and Tom have seen. 1442 01:09:55,030 --> 01:09:56,260 Well, let me pause here. 1443 01:09:56,260 --> 01:09:57,970 This is regulatory arbitrage. 1444 01:09:57,970 --> 01:10:00,160 And Kelly, given your paper, you'll like this. 1445 01:10:00,160 --> 01:10:03,535 But this is the list of where cryptocurrency exchanges were. 1446 01:10:03,535 --> 01:10:05,350 It's from a Morgan Stanley research 1447 01:10:05,350 --> 01:10:07,390 paper earlier this year. 1448 01:10:07,390 --> 01:10:09,610 But if you can see the little slices on the left, 1449 01:10:09,610 --> 01:10:14,050 that's Malta, Belize, and Seychelles, 1450 01:10:14,050 --> 01:10:16,870 three really deep capital markets. 1451 01:10:16,870 --> 01:10:19,300 Well, not really, not really. 1452 01:10:19,300 --> 01:10:24,770 But a bunch of exchanges from South Korea, Hong Kong and Asia 1453 01:10:24,770 --> 01:10:31,090 reincorporated in Malta, the Seychelles, and Belize. 1454 01:10:31,090 --> 01:10:33,040 And so it's just there is a whole bunch 1455 01:10:33,040 --> 01:10:36,880 of regulatory arbitrage going on right now. 1456 01:10:36,880 --> 01:10:40,450 Public policy development-- this is only five minutes, 1457 01:10:40,450 --> 01:10:43,720 but I just wanted to mention how public policy actually 1458 01:10:43,720 --> 01:10:45,810 comes together. 1459 01:10:45,810 --> 01:10:49,960 And Tom, you going to help me here? 1460 01:10:49,960 --> 01:10:51,730 You got it? 1461 01:10:51,730 --> 01:10:52,782 AUDIENCE: Analysis. 1462 01:10:52,782 --> 01:10:53,740 GARY GENSLER: Analysis. 1463 01:10:53,740 --> 01:10:55,120 Tom starts with analysis. 1464 01:10:55,120 --> 01:10:57,670 Who thinks analysis is at the top of what 1465 01:10:57,670 --> 01:10:59,810 happens in public policy? 1466 01:10:59,810 --> 01:11:02,130 Any show of hands? 1467 01:11:02,130 --> 01:11:03,600 Tom, no. 1468 01:11:03,600 --> 01:11:04,560 What's number one? 1469 01:11:04,560 --> 01:11:06,850 What do you think happens first? 1470 01:11:06,850 --> 01:11:07,350 What's that? 1471 01:11:07,350 --> 01:11:08,310 AUDIENCE: Panic. 1472 01:11:08,310 --> 01:11:10,980 GARY GENSLER: Panic. 1473 01:11:10,980 --> 01:11:12,180 Public policy, huh? 1474 01:11:12,180 --> 01:11:14,460 Panic? 1475 01:11:14,460 --> 01:11:15,400 Lauren? 1476 01:11:15,400 --> 01:11:16,817 AUDIENCE: I thought this was going 1477 01:11:16,817 --> 01:11:18,660 to be a plug for your personnel as policy. 1478 01:11:18,660 --> 01:11:21,060 GARY GENSLER: Personnel as policy is going to be in here, 1479 01:11:21,060 --> 01:11:24,560 but messaging. 1480 01:11:24,560 --> 01:11:27,130 If you don't get your message right, 1481 01:11:27,130 --> 01:11:31,110 you're never going to get to your analysis. 1482 01:11:31,110 --> 01:11:35,006 But there's one other thing between messaging and analysis. 1483 01:11:35,006 --> 01:11:36,320 AUDIENCE: Coalition. 1484 01:11:36,320 --> 01:11:38,510 GARY GENSLER: Coalition building or politics. 1485 01:11:38,510 --> 01:11:40,790 So messaging-- with your messaging, 1486 01:11:40,790 --> 01:11:43,880 you can build a coalition, which is called politics. 1487 01:11:43,880 --> 01:11:45,860 And if you get your politics right, 1488 01:11:45,860 --> 01:11:49,400 you can actually get to your analysis. 1489 01:11:49,400 --> 01:11:52,730 This hierarchy, not written in textbooks, 1490 01:11:52,730 --> 01:11:58,340 comes from an old, wonderful political lawyer from Texas 1491 01:11:58,340 --> 01:12:00,057 who shared it with me some 20 years ago 1492 01:12:00,057 --> 01:12:01,140 when I went to Washington. 1493 01:12:01,140 --> 01:12:06,560 He said, young man, you know nothing about this town. 1494 01:12:06,560 --> 01:12:08,060 You don't get your message right, 1495 01:12:08,060 --> 01:12:09,620 you're not going to get to your politics. 1496 01:12:09,620 --> 01:12:11,162 If you don't get your politics right, 1497 01:12:11,162 --> 01:12:14,150 you'll never get to your analysis and your policy. 1498 01:12:14,150 --> 01:12:18,130 And that's how it's all made, kind of. 1499 01:12:18,130 --> 01:12:19,980 And so what do I mean by messaging? 1500 01:12:19,980 --> 01:12:21,920 So let's have a little bit of fun. 1501 01:12:21,920 --> 01:12:24,370 Does anybody remember this? 1502 01:12:24,370 --> 01:12:25,990 What's that? 1503 01:12:25,990 --> 01:12:27,250 What is that? 1504 01:12:27,250 --> 01:12:28,610 Messaging, right? 1505 01:12:28,610 --> 01:12:31,880 It's messaging from 2016. 1506 01:12:31,880 --> 01:12:33,740 Does anybody want to go back to 2008 1507 01:12:33,740 --> 01:12:37,460 and tell me what was the message for 2008 to have some fun? 1508 01:12:37,460 --> 01:12:39,020 AUDIENCE: Hope and change. 1509 01:12:39,020 --> 01:12:39,895 GARY GENSLER: Change. 1510 01:12:42,200 --> 01:12:44,780 AUDIENCE: Change we believe in. 1511 01:12:44,780 --> 01:12:48,710 GARY GENSLER: You want to go back to 2000? 1512 01:12:48,710 --> 01:12:49,850 Harder, harder I know. 1513 01:12:49,850 --> 01:12:52,910 It's almost-- it's not in the history books yet. 1514 01:12:52,910 --> 01:12:54,440 No? 1515 01:12:54,440 --> 01:12:57,650 Compassionate conservative. 1516 01:12:57,650 --> 01:13:00,150 That's W. He was compassionate, he 1517 01:13:00,150 --> 01:13:02,060 was conservative, but compassionate, 1518 01:13:02,060 --> 01:13:05,860 a nod to that moderate side. 1519 01:13:05,860 --> 01:13:06,860 '92? 1520 01:13:06,860 --> 01:13:11,530 This is going to be hard, huh? 1521 01:13:11,530 --> 01:13:12,930 It's the economy, stupid. 1522 01:13:15,387 --> 01:13:16,720 That's Bill Clinton, by the way. 1523 01:13:20,080 --> 01:13:21,130 It's the economy, stupid. 1524 01:13:21,130 --> 01:13:22,780 So messaging. 1525 01:13:22,780 --> 01:13:24,910 Coalition building, that just basically 1526 01:13:24,910 --> 01:13:27,500 means, unless you can really bring folks together. 1527 01:13:27,500 --> 01:13:30,190 So in the blockchain Bitcoin space, 1528 01:13:30,190 --> 01:13:34,080 right now, there's not a broad coalition. 1529 01:13:34,080 --> 01:13:36,900 It's not a deep well of people investing in blockchain 1530 01:13:36,900 --> 01:13:38,770 and Bitcoin in America. 1531 01:13:38,770 --> 01:13:41,610 But if you were to try to address yourselves 1532 01:13:41,610 --> 01:13:45,210 to legislative change or regulatory change, 1533 01:13:45,210 --> 01:13:47,610 you'd need some coalition. 1534 01:13:47,610 --> 01:13:51,180 You probably can't just be a bunch of miners, 1535 01:13:51,180 --> 01:13:56,070 or a bunch of incumbents, or startups, or crypto exchanges. 1536 01:13:56,070 --> 01:13:59,220 There would have to be some form of coalition building 1537 01:13:59,220 --> 01:14:02,710 that goes along with it. 1538 01:14:02,710 --> 01:14:04,690 Analysis does matter. 1539 01:14:04,690 --> 01:14:06,940 I'm not going to say, Tom, it doesn't matter. 1540 01:14:06,940 --> 01:14:13,160 It's just-- no, no, it's just to get to the analysis-- 1541 01:14:13,160 --> 01:14:16,210 if you are sitting down with somebody in Congress right now, 1542 01:14:16,210 --> 01:14:21,640 you probably also need, as James says, the crisis. 1543 01:14:21,640 --> 01:14:24,310 My sense is legislative bodies around the globe, 1544 01:14:24,310 --> 01:14:27,070 by and large, are not engaged in blockchain Bitcoin yet. 1545 01:14:27,070 --> 01:14:29,030 Gibraltar passed something. 1546 01:14:29,030 --> 01:14:30,370 Malta's passed something. 1547 01:14:30,370 --> 01:14:34,890 The Russian Duma, thank you, has been 1548 01:14:34,890 --> 01:14:36,990 working on something for six straight months 1549 01:14:36,990 --> 01:14:39,240 and can't come to a coalition around it. 1550 01:14:39,240 --> 01:14:41,310 Some state legislative bodies in the US 1551 01:14:41,310 --> 01:14:43,530 have passed some modest things. 1552 01:14:43,530 --> 01:14:45,840 There was a bill in Arizona actually promoted 1553 01:14:45,840 --> 01:14:49,950 to allow Bitcoin for payment of taxes. 1554 01:14:49,950 --> 01:14:52,620 It failed in committee, but it's interesting. 1555 01:14:52,620 --> 01:14:53,590 Question? 1556 01:14:53,590 --> 01:14:55,920 No. 1557 01:14:55,920 --> 01:14:57,750 And yes, Lauren, you're right. 1558 01:14:57,750 --> 01:14:59,460 Personnel is policy. 1559 01:14:59,460 --> 01:15:03,960 Ultimately, who sits in the jobs matters. 1560 01:15:03,960 --> 01:15:05,400 And I would just close on it. 1561 01:15:05,400 --> 01:15:07,650 Think of those several layers. 1562 01:15:07,650 --> 01:15:09,930 There's the political layer. 1563 01:15:09,930 --> 01:15:12,210 Those are either elected or appointed 1564 01:15:12,210 --> 01:15:13,650 by the people that are elected. 1565 01:15:13,650 --> 01:15:15,540 There's the political layer. 1566 01:15:15,540 --> 01:15:17,910 And their risk appetites are different 1567 01:15:17,910 --> 01:15:25,490 than the senior career level and the day-to-day career level. 1568 01:15:25,490 --> 01:15:27,860 And the day-to-day career level is usually 1569 01:15:27,860 --> 01:15:31,220 that person with whom we are all interfacing. 1570 01:15:31,220 --> 01:15:33,950 But as we all know, if you walk into the Department of Motor 1571 01:15:33,950 --> 01:15:36,320 Vehicles, that day-to-day person, 1572 01:15:36,320 --> 01:15:40,220 that bureaucrat really has a very narrow range 1573 01:15:40,220 --> 01:15:42,790 of decision making. 1574 01:15:42,790 --> 01:15:47,550 The senior career person who's in their 40s or 50s has 1575 01:15:47,550 --> 01:15:53,730 a broader range of decision making, but also 1576 01:15:53,730 --> 01:15:58,830 always remember they live in a world of asymmetric risk. 1577 01:15:58,830 --> 01:16:01,830 There's not much upside to saying yes 1578 01:16:01,830 --> 01:16:06,180 to something new, and funky, and hard, and difficult, 1579 01:16:06,180 --> 01:16:09,450 but they could be getting a host of downside risk 1580 01:16:09,450 --> 01:16:11,820 if it blows up on their watch. 1581 01:16:11,820 --> 01:16:14,010 So there's asymmetric risk. 1582 01:16:14,010 --> 01:16:17,580 And Bitcoin and blockchain gives that. 1583 01:16:17,580 --> 01:16:20,220 So that's everything. 1584 01:16:20,220 --> 01:16:24,180 Thursday is permissioned versus permissionless systems. 1585 01:16:24,180 --> 01:16:26,310 So we'll dive into some of that. 1586 01:16:26,310 --> 01:16:30,570 If you've got more questions on public policy, just ask. 1587 01:16:30,570 --> 01:16:33,240 We'll be talking about the rest of the semester. 1588 01:16:33,240 --> 01:16:37,770 And the conclusions, basically, are public policy matters. 1589 01:16:37,770 --> 01:16:38,910 Thank you. 1590 01:16:38,910 --> 01:16:43,160 [APPLAUSE]