The following content isprovided under a Creative Commons license. Your support will helpMIT OpenCourseWare continue to offer high-qualityeducational resources for free. To make a donation or toview additional materials from hundreds of MIT courses,visit MIT OpenCourseWare at ocw.mit.edu. GARY GENSLER: Welcome, welcome. If you have a desire to learna little bit about blockchain and its intersection with theworld of finance and money and you’re looking for 15.S12,you’re in the right place. If you’re here tonot do that and just hang out and have a good time,I guess you still hopefully are in the rightplace, because we’re going to have a goodtime this semester. My name is Gary Gensler. I’m a Senior Lecturerhere at MIT Sloan. I’m also an advisor overat the MIT Media Lab. And I’ve spent a lifetimearound the world of finance, and money, and public policy. And I’ve been at MITthis last eight months. And we’re going tolearn a lot together about blockchain and money. We’re going to havea little bit of fun here and see whatwe’re going to do.So we’re talking aboutblockchain and money. That’s where we are. By the way, I do cold call. I do call on you– so ifyou want to leave now, I understand– because I want to have aninteraction a little bit about it. So my first questionfor the class, for everyone, whether registeredor not, how many of you have ever owneda cryptocurrency? Wait, wait, let’s see. It seems like it’sabout 45% of you or so. All right, so it gives me– Alin you want to keepyour hand up long? And how many of youhave ever worked on any blockchain-relatedprojects, in an entrepreneurial setting,a corporate setting, anywhere? All right, good, so abouta third in the room. All right, so you all knowprobably more than I do, but I’m going to give it a shot. I’m going to always start everyweek with what are the study questions for the week. How many of you actuallygot the syllabus? This is not going tobe graded assignment. I just have tohave a sense of who actually got this syllabus–so a good many of you. And how many of you actuallydid the two readings? It’s not graded. I’ve just got togauge the class. Oh, thank you, thank you. Write those gradesdown, by the way– [LAUGHTER] –no, no. All right, so thetwo main questions for this week’s lecturereally 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 lotabout things outside of the world of finance. And blockchain may indeed havea lot of applications outside of finance, butI’ve chosen to try to just narrow the scope a bit. So this semester is reallyabout blockchain and money or blockchain and finance.And secondly, youwill see index cards on every one ofthese round tables. One assignment, bythe end of the class– you could do it now or later– I would like each ofyou to anonymously write on the card what you wantto achieve in this semester. It could be anythingfrom this class, from learning about blockchain,from making money on Bitcoin, from– I don’t care if you tell meit’s meeting your future spouse. Like, what do you wantto achieve in this class? I can’t help youon the third, but I will try to help you on thethings I can help you on.And Sabrina and Talidawill collect them later. And next Tuesday, we’lltell you the results. What is it that you wantto achieve in this class? And then we’ll see atthe end of the semester if we’ve done that. So it’s just a way tohelp guide me help you. So that’s whatwe’re trying to do. And so what werethe two readings? One was a little thing I did.And one was a thing I didwith some of my colleagues. And Tom, since I knowyou, what did you take out of the readings? AUDIENCE: That blockchainis essential to improved profitability [INAUDIBLE]. GARY GENSLER: Did youhave a good summer? AUDIENCE: Mhm. GARY GENSLER: Didyou raise your hand? Did you own Bitcoin? No. Who in the classread the readings and took somethingdifferent than Tom? He said there was potential. And your first name? AUDIENCE: Alin.GARY GENSLER: Alin. AUDIENCE: Well, I’m comingfrom the technical side. So from the technical side,all I see is a bunch of hype. And 10 years have passedsince the launch of Bitcoin with very little to showfor it other than hype. [INAUDIBLE] GARY GENSLER: OK, howmany 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 aretoo shy on the first day to put your hands up? Most. So I’m going to start andgo back– the internet. How do I sort of– I’ve come about this andof thought about, well, what is blockchain? What is it really about? Well, the internet started manydecades ago, before most of you were born, but 1974-ish. I mean, there issome predecessors even from the late ’60s, theethernet, which is really how two computers communicate. And then you hadTCP/IP, which was really the internet protocol ofmultiple 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 namewould be helpful. AUDIENCE: Eric. GARY GENSLER: Eric. AUDIENCE: It’s a protocolfor communicate web content. GARY GENSLER: Web content. AUDIENCE: It’s HypertextTransport Protocol. GARY GENSLER: Right,do You know who is associated with the invention? AUDIENCE: I don’tremember right now. GARY GENSLER: Anybody else? Anybody know who– it’s notin the readings, or anything, Tim Berners-Lee? Anybody know who isassociated with TCP/IP? AUDIENCE: Was the companyinitiated by MIT faculty, I think, [INAUDIBLE]or something? GARY GENSLER: I don’t know ifit was a company associated with MIT, but Vint Cerf may havehad some association with MIT. So these are thefirst three layers. And then there were companies,commercialization, 3Com and Cisco. And of course, Amazonis still around today. But there was somethingelse going on. How do we commercializethe internet? Does anybody know whatthis scene is from? AUDIENCE: This is the firstpizza sold by Bitcoin. GARY GENSLER: Goodthought, good thought, first pizza soldby Bitcoin, but no. AUDIENCE: Is it from thatmovie Hackers or something? GARY GENSLER: Allright, 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 openingscene of The Net. And yes, that’s Sandra Bullock. And the year is 1995. It’s a cyber thriller. You know, apresident’s involved. The Defense Department’sinvolved, and so forth. But actually, PizzaHut is associated with the very first sale, onlinesale anywhere in the world. They started somethingcalled 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 theproblem was with PizzaNet? I mean, maybe therewere multiple problems.No, Alin I’ve called on you. AUDIENCE: Youcouldn’t pay online. GARY GENSLER: Youcouldn’t pay online. Nobody had figured outhow to move money online. You had to pay when youshowed up with the pizza. So now I’m going to talk alittle bit about cryptography. We’re going to spend a lotof time on cryptography. It’s cryptocurrenciesand the like. What’s your name? AUDIENCE: Jihee. GARY GENSLER: Gigi? AUDIENCE: Jihee. GARY GENSLER: Jihee.Jihee, what’s cryptography? AUDIENCE: I would assume thatthat’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 wantto help Jihee out? Yeah, tell me your first name. We’re going to figureout 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 thetechnology or the science behind encryption and decryptionfor fortification, so how do you encrypt aparticular text such that it’s not readableby someone else without having thedecryption code. GARY GENSLER: OK, so it’show do you encrypt something so it’s notdetectable by others.Or in essence,it’s communications in the presence of adversaries. You have an adversary whowants the communication. You want to communicate andnot let your adversaries know that communication. And this is truefor ancient times. So in ancient times, there wassomething called the cipher. And this was a way thatyou’d take a piece of leather or a piece of cloth andhave a lot of letters. And both sides, you’dencrypt and decrypt, because they were differentmeasurements of the cylinder. Has anybody seen themovie Imitation Games? AUDIENCE: Mhm. GARY GENSLER: All, rightthe Enigma machine– now the movie waswonderful, because it said Turing cracked it.And he did help crackit in an automated way, but actually, thePolish government had cracked it inthe 1930s before they fell to the Germans. And Turing built on all ofthat and cracked it further. And then in the 1970s– and this was here atMIT, to some extent– there is private-keypublic-key cryptography, which I’m not goingto dive into today, but it’s the heart ofBitcoin and blockchain. It’s at the heartof the internet. But it’s about–the key thing is communications and thepresence of adversaries. How do you keep a secretwhen everybody wants in and get that information? And there is a long history. And MIT is at thecenter of a lot of that.A lot of early cryptographyfailed on the internet. In the early ’90s and late’80s, David Chaum and others tried to do things. And we’re not goingto debate these today, but you will have one reading– I think it’s either next week– which will giveyou that history. And it’s worthwhile knowingabout the history of failure. But cryptography is the reasonwhy the internet works today. Does anybody want to tellme what SSL and TLS is? Do we have anycomputer scientists? And remind me your first name? AUDIENCE: Eric. GARY GENSLER: Eric. AUDIENCE: That’sthe protocol that mounts on top ofthe TCP/IP stack to provide encryption usingasymmetric case, which is public-infrastructurecryptography. It’s secure socketlayer [INAUDIBLE].. GARY GENSLER: Right,so it basically uses asymmetriccryptography, which we’re going to talk abouttwo lectures from now, but it secures thewhole internet. So all of a sudden youcould 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 otherdigital currencies then failed, but some of thesepeople who we’ll read later– like, we’ll read Nick Szabo’sis a piece on smart contracts later, Adam Back whocreated Hashcash. Some of these innovations werewhat Satoshi Nakamoto later used. Some innovations which werereally helpful and worked were Alipay and M-Pesa. Does anybody knowwhat M-Pesa is? AUDIENCE: I think it’sused in Kenya as, like, mobile cellular-enabled cash. GARY GENSLER: Right. In essence, theyfound out in Kenya– this was 10, 12 yearsago– that people were trading mobile minutes. They were unbanked, butthey had cellular phones. And they were trading theirminutes as a form of currency. And Safaricom realizedthat and said, wait, we could help people bepart of the digital economy, even if they’re unbanked.And in Africa today, a halfof the adult population, according to World Bankfigures, is still unbanked, but half of that halfhas mobile phones. M-Pesa has 20 millioncustomers in Kenya right now. So it’s a form ofmoney that’s kind of swapping mobile minutes. But the riddle remained, how doyou move money on the internet? Or in essence how,do you move value peer to peer without acentralized intermediary? And that’s the core ofblockchain technology. So who solved the riddle? Is anybody going to tellme who solved the riddle? Who solved this riddle? No, [INAUDIBLE]. You’re wearing a t-shirtthat says Quentin Tarantino.So I think Quentin Tarantino– AUDIENCE: [INAUDIBLE] GARY GENSLER: –shouldsolve a riddle. What’s that? What’s your name? AUDIENCE: Rufus. GARY GENSLER: Rufus– andwho solved this riddle? AUDIENCE: Satoshi Nakamoto. GARY GENSLER: Yeah. So a peer-to-peer cash– this is the actualdoc top of an email that was sent out on Halloween2008 by Satoshi Nakamoto. We don’t actually knowwho Satoshi Nakamoto is, but it’s a study questiona few lectures from now to ask you to tell me who youthink Satoshi Nakamoto is. So I won’t ask that now. And he started with a verysimple sentence in his email. “I’ve been working ona new electronic cash system that’s fully peer-to-peerwith no trusted third party. It’s kind of a modest statement. And so the question is, isthis another internet layer? We’re going to explorethat this whole semester. I don’t really have the answer. I don’t think the best minds atMIT could really yet tell you. There are somewho are maximalist and say, yes, it will be.And there are others whowill say, no, no, no. And in this course, we’regoing to review the minimalist and the maximalist. We’re not going to try tocenter it in one place. But that’s the keykind of question. So what is a blockchain? We’re going to do thisand a lot of lectures, but I’m going to try todo it in a short version. So it’s time-stampedappend logs, meaning you can add a littlebit of information to this. And it’s time-stamped. So these are theseblocks being added. Satoshi did notinvent blockchain. It was way earlier. Does anybody want toguess when it was? You’re going to havea reading about this later, but early 1990s. AUDIENCE: Stuart Haber. GARY GENSLER:What’s that, Madars? AUDIENCE: Stuart Haber. GARY GENSLER: StuartHaber, Stuart Haber– worked for Bell Labs, right? So one of yourassignments– it’s not going to be agraded assignment. It’s just going tobe a fun assignment. Could any of you, I’m goingto say by next Thursday, just because, have somefun, find the longest, and time wise,longest-running blockchain.It’s not Bitcoin. And it’s been runningsince the mid ’90s. And your clue isThe New York Times. And we’ll discussit 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 ledgersall throughout this course, and how it changesthe world of finance. Now, it’s securedby cryptography, because cryptography,remember, is communications and making sure adversariescan’t pick you off. We’re going to learnabout hash functions. And hash functions are a reallyimportant 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 tonot only append the next block to the prior blocks, but reallyimportantly, to compress data, to make it more manipulable,and to verify it, and as I’ve written here, tamperresistance and the integrity.Digital signatures,which has to do the public-keyprivate-key cryptography– there is no prerequisiteto this course. You do not had to havetaken computer science, cryptography, algorithms. If I can learn a littlebit about hash functions and asymmetric cryptography,these are the two key important sides. And we have enoughcomputer scientists in this room that can sort usout if I say the wrong thing. Right, Madars? Hopefully. And then consensus– so thereis 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, somebodyhas to decide who appends, who gets to pick the next block. And that’s what’s calledconsensus protocol. And there is wide debatesabout consensus protocol. And we’ll talk a lotabout consensus protocol. But in essence, itaddresses something, a term called the cost of trust. And we’ll talk aboutByzantine Generals problems, which is another reading. The Byzantine Generalsproblem was laid out as a sort ofmathematical game theory issue some 30-ish years ago. That’s what SatoshiNakamoto solved was this last part, theByzantine Generals problem. Pizza for Bitcoins– a year anda half after Satoshi Nakamoto laid out blockchain andBitcoin, somebody sent an email. And you’ll get these slides. But this is thereal, live email. I’ll pay you 10,000 Bitcoinsfor a couple of pizzas. I just want some pizzas.The guy who sent this, hesays, I like onions, peppers, sausage, mushrooms– Laszlo. Now, catch the date. This is May 18. And he’s offering10,000 Bitcoins of 2010. But the key lineis, what I’m aiming for is getting food deliveredin exchange for Bitcoins. Nobody had used Bitcoinsas a medium of exchange. 16 months into itsexistence, nobody had used it to buy something. And Laszlo is a computerscientist in Florida who was just kind of interested. And he put this adon an email list. Three days later, he stilldoesn’t have his two pizzas. So nobody wantsto buy me a pizza? Is the Bitcoin amountI’m offering too low? Another day goes by. He gets his pizzas. And he posts pictures. So here is a pictureof his child reaching for those Papa John’s pizzas. Anybody know what those 10,000Bitcoins were worth back in– back then? Chicago. AUDIENCE: I know whatthey’re worth now. GARY GENSLER: Anybodywant to say back then? AUDIENCE: [INAUDIBLE] GARY GENSLER: What’s that? AUDIENCE: [INAUDIBLE] GARY GENSLER: $41. And Laszlo wassaying, two pizzas are probably worth $25 to $30,because there was a whole email thread.He kept saying, why won’tanybody get me my pizzas? You can make money on this. Today or earlier, latelast night, $66 million. Yeah, so it’s kindof a cute story. May 22 every year is calledPizza Day or Bitcoin Pizza Day or something. So what is blockchaintechnology? These are my words butthey’re sort of picked from the literatureand so forth. It verifiably moves dataon a decentralized network. And the economics ofblockchain technology are really aroundthat, verification, and the economicsof verification, and the economics of networking. And in many ways, blockchainadds certain costs to the verification throughthis consensus protocol that we’ll be studying, butit lowers some other costs of verification, becauseyou’re not relying on a centralized authority. So it’s really a trade offof cost to verification. I don’t think it’s– I’m not a purist thatsays it’s better or worse, but it’s a trade off ofcost and verification through decentralized networks. The data can be value. Like, Bitcoin wasa money system.Or the data can beactually computer code. And we’ll learn a lotabout smart contracts. And you could have thedata being verified computer code and algorithms. My world, finance,this directly goes to the plumbing offinance, because finance is fundamentally aboutmoving money and risk through a network. And that network isthe 7 billion people that live in this world. It’s moving money and risk. And you’ve all takenfinance courses. Or many of you have. And it’s the intermediationof money and risk throughout our economy. But there is a wholehost of challenges. And over the courseof this semester, we’ll talk about thosechallenges, technical, commercial, andpublic 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 worldof money and finance. So does anybody want to tellme that the role of money in society? And tell me your first name. AUDIENCE: Thomas. GARY GENSLER: Thomas. AUDIENCE: Basically it’s a wayexchange things and services between people– GARY GENSLER: All right, mediumof exchange, got that one.AUDIENCE: –withoutdoing bartering, I mean. Exchange [INAUDIBLE]. GARY GENSLER: So amedium of exchange. Somebody give me a second– yellow shirt. AUDIENCE: Yeah,medium of savings. GARY GENSLER:Savings, all right, so that would bea 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 spendsome 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 saida few things about that. And I’m sorry. I don’t know your name, butright here, the woman, yeah– role of finance? It’s all right, I’m not goingto 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: Connectsavers and borrowers. GARY GENSLER: Connectsavers and borrowers– so connecting is sortof 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 thevaluations 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 complexcredit default swap, that’s a transference of risk. So finance is not justthe movement of money. It’s the movement of risk aswell, throughout the economy. And I always think,finance, I always– I’ve thought this when I wasat Goldman Sachs for 18 years– that finance sits at theneck of an hourglass.And it’s why it collects so mucheconomic rents from society, because when you sit at the neckof an hourglass and billions, literally trillions ofgrains of sand go by, if you collect some ofthose grains of sand, you get uber wealth. And that’s– thoseare for other classes. But finance can collecta lot of economic rents. The financial sector, though,has a bunch of challenges. We’ll have one lecturelater in the semester about some of those challenges.And we have a reading. I think Sheila Bairwrote something recently that I asked you all toread later in the semester. But we will talk about thefinancial crisis and some of the problems. But it’s had a lot of crises. Fiat currencies have a lotof instabilities, of course. We have centralizedintermediaries, as I laid out. And we’ll talk about collecta lot of economic rents. So there is opportunity.Blockchain has realopportunity to kind of come under this world of finance andmaybe do some things better. Central banking, Ialso have a bunch of legacy payment systems. And those legacy paymentsystems are slowly adapting, but it’s slow. And why did Alipay do so wellin China is part of this story, because there were somany unbanked, just like M-Pesa in Kenya. But here in the US, westill pay 2.5% to 3% for our interchange charges forVisa, MasterCard, and the like. And a lot of clearingand settlement still has a lot ofcounterparty risk. And one that Icare deeply about, financial inclusion– thereis still 1.7 billion people in this world who are unbanked. And so we don’t think ofit as much in the developed countries, but it’s certainlytrue 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 trillionof revenues. So any of you thatare thinking about entrepreneurial opportunities,the payment system just here in the US is a0.5% to 1% of our economy. That’s $100 billion to$200 billion of revenues. I think Visa isabout $18 billion. But you know, when you addup the whole payment system, that’s $100 billion to $200billion in payment revenues. So that’s kind ofthe opportunity. Can blockchaintechnology come in? It’s got problems. It’s slow. It has performance issues still. But can it compete with that? Here are some of theproblems, the financial sector would say, with blockchain. These are real, livethings that we’re going to study later in the semester. They say, it doesn’t havethe performance, scalability. A modern paymentsystem, you need to be able to move about100,000 payments a second. A modern securities clearing,the Depository Trust Corporation, the Securitiesand Exchange Commission says, you do about 30,000transactions a second, but we need you to scale. And your computersand everything have to be resilient to100,000 transactions a second.Bitcoin, you can do aboutseven transactions a second. Visa currently– itdepends on the second– does anywhere from 20,000to 70,000 a second. So it’s just a sense ofscalability and performance. We might get there. It might be threeto seven years away. I’m optimistic,but there is still a bunch of performanceand scalability issues. Privacy and security–blockchains, by their nature, are public. So they’re not fullycensorship-resistant, but there is a lot of innovationabout making them more private. But then that makes the publicsector a little nervous. Interoperability–they don’t necessarily work yet with other legacysystems or with each other. The internet, one of the greatinnovations of the internet, it became interoperable, thatall of these different websites could kind of speakwith each other. Governance is a very bigissue we’ll talk about.And one of the thingsabout governance is, it’s hard to update thesoftware of a blockchain, because if you createa decentralized where no one’s in control, no onecan collect economic rents, you also don’t have sort ofsomebody with the ability to necessarilyupdate the software. And we’ll talk later about howBitcoin updates its software, and what Bitcoin coredevelopers are, and so forth. But Facebook, you do knowone thing– though they’re a company that collectsa lot of profits and economic rents off oftheir two billion members, they know how toupdate their software. It’s a governance issuethat’s a real, live challenge. And that’s why thefinancial sector says, I’m not sure this works,this is ready yet for me. And then thus, what arethe commercial use cases? And what are thepublic policy issues? So right now, thefinancial sector favors permissioned blockchainsversus permissionless. About four weeksfrom now, we’ll kind go through thesetwo differences, but I want to justframe this briefly. Permissioned blockchainshave a known group of people who actually participate. The half of you that saidyou’ve owned Bitcoin, you know it to besomething where anybody can update the ledger. Permissioned blockchains, youcan’t do that, in essence. You pick the 3 or 20. The Australian Stock Exchangeis updating their clearing and settling.They announced they’redoing a blockchain project. They’re doing itwith digital assets. And they’re using theHyperledger blockchain, which is an IBM software,open-source software. But the AustralianStock Exchange is going to put it onthree computers, which is called three nodes, thatthey control all three of them. The DepositoryTrust Corporation is looking at blockchain-inspiredsolutions for some of their data warehouses,but they, too, are going to control the nodes. I’m just giving you– that’spermissioned blockchain. So there is nothingwrong with that. That’s just how theyare looking at this. Permissionlessblockchains are like Bitcoin, unknownparticipants, securities based on incentives, acryptocurrency, and crypto economics. Crypto finance isabout $200 billion. But you know, you have toupdate these slides daily. Two days ago, itwas $230 billion. And this little pie chart is–a little over half is Bitcoin. The next slice is somethingcalled Ethereum, and then Ripple, and down the line. We’re not going to spend alot of time in this semester– if your goal is tohow can you profit, and day trade Bitcoin, andday trade Ether, god bless.Go prosper. You can stay in the class. I just won’t give youmuch advice on it. This is not acrypto-investing-centered class. But I’m OK if that’swhat you’re doing. Does anybody know what theworldwide 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 oftrillions– global equity, about $80 trillion,global bond and debt markets, $250 trillion,so it’s still quite modest compared to that broadbreadth 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 youa sense of scale. So there is also somethingthat’s interesting about this space, is that it’soutsized public attention, even as evidenced by thehundred of you in this room, versus the size it is relativeto the capital markets today. There is a bunch ofpublic policy issues. We’ll have a lecture. I’m a former regulator. I ran the CommodityFutures Trading Commission. But this course isnot about regulation, though we have to alwayscome back to regulation.We always have toinfuse what we’re doing with the regulation. But let me just giveyou a little framework. And then you’ll have to bebored in a handful of weeks and read– I gave some congressionaltestimony on it. Yes, it will berequired reading, sorry. But it’s guardingagainst illicit activity. A lot of Bitcoinand cryptocurrencies started out in thecyber punk sort of movement and libertarianmovement, so forth.And it is true. You can use this for illicitactivity, absolutely. But I would say,crime is not new, just the mechanismsand means are new. And so the criminals,yes, will use this and have used it forillicit activity. Financial stability– centralbankers around the globe, sort of will this shake finance? Well, it’s only $200 billion. The financial marketsare $300 trillion plus– not yet, is generallywhat they’re saying. But for somecountries, it’s a way to get around capital controls. And so for those countriesworried about capital controls, it’s a very real andlive set of issues. And then protectingthe investing public– and when we do thisin a few weeks, I’ll go through each ofthese, the investor protection issues, and yes, the SEC,how we test, and the like.For those who wish to do theirown initial coin offering, I’ll give some broadsense of what the SEC is trying to accomplish. But it’s a moving target. So this is a veryinteresting thing. As opposed to many ofyour Sloan classes, or your C cell classes,or Media Lab classes, this is a very unsettledarea of public policy. So it makes it interesting. And if you all go offand form companies, you will actuallybe helping sort of set the edge of thatpublic 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 USmight not know the duck test. But basically, if itquacks like a duck and it walks like aduck, it’s a duck. So whenever you’re thinkingabout public policy, folks like myself who oncewas a regulator, we think in the duck test.And then we secondarilythink about the actual words in the congressional act. Where is the common sense? And if it quacks andwalks like a duck, it’s probably a security. Or it’s probably this or that. The incumbents, like thislioness in the corner, are eyeing this space, becausethere is a lot of volatility. And Wall Street makesmoney on volatility. Volatility is thefriend of Wall Street. It may not be thefriend of investors, but it’s a friendof Wall Street. And they also like the tradingvolumes and the spreads. Coinbase, the largest cryptoexchange here in the US, has 20 million accounts. They might not allbe active, but that’s the size of Fidelity’smembership or account list and twice DE Shaw. And Robin Hood– how manyof 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 stocksfor free, no commission. And if anybody isinterested, show up and I’ll do office hours onhow Robinhood commercializes– they commercializeyour order flow. And they make money withoutcharging you commissions. But it’s a sortof wonderful app. Millennials love it, 5million members already. So you better believe DEShaw and the incumbents are worried aboutthings like that. The startups are also morewilling to beg for forgiveness from regulators. They’re willing to sort of takerisks and beg for forgiveness, whereas incumbents tend tohave to ask for permission. So there is an unlevelfield, that always, it’s asymmetric business set ofrisk about regulatory risk– not always. I’m not crying for JP Morgan. I mean, the big incumbentshave also– they have their advantages. And Coinbase is becomingan incumbent rather than just a startup, in a sense. And we’ll talkduring the semester about some of the incumbents.We’re probably going to get JeffSprechers here in mid-November. He’s going to talk to you aboutwhat Intercontinental Exchange and the New York Stock Exchangeis doing with Starbucks, and Microsoft, and the like. The financial sector use cases– I’m not going togo through these, but this is the second halfof the course, is going to go through each of these. And we’ll do one to two sessionson each, payment systems, central bank digital currency,secondary market trading. The venture capital andinitial coin offering space, we’ll do two course onthat, and move through. So what are we going todo in this whole course? Basically, our goal is tolearn the fundamentals– that’s about roughly thefirst half of the course– pivot to two sessionson the economics.We’re going to be talkingabout the economics throughout thewhole course, but I want to really just focus,drill down on the economics, on two of the discussions. And then riff throughthe financial space for the second half– that’s our journey together. To me, it’s for anybodywho wants to gain critical reasoning skills. This is not justkind of a, hey, this is going to change the world andrevolutionize everything class. And so I basically think ofan old Defense Department term called ground truths. It’s when the general doesn’treally know what’s going on but needs to figure it out andneeds to talk to that corporal on the ground who hasgot dirt all over him and has been shot up and says,here is the real ground truth. We’re going to try to talk aboutground truths in this class and separate the mereassertion from the hype. And some of your readingswill be some real Bitcoin and blockchain minimalists,from Nouriel Roubini that uses words I’m notsupposed to repeat on a recording about thisstuff, to Paul Krugman who– and Joe Stiglitz, and otherNobel laureates who say, no, it’s not going to work, orWarren Buffett, to maximalists.We’re going to tryto cover both sides. Larry Lessig ishonoring me because he’s in the back of the class– who is an enormously esteemedprofessor from Harvard. I didn’t know Larrywas going to be here. And I did this slide before. But in 1999, I think, youwrote this book, Larry. Is that right? AUDIENCE: [INAUDIBLE] GARY GENSLER: Code andOther Laws of Cyberspace, I put you in the– but I think it’s worthwhile tothink about Larry’s four bits here. And I don’t know, Larry, ifyou want to say anything, but I’m going to try to infusethis course in just how you think about this. The tech– we’re at MIT. The technology– and we’re goingto get you a lot of technology. If you want more than I cangive you as a former finance sort of type mywhole life, there is going to be a bunchof computer science people in the class.We’re going to hookyou up together with the folks from theMedia Lab and C cell and try to connect youto the technology side if you want to swimdeeper in that pond. But the technologyreally, really matters. And that’s why we are goingto go through hash functions, and go through asymmetriccryptography, and so forth. From a businessperspective, markets matter. Why is it that incumbentsor startups are or are not doing this and that? Why is it 10 yearsin and nobody has got an enterprise-widesolution yet to payments that use blockchain? The law matters. The public policy side matters. And the fourth of Larry’slayout, social norms– that’s a little harderfor me to teach. That’s not whatthis 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 athree-legged stool.It’s kind of afour-legged stool. How did I do Larry? AUDIENCE: Excellent, all right. GARY GENSLER: Ireally didn’t know Larry was going to be here. But I wanted to give you aframework for how your faculty member thinks. And we’ll be on thisjourney together. Range of perspectives–we’re not going to be a Bitcoinminimalist or maximalist. I’m probably, to beself-disclosed here, a little bit centerminimalist on Bitcoin. Smart contractminimalist, maximalist, I’m probably pretty center. Larry is probably a littlebit center maximalist, I’m guessing. AUDIENCE: I’m hoping Ican be, but you’re going to teach me whether I can. GARY GENSLER: Oh, so you’restill center or center minimalist on smart contracts? And then blockchainmaximalist or minimalist– I’d say a few weeks ago, Iwas kind of center maximalist. And I’m sort of skippingback to the middle. Permissioned blockchain,I’m a little bit more– and there is some in here. Alin who is one ofyour Sloan cohort that you might know, sixmonths ago when we met was working on apermissionless system.And now you’re workingon 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 talka lot in this course about criticalthinking, about when do you really need the advantageof a decentralized peer-to-peer system where the costs oftrust are such that that’s the right way to go. But I am one who thinksthat there is also so much economic rents in the financialsystem that $1.5 of revenues, or 7.5% of our economy,or just $200 billion in the paymentsystems, for instance, that there may be timesthat you don’t really need a decentralizedsystem, but it just might be youropportunity to tuck in underneath all of thoseeconomic 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 thinkblockchain may well be a catalyst for change,even if incumbents then adopt a lot of that inside. The requirements of the course– class participationis a hard thing to judge as a faculty memberwhen I have this many people. But I always think classparticipation matters. We made it 30%, whichif you have any advice on this next semester– 30% two individual writeups, 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, butyou’ll get a much better grade if it’s aboutcritical reasoning, if it’s really taking whateverthose sets of writings are and not just repeating thatwhich is in the readings, but really going thenext step and saying, here is what’s going on.And this isn’t business school. You don’t have to convince methat something about computer science. It’s like criticalreasoning about the economic opportunities, thestrengths, the weaknesses, the opportunities, the threats,that old business school sort saying of swats withregard to that week’s– whether it’s about hashfunctions early on, cryptography, oryou sort of wait during the foundationalperiod to permissioned versus permissionless. You pick– but to please hand itin before that class’ lecture, because I might during thelecture say, who wrote today? Do you want to tellus what you think? And it might help spurthe class participation– and then a second writeup in the second half when we’re riffingthrough the use cases, again, critical reasoning.And then lastly,the usual approach of teams of up to four– no, I don’t want teams offive, to handle that right now, three or four. And somewhere in the secondhalf of this semester, we’ll talk aboutmore of the content. And there is acouple of you in here that worked with me lastsemester in a smaller group. You know, I want you to do wellso I’m going to sort of give you a sense of what do we wantto do, but it’s basically, the idea is, you’rean entrepreneur or you’re an incumbent.And what sort of use caseare you going to pick? And whether it’s permissionedor permissionless, sort of make a proposal. Do a use case. Use your critical reasoningaround this new technology somewhere in the broadworld of finance. I mean, you know, and I’m gladto 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 ofthe pieces, but you know, that’s in thesyllabus, of course. Act two is the pivotof the economics, and act three, ourfinancial sector use cases.And hopefully throughout,we’ll have a lot of fun. So the study questions fornext Tuesday, real quick, what are the roles andcharacteristics of money? So I really want to sortof dig behind money. Money is but a social constructor a social convention, medium of exchange, a storeof value, unit of account. There is some readingsabout the debate, whether money first camefrom the barter system, or a really good setof anthropologists and archaeologistsand everything say, no, it actuallycame as a ledger system. And no one knows for sure10,000 and 15,000 years ago whether moneycame from the– out of the barter system ormore as a unit of account, keeping account ofcredits and ledger.But I’d say, when you readthrough some of those readings, you start to think, well, thisis just a societal construct. And so we’ll get behind that. What is fiat currency? Fiat currency, which is aninvention, really, only of the last few hundreds yearsthat we take for granted now. But how does that fitinto that whole history? And importantly,how do ledgers– accounting ledgers,I know, boring stuff, but it’s probablywhy we came out of the dark ages about500 or 600 years ago with double-entry bookkeeping. Sorry, I like ledgers. We’ll talk a littlebit about ledgers and how that fits intomoney, and securities, and so forth, and thenlayering in how Bitcoin fits on top of that history. Next Tuesday is notdeeply about Bitcoin. It’s just a littledollop on that. There will be fiveor six readings.One of them is a three-minutevideo, the third one. It’s fun. Watch. It’s just a funny littlevideo on what money is. There is no need to readNakamoto’s full paper. When I said the email, Imean just the cover email. It’s one paragraph. My goal in the readingseach week was not– and each sessionwas, by and large, try to keep less than 50 pages. You say, you’re going tolook sometimes and you’ll go, it looks like it’s more. And maybe it is. I figure you’re allgoing to figure out for yourself how to sort throughthe depth of your knowledge. But I will predict that some ofyou, maybe as much as a quarter or a third of you, are going togo down a rabbit hole one day.And you’re going to be doingblockchain for the next 48 hours. And you won’t knowwhere the time went, because it is an addiction atsome point that some of you will get, because thereis this curious notion. I’m not predicting thatinfirmity for all of you. I’m just saying some of youwill have that happen to you. So occasionally Ihave readings just– what, Alin it’s happened to you? AUDIENCE: I think so.GARY GENSLER: Letme just conclude and then take any otherquestions and lay it up there. Blockchain I think does providea peer-to-peer alternative. I hope, Larry, I’llbe able to convince. It does provide– and thatpeer-to-peer alternative addresses cost of trust. It doesn’t mean it’s the onlyway to address cost of trust, but it addresses cost of trust. The financial sectordoes have challenges, not just that it has 7.5%of our economy in the US and similar ratiosaround the globe, but resilience, howit survives shocks.The financial crisis andthings like that are real. And inclusion– 1.7 billionpeople 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 lotabout the instabilities that come with fiat currencies. And we’ll talk aboutsome of the history, and why central banks exist,and how they came about. The next key pointis, we already live in an electronic age. Satoshi Nakamoto and Bitcoindidn’t create electronic cash. I mean, Sandra Bullockcouldn’t pay electronically. That was 1995. They did a sort of B-ratedmovie about it all. But by today, you payyour tuition online. Those of you whowork get paid online. You pay your auto loans online. Most of our lives areelectronic cash, not 100%, but in some countrieslike Sweden, it’s getting very close to 100%. We’ll learn togetherand discover that money is but a socialand economic consensus. Blockchain technologyalong with crypto finance might be a catalyst for change. And then muchmasquerades as fact, but is only mere assertion. We’re going to tryto sort through that, those differences. That doesn’t meanthat all of you are going to walk out agreeingwith Paul Krugman, a Nobel laureate, or NourielRoubini, that this is just a bunch of nonsense. Some of you might, by the way. But I think you’ll come out withreal critical thinking skills.And I hope that someof you will say, I’ve figured outactually where there is a real opportunityin the world of finance to use blockchain technology,and make it a better financial sector, democratizingfinance, or somehow providing a service at a lower cost,a better service throughout. I hope throughout thatwe’ll learn together and we’ll have a bitof fun along the way. So that’s kind of my thoughts. Questions? We have exactly– what? AUDIENCE: 18.GARY GENSLER: 18minutes, 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 tofigure out how to do placards, because– AUDIENCE: It’s[? Younghere. ?] I wonder how are the teamsformed, the final project. GARY GENSLER: Howthe teams form? Traditionally– anybody atSloan can speak to this too– but students do it their own. So the facultydoesn’t sort of try to insert themselvesto help you, but we tend towards thelatter half and say, well, who is formed up in groups? If it’s a smaller group, it’slike, well anybody who is not yet formed in ateam, why don’t you move to the left-hand side ofthe room and just get together. But we could do thatelectronically too. And you know, whetherTalida and Sabrina who could help in trying tobasically 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 outand sell their Bitcoin now? Larry, why are you here? No, no, let– AUDIENCE: Other than thepayments you talked about or– no, I am here becauseI think you’re going to bring a criticalskepticism to the whole field.And you’re incredibly informedabout the finance side. So I want to see thecombination of those, and whether at the end I’mstill there is a there there. I am convinced thereis a there there. As we’ve spoken,because I really think it could radically change thecost of trust around the world. That will benefit the developingnations substantially. But I think there is a lotof questions I still have. And I’m eager to see howthis conversation helps it [INAUDIBLE]. GARY GENSLER: Well, Ithank you for coming. And any week you could behere, any day, we benefit. And I hope it’s really– this is meant tobe a conversation. I’m not that far ahead of you. Simon Johnson approachedme last October and said, what do you thinkabout coming up to MIT? And Tom knows this story. And we were sittingdown for lunch in DC. And it was a goodtime in my life. My three girls– Ihave three daughters. And I’m a single dad. And they were– twoare in grad school and one are in undergrad.It was a good time in my life. I said, why notcome up here and get engaged in this digitalcurrency initiative over at the Media Lab? And I’ve spent a life– I was 18 years at Goldman Sachson the investment banking side, helping people buyand sell companies. We call it mergersand acquisitions. And then I went to thetrading side, fixed income, and went off to Asia,and did a bunch of– I ran the fixedincome, and currency, and swap trading in Asia. And then my last job wasthe co-finance officer. So we were about a quarterof a trillion dollar balance sheet at that time– Goldman Sachs, this is. We were still private, whichmeant if we lost money, we were personally– I was a general partner– was kaput. That’s a technical word. But we had 700 legal entitiesand 1,000 people who could commit the capital of the firm. Those are people wegenerally call traders. But you know, it was afascinating period of time. I then went on topublic service, because Bob Rubin knew thatI’d be a soft touch to service. He was the Treasury Secretary.I was a former partnerat Goldman Sachs. And I went off tothe US Treasury as a assistant secretary,an undersecretary in the late ’90s– alittle different times than we have nowfor many reasons. But we were payingdown the debt. We were dealing with the Asiandebt crisis, long-term capital management, theRussian debt crisis. It was sort of afascinating period of time. I worked on a billwith John McCain– I didn’t get to knowSenator McCain that well, but he was justremarkable to work with even for a short periodof time– called E-Signature. It was a bill thatbasically said, you can sign everythingelectronically. And he was the Chair of theSenate Commerce Committee at the time.It was a wonderful little–sometimes in government, you can work on small things. I worked on the redesignof the currency. And I could tell youstories about why it looks the way itdoes, and how you can redesign paper currency. And for a futurelecture, I’ll tell you the one design feature thatI– is still in the currency. And you can visually see it.And when I askedfor it, the fellow that ran the Bureau ofEngraving said, why? And I said, becauseit looks better. And I’m the guythat’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 thepolitical risk of doing it. It was a better design. He just was– I said, I’ll coveryou politically. Let’s do it. But then I workedwith Paul Sarbanes in what became Sarbanes-Oxley. I was his senior advisor.I worked and kicked aroundsome political campaigns. We lost two of them. That would be the ’08 Hillarycampaign and the ’16 Hillary campaign. I was her ChiefFinancial Officer. I was an OA to asenior advisor doing economic policy, and outreach,and handholding, and– oh, gosh. And then in the middleof those two campaigns, I ran something called theCommodity Futures Trading Commission, which waspost-crisis, what do we do? This is a real publicpolicy shortcoming. And I looked at it as anopportunity to, as I said, democratize financea bit and lower risk. And so we tried to bringtransparency to a $300 or $400 trillion dollarmarket called swaps, which are just contractsfor transference of risk.And they are a formof a derivative that were unregulated. And we were trying to bringtransparency to that and lower risk through central clearing. So that’s sort of myprofessional life. And as I said, I’vegot three daughters. And they’re well-situated. So when Simon said comeon 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] .
Get in touch for your NFT project
