1. Introduction for 15.S12 Blockchain and Money, Fall 2018

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visit MIT OpenCourseWare at ocw.mit.edu. GARY GENSLER: Welcome, welcome. If you have a desire to learn
a little bit about blockchain and its intersection with the
world of finance and money and you're looking for 15.S12,
you're in the right place. If you're here to
not do that and just hang out and have a good time,
I guess you still hopefully are in the right
place, because we're going to have a good
time this semester. My name is Gary Gensler. I'm a Senior Lecturer
here at MIT Sloan. I'm also an advisor over
at the MIT Media Lab. And I've spent a lifetime
around the world of finance, and money, and public policy.

And I've been at MIT
this last eight months. And we're going to
learn a lot together about blockchain and money. We're going to have
a little bit of fun here and see what
we're going to do. So we're talking about
blockchain and money. That's where we are. By the way, I do cold call. I do call on you– so if
you want to leave now, I understand– because I want to have an
interaction a little bit about it. So my first question
for the class, for everyone, whether registered
or not, how many of you have ever owned
a cryptocurrency? Wait, wait, let's see. It seems like it's
about 45% of you or so. All right, so it gives me– Alin you want to keep
your hand up long? And how many of you
have ever worked on any blockchain-related
projects, in an entrepreneurial setting,
a corporate setting, anywhere? All right, good, so about
a third in the room. All right, so you all know
probably more than I do, but I'm going to give it a shot.

I'm going to always start every
week with what are the study questions for the week. How many of you actually
got the syllabus? This is not going to
be graded assignment. I just have to
have a sense of who actually got this syllabus–
so a good many of you. And how many of you actually
did the two readings? It's not graded. I've just got to
gauge the class. Oh, thank you, thank you. Write those grades
down, by the way– [LAUGHTER] –no, no. All right, so the
two main questions for this week's lecture
really is, what is blockchain? And why might it be a catalyst? And I emphasize the word "might"
it be a catalyst for change in the world of finance.

We could talk a lot
about things outside of the world of finance. And blockchain may indeed have
a lot of applications outside of finance, but
I've chosen to try to just narrow the scope a bit. So this semester is really
about blockchain and money or blockchain and finance. And secondly, you
will see index cards on every one of
these round tables. One assignment, by
the end of the class– you could do it now or later– I would like each of
you to anonymously write on the card what you want
to achieve in this semester. It could be anything
from this class, from learning about blockchain,
from making money on Bitcoin, from– I don't care if you tell me
it's meeting your future spouse.

Like, what do you want
to achieve in this class? I can't help you
on the third, but I will try to help you on the
things I can help you on. And Sabrina and Talida
will collect them later. And next Tuesday, we'll
tell you the results. What is it that you want
to achieve in this class? And then we'll see at
the end of the semester if we've done that. So it's just a way to
help guide me help you. So that's what
we're trying to do. And so what were
the two readings? One was a little thing I did. And one was a thing I did
with some of my colleagues. And Tom, since I know
you, what did you take out of the readings? AUDIENCE: That blockchain
is essential to improved profitability [INAUDIBLE].

have a good summer? AUDIENCE: Mhm. GARY GENSLER: Did
you raise your hand? Did you own Bitcoin? No. Who in the class
read the readings and took something
different than Tom? He said there was potential. And your first name? AUDIENCE: Alin. GARY GENSLER: Alin. AUDIENCE: Well, I'm coming
from the technical side. So from the technical side,
all I see is a bunch of hype. And 10 years have passed
since the launch of Bitcoin with very little to show
for it other than hype.

many agreed with Alin? This isn't a vote. No, just two or three. How many agreed with Tom? There is more. And how many of you are
too shy on the first day to put your hands up? Most. So I'm going to start and
go back– the internet. How do I sort of– I've come about this and
of thought about, well, what is blockchain? What is it really about? Well, the internet started many
decades ago, before most of you were born, but 1974-ish. I mean, there is
some predecessors even from the late '60s, the
ethernet, which is really how two computers communicate. And then you had
TCP/IP, which was really the internet protocol of
multiple computers compute– talking to each other.

And then later on in 1990,
how do we move forward? Does anybody know what HTTP is? We're at MIT. Your first name
would be helpful. AUDIENCE: Eric. GARY GENSLER: Eric. AUDIENCE: It's a protocol
for communicate web content. GARY GENSLER: Web content. AUDIENCE: It's Hypertext
Transport Protocol. GARY GENSLER: Right,
do You know who is associated with the invention? AUDIENCE: I don't
remember right now. GARY GENSLER: Anybody else? Anybody know who– it's not
in the readings, or anything, Tim Berners-Lee? Anybody know who is
associated with TCP/IP? AUDIENCE: Was the company
initiated by MIT faculty, I think, [INAUDIBLE]
or something? GARY GENSLER: I don't know if
it was a company associated with MIT, but Vint Cerf may have
had some association with MIT. So these are the
first three layers. And then there were companies,
commercialization, 3Com and Cisco.

And of course, Amazon
is still around today. But there was something
else going on. How do we commercialize
the internet? Does anybody know what
this scene is from? AUDIENCE: This is the first
pizza sold by Bitcoin. GARY GENSLER: Good
thought, good thought, first pizza sold
by Bitcoin, but no. AUDIENCE: Is it from that
movie Hackers or something? GARY GENSLER: All
right, movie Hackers. AUDIENCE: I think it's from Net. GARY GENSLER: The Net? Have you ever seen the movie? It's not a good movie. So this is the opening
scene of The Net. And yes, that's Sandra Bullock. And the year is 1995. It's a cyber thriller. You know, a
president's involved. The Defense Department's
involved, and so forth. But actually, Pizza
Hut is associated with the very first sale, online
sale anywhere in the world. They started something
called PizzaNet.

This was the screen, by the way. If you wanted to go on,
you could order your pizza. But there was one problem. Does anybody know what the
problem was with PizzaNet? I mean, maybe there
were multiple problems. No, Alin I've called on you. AUDIENCE: You
couldn't pay online. GARY GENSLER: You
couldn't pay online. Nobody had figured out
how to move money online. You had to pay when you
showed up with the pizza. So now I'm going to talk a
little bit about cryptography. We're going to spend a lot
of time on cryptography. It's cryptocurrencies
and the like. What's your name? AUDIENCE: Jihee. GARY GENSLER: Gigi? AUDIENCE: Jihee. GARY GENSLER: Jihee. Jihee, what's cryptography? AUDIENCE: I would assume that
that's something cryptic? GARY GENSLER: Cryptic,
all right, no, you got it. You've got a start there.

Anybody want to help Jihee out? Does anybody want
to help Jihee out? Yeah, tell me your first name. We're going to figure
out how to have everybody have nameplates by next week,
but we'll work with Ryan and do it that way. AUDIENCE: Addy GARY GENSLER: Addy AUDIENCE: Yeah– it's the
technology or the science behind encryption and decryption
for fortification, so how do you encrypt a
particular text such that it's not readable
by someone else without having the
decryption code. GARY GENSLER: OK, so it's
how do you encrypt something so it's not
detectable by others.

Or in essence,
it's communications in the presence of adversaries. You have an adversary who
wants the communication. You want to communicate and
not let your adversaries know that communication. And this is true
for ancient times. So in ancient times, there was
something called the cipher. And this was a way that
you'd take a piece of leather or a piece of cloth and
have a lot of letters. And both sides, you'd
encrypt and decrypt, because they were different
measurements of the cylinder. Has anybody seen the
movie Imitation Games? AUDIENCE: Mhm. GARY GENSLER: All, right
the Enigma machine– now the movie was
wonderful, because it said Turing cracked it.

And he did help crack
it in an automated way, but actually, the
Polish government had cracked it in
the 1930s before they fell to the Germans. And Turing built on all of
that and cracked it further. And then in the 1970s– and this was here at
MIT, to some extent– there is private-key
public-key cryptography, which I'm not going
to dive into today, but it's the heart of
Bitcoin and blockchain. It's at the heart
of the internet.

But it's about–
the key thing is communications and the
presence of adversaries. How do you keep a secret
when everybody wants in and get that information? And there is a long history. And MIT is at the
center of a lot of that. A lot of early cryptography
failed on the internet. In the early '90s and late
'80s, David Chaum and others tried to do things. And we're not going
to debate these today, but you will have one reading– I think it's either next week– which will give
you that history.

And it's worthwhile knowing
about the history of failure. But cryptography is the reason
why the internet works today. Does anybody want to tell
me what SSL and TLS is? Do we have any
computer scientists? And remind me your first name? AUDIENCE: Eric. GARY GENSLER: Eric. AUDIENCE: That's
the protocol that mounts on top of
the TCP/IP stack to provide encryption using
asymmetric case, which is public-infrastructure
cryptography. It's secure socket
so it basically uses asymmetric
cryptography, which we're going to talk about
two lectures from now, but it secures the
whole internet. So all of a sudden you
could deliver the pizza and get a pass code. And I have to tell you,
I never knew how this worked before I was at MIT.

So PayPal came along in 1998. I mentioned this. A whole bunch of other
digital currencies then failed, but some of these
people who we'll read later– like, we'll read Nick Szabo's
is a piece on smart contracts later, Adam Back who
created Hashcash. Some of these innovations were
what Satoshi Nakamoto later used. Some innovations which were
really helpful and worked were Alipay and M-Pesa. Does anybody know
what M-Pesa is? AUDIENCE: I think it's
used in Kenya as, like, mobile cellular-enabled cash. GARY GENSLER: Right. In essence, they
found out in Kenya– this was 10, 12 years
ago– that people were trading mobile minutes. They were unbanked, but
they had cellular phones. And they were trading their
minutes as a form of currency.

And Safaricom realized
that and said, wait, we could help people be
part of the digital economy, even if they're unbanked. And in Africa today, a half
of the adult population, according to World Bank
figures, is still unbanked, but half of that half
has mobile phones. M-Pesa has 20 million
customers in Kenya right now. So it's a form of
money that's kind of swapping mobile minutes. But the riddle remained, how do
you move money on the internet? Or in essence how,
do you move value peer to peer without a
centralized intermediary? And that's the core of
blockchain technology. So who solved the riddle? Is anybody going to tell
me who solved the riddle? Who solved this riddle? No, [INAUDIBLE]. You're wearing a t-shirt
that says Quentin Tarantino. So I think Quentin Tarantino– AUDIENCE: [INAUDIBLE] GARY GENSLER: –should
solve a riddle.

What's that? What's your name? AUDIENCE: Rufus. GARY GENSLER: Rufus– and
who solved this riddle? AUDIENCE: Satoshi Nakamoto. GARY GENSLER: Yeah. So a peer-to-peer cash– this is the actual
doc top of an email that was sent out on Halloween
2008 by Satoshi Nakamoto. We don't actually know
who Satoshi Nakamoto is, but it's a study question
a few lectures from now to ask you to tell me who you
think Satoshi Nakamoto is. So I won't ask that now. And he started with a very
simple sentence in his email. "I've been working on
a new electronic cash system that's fully peer-to-peer
with no trusted third party. It's kind of a modest statement. And so the question is, is
this another internet layer? We're going to explore
that this whole semester. I don't really have the answer. I don't think the best minds at
MIT could really yet tell you.

There are some
who are maximalist and say, yes, it will be. And there are others who
will say, no, no, no. And in this course, we're
going to review the minimalist and the maximalist. We're not going to try to
center it in one place. But that's the key
kind of question. So what is a blockchain? We're going to do this
and a lot of lectures, but I'm going to try to
do it in a short version. So it's time-stamped
append logs, meaning you can add a little
bit of information to this. And it's time-stamped. So these are these
blocks being added. Satoshi did not
invent blockchain. It was way earlier.

Does anybody want to
guess when it was? You're going to have
a reading about this later, but early 1990s. AUDIENCE: Stuart Haber. GARY GENSLER:
What's that, Madars? AUDIENCE: Stuart Haber. GARY GENSLER: Stuart
Haber, Stuart Haber– worked for Bell Labs, right? So one of your
assignments– it's not going to be a
graded assignment. It's just going to
be a fun assignment. Could any of you, I'm going
to say by next Thursday, just because, have some
fun, find the longest, and time wise,
longest-running blockchain. It's not Bitcoin. And it's been running
since the mid '90s. And your clue is
The New York Times. And we'll discuss
it next Thursday. But this time-stamped block,
block, block, block of data creates a database,
an auditable database. And we'll talk about ledgers,
particularly next week, but we'll talk about ledgers
all throughout this course, and how it changes
the world of finance. Now, it's secured
by cryptography, because cryptography,
remember, is communications and making sure adversaries
can't pick you off. We're going to learn
about hash functions.

And hash functions are a really
important part of cryptography, and initially for databases,
and how to search and store information in databases,
but in this circumstance, hash functions were the way to
not only append the next block to the prior blocks, but really
importantly, to compress data, to make it more manipulable,
and to verify it, and as I've written here, tamper
resistance and the integrity. Digital signatures,
which has to do the public-key
private-key cryptography– there is no prerequisite
to this course. You do not had to have
taken computer science, cryptography, algorithms. If I can learn a little
bit about hash functions and asymmetric cryptography,
these are the two key important sides. And we have enough
computer scientists in this room that can sort us
out if I say the wrong thing. Right, Madars? Hopefully. And then consensus– so there
is a really important part of blockchain is,
how do you decide who appends that next block? Because when I went back here,
there is block and block. Each of these blocks, somebody
has to decide who appends, who gets to pick the next block.

And that's what's called
consensus protocol. And there is wide debates
about consensus protocol. And we'll talk a lot
about consensus protocol. But in essence, it
addresses something, a term called the cost of trust. And we'll talk about
Byzantine Generals problems, which is another reading. The Byzantine Generals
problem was laid out as a sort of
mathematical game theory issue some 30-ish years ago. That's what Satoshi
Nakamoto solved was this last part, the
Byzantine Generals problem. Pizza for Bitcoins– a year and
a half after Satoshi Nakamoto laid out blockchain and
Bitcoin, somebody sent an email. And you'll get these slides. But this is the
real, live email. I'll pay you 10,000 Bitcoins
for a couple of pizzas. I just want some pizzas. The guy who sent this, he
says, I like onions, peppers, sausage, mushrooms– Laszlo. Now, catch the date. This is May 18. And he's offering
10,000 Bitcoins of 2010. But the key line
is, what I'm aiming for is getting food delivered
in exchange for Bitcoins. Nobody had used Bitcoins
as a medium of exchange.

16 months into its
existence, nobody had used it to buy something. And Laszlo is a computer
scientist in Florida who was just kind of interested. And he put this ad
on an email list. Three days later, he still
doesn't have his two pizzas. So nobody wants
to buy me a pizza? Is the Bitcoin amount
I'm offering too low? Another day goes by. He gets his pizzas. And he posts pictures. So here is a picture
of his child reaching for those Papa John's pizzas. Anybody know what those 10,000
Bitcoins were worth back in– back then? Chicago. AUDIENCE: I know what
they're worth now. GARY GENSLER: Anybody
want to say back then? AUDIENCE: [INAUDIBLE] GARY GENSLER: What's that? AUDIENCE: [INAUDIBLE] GARY GENSLER: $41. And Laszlo was
saying, two pizzas are probably worth $25 to $30,
because there was a whole email thread.

He kept saying, why won't
anybody get me my pizzas? You can make money on this. Today or earlier, late
last night, $66 million. Yeah, so it's kind
of a cute story. May 22 every year is called
Pizza Day or Bitcoin Pizza Day or something. So what is blockchain
technology? These are my words but
they're sort of picked from the literature
and so forth. It verifiably moves data
on a decentralized network. And the economics of
blockchain technology are really around
that, verification, and the economics
of verification, and the economics of networking. And in many ways, blockchain
adds certain costs to the verification through
this consensus protocol that we'll be studying, but
it lowers some other costs of verification, because
you're not relying on a centralized authority. So it's really a trade off
of cost to verification. I don't think it's– I'm not a purist that
says it's better or worse, but it's a trade off of
cost and verification through decentralized networks.

The data can be value. Like, Bitcoin was
a money system. Or the data can be
actually computer code. And we'll learn a lot
about smart contracts. And you could have the
data being verified computer code and algorithms. My world, finance,
this directly goes to the plumbing of
finance, because finance is fundamentally about
moving money and risk through a network. And that network is
the 7 billion people that live in this world. It's moving money and risk.

And you've all taken
finance courses. Or many of you have. And it's the intermediation
of money and risk throughout our economy. But there is a whole
host of challenges. And over the course
of this semester, we'll talk about those
challenges, technical, commercial, and
public policy hurdles. Will they be solved? Will they not be solved? But it could be a catalyst– but we're not sure yet– for a change in the world
of money and finance. So does anybody want to tell
me that the role of money in society? And tell me your first name. AUDIENCE: Thomas. GARY GENSLER: Thomas. AUDIENCE: Basically it's a way
exchange things and services between people– GARY GENSLER: All right, medium
of exchange, got that one. AUDIENCE: –without
doing bartering, I mean. Exchange [INAUDIBLE]. GARY GENSLER: So a
medium of exchange. Somebody give me a second– yellow shirt. AUDIENCE: Yeah,
medium of savings. GARY GENSLER:
Savings, all right, so that would be
a store of value. AUDIENCE: Yeah. GARY GENSLER: Third– I'm sorry, the gentleman here. AUDIENCE: Unit of account. GARY GENSLER: Unit of account– wow, all right, there we go.

There we go. So we're going to spend
some time next Tuesday talking more about money,
and the role of money, in the history of money,
which I think it sort of lays a foundational piece of this. What about the role of finance? I've already sort of said
a few things about that. And I'm sorry. I don't know your name, but
right here, the woman, yeah– role of finance? It's all right, I'm not going
to tell any financial finance professor what your answer is.

AUDIENCE: To raise money. GARY GENSLER: To raise money– so keep going. Anybody else want to– AUDIENCE: Connect
savers and borrowers. GARY GENSLER: Connect
savers and borrowers– so connecting is sort
of moving money, moving. AUDIENCE: The valuations. GARY GENSLER: Valuations–
so that's the pieces of it. So there is moving,
making valuations. I use the words, moving,
allocating, and pricing. Pricing is the
valuations of money. But let's not forget,
it's also about risk. When you buy insurance,
that's a transference of risk. When you buy an equity stock,
that's a transference of risk. If you enter into a complex
credit default swap, that's a transference of risk. So finance is not just
the movement of money. It's the movement of risk as
well, throughout the economy. And I always think,
finance, I always– I've thought this when I was
at Goldman Sachs for 18 years– that finance sits at the
neck of an hourglass.

And it's why it collects so much
economic rents from society, because when you sit at the neck
of an hourglass and billions, literally trillions of
grains of sand go by, if you collect some of
those grains of sand, you get uber wealth. And that's– those
are for other classes. But finance can collect
a lot of economic rents. The financial sector, though,
has a bunch of challenges. We'll have one lecture
later in the semester about some of those challenges. And we have a reading. I think Sheila Bair
wrote something recently that I asked you all to
read later in the semester. But we will talk about the
financial crisis and some of the problems. But it's had a lot of crises. Fiat currencies have a lot
of instabilities, of course. We have centralized
intermediaries, as I laid out. And we'll talk about collect
a lot of economic rents.

So there is opportunity. Blockchain has real
opportunity to kind of come under this world of finance and
maybe do some things better. Central banking, I
also have a bunch of legacy payment systems. And those legacy payment
systems are slowly adapting, but it's slow. And why did Alipay do so well
in China is part of this story, because there were so
many unbanked, just like M-Pesa in Kenya. But here in the US, we
still pay 2.5% to 3% for our interchange charges for
Visa, MasterCard, and the like. And a lot of clearing
and settlement still has a lot of
counterparty risk. And one that I
care deeply about, financial inclusion– there
is still 1.7 billion people in this world who are unbanked. And so we don't think of
it as much in the developed countries, but it's certainly
true in many products even here in the US. And these are, to me,
the opportunities. Finance is 7.5%
of the US economy. That's $1.5 trillion
of revenues. So any of you that
are thinking about entrepreneurial opportunities,
the payment system just here in the US is a
0.5% to 1% of our economy.

That's $100 billion to
$200 billion of revenues. I think Visa is
about $18 billion. But you know, when you add
up the whole payment system, that's $100 billion to $200
billion in payment revenues. So that's kind of
the opportunity. Can blockchain
technology come in? It's got problems. It's slow. It has performance issues still. But can it compete with that? Here are some of the
problems, the financial sector would say, with blockchain. These are real, live
things that we're going to study later in the semester. They say, it doesn't have
the performance, scalability. A modern payment
system, you need to be able to move about
100,000 payments a second. A modern securities clearing,
the Depository Trust Corporation, the Securities
and Exchange Commission says, you do about 30,000
transactions a second, but we need you to scale.

And your computers
and everything have to be resilient to
100,000 transactions a second. Bitcoin, you can do about
seven transactions a second. Visa currently– it
depends on the second– does anywhere from 20,000
to 70,000 a second. So it's just a sense of
scalability and performance. We might get there. It might be three
to seven years away. I'm optimistic,
but there is still a bunch of performance
and scalability issues. Privacy and security–
blockchains, by their nature, are public. So they're not fully
censorship-resistant, but there is a lot of innovation
about making them more private.

But then that makes the public
sector a little nervous. Interoperability–
they don't necessarily work yet with other legacy
systems or with each other. The internet, one of the great
innovations of the internet, it became interoperable, that
all of these different websites could kind of speak
with each other. Governance is a very big
issue we'll talk about. And one of the things
about governance is, it's hard to update the
software of a blockchain, because if you create
a decentralized where no one's in control, no one
can collect economic rents, you also don't have sort of
somebody with the ability to necessarily
update the software.

And we'll talk later about how
Bitcoin updates its software, and what Bitcoin core
developers are, and so forth. But Facebook, you do know
one thing– though they're a company that collects
a lot of profits and economic rents off of
their two billion members, they know how to
update their software. It's a governance issue
that's a real, live challenge. And that's why the
financial sector says, I'm not sure this works,
this is ready yet for me. And then thus, what are
the commercial use cases? And what are the
public policy issues? So right now, the
financial sector favors permissioned blockchains
versus permissionless. About four weeks
from now, we'll kind go through these
two differences, but I want to just
frame this briefly. Permissioned blockchains
have a known group of people who actually participate.

The half of you that said
you've owned Bitcoin, you know it to be
something where anybody can update the ledger. Permissioned blockchains, you
can't do that, in essence. You pick the 3 or 20. The Australian Stock Exchange
is updating their clearing and settling. They announced they're
doing a blockchain project. They're doing it
with digital assets. And they're using the
Hyperledger blockchain, which is an IBM software,
open-source software. But the Australian
Stock Exchange is going to put it on
three computers, which is called three nodes, that
they control all three of them. The Depository
Trust Corporation is looking at blockchain-inspired
solutions for some of their data warehouses,
but they, too, are going to control the nodes. I'm just giving you– that's
permissioned blockchain. So there is nothing
wrong with that. That's just how they
are looking at this. Permissionless
blockchains are like Bitcoin, unknown
participants, securities based on incentives, a
cryptocurrency, and crypto economics.

Crypto finance is
about $200 billion. But you know, you have to
update these slides daily. Two days ago, it
was $230 billion. And this little pie chart is–
a little over half is Bitcoin. The next slice is something
called Ethereum, and then Ripple, and down the line. We're not going to spend a
lot of time in this semester– if your goal is to
how can you profit, and day trade Bitcoin, and
day trade Ether, god bless.

Go prosper. You can stay in the class. I just won't give you
much advice on it. This is not a
crypto-investing-centered class. But I'm OK if that's
what you're doing. Does anybody know what the
worldwide capital market size is? Does anybody want to guess? You know, this is $200 billion. What's it look like? I've already said it's modest. AUDIENCE: Hundreds of trillions. GARY GENSLER: Hundreds of
trillions– global equity, about $80 trillion,
global bond and debt markets, $250 trillion,
so it's still quite modest compared to that broad
breadth of capital formation. And gold? If Bitcoin is digital gold,
what's the value of gold? All the gold that's ever been– Tom? AUDIENCE: About
$6 or $7 trillion. GARY GENSLER:
Yeah, $7 trillion– so just to give you
a sense of scale. So there is also something
that's interesting about this space, is that it's
outsized public attention, even as evidenced by the
hundred of you in this room, versus the size it is relative
to the capital markets today.

There is a bunch of
public policy issues. We'll have a lecture. I'm a former regulator. I ran the Commodity
Futures Trading Commission. But this course is
not about regulation, though we have to always
come back to regulation. We always have to
infuse what we're doing with the regulation. But let me just give
you a little framework. And then you'll have to be
bored in a handful of weeks and read– I gave some congressional
testimony on it. Yes, it will be
required reading, sorry. But it's guarding
against illicit activity. A lot of Bitcoin
and cryptocurrencies started out in the
cyber punk sort of movement and libertarian
movement, so forth. And it is true. You can use this for illicit
activity, absolutely. But I would say,
crime is not new, just the mechanisms
and means are new. And so the criminals,
yes, will use this and have used it for
illicit activity. Financial stability– central
bankers around the globe, sort of will this shake finance? Well, it's only $200 billion. The financial markets
are $300 trillion plus– not yet, is generally
what they're saying. But for some
countries, it's a way to get around capital controls.

And so for those countries
worried about capital controls, it's a very real and
live set of issues. And then protecting
the investing public– and when we do this
in a few weeks, I'll go through each of
these, the investor protection issues, and yes, the SEC,
how we test, and the like. For those who wish to do their
own initial coin offering, I'll give some broad
sense of what the SEC is trying to accomplish.

But it's a moving target. So this is a very
interesting thing. As opposed to many of
your Sloan classes, or your C cell classes,
or Media Lab classes, this is a very unsettled
area of public policy. So it makes it interesting. And if you all go off
and form companies, you will actually
be helping sort of set the edge of that
public policy debate. I would always say,
just remember poet Riley, the duck test. This is a poet,
Indiana poet– so those that aren't from the US
might not know the duck test. But basically, if it
quacks like a duck and it walks like a
duck, it's a duck. So whenever you're thinking
about public policy, folks like myself who once
was a regulator, we think in the duck test. And then we secondarily
think about the actual words in the congressional act.

Where is the common sense? And if it quacks and
walks like a duck, it's probably a security. Or it's probably this or that. The incumbents, like this
lioness in the corner, are eyeing this space, because
there is a lot of volatility. And Wall Street makes
money on volatility. Volatility is the
friend of Wall Street. It may not be the
friend of investors, but it's a friend
of Wall Street. And they also like the trading
volumes and the spreads. Coinbase, the largest crypto
exchange here in the US, has 20 million accounts.

They might not all
be active, but that's the size of Fidelity's
membership or account list and twice DE Shaw. And Robin Hood– how many
of you have ever used Robinhood as a trading app? Wow, half of you. So you know, free trading,
five million members– for those who don't know,
you can download Robinhood. And you can trade stocks
for free, no commission. And if anybody is
interested, show up and I'll do office hours on
how Robinhood commercializes– they commercialize
your order flow. And they make money without
charging you commissions. But it's a sort
of wonderful app. Millennials love it, 5
million members already. So you better believe DE
Shaw and the incumbents are worried about
things like that.

The startups are also more
willing to beg for forgiveness from regulators. They're willing to sort of take
risks and beg for forgiveness, whereas incumbents tend to
have to ask for permission. So there is an unlevel
field, that always, it's asymmetric business set of
risk about regulatory risk– not always. I'm not crying for JP Morgan. I mean, the big incumbents
have also– they have their advantages. And Coinbase is becoming
an incumbent rather than just a startup, in a sense. And we'll talk
during the semester about some of the incumbents. We're probably going to get Jeff
Sprechers here in mid-November. He's going to talk to you about
what Intercontinental Exchange and the New York Stock Exchange
is doing with Starbucks, and Microsoft, and the like.

The financial sector use cases– I'm not going to
go through these, but this is the second half
of the course, is going to go through each of these. And we'll do one to two sessions
on each, payment systems, central bank digital currency,
secondary market trading. The venture capital and
initial coin offering space, we'll do two course on
that, and move through. So what are we going to
do in this whole course? Basically, our goal is to
learn the fundamentals– that's about roughly the
first half of the course– pivot to two sessions
on the economics. We're going to be talking
about the economics throughout the
whole course, but I want to really just focus,
drill down on the economics, on two of the discussions. And then riff through
the financial space for the second half– that's our journey together. To me, it's for anybody
who wants to gain critical reasoning skills. This is not just
kind of a, hey, this is going to change the world and
revolutionize everything class.

And so I basically think of
an old Defense Department term called ground truths. It's when the general doesn't
really know what's going on but needs to figure it out and
needs to talk to that corporal on the ground who has
got dirt all over him and has been shot up and says,
here is the real ground truth. We're going to try to talk about
ground truths in this class and separate the mere
assertion from the hype. And some of your readings
will be some real Bitcoin and blockchain minimalists,
from Nouriel Roubini that uses words I'm not
supposed to repeat on a recording about this
stuff, to Paul Krugman who– and Joe Stiglitz, and other
Nobel laureates who say, no, it's not going to work, or
Warren Buffett, to maximalists.

We're going to try
to cover both sides. Larry Lessig is
honoring me because he's in the back of the class– who is an enormously esteemed
professor from Harvard. I didn't know Larry
was going to be here. And I did this slide before. But in 1999, I think, you
wrote this book, Larry. Is that right? AUDIENCE: [INAUDIBLE] GARY GENSLER: Code and
Other Laws of Cyberspace, I put you in the– but I think it's worthwhile to
think about Larry's four bits here. And I don't know, Larry, if
you want to say anything, but I'm going to try to infuse
this course in just how you think about this.

The tech– we're at MIT. The technology– and we're going
to get you a lot of technology. If you want more than I can
give you as a former finance sort of type my
whole life, there is going to be a bunch
of computer science people in the class. We're going to hook
you up together with the folks from the
Media Lab and C cell and try to connect you
to the technology side if you want to swim
deeper in that pond. But the technology
really, really matters. And that's why we are going
to go through hash functions, and go through asymmetric
cryptography, and so forth. From a business
perspective, markets matter. Why is it that incumbents
or startups are or are not doing this and that? Why is it 10 years
in and nobody has got an enterprise-wide
solution yet to payments that use blockchain? The law matters.

The public policy side matters. And the fourth of Larry's
layout, social norms– that's a little harder
for me to teach. That's not what
this class is about. But it is also a flex all this. It's not just the technology,
and the markets, and the law. So it's not just a
three-legged stool. It's kind of a
four-legged stool. How did I do Larry? AUDIENCE: Excellent, all right. GARY GENSLER: I
really didn't know Larry was going to be here. But I wanted to give you a
framework for how your faculty member thinks. And we'll be on this
journey together. Range of perspectives–
we're not going to be a Bitcoin
minimalist or maximalist. I'm probably, to be
self-disclosed here, a little bit center
minimalist on Bitcoin. Smart contract
minimalist, maximalist, I'm probably pretty center.

Larry is probably a little
bit center maximalist, I'm guessing. AUDIENCE: I'm hoping I
can be, but you're going to teach me whether I can. GARY GENSLER: Oh, so you're
still center or center minimalist on smart contracts? And then blockchain
maximalist or minimalist– I'd say a few weeks ago, I
was kind of center maximalist. And I'm sort of skipping
back to the middle. Permissioned blockchain,
I'm a little bit more– and there is some in here. Alin who is one of
your Sloan cohort that you might know, six
months ago when we met was working on a
permissionless system. And now you're working
on a permissioned system. You have a startup. AUDIENCE: That is correct. GARY GENSLER: Yeah,
because you bounce up into the market realities.

And we're going to talk
a lot in this course about critical
thinking, about when do you really need the advantage
of a decentralized peer-to-peer system where the costs of
trust are such that that's the right way to go. But I am one who thinks
that there is also so much economic rents in the financial
system that $1.5 of revenues, or 7.5% of our economy,
or just $200 billion in the payment
systems, for instance, that there may be times
that you don't really need a decentralized
system, but it just might be your
opportunity to tuck in underneath all of those
economic rents and all those revenues. Now, incumbents will react. You poke an incumbent,
commercially poke them, I mean, and they're going to react. And that's why I think
blockchain may well be a catalyst for change,
even if incumbents then adopt a lot of that inside.

The requirements of the course– class participation
is a hard thing to judge as a faculty member
when I have this many people. But I always think class
participation matters. We made it 30%, which
if you have any advice on this next semester– 30% two individual write
ups, one in the first half, which is up to, I think,
lecture 10, which is basically the blockchain fundamentals. You pick a topic. I don't care which one, but
you'll get a much better grade if it's about
critical reasoning, if it's really taking whatever
those sets of writings are and not just repeating that
which is in the readings, but really going the
next step and saying, here is what's going on.

And this isn't business school. You don't have to convince me
that something about computer science. It's like critical
reasoning about the economic opportunities, the
strengths, the weaknesses, the opportunities, the threats,
that old business school sort saying of swats with
regard to that week's– whether it's about hash
functions early on, cryptography, or
you sort of wait during the foundational
period to permissioned versus permissionless. You pick– but to please hand it
in before that class' lecture, because I might during the
lecture say, who wrote today? Do you want to tell
us what you think? And it might help spur
the class participation– and then a second write
up in the second half when we're riffing
through the use cases, again, critical reasoning.

And then lastly,
the usual approach of teams of up to four– no, I don't want teams of
five, to handle that right now, three or four. And somewhere in the second
half of this semester, we'll talk about
more of the content. And there is a
couple of you in here that worked with me last
semester in a smaller group. You know, I want you to do well
so I'm going to sort of give you a sense of what do we want
to do, but it's basically, the idea is, you're
an entrepreneur or you're an incumbent. And what sort of use case
are you going to pick? And whether it's permissioned
or permissionless, sort of make a proposal.

Do a use case. Use your critical reasoning
around this new technology somewhere in the broad
world of finance. I mean, you know, and I'm glad
to define finance really broad. You'll pick. So that's kind of the piece. Act one are the fundamentals. I won't go through each of
the pieces, but you know, that's in the
syllabus, of course. Act two is the pivot
of the economics, and act three, our
financial sector use cases. And hopefully throughout,
we'll have a lot of fun. So the study questions for
next Tuesday, real quick, what are the roles and
characteristics of money? So I really want to sort
of dig behind money. Money is but a social construct
or a social convention, medium of exchange, a store
of value, unit of account.

There is some readings
about the debate, whether money first came
from the barter system, or a really good set
of anthropologists and archaeologists
and everything say, no, it actually
came as a ledger system. And no one knows for sure
10,000 and 15,000 years ago whether money
came from the– out of the barter system or
more as a unit of account, keeping account of
credits and ledger. But I'd say, when you read
through some of those readings, you start to think, well, this
is just a societal construct. And so we'll get behind that. What is fiat currency? Fiat currency, which is an
invention, really, only of the last few hundreds years
that we take for granted now. But how does that fit
into that whole history? And importantly,
how do ledgers– accounting ledgers,
I know, boring stuff, but it's probably
why we came out of the dark ages about
500 or 600 years ago with double-entry bookkeeping.

Sorry, I like ledgers. We'll talk a little
bit about ledgers and how that fits into
money, and securities, and so forth, and then
layering in how Bitcoin fits on top of that history. Next Tuesday is not
deeply about Bitcoin. It's just a little
dollop on that. There will be five
or six readings. One of them is a three-minute
video, the third one. It's fun. Watch. It's just a funny little
video on what money is. There is no need to read
Nakamoto's full paper. When I said the email, I
mean just the cover email. It's one paragraph. My goal in the readings
each week was not– and each session
was, by and large, try to keep less than 50 pages.

You say, you're going to
look sometimes and you'll go, it looks like it's more. And maybe it is. I figure you're all
going to figure out for yourself how to sort through
the depth of your knowledge. But I will predict that some of
you, maybe as much as a quarter or a third of you, are going to
go down a rabbit hole one day. And you're going to be doing
blockchain for the next 48 hours. And you won't know
where the time went, because it is an addiction at
some point that some of you will get, because there
is this curious notion.

I'm not predicting that
infirmity for all of you. I'm just saying some of you
will have that happen to you. So occasionally I
have readings just– what, Alin it's happened to you? AUDIENCE: I think so. GARY GENSLER: Let
me just conclude and then take any other
questions and lay it up there. Blockchain I think does provide
a peer-to-peer alternative. I hope, Larry, I'll
be able to convince. It does provide– and that
peer-to-peer alternative addresses cost of trust.

It doesn't mean it's the only
way to address cost of trust, but it addresses cost of trust. The financial sector
does have challenges, not just that it has 7.5%
of our economy in the US and similar ratios
around the globe, but resilience, how
it survives shocks. The financial crisis and
things like that are real. And inclusion– 1.7 billion
people unbanked, but then if you look at other products,
who has access to credit cards, and mortgages, and the like? And then fiat currencies,
Ken Rogoff and others have written a lot
about the instabilities that come with fiat currencies. And we'll talk about
some of the history, and why central banks exist,
and how they came about. The next key point
is, we already live in an electronic age. Satoshi Nakamoto and Bitcoin
didn't create electronic cash. I mean, Sandra Bullock
couldn't pay electronically. That was 1995. They did a sort of B-rated
movie about it all. But by today, you pay
your tuition online. Those of you who
work get paid online. You pay your auto loans online.

Most of our lives are
electronic cash, not 100%, but in some countries
like Sweden, it's getting very close to 100%. We'll learn together
and discover that money is but a social
and economic consensus. Blockchain technology
along with crypto finance might be a catalyst for change. And then much
masquerades as fact, but is only mere assertion. We're going to try
to sort through that, those differences. That doesn't mean
that all of you are going to walk out agreeing
with Paul Krugman, a Nobel laureate, or Nouriel
Roubini, that this is just a bunch of nonsense. Some of you might, by the way.

But I think you'll come out with
real critical thinking skills. And I hope that some
of you will say, I've figured out
actually where there is a real opportunity
in the world of finance to use blockchain technology,
and make it a better financial sector, democratizing
finance, or somehow providing a service at a lower cost,
a better service throughout. I hope throughout that
we'll learn together and we'll have a bit
of fun along the way. So that's kind of my thoughts. Questions? We have exactly– what? AUDIENCE: 18. GARY GENSLER: 18
minutes, there you go, but we can cut it short, too. I don't care. There we go. Could you tell me your name? And we're going to do placards. Ryan's going to work to
figure out how to do placards, because– AUDIENCE: It's
[? Younghere. ?] I wonder how are the teams
formed, the final project. GARY GENSLER: How
the teams form? Traditionally– anybody at
Sloan can speak to this too– but students do it their own. So the faculty
doesn't sort of try to insert themselves
to help you, but we tend towards the
latter half and say, well, who is formed up in groups? If it's a smaller group, it's
like, well anybody who is not yet formed in a
team, why don't you move to the left-hand side of
the room and just get together.

But we could do that
electronically too. And you know, whether
Talida and Sabrina who could help in trying to
basically have a social network to help form the teams,
because this is a big group, you're right. But that's traditionally,
people– students do it on their own. Other questions? Is anybody going to go out
and sell their Bitcoin now? Larry, why are you here? No, no, let– AUDIENCE: Other than the
payments you talked about or– no, I am here because
I think you're going to bring a critical
skepticism to the whole field.

And you're incredibly informed
about the finance side. So I want to see the
combination of those, and whether at the end I'm
still there is a there there. I am convinced there
is a there there. As we've spoken,
because I really think it could radically change the
cost of trust around the world. That will benefit the developing
nations substantially. But I think there is a lot
of questions I still have. And I'm eager to see how
this conversation helps it [INAUDIBLE]. GARY GENSLER: Well, I
thank you for coming. And any week you could be
here, any day, we benefit. And I hope it's really– this is meant to
be a conversation. I'm not that far ahead of you. Simon Johnson approached
me last October and said, what do you think
about coming up to MIT? And Tom knows this story. And we were sitting
down for lunch in DC. And it was a good
time in my life. My three girls– I
have three daughters. And I'm a single dad. And they were– two
are in grad school and one are in undergrad. It was a good time in my life.

I said, why not
come up here and get engaged in this digital
currency initiative over at the Media Lab? And I've spent a life– I was 18 years at Goldman Sachs
on the investment banking side, helping people buy
and sell companies. We call it mergers
and acquisitions. And then I went to the
trading side, fixed income, and went off to Asia,
and did a bunch of– I ran the fixed
income, and currency, and swap trading in Asia. And then my last job was
the co-finance officer. So we were about a quarter
of a trillion dollar balance sheet at that time– Goldman Sachs, this is. We were still private, which
meant if we lost money, we were personally– I was a general partner– was kaput. That's a technical word. But we had 700 legal entities
and 1,000 people who could commit the capital of the firm.

Those are people we
generally call traders. But you know, it was a
fascinating period of time. I then went on to
public service, because Bob Rubin knew that
I'd be a soft touch to service. He was the Treasury Secretary. I was a former partner
at Goldman Sachs. And I went off to
the US Treasury as a assistant secretary,
an undersecretary in the late '90s– a
little different times than we have now
for many reasons.

But we were paying
down the debt. We were dealing with the Asian
debt crisis, long-term capital management, the
Russian debt crisis. It was sort of a
fascinating period of time. I worked on a bill
with John McCain– I didn't get to know
Senator McCain that well, but he was just
remarkable to work with even for a short period
of time– called E-Signature. It was a bill that
basically said, you can sign everything
electronically. And he was the Chair of the
Senate Commerce Committee at the time.

It was a wonderful little–
sometimes in government, you can work on small things. I worked on the redesign
of the currency. And I could tell you
stories about why it looks the way it
does, and how you can redesign paper currency. And for a future
lecture, I'll tell you the one design feature that
I– is still in the currency. And you can visually see it. And when I asked
for it, the fellow that ran the Bureau of
Engraving said, why? And I said, because
it looks better. And I'm the guy
that's approving it. And maybe can we get it done? Can we work this out? And it did look better. And he loved it. He was worried about the
political risk of doing it. It was a better design. He just was– I said, I'll cover
you politically.

Let's do it. But then I worked
with Paul Sarbanes in what became Sarbanes-Oxley. I was his senior advisor. I worked and kicked around
some political campaigns. We lost two of them. That would be the '08 Hillary
campaign and the '16 Hillary campaign. I was her Chief
Financial Officer. I was an OA to a
senior advisor doing economic policy, and outreach,
and handholding, and– oh, gosh. And then in the middle
of those two campaigns, I ran something called the
Commodity Futures Trading Commission, which was
post-crisis, what do we do? This is a real public
policy shortcoming. And I looked at it as an
opportunity to, as I said, democratize finance
a bit and lower risk.

And so we tried to bring
transparency to a $300 or $400 trillion dollar
market called swaps, which are just contracts
for transference of risk. And they are a form
of a derivative that were unregulated. And we were trying to bring
transparency to that and lower risk through central clearing. So that's sort of my
professional life. And as I said, I've
got three daughters. And they're well-situated. So when Simon said come
on up, I said great. And I love him.

I'd say, it's just terrific. And you all are great. Unless there is other questions,
I'm going to let you go early. I don't– [APPLAUSE] .

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