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GARY GENSLER: All
right, we're going

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to turn today to
a fun topic of how

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central banks, right at the
heart of the financial system,

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are thinking about blockchain.

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And we're going to do
this over two classes.

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We're fortunate that we
have some real expertise

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in the room, and I'm not
talking about myself.

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But Rob Ali, who ran the digital
efforts at the Bank of England,

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and is now--

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and has been for some time--
part of the digital currency

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initiative over
at the Media Lab,

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is going to come up from time to
time and give his perspective.

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Not only from MIT's
Media Lab's perspective,

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but also from the history
of what he's done.

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He's authored a number
of papers in this area.

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He works with
technologists creating

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a number of technologies.

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But I'll let Rob tell you
a little bit about what

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he's doing in central banking.

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Simon Johnson's
also joined us, who

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is a former chief economist
of the International Monetary

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Fund.

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He's told me he doesn't
want to be called on,

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but I will call on Simon to give
his perspective at some point

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in time, from the IMF days.

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But as you all know,
Simon is Sloan faculty,

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a great teacher, himself,
teaches a lot of you

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in the global markets
course and the GLAB course,

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and things like that.

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And Simon and I in the
spring teach a public policy

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and private sector
course, which is just one

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more time for me to plug that
that's a good course, too.

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So now, let's just talk a
little bit about central banking

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and blockchain.

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First, what are we going to do?

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A little bit about our readings
and the study questions.

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We're going to start
with Fiat currency,

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and go back again
to Fiat currency,

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and how does it fit
into central banking.

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So the first 20% or
30% of today is really

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just about what
is a central bank,

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and how does it fit into money?

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Then, how are central
banks thinking

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about blockchain technology?

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What are their approaches?

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And we're going to talk about
four different approaches

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that central banks are taking
to blockchain technology.

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Then dive into one of those four
approaches-- payment systems,

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and how are they looking at
payment systems right now.

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Dive into probably the most
interesting one-- central bank

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digital currency, and what's
called the money flower.

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You might remember
that money flower

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that was in the BIS
report, and so forth.

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And then just wrap it up.

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So that's a little bit of
what we're trying to do.

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The study questions were
really about central banking--

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what are they thinking about?

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How are they thinking about
digital reserves, and so forth?

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Because I have a
guest with me, I'm

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not going to do as
much cold calling,

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because we're going
to leave time for Rob

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to get up here and give some of
his thoughts as we go through.

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But the key
questions were really

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how are central banks
thinking about central bank

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digital currency?

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How might they think of
the design considerations--

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which we're going to dive
into in the latter part

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of the class.

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Designing retail
versus wholesale.

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Access-- should it be a
token or account-based?

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Interest bearing or not?

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And we'll talk a lot Thursday
about why Sweden right now is

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come out with their most
recent paper, which was not

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in assigned reading,
because the paper came out

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about a week ago.

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But they're saying they're
thinking they should make it

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interest bearing, which I
wouldn't have necessarily

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predicted.

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But that's where their thinking
is as of October of 2018.

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And then, what are
the challenges?

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That it might relate back to
the commercial banking business,

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the credit markets,
the economy as a whole.

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So that's a little
bit of the background.

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And these were the readings.

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I apologize, because
this week is probably

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a little heavy reading,
which meant you all skimmed

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rather than actually dove in.

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One of these
readings, Broadbent--

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Rob did you help write this
speech that Broadbent wrote?

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00:04:30,627 --> 00:04:32,710
ROBLEH ALI: No, I confess,
this is all Ben's work.

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And I reviewed a draft
that he sent round

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and made some
comments on it, but I

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can't claim any [INAUDIBLE].

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GARY GENSLER: Anybody
working in the central bank

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digital currency
space really goes back

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to Broadbent's speech--

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I assumed that Rob may have
written it or reviewed it.

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And Garratt, who gave testimony
in front of the US Congress

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on these issues, is often quoted
by the Bank of International

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Settlement and others.

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So if there were two that you
really want to think about--

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the economics of money and
central bank digital currency,

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Garratt and Broadbent
are picked up a lot.

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The Economist piece
was kind of lively,

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and walked us all the
way back to Adam Smith.

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Did anybody read The Economist
piece and remember what he--

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anybody remember
the Adam-- so James?

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AUDIENCE: He basically
argued everything

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that's done right and wrong
with Fiat currencies, exactly

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what's happening with Bitcoin.

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GARY GENSLER: It's exactly
what's happening with Bitcoin.

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In The Economist piece, it
talks about in the 1770s, when

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they started to move a bit away
from gold money to paper money,

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and they set up a
clearing house in 1773

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to deal with the paper that was
going amongst and between all

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the banks.

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That Adam Smith
apparently wrote that it

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was wagon wheels in
the air, and that gold

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was the highway of money--

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but paper money and central
clearing of that paper money

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was the wagon wheels in the air.

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So The Economist was
basically saying,

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these debates are
as old as time.

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Adam Smith was saying,
you can promote an economy

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with wagon wheels in the air--

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money.

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But maybe that's what's
going on now, as well.

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So I've already introduced Rob--

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research scientist from the
Digital Currency Initiative,

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and before MIT.

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He helped Broadbent--
he won't say he did,

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but he helped
Broadbent do everything

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he did at the Bank of England.

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And then Simon, who's
taking notes feverishly--

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did I get your--

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did I get this right?

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Yeah, good picture?

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SIMON JOHNSON: Not
sure about the picture.

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GARY GENSLER: What's that?

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Not sure about the picture?

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So Fiat currency is
anybody going to remind me

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what Fiat currency is?

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00:07:01,990 --> 00:07:04,970
Brodish?

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You were slouching in the
chair a little bit there.

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AUDIENCE: So Fiat currency
is the currency particularly

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issued by the central
bank of the government

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of the countries-- which
is [INAUDIBLE] something

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that is normally the
norm in the ecosystem

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to use as a [INAUDIBLE].

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GARY GENSLER: So it's
issued by a central bank,

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it's the norm in the system.

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And what are two very
important economic features

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of Fiat currency, that
make it so widely accepted

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00:07:34,390 --> 00:07:38,260
in any economy that
we've talked about?

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AUDIENCE: One of
the reasons is it's

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typically used as the means to
pay taxes for that [INAUDIBLE]..

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GARY GENSLER: Right, so taxes.

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And what was the other big
one that almost every country

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you can use it for?

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Pria, were you looking at me?

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No?

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Shawn?

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What?

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Yeah, you can use it
for debt payments.

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So societies come
together and say,

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you can use it for all
debts, public and private.

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You can use it for taxes.

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It sort of gives it an enormous
network effect and an advantage

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in any economy.

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And then what happens is,
so many of us in a society

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then use it as a
unit of account,

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and there's an enormous
amount of network effect.

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Just the raw
economics of money is

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that others will use
it, and exchange it,

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and thus it becomes the medium
of exchange, unit account

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and store of value.

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So it's represented
by central bank notes.

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And commercial bank deposits
relies on a system of ledgers,

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which makes it
somewhat adaptable,

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and why blockchain is
interesting in this space.

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And taxes and debts.

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So then, I've pieced together
a little bit of a slide

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to think about, where do
central banks fit into this?

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Ultimately, you'll see
where I'm going with this.

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But commercial banks and
central banks both have money.

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Central bank money
are reserves and cash.

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00:09:05,770 --> 00:09:10,840
So it's not simply the cash in
our pocket, it's also reserves.

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And bank deposits actually
are a form of money.

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So a little diagram--

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if the central bank
is at the top--

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and these are number
banks, commercial banks--

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reserves are the deposits
that commercial banks

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00:09:28,590 --> 00:09:31,410
have with the central bank.

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When central banking started
200 and 300 years ago,

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it was the commercial
banks wanted something

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from the government.

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They wanted some backing, they
wanted a lender of last resort,

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and they would have to open up
accounts at the central bank.

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But today, when we
have unified ledgers,

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then the central bank issues
reserves to the banking system,

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and those reserves
are a form of money.

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00:10:02,070 --> 00:10:05,130
The next thing is, there's the
public down at the bottom--

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00:10:05,130 --> 00:10:07,830
Bob, Alice, and Charlie.

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00:10:07,830 --> 00:10:12,120
We all have money, and
it's called bank deposits.

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But there's one other piece of
this puzzle, if I can get it,

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00:10:15,230 --> 00:10:16,590
it's cash.

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00:10:16,590 --> 00:10:19,400
So three forms of money--

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00:10:19,400 --> 00:10:21,930
we can all have
cash in our pocket,

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00:10:21,930 --> 00:10:28,040
as I commonly pull
out, this here, right.

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00:10:28,040 --> 00:10:32,090
I'm going to watch you,
Hugo, I'm going to watch you.

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00:10:32,090 --> 00:10:34,268
No, no, but what is
that right there?

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AUDIENCE: Federal Reserve note?

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00:10:35,560 --> 00:10:36,890
GARY GENSLER: Right.

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00:10:36,890 --> 00:10:40,360
That Federal Reserve
note is a representation

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00:10:40,360 --> 00:10:44,690
that at the central bank they're
storing some value for me.

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00:10:44,690 --> 00:10:47,470
It's got a serial number.

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00:10:47,470 --> 00:10:50,380
That piece of paper itself
is not the store of value,

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00:10:50,380 --> 00:10:53,260
in a sense, even
though we accept it.

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00:10:53,260 --> 00:10:55,870
Would you say that's
a store of value?

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00:10:55,870 --> 00:10:57,940
AUDIENCE: In some ways.

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00:10:57,940 --> 00:11:00,460
GARY GENSLER: In what way
is that a store of value?

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00:11:00,460 --> 00:11:02,920
AUDIENCE: I know
that it's worth $20.

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00:11:02,920 --> 00:11:04,880
GARY GENSLER: And
why is it worth $20?

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00:11:04,880 --> 00:11:07,675
AUDIENCE: Because the
central bank says so.

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00:11:07,675 --> 00:11:11,700
GARY GENSLER: And see what
happens if you hand it to Rob.

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00:11:11,700 --> 00:11:14,400
He'll take it, right?

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00:11:14,400 --> 00:11:17,220
That's how you know
it's worth something.

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00:11:17,220 --> 00:11:20,940
But it's a tokenized
means of money.

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00:11:20,940 --> 00:11:24,360
It's a physical token,
and the central bank

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00:11:24,360 --> 00:11:27,510
has something stored there.

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00:11:27,510 --> 00:11:29,280
But you also have bank deposits.

239
00:11:29,280 --> 00:11:33,060
And if you go into Starbucks,
and you buy something

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00:11:33,060 --> 00:11:34,380
at Starbucks--

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00:11:34,380 --> 00:11:36,400
James, if you buy
something at Starbucks,

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00:11:36,400 --> 00:11:37,970
what are you giving them?

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00:11:37,970 --> 00:11:41,190
AUDIENCE: A piece of paper--
well, a piece of linen.

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00:11:41,190 --> 00:11:43,280
GARY GENSLER: No, but do
you actually-- who here--

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00:11:43,280 --> 00:11:44,360
AUDIENCE: A credit card.

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00:11:44,360 --> 00:11:44,880
GARY GENSLER: All
right, so when you

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00:11:44,880 --> 00:11:47,250
give a credit card, what
are you giving to Starbucks,

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00:11:47,250 --> 00:11:49,170
ultimately?

249
00:11:49,170 --> 00:11:52,374
AUDIENCE: A notion that I have
some money in my bank account

250
00:11:52,374 --> 00:11:55,450
that they can take in
exchange for coffee.

251
00:11:55,450 --> 00:12:00,870
GARY GENSLER: In exchange
for coffee, you're going to--

252
00:12:00,870 --> 00:12:03,540
I hope you give them
more than a notion.

253
00:12:03,540 --> 00:12:05,230
What will the payment system do?

254
00:12:05,230 --> 00:12:05,810
Ross?

255
00:12:05,810 --> 00:12:07,680
AUDIENCE: A receivable from
the credit card company.

256
00:12:07,680 --> 00:12:09,972
They just have a right to
get paid from the credit card

257
00:12:09,972 --> 00:12:11,250
company.

258
00:12:11,250 --> 00:12:14,007
That company checks to make
sure they're willing to--

259
00:12:14,007 --> 00:12:15,840
GARY GENSLER: And
ultimately that receivable

260
00:12:15,840 --> 00:12:18,285
will be moved bank
deposit to bank deposit.

261
00:12:21,360 --> 00:12:24,228
You'll never be handing
him my $20 bill.

262
00:12:24,228 --> 00:12:26,220
[LAUGHTER]

263
00:12:26,220 --> 00:12:26,730
What's that?

264
00:12:26,730 --> 00:12:28,440
All right, Rob, that's his fee.

265
00:12:28,440 --> 00:12:29,980
Teaching fees are cheap at MIT.

266
00:12:32,747 --> 00:12:34,330
But Ross, you want
to go through that?

267
00:12:34,330 --> 00:12:36,550
So the receivable will be
a bank deposit, ultimately.

268
00:12:36,550 --> 00:12:38,050
AUDIENCE: Right,
and they collect it

269
00:12:38,050 --> 00:12:40,392
from the credit
card company, who

270
00:12:40,392 --> 00:12:42,100
is going to move money
from their account

271
00:12:42,100 --> 00:12:43,350
to Starbucks's account.

272
00:12:43,350 --> 00:12:46,160
Then the credit card
company sends you a bill.

273
00:12:46,160 --> 00:12:48,040
So there's two separate
relationships there.

274
00:12:48,040 --> 00:12:49,570
So when they're
checking your card,

275
00:12:49,570 --> 00:12:52,450
it's just a credit card
company checking its records

276
00:12:52,450 --> 00:12:54,790
to see if they're
willing to issue

277
00:12:54,790 --> 00:12:56,320
the receivable to Starbucks.

278
00:12:56,320 --> 00:12:58,028
GARY GENSLER: So what
you're really doing

279
00:12:58,028 --> 00:13:01,480
is you're spending a form of
money called bank deposits.

280
00:13:01,480 --> 00:13:04,000
And your bank deposit
is going to go down,

281
00:13:04,000 --> 00:13:06,423
and what's Starbucks
bank deposit going to do?

282
00:13:06,423 --> 00:13:07,090
AUDIENCE: Go up.

283
00:13:07,090 --> 00:13:08,600
GARY GENSLER: Go up.

284
00:13:08,600 --> 00:13:11,830
So three forms of money--

285
00:13:11,830 --> 00:13:16,080
the cash, the deposits,
and the reserves,

286
00:13:16,080 --> 00:13:18,840
because the central bank
is giving some money.

287
00:13:21,410 --> 00:13:25,430
All of this is handled in
accounts in a ledger structure.

288
00:13:25,430 --> 00:13:26,960
And we talked about it.

289
00:13:26,960 --> 00:13:29,540
So the accounts-- there's
central bank accounts,

290
00:13:29,540 --> 00:13:30,710
and there are bank accounts.

291
00:13:30,710 --> 00:13:35,060
It's just accounts are ledgers,
I've just changed the words.

292
00:13:35,060 --> 00:13:37,910
And it's moved through a
system, a payment system

293
00:13:37,910 --> 00:13:40,130
that we talked about last
week-- and I'm putting to.

294
00:13:40,130 --> 00:13:43,550
Real-time gross settlement
is that little box up there.

295
00:13:43,550 --> 00:13:47,300
Real-time gross settlement
is a system between banks

296
00:13:47,300 --> 00:13:48,560
and a central bank.

297
00:13:48,560 --> 00:13:50,510
Almost every country
has some form

298
00:13:50,510 --> 00:13:52,520
of real-time gross
settlement system.

299
00:13:52,520 --> 00:13:58,830
Here in the US, we might
call it the Fed wire, or ACH.

300
00:13:58,830 --> 00:14:02,998
I see Ali-- is ACH real-time
gross settlement, or maybe not?

301
00:14:02,998 --> 00:14:04,290
AUDIENCE: No, they're not real.

302
00:14:04,290 --> 00:14:05,350
GARY GENSLER: Just the Fed wire.

303
00:14:05,350 --> 00:14:06,850
AUDIENCE: There's
another one, but I

304
00:14:06,850 --> 00:14:08,400
forget the name [INAUDIBLE].

305
00:14:08,400 --> 00:14:09,283
GARY GENSLER: Chips?

306
00:14:09,283 --> 00:14:09,950
AUDIENCE: Chips.

307
00:14:09,950 --> 00:14:12,033
GARY GENSLER: Chips-- so
in the US, we have chips,

308
00:14:12,033 --> 00:14:14,400
and the Fed wire are both
real-time gross settlement.

309
00:14:17,550 --> 00:14:22,480
That's between banks
and the central bank.

310
00:14:22,480 --> 00:14:24,620
And then you have all
sorts of systems--

311
00:14:24,620 --> 00:14:27,940
what's in that little box
is not as important to read,

312
00:14:27,940 --> 00:14:30,580
is basically to
move between banks.

313
00:14:30,580 --> 00:14:34,420
So that's central banking
and how it fits into money.

314
00:14:34,420 --> 00:14:35,560
Rob, how we doing?

315
00:14:35,560 --> 00:14:38,140
All right so for?

316
00:14:38,140 --> 00:14:40,570
You can come up here anytime.

317
00:14:40,570 --> 00:14:42,100
All right-- what's that?

318
00:14:42,100 --> 00:14:43,150
ROBLEH ALI: [INAUDIBLE]

319
00:14:43,150 --> 00:14:45,640
GARY GENSLER: All right, we've
got some feedback, though.

320
00:14:45,640 --> 00:14:48,170
So I just wanted to
hit two things on cash.

321
00:14:48,170 --> 00:14:52,540
Cash in the economy is
moving up a little bit.

322
00:14:52,540 --> 00:14:55,270
The BIS report, for
those who read deeply,

323
00:14:55,270 --> 00:14:58,180
this is just a chart that
comes from your reading.

324
00:14:58,180 --> 00:15:02,290
This is cash as a
percentage of GDP.

325
00:15:02,290 --> 00:15:04,810
You'll see one
arrow going down--

326
00:15:04,810 --> 00:15:06,590
Sweden.

327
00:15:06,590 --> 00:15:13,010
Sweden only has about 2%
of their economy in cash.

328
00:15:13,010 --> 00:15:18,600
The US is going
up-- it's about 8%.

329
00:15:18,600 --> 00:15:22,050
We have a $20 trillion
economy, we have $1.6 trillion

330
00:15:22,050 --> 00:15:25,870
of those $20 bills.

331
00:15:29,010 --> 00:15:31,650
So in most countries,
it's going up.

332
00:15:31,650 --> 00:15:35,190
China-- Japan, by the
way, is close to 20%

333
00:15:35,190 --> 00:15:39,790
of their GDP in cash.

334
00:15:39,790 --> 00:15:44,140
I added this chart, Simon,
this was to keep you guessing.

335
00:15:44,140 --> 00:15:44,890
Yes?

336
00:15:44,890 --> 00:15:46,307
AUDIENCE: Why is Japan so high?

337
00:15:46,307 --> 00:15:47,390
GARY GENSLER: Why is what?

338
00:15:47,390 --> 00:15:49,660
AUDIENCE: Why is
Japan's cash is so high?

339
00:15:49,660 --> 00:15:51,880
GARY GENSLER: Who do we
have from Japan here?

340
00:15:51,880 --> 00:15:54,160
You want to answer
this question, Akira?

341
00:15:54,160 --> 00:15:57,220
AUDIENCE: Japanese people tend
to use actual cash rather than

342
00:15:57,220 --> 00:15:58,520
credit card.

343
00:15:58,520 --> 00:16:01,510
People use [INAUDIBLE] going
to use their credit card,

344
00:16:01,510 --> 00:16:04,300
because they're using the
account credit card number,

345
00:16:04,300 --> 00:16:08,200
and the [INAUDIBLE]--

346
00:16:08,200 --> 00:16:13,570
it's a little bit old people
feel uncomfortable to use

347
00:16:13,570 --> 00:16:15,860
that number.

348
00:16:15,860 --> 00:16:17,443
GARY GENSLER: So a
bit of a cultural--

349
00:16:17,443 --> 00:16:19,900
AUDIENCE: Cultural, I
think, yeah, cultural.

350
00:16:19,900 --> 00:16:22,140
GARY GENSLER: And technological.

351
00:16:22,140 --> 00:16:25,522
Or more culture?

352
00:16:25,522 --> 00:16:26,980
AUDIENCE: So the
younger generation

353
00:16:26,980 --> 00:16:30,130
is right to use their
credit card for [INAUDIBLE],,

354
00:16:30,130 --> 00:16:34,140
but older people
doesn't [INAUDIBLE]..

355
00:16:34,140 --> 00:16:36,640
ROBLEH ALI: And I think, what's
interesting about this slide

356
00:16:36,640 --> 00:16:39,340
is, a lot of the other
central banks in Sweden

357
00:16:39,340 --> 00:16:42,250
is like the canary in the mine--

358
00:16:42,250 --> 00:16:44,200
they see cash usage
dropping, and they're

359
00:16:44,200 --> 00:16:47,985
thinking about this sort
of fundamental question

360
00:16:47,985 --> 00:16:50,360
about should the public have
access to central bank money

361
00:16:50,360 --> 00:16:51,035
at all?

362
00:16:51,035 --> 00:16:52,660
And they have it now,
in terms of cash,

363
00:16:52,660 --> 00:16:55,900
and should we provide a digital
version cash is not convenient

364
00:16:55,900 --> 00:16:56,704
anymore.

365
00:17:00,500 --> 00:17:05,502
AUDIENCE: It's starting on
2007, is this [INAUDIBLE]??

366
00:17:05,502 --> 00:17:10,210
Or is it capturing the effect
of advanced buying lots

367
00:17:10,210 --> 00:17:11,410
of assets in the market?

368
00:17:11,410 --> 00:17:13,329
GARY GENSLER: So
this question is,

369
00:17:13,329 --> 00:17:18,190
is does this reflect because--
we start in 2007 to 2016--

370
00:17:18,190 --> 00:17:20,160
is there something
else going on?

371
00:17:20,160 --> 00:17:22,490
The quantitative easing
of central banks.

372
00:17:22,490 --> 00:17:24,619
But what else happened
during this period of time?

373
00:17:24,619 --> 00:17:27,800
What fundamentally happened
during this period, Elan?

374
00:17:27,800 --> 00:17:29,050
AUDIENCE: The mortgage crisis.

375
00:17:29,050 --> 00:17:30,800
GARY GENSLER: The
mortgage crisis, or more

376
00:17:30,800 --> 00:17:32,930
broadly, the financial crisis.

377
00:17:32,930 --> 00:17:34,700
So there was--

378
00:17:34,700 --> 00:17:37,210
I think, more than
quantitative easing,

379
00:17:37,210 --> 00:17:40,150
I think that this whole sense--

380
00:17:40,150 --> 00:17:43,300
that Satoshi Nakamoto
tapped into, too--

381
00:17:43,300 --> 00:17:46,180
is central institutions
are failing.

382
00:17:46,180 --> 00:17:50,230
So should there be a
run to physical cash?

383
00:17:50,230 --> 00:17:52,780
Is this-- it's not gold--

384
00:17:52,780 --> 00:17:57,680
but is this more,
in some cases, safe

385
00:17:57,680 --> 00:17:59,735
than commercial bank deposits?

386
00:18:03,290 --> 00:18:06,060
Now, my dad, if he
would have been--

387
00:18:06,060 --> 00:18:07,710
well, he was alive
during this period,

388
00:18:07,710 --> 00:18:09,918
but he would've been taking
his money out of the bank

389
00:18:09,918 --> 00:18:12,320
and getting gold.

390
00:18:12,320 --> 00:18:13,820
Simon, you haven't
heard this story,

391
00:18:13,820 --> 00:18:20,830
but my dad always had some
gold coins and a few diamonds.

392
00:18:20,830 --> 00:18:25,770
He inherently did
not trust government.

393
00:18:25,770 --> 00:18:28,160
He also carried a
gun most days, too.

394
00:18:28,160 --> 00:18:30,410
[LAUGHTER]

395
00:18:30,410 --> 00:18:31,625
He is in a tough business.

396
00:18:35,000 --> 00:18:40,120
But in this period of time, you
couldn't easily get the gold.

397
00:18:40,120 --> 00:18:42,550
A lot of people went to cash.

398
00:18:42,550 --> 00:18:45,790
How much do you think
the US's $1.6 trillion,

399
00:18:45,790 --> 00:18:52,180
or 8% of our economy, is $20
bills like that, and $10s?

400
00:18:52,180 --> 00:18:54,470
And how much do you
think it's $100 bills?

401
00:18:54,470 --> 00:18:54,970
Anybody?

402
00:18:54,970 --> 00:18:56,590
It was not in the
readings, I'm just

403
00:18:56,590 --> 00:19:00,720
kind of curious what
do people think here?

404
00:19:00,720 --> 00:19:05,320
AUDIENCE: I think $100
bills are worth 80% of the--

405
00:19:05,320 --> 00:19:10,220
GARY GENSLER: So 80%
of the $1.6 trillion.

406
00:19:10,220 --> 00:19:13,920
Does anybody have a
different thought?

407
00:19:13,920 --> 00:19:15,240
That was pretty good.

408
00:19:15,240 --> 00:19:18,600
So here's a chart that I
pulled out, through 2017.

409
00:19:18,600 --> 00:19:23,280
Of the $1.6 trillion, it
looks like about $1.3 trillion

410
00:19:23,280 --> 00:19:24,450
is $100 bills.

411
00:19:27,180 --> 00:19:30,570
So what's expanding
in the US is not

412
00:19:30,570 --> 00:19:33,270
the use of $20
bills and $10 bills,

413
00:19:33,270 --> 00:19:36,750
it's the use of the $100s.

414
00:19:36,750 --> 00:19:38,560
And I could put
up another chart--

415
00:19:38,560 --> 00:19:40,920
over half of those
$100 bills are thought

416
00:19:40,920 --> 00:19:42,450
to be held internationally.

417
00:19:42,450 --> 00:19:46,980
And they're not even held
within the 50 continental--

418
00:19:46,980 --> 00:19:50,200
the 48 continental states,
and Alaska and Hawaii.

419
00:19:50,200 --> 00:19:52,290
They're not held domestically.

420
00:19:52,290 --> 00:19:54,240
So it's great to be
a reserve currency,

421
00:19:54,240 --> 00:19:57,090
it's great to be
a store of value.

422
00:19:57,090 --> 00:19:57,605
Ross?

423
00:19:57,605 --> 00:19:58,980
AUDIENCE: I was
just going to ask

424
00:19:58,980 --> 00:20:00,290
the store of value question.

425
00:20:00,290 --> 00:20:03,705
Maybe I misheard you before,
when you were passing the $20,

426
00:20:03,705 --> 00:20:05,080
you said, is it
a store of value?

427
00:20:05,080 --> 00:20:06,990
And I thought you said, no.

428
00:20:06,990 --> 00:20:10,210
And if half of that
is $100s overseas,

429
00:20:10,210 --> 00:20:13,320
then that's the store of value,
that's what people are holding.

430
00:20:13,320 --> 00:20:17,010
GARY GENSLER: I don't think
there's a real answer to it.

431
00:20:17,010 --> 00:20:20,760
I would say this represents
a store of value, ultimately,

432
00:20:20,760 --> 00:20:24,390
on the central bank's ledger.

433
00:20:24,390 --> 00:20:31,120
Because the central bank
could, if they wish to,

434
00:20:31,120 --> 00:20:32,380
deny use of this.

435
00:20:32,380 --> 00:20:34,300
They haven't, they
haven't for decades,

436
00:20:34,300 --> 00:20:36,430
but I'm saying
somebody could say,

437
00:20:36,430 --> 00:20:39,190
that's a bad serial number.

438
00:20:39,190 --> 00:20:41,950
But most people would say
that $20 piece of linen

439
00:20:41,950 --> 00:20:45,155
is a store of value.

440
00:20:45,155 --> 00:20:46,780
AUDIENCE: I was going
to ask, would you

441
00:20:46,780 --> 00:20:51,280
expect the velocity of these
to be inversely related?

442
00:20:51,280 --> 00:20:53,450
Like with $20
bills, they probably

443
00:20:53,450 --> 00:20:55,960
have a higher velocity
than $100 bills,

444
00:20:55,960 --> 00:20:59,207
especially if they're being
used to store of value, right?

445
00:20:59,207 --> 00:21:00,790
GARY GENSLER: Yes,
so the question is,

446
00:21:00,790 --> 00:21:04,240
is the velocity of
$20s higher than $100s?

447
00:21:04,240 --> 00:21:06,850
Yes, meaning they
turn over faster.

448
00:21:06,850 --> 00:21:09,880
And one measurement of
it is, is how quickly

449
00:21:09,880 --> 00:21:17,050
these currencies, these
linens, have to be replaced.

450
00:21:17,050 --> 00:21:22,300
And $1 bills, I think, have an
average life about 18 months.

451
00:21:22,300 --> 00:21:24,820
They keep coming in
and out of the system.

452
00:21:24,820 --> 00:21:28,720
And I'm not entirely
sure, but I think $20s

453
00:21:28,720 --> 00:21:32,530
are maybe three,
four, five years.

454
00:21:32,530 --> 00:21:35,950
In essence, these are
all signed by secretaries

455
00:21:35,950 --> 00:21:37,600
of the treasuries,
and I apologize

456
00:21:37,600 --> 00:21:38,920
for those who aren't Americans.

457
00:21:38,920 --> 00:21:42,160
But it's hard now to
still find Rubin's--

458
00:21:42,160 --> 00:21:46,300
Bob Rubin, or Benson's,
which was the early '90s--

459
00:21:46,300 --> 00:21:50,260
signatures on the $20 bills.

460
00:21:50,260 --> 00:21:53,095
Now, part of that is because the
currency design keeps changing.

461
00:21:56,390 --> 00:21:59,360
So $100s aren't used as often.

462
00:21:59,360 --> 00:22:02,870
They have turned over since the
currency design has changed,

463
00:22:02,870 --> 00:22:05,570
because even an
illicit activity,

464
00:22:05,570 --> 00:22:09,470
you'd prefer a new
$100 to an old $100.

465
00:22:09,470 --> 00:22:12,570
Because a new $100
is more secure--

466
00:22:12,570 --> 00:22:15,250
it's less able to
be counterfeited.

467
00:22:15,250 --> 00:22:18,010
And when I served in the
US Department of Treasury,

468
00:22:18,010 --> 00:22:21,040
I had to spend a lot of
time, because I chaired

469
00:22:21,040 --> 00:22:24,130
something called the Interagency
Counterfeit Deterrent

470
00:22:24,130 --> 00:22:25,390
committee.

471
00:22:25,390 --> 00:22:28,300
And I had to meet in these
secure rooms, where they locked

472
00:22:28,300 --> 00:22:31,570
us in, and you learned about who
was counterfeiting the money.

473
00:22:31,570 --> 00:22:32,890
Brodish?

474
00:22:32,890 --> 00:22:35,746
AUDIENCE: Please go
back to the last slide.

475
00:22:35,746 --> 00:22:39,190
So what I see here is the
vertical shift in most

476
00:22:39,190 --> 00:22:42,430
of the economies
is smaller, which

477
00:22:42,430 --> 00:22:46,120
I'm hypothesizing that the
value of consumption in cash

478
00:22:46,120 --> 00:22:49,490
are also [INAUDIBLE] dense.

479
00:22:49,490 --> 00:22:50,950
So if that is the
case, then what

480
00:22:50,950 --> 00:22:53,530
is the rationale of increasing
the high-value notes

481
00:22:53,530 --> 00:22:55,540
in the system?

482
00:22:55,540 --> 00:22:59,620
GARY GENSLER: What do
central bank issue more cash

483
00:22:59,620 --> 00:23:02,110
to meet that demand?

484
00:23:02,110 --> 00:23:04,710
AUDIENCE: And why
more $100, as compared

485
00:23:04,710 --> 00:23:07,550
to the smaller denominations
who have the cash consumption--

486
00:23:07,550 --> 00:23:09,940
seem to be more low
value consumptions?

487
00:23:09,940 --> 00:23:13,600
GARY GENSLER: So
Brodish is asking why--

488
00:23:13,600 --> 00:23:18,810
why, in, essence
is this happening?

489
00:23:18,810 --> 00:23:21,210
Well, a central bank has
a couple of choices--

490
00:23:21,210 --> 00:23:26,600
they can issue paper
currency to meet demand.

491
00:23:26,600 --> 00:23:29,890
And the demand is
really as evidenced

492
00:23:29,890 --> 00:23:32,170
through this thing called DAS--

493
00:23:32,170 --> 00:23:35,480
does the public
ask for the cash?

494
00:23:35,480 --> 00:23:37,770
And that's what's
largely happening.

495
00:23:37,770 --> 00:23:41,520
Or can they put some quota
system, or by government Fiat--

496
00:23:41,520 --> 00:23:43,590
like an India, where
they said, no, you

497
00:23:43,590 --> 00:23:47,580
have to hand in all
the old banknotes?

498
00:23:47,580 --> 00:23:51,360
And there was an
active desire in India

499
00:23:51,360 --> 00:23:54,730
to take cash out of the system.

500
00:23:54,730 --> 00:23:56,880
But in the US,
we've not had that.

501
00:23:56,880 --> 00:24:00,930
We have not had any real
large government interest

502
00:24:00,930 --> 00:24:02,770
of taking it out of the system.

503
00:24:02,770 --> 00:24:06,600
And so what you do have, is
you have more and more demand

504
00:24:06,600 --> 00:24:08,670
for $100s, as a--

505
00:24:08,670 --> 00:24:10,980
I'll call store of
value, whether it's

506
00:24:10,980 --> 00:24:15,360
for illicit activity, or
for straight-up appropriate

507
00:24:15,360 --> 00:24:17,220
activity.

508
00:24:17,220 --> 00:24:21,180
And the central bank
is facilitating that.

509
00:24:21,180 --> 00:24:27,450
This entire 8% of our GDP,
or $1.6 trillion of notes,

510
00:24:27,450 --> 00:24:32,660
is interest-free borrowing
for the US government.

511
00:24:32,660 --> 00:24:35,260
So there's seniorage.

512
00:24:35,260 --> 00:24:35,760
Eric?

513
00:24:35,760 --> 00:24:38,385
AUDIENCE: Yeah, I just wanted to
make a quick comment regarding

514
00:24:38,385 --> 00:24:40,910
the store of value.

515
00:24:40,910 --> 00:24:44,270
And going back to what we
discussed in the first classes

516
00:24:44,270 --> 00:24:48,290
was that, it's actually a
social construct, the belief

517
00:24:48,290 --> 00:24:53,880
that you're going to
solve debts, or pay taxes

518
00:24:53,880 --> 00:24:56,670
without the Fiat currency.

519
00:24:56,670 --> 00:24:58,950
And that reminded
me of a story, there

520
00:24:58,950 --> 00:25:02,980
was this-- this was true-- this
was a South American drug lord

521
00:25:02,980 --> 00:25:07,640
family, this drug lord was
on the verge of being caught.

522
00:25:07,640 --> 00:25:12,300
All their assets were being
seized by the government.

523
00:25:12,300 --> 00:25:16,100
And the story is told by
his son, who was actually

524
00:25:16,100 --> 00:25:19,910
sitting in the one
apartment, surrounded

525
00:25:19,910 --> 00:25:23,600
by piles and piles
of dollar bills,

526
00:25:23,600 --> 00:25:27,500
which they actually
couldn't do anything with.

527
00:25:27,500 --> 00:25:31,760
They actually used them to burn
and get some heat out of them.

528
00:25:31,760 --> 00:25:35,530
And then you go back
to think, is it really

529
00:25:35,530 --> 00:25:37,480
an intrinsic sort of value?

530
00:25:37,480 --> 00:25:41,180
This is going back to the
social construct, right?

531
00:25:41,180 --> 00:25:46,070
Because their money wasn't
good for any merchant

532
00:25:46,070 --> 00:25:49,130
in the south-- in that specific
South American country.

533
00:25:49,130 --> 00:25:51,230
GARY GENSLER: Right, so it is--

534
00:25:51,230 --> 00:25:53,840
if your point is, it's
a social construct,

535
00:25:53,840 --> 00:25:56,180
I'm concurring, agreeing.

536
00:25:56,180 --> 00:25:58,310
In that case, maybe it
was also a little bit

537
00:25:58,310 --> 00:26:02,700
of time value of paper money--
he was about to get arrested.

538
00:26:02,700 --> 00:26:06,180
There's so might-- so
I don't know enough

539
00:26:06,180 --> 00:26:07,620
about that circumstance.

540
00:26:07,620 --> 00:26:10,180
But for sure.

541
00:26:10,180 --> 00:26:14,200
So let's move a little
bit on to central banking.

542
00:26:14,200 --> 00:26:21,460
And I choose the US, but
it's true around the globe.

543
00:26:21,460 --> 00:26:23,640
So there are
economic policy goals

544
00:26:23,640 --> 00:26:25,560
that central banks
have taken on.

545
00:26:25,560 --> 00:26:30,300
In the US, it was captured,
written into law in the 1970s--

546
00:26:30,300 --> 00:26:33,240
1977, to be precise--

547
00:26:33,240 --> 00:26:36,000
something called
the dual mandate.

548
00:26:36,000 --> 00:26:39,090
Interestingly, the US dual
mandate for the central bank

549
00:26:39,090 --> 00:26:42,390
has three things,
written in law.

550
00:26:42,390 --> 00:26:44,700
This is a quote, "promote
effectively the goals

551
00:26:44,700 --> 00:26:48,330
of maximum employment,
comma, stable prices,

552
00:26:48,330 --> 00:26:51,780
and moderate long
term interest rates."

553
00:26:51,780 --> 00:26:53,640
That is what's
known as, in the US,

554
00:26:53,640 --> 00:26:55,530
is the Federal
Reserve's dual mandate.

555
00:26:55,530 --> 00:26:57,990
You might say it looks
like three mandates.

556
00:26:57,990 --> 00:26:59,773
Simon, do you have any thoughts?

557
00:26:59,773 --> 00:27:01,440
SIMON JOHNSON: Well,
the central bankers

558
00:27:01,440 --> 00:27:03,315
will tell you that stable
prices are the best

559
00:27:03,315 --> 00:27:04,950
way to moderate interest rates.

560
00:27:04,950 --> 00:27:06,140
So that's [INAUDIBLE].

561
00:27:06,140 --> 00:27:08,580
GARY GENSLER: And
thus, mostly, people

562
00:27:08,580 --> 00:27:13,410
call the dual mandate
is price stability

563
00:27:13,410 --> 00:27:16,420
and maximum employment.

564
00:27:16,420 --> 00:27:17,970
And then some
central bankers would

565
00:27:17,970 --> 00:27:20,760
say, the best way to
promote maximum employment

566
00:27:20,760 --> 00:27:24,600
is stable prices,
depending on how--

567
00:27:24,600 --> 00:27:27,240
You wouldn't say that if you're
going for senate confirmation

568
00:27:27,240 --> 00:27:30,060
to be a member of the
Federal Reserve Board,

569
00:27:30,060 --> 00:27:32,280
but am I not right?

570
00:27:32,280 --> 00:27:33,300
That some economists--

571
00:27:33,300 --> 00:27:35,450
AUDIENCE: If you were up
for presidency of the ECP.

572
00:27:35,450 --> 00:27:37,200
GARY GENSLER: If you
were up for president

573
00:27:37,200 --> 00:27:38,610
of the European Central Bank.

574
00:27:38,610 --> 00:27:40,050
AUDIENCE: You'd
have to say that.

575
00:27:40,050 --> 00:27:40,860
GARY GENSLER: Because?

576
00:27:40,860 --> 00:27:42,402
AUDIENCE: They only
have one mandate.

577
00:27:42,402 --> 00:27:44,430
GARY GENSLER: They
only have one mandate.

578
00:27:44,430 --> 00:27:46,260
So around the
globe, central banks

579
00:27:46,260 --> 00:27:49,370
might have different
mandates, but almost--

580
00:27:49,370 --> 00:27:53,210
I would say, though I haven't
studied 180 central banks,

581
00:27:53,210 --> 00:27:56,870
all of them would
have price stability,

582
00:27:56,870 --> 00:27:59,300
or to ensure that there's
not much inflation.

583
00:27:59,300 --> 00:28:03,600
Because they are in the business
of having the public mandate

584
00:28:03,600 --> 00:28:07,340
to secure the money.

585
00:28:07,340 --> 00:28:10,160
That's the core thing.

586
00:28:10,160 --> 00:28:11,570
Now, what do they do?

587
00:28:11,570 --> 00:28:13,590
They manage money.

588
00:28:13,590 --> 00:28:17,300
And I think of it
as supply and price.

589
00:28:17,300 --> 00:28:19,030
So these are
Gensler's way to think

590
00:28:19,030 --> 00:28:22,000
about what central banks do,
but it's about supply and money.

591
00:28:22,000 --> 00:28:24,610
Supply is physical cash.

592
00:28:24,610 --> 00:28:26,860
Do we keep issuing
more physical cash?

593
00:28:26,860 --> 00:28:30,130
This $1.6 trillion of cash?

594
00:28:30,130 --> 00:28:32,273
But there's broader things
called monetary base.

595
00:28:32,273 --> 00:28:34,690
This was not in the reading--
does anybody want to tell me

596
00:28:34,690 --> 00:28:38,500
things like M2 and M3, what--

597
00:28:38,500 --> 00:28:40,680
anybody taking a finance course?

598
00:28:40,680 --> 00:28:46,540
Are you studying what monetary
base is, or M1, or M2, or M3?

599
00:28:46,540 --> 00:28:48,070
There's no reflection
on you, it's

600
00:28:48,070 --> 00:28:49,540
maybe a reflection on Sloan.

601
00:28:49,540 --> 00:28:50,930
I'm just asking.

602
00:28:50,930 --> 00:28:51,730
No?

603
00:28:51,730 --> 00:28:54,160
So there's different
measurements of money

604
00:28:54,160 --> 00:28:59,820
that central bankers
will monitor and manage.

605
00:28:59,820 --> 00:29:04,270
M1 is usually the hardest core
money-- used to just be cash,

606
00:29:04,270 --> 00:29:06,280
or cash and demand deposits.

607
00:29:06,280 --> 00:29:10,100
In the US system, it's about
$3 and 1/2 to $4 trillion.

608
00:29:10,100 --> 00:29:11,920
So about half of it's the cash.

609
00:29:11,920 --> 00:29:15,610
And then they add-- the
Federal Reserve says,

610
00:29:15,610 --> 00:29:18,850
demand deposits in a
bank are just like cash.

611
00:29:18,850 --> 00:29:21,970
And this comes back four
and five decades ago,

612
00:29:21,970 --> 00:29:28,740
started to say that the
hard money, M1 is that.

613
00:29:28,740 --> 00:29:32,380
M2 includes the
rest of deposits.

614
00:29:32,380 --> 00:29:38,180
So M2, in the US, is somewhere
in the order of $14 trillion.

615
00:29:38,180 --> 00:29:41,710
In the US, there's
about $13 trillion--

616
00:29:41,710 --> 00:29:45,260
or 65% of our economy
is in deposits

617
00:29:45,260 --> 00:29:46,700
the banking system has.

618
00:29:46,700 --> 00:29:49,520
Every country that you're
from has a different number,

619
00:29:49,520 --> 00:29:52,130
I'm just using the
US as an example.

620
00:29:52,130 --> 00:29:56,690
So deposits and make up
more money than cash.

621
00:29:56,690 --> 00:29:59,180
Cash is about 1/2
to $2 trillion,

622
00:29:59,180 --> 00:30:00,920
deposits are $13 trillion.

623
00:30:00,920 --> 00:30:04,060
You add the together,
you roughly--

624
00:30:04,060 --> 00:30:06,110
I'm using this term loosely--

625
00:30:06,110 --> 00:30:10,280
M2, which is a wider form of
money, is about $14 trillion

626
00:30:10,280 --> 00:30:11,090
here in the US.

627
00:30:11,090 --> 00:30:16,700
There's also an M3, and there's
other measurements of money.

628
00:30:16,700 --> 00:30:19,580
So the Federal Reserve
tries to manage that,

629
00:30:19,580 --> 00:30:22,760
and they manage it not only
by how much physical cash is

630
00:30:22,760 --> 00:30:26,210
printed, but it's also the
leverage in the banking system.

631
00:30:26,210 --> 00:30:28,460
If you let a banking
system be highly leveraged,

632
00:30:28,460 --> 00:30:31,460
then you're, in essence,
creating more money.

633
00:30:31,460 --> 00:30:34,600
If a banking system
needs more capital,

634
00:30:34,600 --> 00:30:37,130
then it's going to
have fewer abilities

635
00:30:37,130 --> 00:30:38,830
to expand the economy.

636
00:30:38,830 --> 00:30:42,590
And those are the big tools that
a Federal Reserve, or the Bank

637
00:30:42,590 --> 00:30:47,510
of England, or any central
bank has to basically shape

638
00:30:47,510 --> 00:30:49,190
the supply of money.

639
00:30:49,190 --> 00:30:53,120
But there's also things they
do to shape the price of money.

640
00:30:53,120 --> 00:30:55,340
And that's interest rates.

641
00:30:55,340 --> 00:30:58,400
The price of money is like
I'm lending Rob money,

642
00:30:58,400 --> 00:31:00,140
he's giving it back
to me in a year--

643
00:31:00,140 --> 00:31:02,090
what's the price of money?

644
00:31:02,090 --> 00:31:03,650
And it's that.

645
00:31:03,650 --> 00:31:07,970
So two big tools-- supply
of money and price of money.

646
00:31:07,970 --> 00:31:11,840
If you ever want to be a
governor of your central bank,

647
00:31:11,840 --> 00:31:15,280
you're in the Fiat
money business.

648
00:31:15,280 --> 00:31:16,220
Rob, any thoughts?

649
00:31:16,220 --> 00:31:17,580
Did I--

650
00:31:17,580 --> 00:31:20,590
ROBLEH ALI: Yeah, I
that's about right.

651
00:31:20,590 --> 00:31:24,170
And obviously, that's when
modern central banking came in,

652
00:31:24,170 --> 00:31:27,330
mid '70s, when the Bretton
Woods came to an end.

653
00:31:27,330 --> 00:31:29,920
So this is [INAUDIBLE]
floating exchange rates,

654
00:31:29,920 --> 00:31:32,030
and all the rest of it.

655
00:31:32,030 --> 00:31:34,960
And there's some good books
about this-- there was a--

656
00:31:34,960 --> 00:31:37,550
there's a recent book
came out, a history

657
00:31:37,550 --> 00:31:41,450
of the eurozone, like
monetary union in Europe

658
00:31:41,450 --> 00:31:45,690
is about 40 years old, give or
take the different [INAUDIBLE]..

659
00:31:45,690 --> 00:31:48,960
[INAUDIBLE],, his name was,
a guy at the IMF, I think,

660
00:31:48,960 --> 00:31:51,470
worked on the Greek crisis,
and he wrote a very good book

661
00:31:51,470 --> 00:31:54,440
about, right, the
history of monetary union

662
00:31:54,440 --> 00:31:58,000
in the European Union,
and how that worked.

663
00:31:58,000 --> 00:31:59,240
And this goes for a long--

664
00:31:59,240 --> 00:32:02,820
like end of-- taking place at
the end of Bretton Woods to,

665
00:32:02,820 --> 00:32:04,450
I think, the Greek crisis.

666
00:32:04,450 --> 00:32:07,890
GARY GENSLER: One
weekend in 1971,

667
00:32:07,890 --> 00:32:14,460
if I've got my year correct,
early 1970s, Richard Nixon

668
00:32:14,460 --> 00:32:15,750
took to Camp David--

669
00:32:15,750 --> 00:32:20,320
which is the presidential
retreat in western Maryland.

670
00:32:20,320 --> 00:32:22,930
The leaders that he needed to
get together in one weekend--

671
00:32:22,930 --> 00:32:27,760
the head of the Federal
Reserve, the undersecretary

672
00:32:27,760 --> 00:32:30,160
for monetary affairs at
the Treasury Department,

673
00:32:30,160 --> 00:32:33,340
who happened to be Paul
Volcker at the time.

674
00:32:33,340 --> 00:32:39,100
But he got together four or
five people in one weekend,

675
00:32:39,100 --> 00:32:42,990
and took the US off the
end of the gold standard.

676
00:32:42,990 --> 00:32:46,060
We kind of went off the
gold standard in the 1930s,

677
00:32:46,060 --> 00:32:49,720
but after World War II, there
was an international consensus,

678
00:32:49,720 --> 00:32:51,760
Bretton Woods, and
there was still

679
00:32:51,760 --> 00:32:54,280
that central banks
to central banks

680
00:32:54,280 --> 00:32:56,870
could exchange money for gold.

681
00:32:56,870 --> 00:33:00,380
So we were still in
somewhat a gold standard.

682
00:33:00,380 --> 00:33:04,262
And Rob might have a
different point of view--

683
00:33:04,262 --> 00:33:05,720
a good friend of
mine, Jeff Gordon,

684
00:33:05,720 --> 00:33:07,430
is writing a book
about that weekend,

685
00:33:07,430 --> 00:33:12,530
he was dean of the
business school at Yale.

686
00:33:12,530 --> 00:33:16,370
But the French had asked
for some of their gold back.

687
00:33:16,370 --> 00:33:17,810
And they got it back.

688
00:33:17,810 --> 00:33:21,560
But then the British started
to make noise, Bank of England,

689
00:33:21,560 --> 00:33:24,530
started make noise that they
wanted some of their gold back.

690
00:33:24,530 --> 00:33:27,410
And Richard Nixon
had a challenge.

691
00:33:27,410 --> 00:33:30,420
So he decided he'd just take
us off the gold standard.

692
00:33:30,420 --> 00:33:31,970
There's a lot of
historians' debate

693
00:33:31,970 --> 00:33:34,420
whether the Bank of
England forced it or not.

694
00:33:34,420 --> 00:33:34,920
Simon?

695
00:33:34,920 --> 00:33:35,490
SIMON JOHNSON: It
wasn't their gold,

696
00:33:35,490 --> 00:33:37,250
it was our gold-- they
wanted to exchange

697
00:33:37,250 --> 00:33:38,498
their dollars for our gold.

698
00:33:38,498 --> 00:33:39,790
That's what Nixon didn't want--

699
00:33:39,790 --> 00:33:40,970
GARY GENSLER: I see, I see.

700
00:33:40,970 --> 00:33:45,270
So Professor Johnson is
saying, it was actually--

701
00:33:45,270 --> 00:33:46,610
SIMON JOHNSON: US gold.

702
00:33:46,610 --> 00:33:49,260
GARY GENSLER: Wait, it was
the US gold, or the UK's gold?

703
00:33:49,260 --> 00:33:51,310
SIMON JOHNSON: They had dollar
balances that they accumulated,

704
00:33:51,310 --> 00:33:52,670
which was all fair and good.

705
00:33:52,670 --> 00:33:54,920
And under Bretton Woods, you
could convert your dollar

706
00:33:54,920 --> 00:33:57,335
balances into gold, until
Richard Nixon said you

707
00:33:57,335 --> 00:33:57,987
couldn't.

708
00:33:57,987 --> 00:33:58,820
GARY GENSLER: Right.

709
00:33:58,820 --> 00:34:01,220
And so the question
was, whose gold was it?

710
00:34:01,220 --> 00:34:03,920
And under Richard Nixon's view--
and I think Simon is agreeing,

711
00:34:03,920 --> 00:34:05,120
it was--

712
00:34:05,120 --> 00:34:08,270
I didn't know, because you're
a dual citizen, aren't you?

713
00:34:08,270 --> 00:34:10,727
I just didn't know when you
said our gold, whose gold?

714
00:34:10,727 --> 00:34:12,560
SIMON JOHNSON: It was
in my American accent.

715
00:34:12,560 --> 00:34:15,300
GARY GENSLER: So your British
accent was throwing me off.

716
00:34:15,300 --> 00:34:17,400
[LAUGHTER]

717
00:34:17,400 --> 00:34:21,020
OK, so Richard Nixon would
agree with Professor Johnson

718
00:34:21,020 --> 00:34:22,900
that it was our gold.

719
00:34:22,900 --> 00:34:25,760
And the British to
this day would say,

720
00:34:25,760 --> 00:34:27,900
well, we didn't really
ask for it back,

721
00:34:27,900 --> 00:34:30,469
They were making some
noises about this.

722
00:34:34,850 --> 00:34:36,870
I don't know if that's--
that might even be.

723
00:34:43,650 --> 00:34:45,353
So what do they do?

724
00:34:45,353 --> 00:34:47,020
What does the central
banks actually do?

725
00:34:47,020 --> 00:34:50,560
They oversee the
fractional banking system,

726
00:34:50,560 --> 00:34:52,600
providing those reserves.

727
00:34:52,600 --> 00:34:55,510
But also regulating
the banking system.

728
00:34:55,510 --> 00:34:59,860
I mean, if you're sitting on
top of all of this back here,

729
00:34:59,860 --> 00:35:02,470
you might want to
regulate the whole system.

730
00:35:02,470 --> 00:35:05,260
And that's why around the globe,
by and large, central banks

731
00:35:05,260 --> 00:35:07,660
regulate the banking
system-- not always,

732
00:35:07,660 --> 00:35:09,490
and sometimes, like
in the United Kingdom,

733
00:35:09,490 --> 00:35:13,210
they gave it up to another
agency and then pulled it back.

734
00:35:13,210 --> 00:35:13,745
Hugo?

735
00:35:13,745 --> 00:35:15,370
AUDIENCE: Yeah, I
just have a question.

736
00:35:15,370 --> 00:35:19,330
So I understand how central
banks introduce new money

737
00:35:19,330 --> 00:35:20,570
into the system.

738
00:35:20,570 --> 00:35:22,450
But what would be the
mechanism of trying

739
00:35:22,450 --> 00:35:23,890
to decrease the supply of cash?

740
00:35:23,890 --> 00:35:27,550
Would it be an increase in the--

741
00:35:27,550 --> 00:35:30,460
or not allowing the commercial
banks to use much leverage?

742
00:35:30,460 --> 00:35:33,790
Or how would they bring
money back and get rid of it?

743
00:35:33,790 --> 00:35:37,080
GARY GENSLER: So you can apply--

744
00:35:37,080 --> 00:35:38,110
a very good question--

745
00:35:38,110 --> 00:35:41,080
Hugo is saying, how can you
change the amount of money?

746
00:35:41,080 --> 00:35:43,840
And I'm going to use all
digital forms of money, not just

747
00:35:43,840 --> 00:35:45,310
physical cash.

748
00:35:45,310 --> 00:35:48,130
But off digital forms, the
way you can effect it is

749
00:35:48,130 --> 00:35:54,530
say that any one bank needs
more capital, or more reserves--

750
00:35:54,530 --> 00:35:57,050
so you're lowering
the multiplier

751
00:35:57,050 --> 00:35:59,390
effect in fractional banking.

752
00:35:59,390 --> 00:36:02,950
If you need 5%
capital, that means

753
00:36:02,950 --> 00:36:05,620
you can have $20
of balance sheet

754
00:36:05,620 --> 00:36:07,530
for every dollar of capital.

755
00:36:07,530 --> 00:36:12,140
If all of a sudden you
say, no, you need 10%,

756
00:36:12,140 --> 00:36:14,910
then you would be shrinking
the banking system in half,

757
00:36:14,910 --> 00:36:16,250
for instance.

758
00:36:16,250 --> 00:36:19,860
So there is a number of tools,
but one of the direct tools

759
00:36:19,860 --> 00:36:22,830
is reserve requirements
and capital requirements.

760
00:36:22,830 --> 00:36:24,480
It's not the only tool.

761
00:36:24,480 --> 00:36:25,980
AUDIENCE: So it
would be a mandate

762
00:36:25,980 --> 00:36:27,390
to the commercial banks?

763
00:36:27,390 --> 00:36:28,800
You wouldn't
necessarily directly

764
00:36:28,800 --> 00:36:30,990
interact with the retail?

765
00:36:30,990 --> 00:36:34,620
GARY GENSLER: Correct, the
Federal Reserve manages

766
00:36:34,620 --> 00:36:36,870
monetary supply
in numerous ways,

767
00:36:36,870 --> 00:36:38,720
but some of the direct ways--

768
00:36:38,720 --> 00:36:42,600
and it's why they also regulate
the fractional banking system.

769
00:36:42,600 --> 00:36:45,930
They have that direct need.

770
00:36:45,930 --> 00:36:48,600
But they also need, very
importantly, the third bullet

771
00:36:48,600 --> 00:36:51,660
point, to promote a safe and
efficient payment system.

772
00:36:51,660 --> 00:36:56,500
In some countries, many of the
countries represented here,

773
00:36:56,500 --> 00:37:00,550
written right in the
legislative act that sets up

774
00:37:00,550 --> 00:37:03,700
a central bank, says they must
promote a safe and efficient

775
00:37:03,700 --> 00:37:06,030
payment system.

776
00:37:06,030 --> 00:37:07,760
And if it's not written
into legislation,

777
00:37:07,760 --> 00:37:11,530
it's at the heart of
every central bank.

778
00:37:11,530 --> 00:37:13,660
They are also the
lender of last resort.

779
00:37:13,660 --> 00:37:17,050
When banks fail, they
come in and support them.

780
00:37:17,050 --> 00:37:19,990
Our central bank
was set up in 1913.

781
00:37:19,990 --> 00:37:23,410
In 1907, we had a crisis.

782
00:37:23,410 --> 00:37:25,620
Banks were failing all around.

783
00:37:25,620 --> 00:37:27,760
Does anyone know the
history of that crisis?

784
00:37:27,760 --> 00:37:30,370
Who actually was the
lender of last resort

785
00:37:30,370 --> 00:37:32,740
in the US economy in 1907?

786
00:37:32,740 --> 00:37:35,130
And it was not
the US government.

787
00:37:35,130 --> 00:37:36,400
AUDIENCE: JP Morgan.

788
00:37:36,400 --> 00:37:38,415
GARY GENSLER: JP Morgan.

789
00:37:38,415 --> 00:37:43,928
And not JP Morgan the
bank, JP Morgan the man.

790
00:37:43,928 --> 00:37:45,595
I mean, he had a bank,
he had a library,

791
00:37:45,595 --> 00:37:49,870
he had a lot of other
things going on for sure.

792
00:37:49,870 --> 00:37:52,030
You could say, he was
the Bill Gates or Warren

793
00:37:52,030 --> 00:37:53,680
Buffett of his time.

794
00:37:53,680 --> 00:37:56,770
But in sense, he had more
influence than a Warren Buffett

795
00:37:56,770 --> 00:38:01,750
or Bill Gates in 1907.

796
00:38:01,750 --> 00:38:04,360
We had had a--

797
00:38:04,360 --> 00:38:07,120
in fact, that picture in
the upper right corner,

798
00:38:07,120 --> 00:38:15,421
is the First Bank of the US in
Philadelphia, set up in 1791.

799
00:38:15,421 --> 00:38:17,750
It was set up with
a 20-year charter.

800
00:38:17,750 --> 00:38:22,130
Hamilton and Jefferson
had a huge fight.

801
00:38:22,130 --> 00:38:23,970
The Congress passed
the law to set up

802
00:38:23,970 --> 00:38:26,190
the First Bank of the US.

803
00:38:26,190 --> 00:38:27,840
And Jefferson recommends--

804
00:38:27,840 --> 00:38:29,630
Jefferson with
Secretary of State--

805
00:38:29,630 --> 00:38:33,240
recommends to President
Washington, veto it.

806
00:38:33,240 --> 00:38:35,530
Hamilton's wrong.

807
00:38:35,530 --> 00:38:39,510
Washington gave Hamilton one
week to write him a report.

808
00:38:39,510 --> 00:38:41,500
It's a really
well-written report--

809
00:38:41,500 --> 00:38:43,160
I've not read it in
a number of years,

810
00:38:43,160 --> 00:38:47,690
but I went back and read
it when I was at Treasury.

811
00:38:47,690 --> 00:38:50,990
One week later, Washington
signed the bill.

812
00:38:50,990 --> 00:38:53,980
Jefferson never forgave
Hamilton for that,

813
00:38:53,980 --> 00:38:55,520
and many other things.

814
00:38:55,520 --> 00:39:00,640
But it was a compromise
that only lasted 20 years.

815
00:39:00,640 --> 00:39:06,580
In 1811, we no longer
had a central bank.

816
00:39:06,580 --> 00:39:09,640
So we had a love-hate in the
US with this central authority

817
00:39:09,640 --> 00:39:12,620
in central banking.

818
00:39:12,620 --> 00:39:15,310
AUDIENCE: There's [INAUDIBLE]
and crypto anarchists say that

819
00:39:15,310 --> 00:39:18,000
because Fiat currency isn't
backed by the gold standard,

820
00:39:18,000 --> 00:39:19,750
and because of fractional
reserve banking,

821
00:39:19,750 --> 00:39:22,252
that the Fiat accounts
is worthless--

822
00:39:22,252 --> 00:39:23,710
I guess, what would
your response--

823
00:39:23,710 --> 00:39:25,085
or the bankers in
the room-- what

824
00:39:25,085 --> 00:39:27,390
would your response to that be?

825
00:39:27,390 --> 00:39:28,770
ROBLEH ALI: Well, I think--

826
00:39:31,570 --> 00:39:33,460
I mean, money is-- it
comes back to money

827
00:39:33,460 --> 00:39:36,200
as a social construct
thing, right?

828
00:39:36,200 --> 00:39:39,598
Anything can be money if you
want it to, almost anything.

829
00:39:39,598 --> 00:39:41,890
So if you've got a big enough
group of people who think

830
00:39:41,890 --> 00:39:44,057
something's money, then it
has-- that it's valuable,

831
00:39:44,057 --> 00:39:44,980
then that's true--

832
00:39:44,980 --> 00:39:47,567
the US dollar, and a Bitcoin.

833
00:39:47,567 --> 00:39:49,150
But I guess the
question is how do you

834
00:39:49,150 --> 00:39:50,440
generate trust in the system?

835
00:39:50,440 --> 00:39:52,270
And I guess the US
government generates it

836
00:39:52,270 --> 00:39:56,017
through having a nation state,
an army, and a treasury,

837
00:39:56,017 --> 00:39:56,850
and everything else.

838
00:39:56,850 --> 00:40:00,070
Whereas Bitcoin has this
network of miners, and this code

839
00:40:00,070 --> 00:40:02,260
that people put their faith in.

840
00:40:02,260 --> 00:40:04,850
So it's just generally-- it's
the trust in a different way.

841
00:40:04,850 --> 00:40:07,780
But to say, money is only
worthless if everybody

842
00:40:07,780 --> 00:40:10,400
thinks it's worthless, or like
a significant group of people.

843
00:40:10,400 --> 00:40:13,550
So the Zimbabwean dollar
is worthless, right?

844
00:40:13,550 --> 00:40:16,340
But Fiat money as a general
concept being worthless,

845
00:40:16,340 --> 00:40:19,060
I mean, now you've choice.

846
00:40:19,060 --> 00:40:21,280
You can choose Bitcoin, or
any other crypto currency,

847
00:40:21,280 --> 00:40:23,197
if you want to, depending
on your preferences.

848
00:40:23,197 --> 00:40:25,900
But I think it's difficult
to maintain it's worthless

849
00:40:25,900 --> 00:40:29,005
when lots of people use it
all the time, can exchange it

850
00:40:29,005 --> 00:40:31,750
for goods and services.

851
00:40:31,750 --> 00:40:36,190
GARY GENSLER: And I think
also, Fiat currency has had

852
00:40:36,190 --> 00:40:39,730
a lot of challenges and crises.

853
00:40:39,730 --> 00:40:43,270
Usually related to either
poor fiscal policy--

854
00:40:43,270 --> 00:40:46,240
that the nation,
the government state

855
00:40:46,240 --> 00:40:49,930
is overspending
its taxing ability,

856
00:40:49,930 --> 00:40:53,420
because taxes are revenue,
and then the spending.

857
00:40:53,420 --> 00:40:58,220
Often related to
wars, but not always.

858
00:40:58,220 --> 00:41:02,360
Or to the monetary policy--

859
00:41:02,360 --> 00:41:04,730
in essence, a lot of
printing of money.

860
00:41:04,730 --> 00:41:07,130
In the old days, it was
physical printing of money.

861
00:41:07,130 --> 00:41:08,570
In the new days, it's digital.

862
00:41:08,570 --> 00:41:12,330
It's the overseeing
of the banking sector.

863
00:41:12,330 --> 00:41:15,170
And some of the
biggest banking crises

864
00:41:15,170 --> 00:41:17,930
have led to
significant, in essence,

865
00:41:17,930 --> 00:41:20,090
expansion of the monetary base.

866
00:41:20,090 --> 00:41:21,890
Maybe it was lending
against real estate

867
00:41:21,890 --> 00:41:25,248
in a housing bubble in
Ireland, or other countries,

868
00:41:25,248 --> 00:41:25,790
and so forth.

869
00:41:25,790 --> 00:41:30,890
But we're not unique in the
US to have housing bubbles.

870
00:41:30,890 --> 00:41:34,010
And that can undermine
the social consensus

871
00:41:34,010 --> 00:41:35,870
about Fiat money.

872
00:41:35,870 --> 00:41:41,960
Take China in the late 1940s,
where every few minutes

873
00:41:41,960 --> 00:41:44,780
you had to worry about, did
you have enough suitcases

874
00:41:44,780 --> 00:41:47,390
of physical cash to pay
for your restaurant bill,

875
00:41:47,390 --> 00:41:50,450
if you were at a
restaurant, and so forth.

876
00:41:50,450 --> 00:41:54,190
And any country that's in
the midst of hyper-inflation,

877
00:41:54,190 --> 00:41:58,280
you usually then-- the
social construct falls away.

878
00:41:58,280 --> 00:42:01,580
But it's rare that it hasn't
been replaced by another Fiat

879
00:42:01,580 --> 00:42:02,750
currency--

880
00:42:02,750 --> 00:42:07,490
maybe with a stronger military,
or a stronger central bank.

881
00:42:07,490 --> 00:42:09,350
But after some crisis.

882
00:42:09,350 --> 00:42:12,920
Occasionally, it's replaced
by another country's Fiat

883
00:42:12,920 --> 00:42:16,280
currency, and there's a number
of Latin American countries

884
00:42:16,280 --> 00:42:18,140
that have said, well
this isn't working.

885
00:42:18,140 --> 00:42:20,960
We're going to go
to the US dollar.

886
00:42:20,960 --> 00:42:22,620
And just be darn--

887
00:42:22,620 --> 00:42:24,970
we're not going to
trust our sovereign,

888
00:42:24,970 --> 00:42:26,585
we're to trust somebody else.

889
00:42:26,585 --> 00:42:28,940
And remember, I've
said this once,

890
00:42:28,940 --> 00:42:30,960
I think, in this
class, the history--

891
00:42:30,960 --> 00:42:34,430
and Simon, bail me
out, and Rob, bail me

892
00:42:34,430 --> 00:42:37,130
out-- but the history
of the Bank of England

893
00:42:37,130 --> 00:42:42,470
was that the King of England was
at war with the King of France,

894
00:42:42,470 --> 00:42:45,830
and needed to borrow some money
and couldn't borrow it readily.

895
00:42:45,830 --> 00:42:48,770
I think it's like 1
and 1/2 million pounds.

896
00:42:48,770 --> 00:42:51,050
And some noble lord
said, well, this is

897
00:42:51,050 --> 00:42:53,090
how we'll give you the money--

898
00:42:53,090 --> 00:42:55,350
if we set up a board--

899
00:42:55,350 --> 00:42:56,900
it was initially,
the Bank of England

900
00:42:56,900 --> 00:43:02,240
was in essence a contract
between the sovereign

901
00:43:02,240 --> 00:43:07,550
and the noble lords that
said, we have to check.

902
00:43:07,550 --> 00:43:10,130
And then the war went
on, I don't remember,

903
00:43:10,130 --> 00:43:12,590
you guys probably won
and beat the French.

904
00:43:12,590 --> 00:43:15,297
But it was in the
midst of a war that--

905
00:43:15,297 --> 00:43:16,340
SIMON JOHNSON: Always.

906
00:43:16,340 --> 00:43:18,840
GARY GENSLER: All right, you're
recorded, by the way, video.

907
00:43:18,840 --> 00:43:19,600
Rob?

908
00:43:19,600 --> 00:43:21,280
ROBLEH ALI: Yeah,
the Bank of England

909
00:43:21,280 --> 00:43:23,323
was set up to finance
a war with France.

910
00:43:23,323 --> 00:43:25,740
GARY GENSLER: Yeah, was to
help finance a war with France.

911
00:43:25,740 --> 00:43:27,240
ROBLEH ALI: And
what's interesting--

912
00:43:27,240 --> 00:43:29,945
because the English
Civil War was actually

913
00:43:29,945 --> 00:43:33,027
in the mid-17th century,
so shortly after that.

914
00:43:33,027 --> 00:43:34,610
So that's after the
powers of the king

915
00:43:34,610 --> 00:43:38,820
had been significantly
reduced, and became effectively

916
00:43:38,820 --> 00:43:41,010
a kind of
constitutional monarchy.

917
00:43:41,010 --> 00:43:44,300
So the Bank of England was sort
of set up around that time.

918
00:43:44,300 --> 00:43:46,850
GARY GENSLER: Same spirit
of checking the sovereign.

919
00:43:46,850 --> 00:43:48,650
So let's move on
a little bit, just

920
00:43:48,650 --> 00:43:50,910
so we can get to what
central banks are doing.

921
00:43:50,910 --> 00:43:53,300
But in essence, what
central banks do

922
00:43:53,300 --> 00:43:56,060
is they oversee
the banking system.

923
00:43:56,060 --> 00:44:01,210
I mean, back to they promote the
economy through stable prices,

924
00:44:01,210 --> 00:44:06,130
and in some countries, also
this concept of a dual mandate.

925
00:44:06,130 --> 00:44:08,590
They manage the Fiat
currency-- money--

926
00:44:08,590 --> 00:44:10,810
through supply and pricing.

927
00:44:10,810 --> 00:44:12,970
Oversee the banking system.

928
00:44:12,970 --> 00:44:16,570
And basically, are the
bankers to the government.

929
00:44:16,570 --> 00:44:18,790
When the government's
really in trouble,

930
00:44:18,790 --> 00:44:23,650
think back to the 1690s
when some noble lords

931
00:44:23,650 --> 00:44:26,760
were funding the king--

932
00:44:26,760 --> 00:44:29,400
it still happens that
central banks do sometimes

933
00:44:29,400 --> 00:44:31,010
fund governments.

934
00:44:31,010 --> 00:44:32,903
So the US Federal
Reserve balance sheet--

935
00:44:32,903 --> 00:44:34,320
I'm not going to
spend time on it.

936
00:44:34,320 --> 00:44:37,600
It will be in the
slides in Canvas.

937
00:44:37,600 --> 00:44:39,900
So let's talk about where
central banks approaches

938
00:44:39,900 --> 00:44:42,940
to blockchain and crypto.

939
00:44:42,940 --> 00:44:46,420
Some-- I would say a majority--
are monitoring and studying.

940
00:44:46,420 --> 00:44:49,300
The US Federal Reserve would be
this way, the European Central

941
00:44:49,300 --> 00:44:49,900
Bank.

942
00:44:49,900 --> 00:44:52,570
Rob has a better feel, because
he talks to central banks

943
00:44:52,570 --> 00:44:53,380
all the time.

944
00:44:53,380 --> 00:44:57,310
But monitor and study
is the dominant place.

945
00:44:57,310 --> 00:44:59,620
Restrict-- restrict its use.

946
00:44:59,620 --> 00:45:04,220
I'd say that the People's Bank
of China is more towards this.

947
00:45:04,220 --> 00:45:06,400
They're kind of a mixture
between monitor and study,

948
00:45:06,400 --> 00:45:10,300
because one of the readings was
actually from a senior policy

949
00:45:10,300 --> 00:45:13,150
person at the People's
Bank of China,

950
00:45:13,150 --> 00:45:15,490
and he's written some
remarkable pieces.

951
00:45:15,490 --> 00:45:19,720
Every few months, there's
a piece in like CNN,

952
00:45:19,720 --> 00:45:24,790
or CCN, which is a crypto
newsletter, or Coin Telegraph,

953
00:45:24,790 --> 00:45:27,700
that this one individual from
the Central Bank of China

954
00:45:27,700 --> 00:45:28,865
is writing these pieces.

955
00:45:28,865 --> 00:45:31,240
Now, I don't know a lot about
the Central Bank of China--

956
00:45:31,240 --> 00:45:34,450
he always puts at the bottom,
these are my personal views.

957
00:45:34,450 --> 00:45:36,100
But I have a
suspicion he would not

958
00:45:36,100 --> 00:45:38,530
be allowed to write these
things if it weren't something

959
00:45:38,530 --> 00:45:40,940
bubbling underneath.

960
00:45:40,940 --> 00:45:44,130
But you can restrict
the use of crypto.

961
00:45:44,130 --> 00:45:47,700
And some countries, like China,
and elsewhere are doing that.

962
00:45:47,700 --> 00:45:50,190
There's payment system
experimentation, which

963
00:45:50,190 --> 00:45:51,682
we're going to chat about.

964
00:45:51,682 --> 00:45:53,640
And then there's this
thing called central bank

965
00:45:53,640 --> 00:45:56,220
digital currency initiatives.

966
00:45:56,220 --> 00:45:59,422
And Rob and I know
the answer to this,

967
00:45:59,422 --> 00:46:00,630
but I'm curious to the group.

968
00:46:00,630 --> 00:46:02,730
Central bank digital
currency, having read all

969
00:46:02,730 --> 00:46:04,920
that you've read
for today, does it

970
00:46:04,920 --> 00:46:08,350
rely on blockchain technology?

971
00:46:08,350 --> 00:46:10,270
Show of hands, yes or no?

972
00:46:10,270 --> 00:46:12,970
So yes, it relies on--

973
00:46:12,970 --> 00:46:14,620
my hand won't matter.

974
00:46:14,620 --> 00:46:16,910
Does it rely on
blockchain technology?

975
00:46:16,910 --> 00:46:18,160
Central bank digital currency?

976
00:46:21,247 --> 00:46:22,330
I don't see a single hand.

977
00:46:22,330 --> 00:46:23,110
How about no?

978
00:46:23,110 --> 00:46:25,760
How many people think no?

979
00:46:25,760 --> 00:46:28,440
Oh, you did your readings well.

980
00:46:28,440 --> 00:46:30,000
Did you read it-- thank you.

981
00:46:30,000 --> 00:46:32,310
She's-- Simon, I'm-- you know.

982
00:46:32,310 --> 00:46:34,140
So central bank
digital currency is

983
00:46:34,140 --> 00:46:37,320
inspired by this whole
crypto finance movement,

984
00:46:37,320 --> 00:46:39,810
but it does not
necessarily depend

985
00:46:39,810 --> 00:46:41,680
upon blockchain technology.

986
00:46:41,680 --> 00:46:43,740
But I think it's
central to this course,

987
00:46:43,740 --> 00:46:46,590
and central to a study
of blockchain technology

988
00:46:46,590 --> 00:46:49,140
and money, because
it's absolutely

989
00:46:49,140 --> 00:46:51,900
inspired by this whole movement.

990
00:46:51,900 --> 00:46:53,820
Though, the first person
that wrote about it

991
00:46:53,820 --> 00:46:57,410
was Tobin in the
1980s, if I'm right.

992
00:46:57,410 --> 00:46:57,910
Right?

993
00:46:57,910 --> 00:47:00,210
ROBLEH ALI: [INAUDIBLE]

994
00:47:00,210 --> 00:47:03,240
GARY GENSLER: Yeah, 1987
or something, I think.

995
00:47:03,240 --> 00:47:06,960
Tobin wrote about
basically giving the public

996
00:47:06,960 --> 00:47:10,350
a direct tokenized means
beyond paper money--

997
00:47:10,350 --> 00:47:13,480
a digital means of an account.

998
00:47:13,480 --> 00:47:17,230
But most people would say,
central bank digital currency

999
00:47:17,230 --> 00:47:19,540
relies on blockchain
technology, and you've

1000
00:47:19,540 --> 00:47:22,570
made me proud that you said no.

1001
00:47:22,570 --> 00:47:25,090
Let's talk about
the pain points.

1002
00:47:25,090 --> 00:47:26,740
This was last
Thursday's lecture,

1003
00:47:26,740 --> 00:47:31,660
but there's some payment
system pain points.

1004
00:47:31,660 --> 00:47:34,960
I added one or two
because of your feedback,

1005
00:47:34,960 --> 00:47:39,190
but cost, delayed settlement,
chargebacks, fraud, privacy,

1006
00:47:39,190 --> 00:47:43,290
financial inclusion,
and the like.

1007
00:47:43,290 --> 00:47:49,420
And for Rob and Simon, this
was last Thursday's discussion.

1008
00:47:49,420 --> 00:47:52,330
So some of what the
public sector is doing

1009
00:47:52,330 --> 00:47:55,480
is non-blockchain
initiatives-- entirely

1010
00:47:55,480 --> 00:47:57,370
non-blockchain initiatives.

1011
00:47:57,370 --> 00:48:01,000
The European Union,
the US, others,

1012
00:48:01,000 --> 00:48:03,580
are doing things
about faster payment.

1013
00:48:03,580 --> 00:48:05,530
Basically trying to
move the payment system

1014
00:48:05,530 --> 00:48:08,110
to 24 hours a day,
seven days a week,

1015
00:48:08,110 --> 00:48:12,130
not locked up on the weekend,
where you can actually move.

1016
00:48:12,130 --> 00:48:16,600
And that merchants can
do it as well as banks.

1017
00:48:16,600 --> 00:48:18,790
So whether it's the
target instant payment

1018
00:48:18,790 --> 00:48:21,610
system, or what's known
as TIPS in Europe,

1019
00:48:21,610 --> 00:48:24,010
or faster payment task
force, which has led

1020
00:48:24,010 --> 00:48:27,550
to a faster payment mechanism--

1021
00:48:27,550 --> 00:48:29,680
I think, I'm guessing
Pria's husband's

1022
00:48:29,680 --> 00:48:31,300
working on that, right?

1023
00:48:31,300 --> 00:48:31,805
Does he--

1024
00:48:31,805 --> 00:48:32,513
AUDIENCE: He was.

1025
00:48:32,513 --> 00:48:35,140
GARY GENSLER: He was
working on the task force?

1026
00:48:35,140 --> 00:48:38,110
Shrimp joined us last
Thursday, and he talked

1027
00:48:38,110 --> 00:48:41,530
about-- he's at MasterCard.

1028
00:48:41,530 --> 00:48:43,450
So a lot's going on.

1029
00:48:43,450 --> 00:48:45,490
I just note--

1030
00:48:45,490 --> 00:48:46,990
I put just two other countries.

1031
00:48:46,990 --> 00:48:49,480
India's immediate
payment service

1032
00:48:49,480 --> 00:48:54,582
is really government
sponsored, government pressed.

1033
00:48:54,582 --> 00:48:56,790
I think one of the gentlemen
that works on it, Simon,

1034
00:48:56,790 --> 00:49:00,540
you have speaking at MIT'S
campus in a few weeks.

1035
00:49:00,540 --> 00:49:01,710
Arvent worked on it.

1036
00:49:04,330 --> 00:49:06,810
And in the UK, where
they're saying--

1037
00:49:06,810 --> 00:49:09,150
not only are we updating our
real time gross settlement

1038
00:49:09,150 --> 00:49:12,030
system, but there's
a government mandate

1039
00:49:12,030 --> 00:49:15,480
that banks have to open up
their bank accounts to what's

1040
00:49:15,480 --> 00:49:18,210
called open API.

1041
00:49:18,210 --> 00:49:21,210
A lot is going on,
non-blockchain related,

1042
00:49:21,210 --> 00:49:25,690
related to payments, making
it faster and more access.

1043
00:49:25,690 --> 00:49:28,750
But in the midst
of that, here is

1044
00:49:28,750 --> 00:49:31,990
a little bit of what's happening
in the blockchain space.

1045
00:49:31,990 --> 00:49:36,370
And with the help of the South
African white paper on this,

1046
00:49:36,370 --> 00:49:37,960
I break it into three phases.

1047
00:49:37,960 --> 00:49:41,050
So I thank South
Africa's central bank.

1048
00:49:41,050 --> 00:49:42,940
First is phase one.

1049
00:49:42,940 --> 00:49:44,870
Three countries wrote papers--

1050
00:49:44,870 --> 00:49:48,100
Canada, Brazil, and Singapore.

1051
00:49:48,100 --> 00:49:50,410
Canada and Singapore
even called them

1052
00:49:50,410 --> 00:49:52,665
something-- it's called
Project Jasper in Canada,

1053
00:49:52,665 --> 00:49:56,410
and Project Ubin in Singapore.

1054
00:49:56,410 --> 00:49:58,780
And they did some
experimentation, all

1055
00:49:58,780 --> 00:50:01,060
based on a Ethereum network--

1056
00:50:01,060 --> 00:50:06,320
could you do a better payment
system based on Ethereum?

1057
00:50:06,320 --> 00:50:11,360
So an open-source, blockchain,
permissionless system.

1058
00:50:11,360 --> 00:50:13,980
And they tested out a new
real-time gross settlement

1059
00:50:13,980 --> 00:50:14,480
system.

1060
00:50:14,480 --> 00:50:16,700
And generally, the way
they do this is they

1061
00:50:16,700 --> 00:50:19,750
get a group of banks
in their country--

1062
00:50:19,750 --> 00:50:22,340
and if you were to read each
of their detailed reports,

1063
00:50:22,340 --> 00:50:24,600
there's some similarities
and some differences--

1064
00:50:24,600 --> 00:50:27,200
but by and large, get a group
of banks in your country,

1065
00:50:27,200 --> 00:50:29,990
use the platform, try to do
a talking through, and see

1066
00:50:29,990 --> 00:50:31,025
if it will work.

1067
00:50:31,025 --> 00:50:31,790
Elene?

1068
00:50:31,790 --> 00:50:33,830
AUDIENCE: So they built
a permissionless system?

1069
00:50:33,830 --> 00:50:35,372
GARY GENSLER: They
were trying to see

1070
00:50:35,372 --> 00:50:39,830
if they could use the Ethereum
network to build a better

1071
00:50:39,830 --> 00:50:41,420
payment solution.

1072
00:50:41,420 --> 00:50:43,880
AUDIENCE: Or are you saying
they developed a smart contract

1073
00:50:43,880 --> 00:50:45,950
undercutting Etherium?

1074
00:50:45,950 --> 00:50:48,450
Or did they deploy their
own Etherium permissionless

1075
00:50:48,450 --> 00:50:48,950
network?

1076
00:50:48,950 --> 00:50:50,120
Which one did they do?

1077
00:50:50,120 --> 00:50:52,550
ROBLEH ALI: I think it
was, they just claimed

1078
00:50:52,550 --> 00:50:53,690
Etherium and deployed it.

1079
00:50:53,690 --> 00:50:56,290
Like internet-- it wasn't
ever outside the [INAUDIBLE]..

1080
00:50:56,290 --> 00:50:57,830
AUDIENCE: They
were doing mining?

1081
00:50:57,830 --> 00:50:59,538
ROBLEH ALI: I don't
know how they did it,

1082
00:50:59,538 --> 00:51:01,040
in terms of mechanism.

1083
00:51:01,040 --> 00:51:02,540
GARY GENSLER: Now,
what you'll see--

1084
00:51:02,540 --> 00:51:06,180
because I want to
quickly go to phase two.

1085
00:51:06,180 --> 00:51:09,960
Phase two, none of
them used Ethereum.

1086
00:51:09,960 --> 00:51:12,900
Phase two, two more
initiatives happened--

1087
00:51:12,900 --> 00:51:14,290
Japan and Europe together.

1088
00:51:14,290 --> 00:51:16,890
And when I say Japan and Europe,
I mean the central banks.

1089
00:51:16,890 --> 00:51:20,100
And all of these are
central bank focused.

1090
00:51:20,100 --> 00:51:24,420
Japan and Europe added,
and South Africa.

1091
00:51:24,420 --> 00:51:27,360
And all five initiatives--

1092
00:51:27,360 --> 00:51:31,000
all have been
published already--

1093
00:51:31,000 --> 00:51:35,280
were happening in those various
states in mid to late '17.

1094
00:51:35,280 --> 00:51:38,340
And into '18, were
all on permission.

1095
00:51:38,340 --> 00:51:41,220
They were looking at
Corda, Hyperledger Fabric,

1096
00:51:41,220 --> 00:51:41,950
and Quorum--

1097
00:51:41,950 --> 00:51:46,560
Quorum is the closed loop
system that JP Morgan.

1098
00:51:46,560 --> 00:51:51,560
We talked about Hyperledger,
Fabric, and Corda.

1099
00:51:51,560 --> 00:51:55,730
So I think, Elene, this kind of
starts to answer your question.

1100
00:51:55,730 --> 00:51:58,100
That they then
said, well, no, it's

1101
00:51:58,100 --> 00:52:00,110
not going to work
on a permissionless.

1102
00:52:00,110 --> 00:52:01,640
Every one of them
in phase one said,

1103
00:52:01,640 --> 00:52:03,140
we don't think this
is going to work

1104
00:52:03,140 --> 00:52:04,320
on a permissionless system.

1105
00:52:04,320 --> 00:52:08,840
Let's then go into a
phase two experimentation.

1106
00:52:08,840 --> 00:52:13,340
We're now in kind of phase
three, or a third wave.

1107
00:52:13,340 --> 00:52:15,650
We haven't heard from
Brazil recently--

1108
00:52:15,650 --> 00:52:19,370
don't know whether that
project is basically stopped.

1109
00:52:19,370 --> 00:52:22,730
But these are big countries
and big central banks,

1110
00:52:22,730 --> 00:52:25,700
that are interested is-- can
there be a payment system

1111
00:52:25,700 --> 00:52:27,840
solution?

1112
00:52:27,840 --> 00:52:31,160
So I'm just going to talk
about Singapore for a minute,

1113
00:52:31,160 --> 00:52:34,340
and give you a flavor for
outside of the readings,

1114
00:52:34,340 --> 00:52:36,680
but a little bit of what
the Singapore project is.

1115
00:52:36,680 --> 00:52:39,350
But it captures all
of these by just

1116
00:52:39,350 --> 00:52:42,590
talking about this project.

1117
00:52:42,590 --> 00:52:45,800
This is from their papers.

1118
00:52:45,800 --> 00:52:49,280
But they really see that we're
in a multi-phase project.

1119
00:52:49,280 --> 00:52:50,990
And they are willing
to publicly say,

1120
00:52:50,990 --> 00:52:53,330
we're going to go further
than where we are right now.

1121
00:52:53,330 --> 00:52:54,800
We want to get to
the place where

1122
00:52:54,800 --> 00:52:57,950
we have domestic
delivery versus payment,

1123
00:52:57,950 --> 00:53:00,800
and in the future payment
versus payment systems,

1124
00:53:00,800 --> 00:53:02,510
money versus money.

1125
00:53:02,510 --> 00:53:05,270
Delivery versus payment,
DVP, is basically

1126
00:53:05,270 --> 00:53:08,540
a security versus money.

1127
00:53:08,540 --> 00:53:13,540
So if you see the words DVP,
it's in the securities business

1128
00:53:13,540 --> 00:53:18,550
where you move a security
and a payment simultaneously,

1129
00:53:18,550 --> 00:53:20,500
and there's no credit risk.

1130
00:53:20,500 --> 00:53:23,230
I will not give Rob the
security unless he gives me

1131
00:53:23,230 --> 00:53:26,860
the cash, or vise versa.

1132
00:53:26,860 --> 00:53:28,690
Ask me one day about when--

1133
00:53:28,690 --> 00:53:33,910
before we had DVP, what
the markets were like.

1134
00:53:33,910 --> 00:53:37,650
So Singapore is willing
to publicly announce--

1135
00:53:37,650 --> 00:53:40,540
we're going to take this
as far as we can go,

1136
00:53:40,540 --> 00:53:43,390
all the way to a
cross-border settlement

1137
00:53:43,390 --> 00:53:46,690
of payments and securities
against each other,

1138
00:53:46,690 --> 00:53:50,170
D versus P versus P,
is what they call it.

1139
00:53:50,170 --> 00:53:52,940
The D you can think
of as securities.

1140
00:53:52,940 --> 00:53:54,070
Will they succeed?

1141
00:53:54,070 --> 00:53:56,330
Do they need to stay
on a blockchain?

1142
00:53:56,330 --> 00:53:59,000
I can't predict that.

1143
00:53:59,000 --> 00:54:02,780
But they're willing to say,
we're going to give this a try.

1144
00:54:02,780 --> 00:54:04,530
Where are they right
now in phase two?

1145
00:54:07,040 --> 00:54:10,070
Well, they tested Corda,
Hyperledger Fabric, and Quorum.

1146
00:54:10,070 --> 00:54:12,050
And they have a
full 60-page report

1147
00:54:12,050 --> 00:54:15,350
they published a month or two
ago about how did each of them

1148
00:54:15,350 --> 00:54:20,360
work to do basically payment
versus payment, cash,

1149
00:54:20,360 --> 00:54:22,310
large cash movements.

1150
00:54:22,310 --> 00:54:24,680
But here are the six
criteria they tested,

1151
00:54:24,680 --> 00:54:28,320
and they say they passed
every one of them.

1152
00:54:28,320 --> 00:54:30,480
Now, I read the full
report, and I have to say,

1153
00:54:30,480 --> 00:54:32,790
it struck me that they
probably did pass it.

1154
00:54:32,790 --> 00:54:35,490
But I'm not enough of an
expert, and this stuff

1155
00:54:35,490 --> 00:54:37,860
gets very granular,
and the question still

1156
00:54:37,860 --> 00:54:42,510
is, could you just use an Oracle
database to do the same thing?

1157
00:54:42,510 --> 00:54:44,550
And it's a fair question.

1158
00:54:44,550 --> 00:54:47,550
But they tested it basically,
can you digitize the payments?

1159
00:54:47,550 --> 00:54:50,130
Can you decentralize
the processing?

1160
00:54:50,130 --> 00:54:51,720
Can you do the queuing--

1161
00:54:51,720 --> 00:54:53,830
the queuing of payments.

1162
00:54:53,830 --> 00:54:57,240
And a lot of
cross-entity payments,

1163
00:54:57,240 --> 00:54:59,340
you have to net the payments.

1164
00:54:59,340 --> 00:55:01,690
I'm going to pay Rob,
Rob is going to pay Hugo,

1165
00:55:01,690 --> 00:55:03,460
Hugo is going to pay me--

1166
00:55:03,460 --> 00:55:04,710
well, that doesn't make sense.

1167
00:55:04,710 --> 00:55:08,550
You net it all, and it's
a queuing factor in all

1168
00:55:08,550 --> 00:55:10,240
these real-time gross payments.

1169
00:55:10,240 --> 00:55:10,915
Elene?

1170
00:55:10,915 --> 00:55:12,790
AUDIENCE: So what is
decentralized processing

1171
00:55:12,790 --> 00:55:13,770
mean here?

1172
00:55:13,770 --> 00:55:15,350
So this was in what country?

1173
00:55:15,350 --> 00:55:16,350
GARY GENSLER: Singapore.

1174
00:55:16,350 --> 00:55:17,350
AUDIENCE: Singapore?

1175
00:55:17,350 --> 00:55:19,440
So there's a central
bank in Singapore,

1176
00:55:19,440 --> 00:55:21,060
it's clearly very centralized.

1177
00:55:21,060 --> 00:55:22,820
What is the central [INAUDIBLE]?

1178
00:55:22,820 --> 00:55:23,100
GARY GENSLER: It's up to them.

1179
00:55:23,100 --> 00:55:24,642
And what they write
about, they think

1180
00:55:24,642 --> 00:55:31,560
that you could lower the
single point of failure risk

1181
00:55:31,560 --> 00:55:33,280
by not having the central bank.

1182
00:55:33,280 --> 00:55:35,820
They actively-- this is a
central bank writing the paper

1183
00:55:35,820 --> 00:55:40,170
saying, we could have more
resilience in the system

1184
00:55:40,170 --> 00:55:43,460
if the database is
distributed amongst--

1185
00:55:43,460 --> 00:55:46,050
in this case, they had
11 banks participating.

1186
00:55:46,050 --> 00:55:48,570
And the 11 banks
have separate nodes.

1187
00:55:48,570 --> 00:55:51,720
Now, it's still a
permissioned system.

1188
00:55:51,720 --> 00:55:53,570
You might say, and
somehow the central bank

1189
00:55:53,570 --> 00:55:57,120
has a notary node, maybe.

1190
00:55:57,120 --> 00:55:59,160
But it's amongst the 11 banks.

1191
00:55:59,160 --> 00:56:02,040
And that there would be more
resilience to this system

1192
00:56:02,040 --> 00:56:03,300
than having it centralized.

1193
00:56:03,300 --> 00:56:05,850
AUDIENCE: And the central bank
still does monetary policy?

1194
00:56:05,850 --> 00:56:08,520
GARY GENSLER: Central bank
still does monetary policy.

1195
00:56:08,520 --> 00:56:11,040
Rob, what do you
want to add to this?

1196
00:56:11,040 --> 00:56:12,875
Because Rob swims
this lane, I don't.

1197
00:56:12,875 --> 00:56:14,250
ROBLEH ALI: Yeah,
I mean, I think

1198
00:56:14,250 --> 00:56:15,930
it's one of the big
challenges, right.

1199
00:56:15,930 --> 00:56:21,480
Because the question of
how much the central bank

1200
00:56:21,480 --> 00:56:24,310
consciously limits its own
power, I think is important.

1201
00:56:24,310 --> 00:56:27,960
Because if you have
a system where--

1202
00:56:27,960 --> 00:56:30,490
because I think there is
an instinct of certainly

1203
00:56:30,490 --> 00:56:34,190
some central banks, they want to
maintain control of the system.

1204
00:56:34,190 --> 00:56:36,080
Like, well, OK,
but we want to have

1205
00:56:36,080 --> 00:56:38,490
a special node for
the central bank,

1206
00:56:38,490 --> 00:56:40,520
we can do all this,
that, and the other.

1207
00:56:40,520 --> 00:56:42,350
And my argument is,
you actually want

1208
00:56:42,350 --> 00:56:44,990
to limit the power
of the central bank

1209
00:56:44,990 --> 00:56:46,882
as far as you possibly
can, because it--

1210
00:56:46,882 --> 00:56:48,340
to the extent that
the central bank

1211
00:56:48,340 --> 00:56:50,007
has special powers
over the system,

1212
00:56:50,007 --> 00:56:51,590
that creates a
weakness in the system.

1213
00:56:51,590 --> 00:56:53,480
Because if that node
is then taken over,

1214
00:56:53,480 --> 00:56:57,588
then whoever can go
change the system--

1215
00:56:57,588 --> 00:56:59,630
has effectively all the
power of the central ban.

1216
00:56:59,630 --> 00:57:06,020
Which takes away the
benefits of decentralization.

1217
00:57:06,020 --> 00:57:08,360
To my mind, the point
of decentralization

1218
00:57:08,360 --> 00:57:10,280
is increasing the
cost of the attack,

1219
00:57:10,280 --> 00:57:13,700
by saying, well, to attack
the system, you have to attack

1220
00:57:13,700 --> 00:57:15,540
50% of the nodes, or whatever.

1221
00:57:15,540 --> 00:57:17,370
But if you have this one special
node that could do everything,

1222
00:57:17,370 --> 00:57:18,953
then you only have
to attack one node.

1223
00:57:18,953 --> 00:57:20,090
And it defeats the object.

1224
00:57:20,090 --> 00:57:22,220
So I think when you're
speaking to central banks,

1225
00:57:22,220 --> 00:57:24,470
you have to persuade
them of the need

1226
00:57:24,470 --> 00:57:26,930
to have a system that they--

1227
00:57:26,930 --> 00:57:29,030
like almost setting
up and let it go,

1228
00:57:29,030 --> 00:57:31,550
rather than have to
continuously interfere with,

1229
00:57:31,550 --> 00:57:33,510
an have to have these
special powers in it.

1230
00:57:33,510 --> 00:57:38,050
GARY GENSLER: What's interesting
with so many countries,

1231
00:57:38,050 --> 00:57:39,700
there's going to
be a wide variety.

1232
00:57:39,700 --> 00:57:42,460
And I really do think that
many of the central banks

1233
00:57:42,460 --> 00:57:45,520
are in that monitor
and study slipstream,

1234
00:57:45,520 --> 00:57:50,140
and a couple are in let's
restrict the use slipstream.

1235
00:57:50,140 --> 00:57:52,450
And even China that says,
we're restricting the use,

1236
00:57:52,450 --> 00:57:54,770
is still studying
the heck out of this.

1237
00:57:54,770 --> 00:57:56,800
But some countries like
Singapore and Canada

1238
00:57:56,800 --> 00:57:59,080
are in the forefront
saying, let's figure

1239
00:57:59,080 --> 00:58:02,980
out-- maybe this technology
will make the payment system,

1240
00:58:02,980 --> 00:58:07,290
and thus the system of
Fiat money more resilient.

1241
00:58:07,290 --> 00:58:11,860
It's still unknown, but they're
really trying to test the edge.

1242
00:58:11,860 --> 00:58:12,360
Yes?

1243
00:58:12,360 --> 00:58:15,150
AUDIENCE: So perhaps this is
just a peculiar observation,

1244
00:58:15,150 --> 00:58:17,940
but I feel like the
very institutions

1245
00:58:17,940 --> 00:58:21,270
that Satoshi and Bitcoin were
trying to disintermediate,

1246
00:58:21,270 --> 00:58:23,640
are the ones that are taking
inspiration from this,

1247
00:58:23,640 --> 00:58:26,100
and then trying to advance
their own technology.

1248
00:58:26,100 --> 00:58:28,950
And it feels-- is it
a competitive threat?

1249
00:58:28,950 --> 00:58:30,030
What's the disconnect?

1250
00:58:30,030 --> 00:58:31,950
How are they
thinking about using

1251
00:58:31,950 --> 00:58:34,108
this for something
that was basically

1252
00:58:34,108 --> 00:58:35,900
built to disintermediate
them [INAUDIBLE]??

1253
00:58:35,900 --> 00:58:37,353
GARY GENSLER: Remind
me your first name?

1254
00:58:37,353 --> 00:58:38,040
AUDIENCE: Zahn.

1255
00:58:38,040 --> 00:58:42,630
GARY GENSLER: Zahn-- so Zahn
is asking about Bitcoin,

1256
00:58:42,630 --> 00:58:45,570
and wasn't Satoshi
Nakamoto's innovation

1257
00:58:45,570 --> 00:58:49,640
about doing something
not just decentralized,

1258
00:58:49,640 --> 00:58:55,610
but not trusting--
trustless sort of system.

1259
00:58:55,610 --> 00:58:59,600
But every technology
evolution, whether it's

1260
00:58:59,600 --> 00:59:02,180
in electronics and
telecommunications,

1261
00:59:02,180 --> 00:59:07,190
or elsewhere, startups, if
they have something good,

1262
00:59:07,190 --> 00:59:10,430
incumbents will look
at that technology

1263
00:59:10,430 --> 00:59:13,130
and see what to
adopt for themselves.

1264
00:59:13,130 --> 00:59:16,430
Partly because they're
threatened by the startups.

1265
00:59:16,430 --> 00:59:19,130
And in this case, I really do
think central banks have felt

1266
00:59:19,130 --> 00:59:22,010
a little bit of heat on their
neck, a little bit of heat

1267
00:59:22,010 --> 00:59:24,980
like, we've got to
think about our payment

1268
00:59:24,980 --> 00:59:27,770
solutions and our
money solutions,

1269
00:59:27,770 --> 00:59:32,000
and maybe there's something
from blockchain technology.

1270
00:59:32,000 --> 00:59:34,340
But regardless of whether
it's the heat on the neck

1271
00:59:34,340 --> 00:59:39,620
or opportunity, incumbents
will always look at technology,

1272
00:59:39,620 --> 00:59:41,150
and see.

1273
00:59:41,150 --> 00:59:43,760
And that's why the paper
that you've read sometimes,

1274
00:59:43,760 --> 00:59:45,860
the Geneva Report,
that Simon and three

1275
00:59:45,860 --> 00:59:49,040
of our colleagues and I
co-authored this past summer,

1276
00:59:49,040 --> 00:59:53,050
we called blockchain technology
a catalyst for change.

1277
00:59:53,050 --> 00:59:55,450
And we were agnostic,
partly because there

1278
00:59:55,450 --> 00:59:59,830
were five of us
co-authoring it, but we

1279
00:59:59,830 --> 01:00:02,860
felt that that captured
our five points of view.

1280
01:00:02,860 --> 01:00:06,190
That it might be a catalyst
for change for incumbents,

1281
01:00:06,190 --> 01:00:07,870
it might be a
catalyst for change

1282
01:00:07,870 --> 01:00:10,450
to inspire central bank
digital currencies, which

1283
01:00:10,450 --> 01:00:13,890
frankly, don't have to be
on a blockchain at all.

1284
01:00:13,890 --> 01:00:19,270
Or it might be some startup
that does really a unique thing,

1285
01:00:19,270 --> 01:00:22,192
and I mean unique
beyond crypto kitties.

1286
01:00:22,192 --> 01:00:23,650
You know, something
more than that.

1287
01:00:27,094 --> 01:00:31,030
Aviva-- I know you, Aviva.

1288
01:00:31,030 --> 01:00:33,040
AUDIENCE: So I was
just curious, are there

1289
01:00:33,040 --> 01:00:35,280
details about the timeline
for this, in the sense--

1290
01:00:35,280 --> 01:00:37,030
GARY GENSLER: Wait,
say that again?

1291
01:00:37,030 --> 01:00:39,060
AUDIENCE: Are there
details about the timing

1292
01:00:39,060 --> 01:00:41,520
for like how long
it takes to process

1293
01:00:41,520 --> 01:00:44,450
a payment by the central bank,
like all the way to settlement,

1294
01:00:44,450 --> 01:00:46,500
vis a vis Fiat currency?

1295
01:00:46,500 --> 01:00:49,290
GARY GENSLER: So the timeline
for the-- so not the study,

1296
01:00:49,290 --> 01:00:51,990
not this timeline, but you're
saying a timeline for--

1297
01:00:51,990 --> 01:00:55,540
AUDIENCE: No, for that specific
project, and this extract here

1298
01:00:55,540 --> 01:00:56,680
that they defined.

1299
01:00:56,680 --> 01:00:57,347
Have they also--

1300
01:00:57,347 --> 01:00:59,805
GARY GENSLER: I'd have to look
back-- it's a good question.

1301
01:00:59,805 --> 01:01:02,400
I don't think Singapore has said
they're going to finish this

1302
01:01:02,400 --> 01:01:05,460
by 2019, but I don't
know whether they

1303
01:01:05,460 --> 01:01:08,720
said a date like 2021, or '22.

1304
01:01:08,720 --> 01:01:10,810
But it's a multi-year project.

1305
01:01:10,810 --> 01:01:12,810
AUDIENCE: [INAUDIBLE] for
a specific transaction

1306
01:01:12,810 --> 01:01:16,290
to process it all the way to
settlement, how long it takes?

1307
01:01:16,290 --> 01:01:21,870
GARY GENSLER: Oh, the test
case in Singapore and Canada,

1308
01:01:21,870 --> 01:01:22,930
within seconds--

1309
01:01:22,930 --> 01:01:24,960
but I don't know if it
was like nanoseconds.

1310
01:01:24,960 --> 01:01:25,848
No, it's very quick.

1311
01:01:25,848 --> 01:01:28,140
AUDIENCE: I have another
question for the three of you,

1312
01:01:28,140 --> 01:01:29,640
actually.

1313
01:01:29,640 --> 01:01:32,670
How is the central bank
thinking about reporting

1314
01:01:32,670 --> 01:01:34,680
for these transactions?

1315
01:01:34,680 --> 01:01:38,310
Or is it a later-stage
problem to worry about?

1316
01:01:38,310 --> 01:01:40,680
GARY GENSLER: Well,
the reporting,

1317
01:01:40,680 --> 01:01:42,410
as I have read these reports--

1318
01:01:42,410 --> 01:01:44,160
and then I want to
move on to central bank

1319
01:01:44,160 --> 01:01:46,410
digital currencies, which we're
going to be largely talking

1320
01:01:46,410 --> 01:01:48,035
about Thursday, but
I want to set it up

1321
01:01:48,035 --> 01:01:51,090
because Rob won't
be with us Thursday.

1322
01:01:51,090 --> 01:01:52,860
Reporting is-- this
is a ledger, this

1323
01:01:52,860 --> 01:01:56,130
creates a database, this
permissioned blockchains

1324
01:01:56,130 --> 01:01:58,460
amongst 11 banks in Singapore.

1325
01:01:58,460 --> 01:02:00,990
And it's just a test,
it's just a test--

1326
01:02:00,990 --> 01:02:03,300
is basically a form of a ledger.

1327
01:02:03,300 --> 01:02:07,290
So I don't think they've built
out any customer user interface

1328
01:02:07,290 --> 01:02:09,400
and reporting that way.

1329
01:02:09,400 --> 01:02:14,400
But the transaction ledgers were
kept, similar to bank ledgers,

1330
01:02:14,400 --> 01:02:15,900
as I understood it.

1331
01:02:15,900 --> 01:02:20,050
But they didn't build
out a user interface.

1332
01:02:20,050 --> 01:02:21,953
Unless Rob, you
know any otherwise.

1333
01:02:21,953 --> 01:02:22,720
No.

1334
01:02:22,720 --> 01:02:25,900
So let's talk a little bit about
the next and the toughest--

1335
01:02:25,900 --> 01:02:28,360
central bank digital
currencies, that may or may not

1336
01:02:28,360 --> 01:02:30,520
be based on
blockchain technology.

1337
01:02:30,520 --> 01:02:34,960
But they're absolutely inspired
by blockchain technology.

1338
01:02:34,960 --> 01:02:38,020
So central banks currently
issue digital reserves.

1339
01:02:38,020 --> 01:02:39,050
We saw that earlier.

1340
01:02:39,050 --> 01:02:41,470
It's digital money already.

1341
01:02:41,470 --> 01:02:43,720
And then physical tokens--

1342
01:02:43,720 --> 01:02:47,740
I keep my eye on this
physical token here, right?

1343
01:02:47,740 --> 01:02:49,090
So that's the form of money.

1344
01:02:49,090 --> 01:02:52,840
Commercial banks, then,
issue bank deposits.

1345
01:02:52,840 --> 01:02:56,080
In the US, that's
about $13 trillion

1346
01:02:56,080 --> 01:02:59,920
to the public in bank deposits,
and there's only $1.7 trillion

1347
01:02:59,920 --> 01:03:00,490
of this.

1348
01:03:00,490 --> 01:03:02,680
So bank deposits are the
biggest form of money,

1349
01:03:02,680 --> 01:03:05,680
and it's all digital.

1350
01:03:05,680 --> 01:03:09,040
Essentially, bank deposits
are intermediated central bank

1351
01:03:09,040 --> 01:03:10,450
digital currency.

1352
01:03:10,450 --> 01:03:16,050
Those are my words, but it's
digital currency bank deposits,

1353
01:03:16,050 --> 01:03:18,240
it's just not directly
with the central bank.

1354
01:03:18,240 --> 01:03:21,600
It's intermediated in between--

1355
01:03:21,600 --> 01:03:26,300
if you go back to that flow
chart that I had earlier.

1356
01:03:26,300 --> 01:03:29,510
So the private sector is also
experimenting with stable value

1357
01:03:29,510 --> 01:03:30,010
tokens.

1358
01:03:30,010 --> 01:03:31,570
We're going to talk about
that Thursday, there's

1359
01:03:31,570 --> 01:03:33,940
some readings, so I'm
not going to dive in now.

1360
01:03:33,940 --> 01:03:36,810
So there's a little
bit of competition.

1361
01:03:36,810 --> 01:03:38,660
So it's like Zahn's
earlier question--

1362
01:03:38,660 --> 01:03:41,340
the private sector,
Circle, and Tether,

1363
01:03:41,340 --> 01:03:43,560
and others are having
these stable value tokens.

1364
01:03:43,560 --> 01:03:47,220
So there's a little bit of
competition coming that way.

1365
01:03:47,220 --> 01:03:49,920
So the strategic question
for the central banks is,

1366
01:03:49,920 --> 01:03:54,870
should we allow direct
access to digital reserves?

1367
01:03:54,870 --> 01:03:56,970
We have this
intermediated central bank

1368
01:03:56,970 --> 01:03:59,520
digital reserve
called bank deposits,

1369
01:03:59,520 --> 01:04:01,980
but should we have
something direct to us?

1370
01:04:01,980 --> 01:04:04,320
Like cash is a
direct relationship

1371
01:04:04,320 --> 01:04:07,140
between the central
bank and the holder.

1372
01:04:07,140 --> 01:04:10,380
That's really the strategic
question, when you--

1373
01:04:10,380 --> 01:04:12,780
I believe when you move
away from the technology,

1374
01:04:12,780 --> 01:04:15,420
you don't know have to
know about hash functions

1375
01:04:15,420 --> 01:04:16,200
or anything.

1376
01:04:16,200 --> 01:04:18,750
That's the strategic question.

1377
01:04:18,750 --> 01:04:20,650
Why do I think there's
some opportunities?

1378
01:04:20,650 --> 01:04:22,650
And we're going to dive
more into this Thursday,

1379
01:04:22,650 --> 01:04:25,870
but I want Rob to see if he
wants to speak about this

1380
01:04:25,870 --> 01:04:26,700
and tell us.

1381
01:04:26,700 --> 01:04:29,040
I think this is
a real question--

1382
01:04:29,040 --> 01:04:31,080
and Sweden has highlighted it--

1383
01:04:31,080 --> 01:04:32,760
they want a
continued involvement

1384
01:04:32,760 --> 01:04:33,840
in the means of payment.

1385
01:04:33,840 --> 01:04:38,220
Sweden is already down to
about 2% of GDP, or 1/2% of GDP

1386
01:04:38,220 --> 01:04:40,350
is their kronas--

1387
01:04:40,350 --> 01:04:43,680
the physical kronas-- the
US is still at 8% or 9%.

1388
01:04:43,680 --> 01:04:46,830
But they're saying
nobody is accepting

1389
01:04:46,830 --> 01:04:49,500
physical kronas anymore
in Sweden and Norway,

1390
01:04:49,500 --> 01:04:50,610
and so forth.

1391
01:04:50,610 --> 01:04:53,670
Pretty soon, most retailers
will not take them.

1392
01:04:53,670 --> 01:04:55,380
So they're saying,
maybe the government

1393
01:04:55,380 --> 01:04:58,950
needs to have a continued
direct relationship.

1394
01:04:58,950 --> 01:05:01,530
Could it promote competition
in the banking system?

1395
01:05:01,530 --> 01:05:03,880
Because otherwise,
if you don't have it,

1396
01:05:03,880 --> 01:05:06,030
then the banks are controlling
the payment system,

1397
01:05:06,030 --> 01:05:07,500
and the means of payment.

1398
01:05:07,500 --> 01:05:10,080
Promoting financial
inclusion-- not everybody

1399
01:05:10,080 --> 01:05:11,190
will have a bank account.

1400
01:05:11,190 --> 01:05:13,140
Well, maybe they could
have some digital form

1401
01:05:13,140 --> 01:05:16,950
of central bank money
instead of a bank account.

1402
01:05:16,950 --> 01:05:19,800
The pain points-- and I
would say for some countries,

1403
01:05:19,800 --> 01:05:22,080
some countries are clearly
looking at central bank

1404
01:05:22,080 --> 01:05:24,840
digital currencies to
avoid US sanctions.

1405
01:05:24,840 --> 01:05:29,220
Venezuela and Iran both have
projects for central bank

1406
01:05:29,220 --> 01:05:30,600
digital currency.

1407
01:05:30,600 --> 01:05:31,560
Sorry, question?

1408
01:05:34,140 --> 01:05:39,480
And so here, of course,
blockchain technology

1409
01:05:39,480 --> 01:05:41,310
could be relevant.

1410
01:05:41,310 --> 01:05:43,890
For these six reasons,
or five reasons,

1411
01:05:43,890 --> 01:05:45,630
you didn't need
blockchain technology.

1412
01:05:45,630 --> 01:05:48,255
But I'm going to say, blockchain
technology could be relevant--

1413
01:05:48,255 --> 01:05:51,840
Fiat currencies on a ledger,
verification and networking

1414
01:05:51,840 --> 01:05:55,470
costs are critical to
the economics of money.

1415
01:05:55,470 --> 01:05:58,350
So I wouldn't count blockchain
technology out of this,

1416
01:05:58,350 --> 01:06:01,020
because blockchain technology
can lower verification

1417
01:06:01,020 --> 01:06:02,640
and networking costs.

1418
01:06:02,640 --> 01:06:06,240
But I think we're too early
to know whether blockchain

1419
01:06:06,240 --> 01:06:08,970
technology will be at the
center of central bank

1420
01:06:08,970 --> 01:06:10,350
digital currency.

1421
01:06:10,350 --> 01:06:12,880
But it could have an effect.

1422
01:06:12,880 --> 01:06:15,075
So the challenges.

1423
01:06:15,075 --> 01:06:16,950
And again, we'll dive
more of these Thursday.

1424
01:06:19,142 --> 01:06:21,350
Rob, you want to say anything
about these challenges?

1425
01:06:21,350 --> 01:06:22,790
ROBLEH ALI: Yeah,
I mean, I think

1426
01:06:22,790 --> 01:06:24,380
Ben's speech was good on--

1427
01:06:24,380 --> 01:06:25,410
GARY GENSLER: Ben
Broadbent's speech.

1428
01:06:25,410 --> 01:06:26,660
ROBLEH ALI: Yeah, Ben
Broadbent's speech

1429
01:06:26,660 --> 01:06:27,740
is good on that one.

1430
01:06:27,740 --> 01:06:30,200
Because I think the
fundamental one is this--

1431
01:06:30,200 --> 01:06:33,570
how do you fund a productive
enterprise in the real economy?

1432
01:06:33,570 --> 01:06:34,570
Right, that's the real--

1433
01:06:34,570 --> 01:06:35,240
GARY GENSLER: How do you--

1434
01:06:35,240 --> 01:06:36,920
ROBLEH ALI: How do you
fund productive enterprise

1435
01:06:36,920 --> 01:06:37,680
in the real economy?

1436
01:06:37,680 --> 01:06:39,830
And at the moment, certainly
in the UK and Europe,

1437
01:06:39,830 --> 01:06:41,930
and I guess to a lesser
extent in the US,

1438
01:06:41,930 --> 01:06:44,550
but it's largely true
for the US, as well,

1439
01:06:44,550 --> 01:06:48,960
is that you are very much
reliant on bank lending.

1440
01:06:48,960 --> 01:06:52,820
And if you do something which
essentially drains deposits

1441
01:06:52,820 --> 01:06:55,070
from banks, are you like
fundamentally changing

1442
01:06:55,070 --> 01:06:56,630
the nature of the system?

1443
01:06:56,630 --> 01:06:59,780
And how are you going
to create a system

1444
01:06:59,780 --> 01:07:02,660
which allows people to fund
mortgages, or fund businesses,

1445
01:07:02,660 --> 01:07:03,420
or whatever it is?

1446
01:07:03,420 --> 01:07:06,230
And I think that's
the big challenge.

1447
01:07:06,230 --> 01:07:09,260
So I think that's like the
central question, which

1448
01:07:09,260 --> 01:07:11,580
I think is the
bullet three, effects

1449
01:07:11,580 --> 01:07:13,490
on credit allocation
in the economy,

1450
01:07:13,490 --> 01:07:16,940
is the thing that I think weighs
on central bankers the most.

1451
01:07:16,940 --> 01:07:19,730
GARY GENSLER: So basically, if
you disintermediate the banks,

1452
01:07:19,730 --> 01:07:21,560
and the banks are
not collecting--

1453
01:07:21,560 --> 01:07:24,710
again, using US numbers--
$13 trillion of deposits,

1454
01:07:24,710 --> 01:07:29,250
but only $12 trillion of
deposits, or maybe $6 trillion

1455
01:07:29,250 --> 01:07:32,950
of deposits, what are we
doing to credit allocation?

1456
01:07:32,950 --> 01:07:35,130
Because for three
to five centuries,

1457
01:07:35,130 --> 01:07:38,880
or certainly since the
Industrial Revolution,

1458
01:07:38,880 --> 01:07:42,390
banks form an important
feature in our economy

1459
01:07:42,390 --> 01:07:45,970
to promote the
extension of credit.

1460
01:07:45,970 --> 01:07:51,060
And we had this six or eight
lectures ago, this graph

1461
01:07:51,060 --> 01:07:55,080
that in the US, debt to
our economy is about 3.8,

1462
01:07:55,080 --> 01:08:01,380
or 380% of our economy in
debt it's not all bank debt,

1463
01:08:01,380 --> 01:08:03,690
but bank debt is a
big piece of that.

1464
01:08:03,690 --> 01:08:07,740
Can you move credit allocation
away from the banking system?

1465
01:08:07,740 --> 01:08:11,280
Well, the answer has got
to be in some level, yes,

1466
01:08:11,280 --> 01:08:15,750
but what are the pros
and cons of doing that?

1467
01:08:15,750 --> 01:08:17,850
It's not whether you
can, it's whether it's

1468
01:08:17,850 --> 01:08:20,729
a better system, a better
economy, better growth

1469
01:08:20,729 --> 01:08:21,960
with or without it.

1470
01:08:21,960 --> 01:08:22,800
Shawn?

1471
01:08:22,800 --> 01:08:24,342
AUDIENCE: I was just
curious, can you

1472
01:08:24,342 --> 01:08:26,880
use different interest
rates to represent

1473
01:08:26,880 --> 01:08:28,490
different level of risk?

1474
01:08:28,490 --> 01:08:32,776
And then use a differentiation
and interest point as a way

1475
01:08:32,776 --> 01:08:35,109
to fund the corporates, so
they can get the loan faster,

1476
01:08:35,109 --> 01:08:36,729
or they can get the [INAUDIBLE]?

1477
01:08:36,729 --> 01:08:37,830
GARY GENSLER: So the
question is, could you use

1478
01:08:37,830 --> 01:08:39,540
interest rates to try to do it?

1479
01:08:39,540 --> 01:08:42,390
Which leads us to
design considerations.

1480
01:08:45,220 --> 01:08:49,870
Which is basically, I
listed that the last one.

1481
01:08:49,870 --> 01:08:52,660
You could have a central
bank digital currency

1482
01:08:52,660 --> 01:08:54,670
that had zero interest rate--

1483
01:08:54,670 --> 01:08:56,800
interestingly, we'll
talk more Thursday--

1484
01:08:56,800 --> 01:08:57,760
Sweden said no.

1485
01:08:57,760 --> 01:09:00,490
They think they'd put
an interest rate on it.

1486
01:09:00,490 --> 01:09:02,370
But you could go
no interest rate.

1487
01:09:02,370 --> 01:09:04,540
And I'd like to
hear your thoughts

1488
01:09:04,540 --> 01:09:07,450
Thursday, well, why did
Sweden come out there?

1489
01:09:07,450 --> 01:09:09,319
And what does that make sense?

1490
01:09:09,319 --> 01:09:11,109
You could put limits
or caps on it,

1491
01:09:11,109 --> 01:09:13,390
and say, these are only
low dollar accounts.

1492
01:09:13,390 --> 01:09:18,310
You can only have X 100
euro, or X 100 krona,

1493
01:09:18,310 --> 01:09:19,600
or Y number of dollars.

1494
01:09:19,600 --> 01:09:22,000
And it's really just small
transactional accounts,

1495
01:09:22,000 --> 01:09:27,130
equivalent to $20 bills,
not $100 or 500 euro notes.

1496
01:09:27,130 --> 01:09:30,520
So you can put limits or
caps, or no interest rates,

1497
01:09:30,520 --> 01:09:32,160
and so forth.

1498
01:09:32,160 --> 01:09:35,420
Do you make it widely
accessible, and so forth?

1499
01:09:35,420 --> 01:09:38,529
So there's all these
design considerations,

1500
01:09:38,529 --> 01:09:41,112
which I'm guessing
Rob, you've talked

1501
01:09:41,112 --> 01:09:42,279
to a bunch of central banks.

1502
01:09:42,279 --> 01:09:46,120
Where do they come out on these
issues, as you see it, in 2018?

1503
01:09:46,120 --> 01:09:48,540
ROBLEH ALI: You've got a lot
of different opinions on it.

1504
01:09:48,540 --> 01:09:50,649
I think the limits and
caps thing is a hard thing

1505
01:09:50,649 --> 01:09:51,910
to practically implement.

1506
01:09:51,910 --> 01:09:56,145
That was always the
sort of skepticism

1507
01:09:56,145 --> 01:09:58,270
around that-- it's like if
you have these accounts,

1508
01:09:58,270 --> 01:10:00,830
and you say, well, we're going
to only have one per person,

1509
01:10:00,830 --> 01:10:02,955
we're going to cap it at
a certain amount of money.

1510
01:10:02,955 --> 01:10:05,530
What practically
happens in a wrong--

1511
01:10:05,530 --> 01:10:07,550
is the government really
going to say, well, no,

1512
01:10:07,550 --> 01:10:08,550
you can't put any more--

1513
01:10:08,550 --> 01:10:11,480
Like there'll be a lot
of political pressure

1514
01:10:11,480 --> 01:10:17,270
in any crisis, so I think caps
are really seen as viable.

1515
01:10:17,270 --> 01:10:19,770
And then, I think the interest
bearing thing is interesting.

1516
01:10:19,770 --> 01:10:21,270
I mean, the only
reason cash doesn't

1517
01:10:21,270 --> 01:10:23,620
bear interest is because it's
technologically difficult

1518
01:10:23,620 --> 01:10:25,930
to make a paper bear interest.

1519
01:10:25,930 --> 01:10:30,000
So I think with
digital currency,

1520
01:10:30,000 --> 01:10:31,960
they might as well give
yourself the option.

1521
01:10:31,960 --> 01:10:33,835
Say, yeah, well, we can
set the interest rate

1522
01:10:33,835 --> 01:10:37,358
to zero if you want to, but
why limit yourself to say,

1523
01:10:37,358 --> 01:10:38,650
well, we won't charge interest?

1524
01:10:38,650 --> 01:10:40,120
Because it's again--
it's like that's

1525
01:10:40,120 --> 01:10:41,912
a limitation that comes
from the technology

1526
01:10:41,912 --> 01:10:44,410
of physical banknotes,
and there's no real need

1527
01:10:44,410 --> 01:10:48,410
to import it into the digital
world, when you could achieve

1528
01:10:48,410 --> 01:10:50,410
the same effect by just
setting the rate at zero

1529
01:10:50,410 --> 01:10:52,060
if you want to.

1530
01:10:52,060 --> 01:10:55,030
GARY GENSLER: And one of the
reasons that some countries are

1531
01:10:55,030 --> 01:10:57,070
exploring this
option, is they think

1532
01:10:57,070 --> 01:10:59,080
it'll be easier to
do monetary policy,

1533
01:10:59,080 --> 01:11:01,750
because you're going to have
negative interest rates.

1534
01:11:01,750 --> 01:11:05,230
Physical cash makes it
hard for-- oh, nobody

1535
01:11:05,230 --> 01:11:06,610
like that, huh?

1536
01:11:06,610 --> 01:11:11,560
No, the two Elenes, you don't
like negative interest rates?

1537
01:11:11,560 --> 01:11:17,620
But for a while, we effectively
had negative interest rates.

1538
01:11:17,620 --> 01:11:20,740
Certainly for
corporate deposits.

1539
01:11:20,740 --> 01:11:25,270
But if everything was digital,
and there was no physical cash,

1540
01:11:25,270 --> 01:11:27,520
central banks say
we could actually

1541
01:11:27,520 --> 01:11:33,164
go and have no lower bound, no
zero bound to interest rates.

1542
01:11:33,164 --> 01:11:34,590
ROBLEH ALI: I guess
you, in a way,

1543
01:11:34,590 --> 01:11:36,850
you don't necessarily need that.

1544
01:11:36,850 --> 01:11:38,935
Because if you can
just create more money

1545
01:11:38,935 --> 01:11:41,700
and pump it into the economy,
it has the same effect, right?

1546
01:11:41,700 --> 01:11:43,450
GARY GENSLER: Right,
so what Rob is saying

1547
01:11:43,450 --> 01:11:46,870
is you could affect
that by supply of money,

1548
01:11:46,870 --> 01:11:48,730
rather than the
pricing of money.

1549
01:11:48,730 --> 01:11:51,370
And so there's both.

1550
01:11:51,370 --> 01:11:54,610
One of the most interesting to
me is the second bullet point--

1551
01:11:54,610 --> 01:11:56,500
is a token or account based.

1552
01:11:56,500 --> 01:11:59,950
And the two merge
together, in a sense.

1553
01:11:59,950 --> 01:12:03,150
This piece of paper is a token.

1554
01:12:03,150 --> 01:12:06,707
Nobody's keeping an account that
when I hand this to Rob-- here,

1555
01:12:06,707 --> 01:12:09,160
you can take it, Rob.

1556
01:12:09,160 --> 01:12:12,210
That's your fee, remember.

1557
01:12:12,210 --> 01:12:15,580
So that's a token based
bit of money, that's

1558
01:12:15,580 --> 01:12:17,770
what is called token based.

1559
01:12:17,770 --> 01:12:19,960
Token based money
is more anonymous,

1560
01:12:19,960 --> 01:12:21,760
and you can keep
it more anonymous.

1561
01:12:21,760 --> 01:12:23,440
Account base is
when you're actually

1562
01:12:23,440 --> 01:12:26,440
keeping the ownership
somewhere on a registry.

1563
01:12:26,440 --> 01:12:29,320
Even though that $20 bill
is registered somewhere,

1564
01:12:29,320 --> 01:12:33,010
it has a serial number, it's
a token based bit of money.

1565
01:12:35,830 --> 01:12:41,100
The Swedes, interestingly, say
they'd have to change the law--

1566
01:12:41,100 --> 01:12:44,520
their own central bank
laws-- for one of these two.

1567
01:12:44,520 --> 01:12:45,690
And now I can't remember.

1568
01:12:45,690 --> 01:12:49,470
But they have-- if
it's token base,

1569
01:12:49,470 --> 01:12:51,210
it would come under
their e-money laws,

1570
01:12:51,210 --> 01:12:54,480
and I think they don't need
to change the law to do that.

1571
01:12:54,480 --> 01:12:58,890
But in Sweden, they would have
to change their central bank

1572
01:12:58,890 --> 01:13:01,800
laws to do e-deposits,
because they would literally

1573
01:13:01,800 --> 01:13:05,100
be opening up their central
bank to something other

1574
01:13:05,100 --> 01:13:06,450
than commercial banks.

1575
01:13:06,450 --> 01:13:10,260
That's it-- they have to go
to their legislative body

1576
01:13:10,260 --> 01:13:13,710
and parliament to actually
do an account based, and not

1577
01:13:13,710 --> 01:13:16,770
a token based, if I recall.

1578
01:13:16,770 --> 01:13:18,410
So there's some
also legal reasons

1579
01:13:18,410 --> 01:13:20,160
why you might need to
do one or the other,

1580
01:13:20,160 --> 01:13:22,957
but one would have more
anonymity than the other.

1581
01:13:22,957 --> 01:13:24,540
ROBLEH ALI: I think
it's worth noting,

1582
01:13:24,540 --> 01:13:27,210
on these token versus
account models,

1583
01:13:27,210 --> 01:13:29,798
it's not well-defined what
people mean when they say taken

1584
01:13:29,798 --> 01:13:30,340
and accounts.

1585
01:13:30,340 --> 01:13:32,700
So different central
banks will say this,

1586
01:13:32,700 --> 01:13:34,680
and mean different things.

1587
01:13:34,680 --> 01:13:37,480
And also people who work on
Bitcoin will think about--

1588
01:13:37,480 --> 01:13:40,940
so when I see tokens, I think
about particular structure

1589
01:13:40,940 --> 01:13:42,960
and transactions,
which Bitcoin has.

1590
01:13:42,960 --> 01:13:44,650
And when I think
about accounts, I

1591
01:13:44,650 --> 01:13:47,320
think of structure of
transactions that Ethereum has.

1592
01:13:47,320 --> 01:13:49,728
And that's how I distinguish
between those two things.

1593
01:13:49,728 --> 01:13:52,020
But I think having spoken to
different central bankers,

1594
01:13:52,020 --> 01:13:56,432
they think about it differently,
because e-money is like--

1595
01:13:56,432 --> 01:13:57,640
you could think about it as--

1596
01:13:57,640 --> 01:14:00,820
I mean to me, that's an
account based system.

1597
01:14:00,820 --> 01:14:02,922
But some bankers
think about it--

1598
01:14:02,922 --> 01:14:05,130
some central bankers think
about that as token based.

1599
01:14:05,130 --> 01:14:08,400
So it's worth noting
that the definitions are

1600
01:14:08,400 --> 01:14:11,190
very fluid in this area.

1601
01:14:11,190 --> 01:14:15,493
GARY GENSLER: So we're going
to save this for Thursday.

1602
01:14:15,493 --> 01:14:16,910
I'm not going to
go through this--

1603
01:14:16,910 --> 01:14:18,620
it was in one of the readings.

1604
01:14:18,620 --> 01:14:21,650
Garratt, who
testified in Congress,

1605
01:14:21,650 --> 01:14:23,820
was so popular with
this, then the Bank

1606
01:14:23,820 --> 01:14:25,820
of International Settlement
picked up this thing

1607
01:14:25,820 --> 01:14:27,770
called the money flower.

1608
01:14:27,770 --> 01:14:30,270
But I'm going to save this, I
want to kick this to Thursday.

1609
01:14:30,270 --> 01:14:32,270
But it's basically
the four things--

1610
01:14:32,270 --> 01:14:35,480
widely accessible, is it
digital, is its central bank,

1611
01:14:35,480 --> 01:14:37,090
is it token based?

1612
01:14:37,090 --> 01:14:40,550
And depending upon
where these intersect,

1613
01:14:40,550 --> 01:14:42,140
you can take any form of money.

1614
01:14:42,140 --> 01:14:44,790
You could say, well, it's
not central bank issued,

1615
01:14:44,790 --> 01:14:48,780
its token based,
private digital tokens,

1616
01:14:48,780 --> 01:14:52,500
is down on the right hand corner
is one little piece of it.

1617
01:14:52,500 --> 01:14:57,060
It's just a way to take these
four important features.

1618
01:14:57,060 --> 01:15:01,640
And we already have
central bank digital money,

1619
01:15:01,640 --> 01:15:04,840
which is in the middle of all
this, it's called reserves.

1620
01:15:04,840 --> 01:15:08,870
But we're going to hold
this for Thursday--

1621
01:15:08,870 --> 01:15:11,540
but this crazy
little money flower,

1622
01:15:11,540 --> 01:15:14,320
central bankers who
are in this world,

1623
01:15:14,320 --> 01:15:18,260
they've been using this, because
this Professor Garratt came up

1624
01:15:18,260 --> 01:15:19,400
with it.

1625
01:15:19,400 --> 01:15:21,037
I mean, I've seen
this in other papers.

1626
01:15:21,037 --> 01:15:22,370
ROBLEH ALI: It's very important.

1627
01:15:22,370 --> 01:15:23,640
GARY GENSLER: They
love it, you know.

1628
01:15:23,640 --> 01:15:24,350
I don't know.

1629
01:15:24,350 --> 01:15:27,800
Money and flowers
together, there you go.

1630
01:15:27,800 --> 01:15:29,895
But Rob, I don't
know if you want

1631
01:15:29,895 --> 01:15:31,520
to come up and help
close it, but these

1632
01:15:31,520 --> 01:15:33,830
are the ones we're going
to talk about on Thursday.

1633
01:15:33,830 --> 01:15:35,600
And since Rob won't
be here on Thursday,

1634
01:15:35,600 --> 01:15:38,420
I'm kind of curious if he has a
point of view on any of these--

1635
01:15:38,420 --> 01:15:40,070
and you can see
them here, as well.

1636
01:15:40,070 --> 01:15:42,170
ROBLEH ALI: The UK one is
actually being stopped.

1637
01:15:42,170 --> 01:15:46,290
So I read something recently
that the UK government--

1638
01:15:46,290 --> 01:15:48,680
I assume at the prompting
of the Bank of England,

1639
01:15:48,680 --> 01:15:50,960
although their fingerprints
are not directly on it,

1640
01:15:50,960 --> 01:15:55,250
I can imagine that
they were behind it.

1641
01:15:55,250 --> 01:15:58,590
I think Uruguay is
an interesting one.

1642
01:15:58,590 --> 01:16:00,740
I recently went
to a presentation

1643
01:16:00,740 --> 01:16:03,800
by Uruguay central bank,
and what's interesting about

1644
01:16:03,800 --> 01:16:07,240
that project is that it was
actually live and out there

1645
01:16:07,240 --> 01:16:11,073
in the hands of people,
paying for things in shops.

1646
01:16:11,073 --> 01:16:12,740
And I think that's
what distinguishes it

1647
01:16:12,740 --> 01:16:16,800
from a lot of the
other projects.

1648
01:16:16,800 --> 01:16:18,965
So for example, the
ones that Gary's talked

1649
01:16:18,965 --> 01:16:21,810
about earlier in, say,
Singapore and Canada,

1650
01:16:21,810 --> 01:16:24,590
are really just in-house
creative concepts,

1651
01:16:24,590 --> 01:16:26,810
whereas the Uruguay
project was something

1652
01:16:26,810 --> 01:16:31,860
that actually has worked, and
they've taken an early form.

1653
01:16:31,860 --> 01:16:35,900
The Swedish one, again,
is fairly early stage.

1654
01:16:35,900 --> 01:16:37,560
The e-krona is
not out there yet,

1655
01:16:37,560 --> 01:16:39,750
they're just starting
to explore it.

1656
01:16:39,750 --> 01:16:41,300
The Tunisia one
was interesting--

1657
01:16:41,300 --> 01:16:43,793
I've spoken to one of
the guys working on that.

1658
01:16:43,793 --> 01:16:46,210
And again, that's interesting
because it's a live project.

1659
01:16:46,210 --> 01:16:48,980
It's continuing-- unlike
the Uruguayan project,

1660
01:16:48,980 --> 01:16:51,080
it's a continuing project.

1661
01:16:51,080 --> 01:16:53,330
So it'll be interesting to
see how it plays out there.

1662
01:16:53,330 --> 01:16:56,303
And I think the reason being
is a lot of the thing that

1663
01:16:56,303 --> 01:16:58,220
puts off central banks
from actually doing it,

1664
01:16:58,220 --> 01:17:00,678
is they don't know what effect
it would have on the banking

1665
01:17:00,678 --> 01:17:01,750
system, or whatever.

1666
01:17:01,750 --> 01:17:03,807
And I think you
will start to see--

1667
01:17:03,807 --> 01:17:05,640
when you start to see
people actually trying

1668
01:17:05,640 --> 01:17:07,730
it, and deploying a central
bank digital currency

1669
01:17:07,730 --> 01:17:10,040
in the real economy,
then you will

1670
01:17:10,040 --> 01:17:13,922
have a real pilot, or
a real world example,

1671
01:17:13,922 --> 01:17:15,380
that you can then
research and say,

1672
01:17:15,380 --> 01:17:16,838
well, actually the
effect was this.

1673
01:17:16,838 --> 01:17:19,690
Because at the moment, a lot of
the debate around central bank

1674
01:17:19,690 --> 01:17:21,440
digital currency, what
would be the effect

1675
01:17:21,440 --> 01:17:22,910
be on the banking system?

1676
01:17:22,910 --> 01:17:24,940
This is conjecture,
you can build a model.

1677
01:17:24,940 --> 01:17:25,940
But it's very difficult.

1678
01:17:25,940 --> 01:17:28,107
But I think once you start
to see countries actually

1679
01:17:28,107 --> 01:17:30,040
issue them, then you
get the evidence in.

1680
01:17:30,040 --> 01:17:33,190
And then I think you'll
see a cascade effect.

1681
01:17:33,190 --> 01:17:35,690
It will be very quickly, then,
the technology is proven out,

1682
01:17:35,690 --> 01:17:37,732
and then more and more
countries will issue them.

1683
01:17:37,732 --> 01:17:39,470
And also because of
the funding effect,

1684
01:17:39,470 --> 01:17:44,100
Gary talked earlier
about the cash--

1685
01:17:44,100 --> 01:17:48,530
like US dollars, physical cash,
is effectively $1.6 trillion

1686
01:17:48,530 --> 01:17:51,230
of interest-free borrowing
by the US government.

1687
01:17:51,230 --> 01:17:54,540
And if, say, the US government
issued digital dollars,

1688
01:17:54,540 --> 01:17:58,787
then arguably you could
retire half the national debt

1689
01:17:58,787 --> 01:17:59,870
and replace it with money.

1690
01:17:59,870 --> 01:18:02,600
So there are these big
fiscal implications.

1691
01:18:02,600 --> 01:18:04,310
And the Body of the
Commonwealth paper,

1692
01:18:04,310 --> 01:18:06,860
which my colleagues at
[INAUDIBLE] wrote, I think,

1693
01:18:06,860 --> 01:18:10,160
two years ago, sort of
addresses that fiscal element.

1694
01:18:10,160 --> 01:18:12,950
And I think that will be a
big attraction to politicians

1695
01:18:12,950 --> 01:18:14,310
looking to spend money.

1696
01:18:14,310 --> 01:18:16,820
GARY GENSLER: And
before we close, Simon,

1697
01:18:16,820 --> 01:18:20,660
because you're rarely with
us, but from your perspective,

1698
01:18:20,660 --> 01:18:23,764
either from your chief
economist days at the IMF,

1699
01:18:23,764 --> 01:18:25,460
or just because you--

1700
01:18:25,460 --> 01:18:30,170
Simon hosts the Tuesday night
blockchain seminar dinners,

1701
01:18:30,170 --> 01:18:31,930
by the way, too,
for three years.

1702
01:18:31,930 --> 01:18:34,160
So Simon is way ahead--

1703
01:18:34,160 --> 01:18:36,680
one might say he was kind
of a blockchain Bitcoin

1704
01:18:36,680 --> 01:18:38,180
maximalist three years ago.

1705
01:18:38,180 --> 01:18:41,480
I think you've moved
more to the middle--

1706
01:18:41,480 --> 01:18:43,700
you can self-declare
where you are.

1707
01:18:43,700 --> 01:18:45,990
And Simon, Johnson,
and Nehan, Narula,

1708
01:18:45,990 --> 01:18:47,490
and Michael, Casey,
and I, are going

1709
01:18:47,490 --> 01:18:52,280
to be standing up a blockchain
lab course in the spring.

1710
01:18:52,280 --> 01:18:54,200
So Simon?

1711
01:18:54,200 --> 01:18:56,330
Your question is, what do
you think about all this,

1712
01:18:56,330 --> 01:18:58,640
and maybe for both of
you in the last minute,

1713
01:18:58,640 --> 01:19:02,003
when are we going to see a true
central bank test this out?

1714
01:19:02,003 --> 01:19:03,920
I mean, there's nine of
them on this page that

1715
01:19:03,920 --> 01:19:07,123
are kind of feeling it out.

1716
01:19:07,123 --> 01:19:09,540
SIMON JOHNSON: I don't think
there's any technical problem

1717
01:19:09,540 --> 01:19:10,040
here at all.

1718
01:19:10,040 --> 01:19:12,710
I think Rob has clearly put
this out on a long time ago.

1719
01:19:12,710 --> 01:19:14,930
I think the issue comes
down to what Rob said,

1720
01:19:14,930 --> 01:19:16,280
what does it do to credit?

1721
01:19:16,280 --> 01:19:18,643
Who really wants to
find out the hard way?

1722
01:19:18,643 --> 01:19:20,060
And what does it
do-- what happens

1723
01:19:20,060 --> 01:19:21,890
in a crisis when
everyone-- you know,

1724
01:19:21,890 --> 01:19:23,480
let's say you're
not paying interest

1725
01:19:23,480 --> 01:19:25,213
on a digital central
bank currency,

1726
01:19:25,213 --> 01:19:27,130
and you can get interest
on your bank account,

1727
01:19:27,130 --> 01:19:28,730
but there's a crisis.

1728
01:19:28,730 --> 01:19:30,735
And you say, well, I
don't want to have this--

1729
01:19:30,735 --> 01:19:32,860
be holding the liability
of a private bank anymore,

1730
01:19:32,860 --> 01:19:35,152
I want to be holding the
liability of the central bank.

1731
01:19:35,152 --> 01:19:36,860
Doesn't everyone run
to the central bank?

1732
01:19:36,860 --> 01:19:38,310
And what does that do to credit?

1733
01:19:38,310 --> 01:19:40,160
And how you're going
to figure this out,

1734
01:19:40,160 --> 01:19:42,512
without actually running
something like on [INAUDIBLE]..

1735
01:19:42,512 --> 01:19:43,970
GARY GENSLER: And
two predictions--

1736
01:19:43,970 --> 01:19:46,830
how many years before
our country actually--

1737
01:19:46,830 --> 01:19:49,615
because 180 countries,
nine of them

1738
01:19:49,615 --> 01:19:51,170
are already bubbling around.

1739
01:19:51,170 --> 01:19:56,750
Two of these-- Ecuador
stopped, Uruguay maybe stopped,

1740
01:19:56,750 --> 01:19:58,400
and the UK Royal
Mint might have been

1741
01:19:58,400 --> 01:19:59,850
stopped by its own government.

1742
01:19:59,850 --> 01:20:02,640
But when do you
think we're going

1743
01:20:02,640 --> 01:20:08,600
to see a country actually
have a direct digital account

1744
01:20:08,600 --> 01:20:09,800
to their reserves?

1745
01:20:09,800 --> 01:20:10,910
For the retail public?

1746
01:20:10,910 --> 01:20:12,110
ROBLEH ALI: It could
be a couple of years.

1747
01:20:12,110 --> 01:20:13,630
I mean, Tunisia is
the closest to--

1748
01:20:13,630 --> 01:20:15,510
up on that list--

1749
01:20:15,510 --> 01:20:16,950
but a couple of years.

1750
01:20:16,950 --> 01:20:18,120
For the first one, yeah.

1751
01:20:18,120 --> 01:20:20,910
I mean, we're early
[INAUDIBLE] years,

1752
01:20:20,910 --> 01:20:22,730
within two years,
at least, possibly.

1753
01:20:22,730 --> 01:20:27,170
GARY GENSLER: So back
together on Thursday.

1754
01:20:27,170 --> 01:20:28,930
We're going to dig
back into these nine,

1755
01:20:28,930 --> 01:20:30,680
and talk a little bit
more about the money

1756
01:20:30,680 --> 01:20:34,170
flower and the readings,
which I think, as I always do,

1757
01:20:34,170 --> 01:20:34,775
I list them.

1758
01:20:37,550 --> 01:20:41,540
Some of those are more fun,
and they're shorter readings,

1759
01:20:41,540 --> 01:20:42,240
as well.

1760
01:20:42,240 --> 01:20:48,290
So I will see you all on
Thursday at 2:30 to 4:00,

1761
01:20:48,290 --> 01:20:51,560
and I thank you once again.

1762
01:20:51,560 --> 01:20:53,410
[APPLAUSE]