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welcome welcome if you have a desire to
learn a little bit about blockchain and
its intersection with the world of
finance and money and you're looking for
15 . s 12 you're in the right place if
you're here to not do that and just hang
out and have a good time I guess you
still hopefully are in the right place
because we're gonna have a good time
this semester my name is Gary Gensler
I'm a senior lecturer here at MIT Sloan
I'm also an advisor over at the MIT
Media Lab and I've spent a lifetime
around the world of finance and money
and public policy and I've been at MIT
this last eight months and we're gonna
learn a lot together about blockchain
and money we're gonna have a little bit
of fun here and see what we're gonna do
so we're talking about blockchain and
money that's where we are by the way I
do cold call I do call on use if you
want to leave now I understand because I
want to have an interaction a little bit
about it so my first question for the
class for everyone whether registered or
not how many of you have ever owned a
cryptocurrency wait wait let's see the
yacht's it seems like it's about 45% of
you or so all right Livan you want to
keep your hand up long and how many of
you have ever worked on any blockchain
related projects in an entrepreneurial
setting or corporate setting anywhere
all right good
so a better third in the room good all
right so you all know probably more than
I do
but I'm gonna give it a shot I'm gonna
always start every week with what are
the study questions for the week how
many of you actually got the syllabus
this is not gonna be graded assignment I
just have to have a sense of who's who
actually got this syllabus so good many
of you and how many of you actually did
the two readings it's not graded I just
got
gage the class oh thank you thank you
right those grades down by the way no no
all right so the two main questions for
this week's lecture really is what is
blockchain and why might it be a
catalyst and I emphasize the word
might it be a catalyst for change in the
world of finance we could talk about a
lot about things outside of the world of
finance and blockchain may indeed have a
lot of applications outside of Finance
but I've chosen to try to just narrow
the scope a bit so this semester is
really about blockchain and money or
blockchain and finance and secondly you
will see index cards on every one of
these round tables one assignment by the
end of the class you could do it now or
later I would like each of you to
anonymously write on the court what you
want to achieve in this semester it
could be anything from this class from
learning about blockchain from making
money on Bitcoin from I don't care if
you tell me it's meeting your future
spouse I just like what do you want to
achieve in this class I can't help you
on the third but I will try to help you
hone the things I can help you ID and
Sabrina and Toledo will collect them
later and next Tuesday will tell you the
results what is it that you want to
achieve in this class and then we'll see
at the end of the semester if we've done
that so that's just a way to help guide
me help you so that's that's what we're
trying to do and so what were the two
readings one was a little thing I did
and one was a thing I did with some of
my colleagues and Tom since I know you
would you take out of the readings
did you have a good summer did you raise
your head did you own Bitcoin know who
in the class read the readings and took
something different than Tom he said
there was potential and your first name
okay how many agreed with the line this
is a vote
they're just two or three how many grids
with Tom there's more and how many of
you're too shy on the first day to put
your hands up most so I'm going to start
and go back the internet how do I sort
of I've come about this and sort of
thought about well what is the WAP chain
what is it really about well the
internet started many decades ago before
most of you were born
but 1974 I mean there's some
predecessors even from the late 60s the
ethernet which is really how two
computers communicate and then you had
tcp/ip which was really the Internet
Protocol of multiple computers compute
that talking to each other and then
later on in 1990 how do we move forward
does anybody know what HTTP is we're at
MIT your first name would be helpful
Erik Erik it's a protocol for
communicate with content web content
hypertext Transfer Protocol eek anybody
know who's associated with tcp/ip
it was a company initiated by MIT I
don't know if it was a company in Sochi
over there mighty but Vince Cerf may
have had some association with it mighty
so these are the first three layers and
then there were companies
commercialization 3com and cisco and of
course amazon it's still around today
but there was something else going on
how do we commercialize the internet
does anybody know what this scene is
from good thought good thought first
pizza sold by Bitcoin but no all right
movie hackers the net do you know have
you ever seen the movie it's not a good
movie so this is the opening scene of
the net and yes that's Sandra Bullock
and the years 1995
it's a cyber thriller you know a
president's involved the Defense
Department's involved and so forth but
actually Pizza Hut is associated with
the very first sale online sale anywhere
in the world they started something
called pizza night this was the screen
by the way if you wanted to go on you
could order your pizza and and but there
was one problem does anybody know what
the problem with was Pizza net I mean
maybe there were multiple problems no
Ilana I've caught on you you couldn't
pay online nobody figured out how to
move money online you had to pay when
you showed up with the pizza so now I'm
going to talk a little bit about
cryptography we're going to spend a lot
of time on cryptography it's crypto
currencies and the like what's your name
Gigi Gigi Gigi what's cryptography
cryptic all right now you got it you got
to start there anybody want to help GE
out does anybody want to help you yeah
tell me your first name we're gonna ask
we're gonna figure out how to have
everybody have name plates by next week
but we will work with Ryan and do it
that way so it's how do you encrypt
something so it's not detectable by
others or in essence it's communications
in the presence of adversaries you have
an adversary who wants the communication
you want to communicate and not let your
adversaries know that communication and
this is this is true for ancient times
so in ancient times there was something
called the cypher and this was a way
that you take a piece of leather or
Peetha cloth and have a lot of letters
and both sides
you'd encrypt and decrypt because there
were different measurements of the
cylinder has anybody seen the movie
imitation games all right
the Enigma machine now it the movie was
wonderful because it said Turin cracked
it and he did help crack it in an
automated way but actually the Polish
government had cracked it in the 1930s
before they fell to the Germans but and
and touring built on all of that and
cracked it further and then in the 1970s
and this was here at MIT to some extent
there's private key public key
cryptography which I'm not going to dive
into today but it's it's the heart of
Bitcoin and blockchain it's at the heart
of the Internet but it's about the key
thing is communications in the presence
of adversaries how do you keep a secret
when everybody wants in and get that
information
and there's a long history and mi t--'s
at the center of a lot of that a lot of
early cryptography failed on the
Internet in the early 90s and late 80s
David cha and others tried to do things
and we're not going to debate these
today but you'll have one reading I
think it's either next week which will
give you that history and it's
worthwhile knowing about the history of
failure but cryptography is the reason
why the internet works today does
anybody want to tell me what SSL and TLS
is do we have any computer scientists
remember your first name encryption
using symmetric keys which is public key
cryptography
right so it basically uses asymmetric
cryptography which we're going to talk
about two lectures from now but it
secures the whole Internet so all of a
sudden you could deliver the pizza and
get a passcode and I have to tell you I
never knew how this worked before I was
at MIT so PayPal came along in 1998 I
mentioned this a whole bunch of other
digital currencies then failed but some
of these people who will read later like
will read Nick Sabo's piece on smart
contracts later Adam back who created
hash cash some of these innovations were
what Satoshi Nakamoto later used some
innovations which were really helpful
and worked where a leap a and M paisa
does anybody know what M pace is in
essence they found out in Kenya this was
ten twelve years ago that people were
trading mobile minutes they were
unbanked but they had cellular phone
and they were trading their minutes as a
form of currency and Safaricom realized
that and said way we could help people
be part of the digital economy even if
they're unbanked and in Africa today 1/2
of the adult population according to
world bag figures is still unbanked but
half of that half has mobile phones and
pace has 20 million customers in Kenya
right now so it's a it's a form of money
that's kind of swapping mobile minutes
but the riddle remained how do you move
money on the internet where in essence
how do you move value peer-to-peer
without a centralized intermediary and
that's the core of blockchain technology
so who solved the riddle and they're
ready to tell me who solved the riddle
who solved this riddle now have you you
you're wearing a t-shirt that says
Quentin Tarantino so I think Quentin
Tarantino should solve over it all
what's that what's your name so a
peer-to-peer cash this is the actual doc
top of an email that was sent out on
Halloween 2008 by Satoshi Nakamoto we
don't actually know who's Satoshi
Nakamoto is but it's a study question a
few lectures from now to ask you to tell
me who you think Satoshi Nakamoto is so
I won't ask that now and he started with
a very simple sentence in his email I've
been working on a new electronic cash
system that fully peer-to-peer with no
trusted third party it's kind of a
modest statement and so the question is
is this another internet layer we're
gonna explore that this whole semester I
don't I don't really have the answer I
don't think the best minds at MIT could
really yet tell you
there are some who are maximalist and
say yes it will be and there are others
who will say no no no and in this course
we're gonna we're gonna review the
minimalist and the maximalist we're not
we're not kind of try to Center it in
one place but that's the key key kind of
question so what is a blockchain we're
gonna do this in a lot of lectures but
I'm gonna try to do it in this short
version so it's time-stamped append logs
meaning you can add a little bit of
information to this and it's
time-stamped so these are these blocks
being added Satoshi did not invent
blockchain there's way earlier does
anybody want to guess what what it was
you're gonna have a reading about this
later but early 1990s what's that Midori
Stuart Haber Stuart Haysbert worked for
Bell Labs right so one of your
assignments it's not gonna be a gray to
decide which it's gonna be a fun
assignment could any of you I'm gonna
say by next Thursday just have some fun
find the longest and timewise longest
running blockchain it's not Bitcoin and
it's been running since the mid 90s and
your clue is the New York Times and
we'll discuss it next Thursday but this
time stamped block block block block of
data creates a database an auditable
database and we'll talk about Ledger's
particularly next week but we'll talk
about Ledger's all throughout this
course and how it changes the world of
Finance
now it's secured by cryptography because
cryptography remembers communications
and making sure adversaries can't pick
you off we're gonna learn about hash
functions and hash functions that are a
really important part of cryptography
and initially for databases and how to
search and store information and
database
but in this circumstances hash functions
were the way to not only append the next
block to the prior blocks but really
importantly to compress data to make it
more manipulatable and to verify it and
as I've written here tamper resistance
and the integrity digital signatures
which has to do the public key private
key cryptography there is no
prerequisite of this course you do not
have had to have taken computer science
cryptography algorithms if I could learn
a little bit about hash functions and
asymmetric cryptography these are the
two key important sides and will we have
enough computer scientists in this room
that can sort us out if I say the wrong
thing right mid doors hopefully and then
consensus so there's a really important
part of blockchain is how do you decide
who appends that next block because when
I went back here
there's block or block each of these
blocks somebody has to decide who
appends who gets to pick the next block
and that's what's called consensus
protocol and there's why debates about
consensus protocol and will talk a lot
about consensus protocol but in essence
it addresses something a term called the
cost of trust and we'll talk about
Byzantine generals problems which is
another reading the Byzantine generals
problem was laid out as a sort of
mathematical game theory issue some
thirty as years ago that's what Satoshi
Nakamoto solved was this last part that
the Byzantine generals problem pizza for
bitcoins a year and a half after Satoshi
Nakamoto laid out blockchain Bitcoin
somebody sends an email and you'll get
these slides but this is the real live
email I'll pay you 10,000 bitcoins for a
couple of pizzas I I just want some
pizzas the guy who sent this
he says I like onions peppers sausage
mushrooms Lazlo
now catch the date this is May 18th and
he's offering 10,000 bitcoins of 2010
but the key line is what I'm aiming for
is getting food deliver in exchange for
bitcoins nobody had used bitcoins as a
medium of exchange 16 months into its
existence nobody had used it to buy
something and Laszlo is a computer
scientist in Florida was just kind of
interested and he put this out on an
email list three days later he still
doesn't have his two pizzas so nobody
wants to buy me a pizza is the Bitcoin
amount I'm offering too low another day
goes by he gets his pizzas and he post
pictures so here's a picture of his
child reaching for those Papa John's
pizzas anybody know what those 10,000
bitcoins were worth back in back then
Chicago anybody want to say back then
what's that $41 and last I was saying
two pizzas are probably worth 25 to 30
because there's a whole email thread he
kept saying why won't anybody get me my
pizzas you could make money on this
today or earlier late yet last night 66
million dollars
yeah so it's a cute story may 22nd every
year is called pizza day or Bitcoin
pizza day or something so so what is
block taint technology these are my
words but they're sort of picked from
the literature and so forth it
verifiably moves data on a decentralized
network and the economics of blockchain
technology are really around that
verification and the economics of
networking and in many ways blockchain
adds certain costs to the verification
through this consensus protocol that
we'll be studying but it lowers some
other costs of verification because
you're not relying on a centralized
Authority so it's really a trade-off of
cost of verification I don't think it's
I'm not a purist that says it's better
or worse but it's it's a trade-off of
costs of verification through
decentralized networks the data can be
value like Bitcoin was a money system
where the data can be actually computer
code and we'll learn a lot about smart
contracts and you could have the data
being verified computer code and
algorithms my world finance this
directly goes to the plumbing of Finance
because finance is fundamentally about
moving money and risk through a network
and that network is the seven billion
people that live on this world it's
moving money and risk and you've all
taken finance courses or many of you
have and it's the intermediating of
money and risk throughout our economy
but there's a whole host of challenges
and over the course of this semester
we'll talk about this challenges
technical commercial and public policy
hurdles will they be solved will they
not be solved but it could be a catalyst
but we're not sure yet
for change in the world of money and
Finance so does anybody want to tell me
the role of money in society and tell me
your first name come on Tomas between
people all right medium of exchange got
that one somebody give me a second
yellow shirt savings all right so that
would be a store of value yeah
third I'm sorry the gentleman here Wow
all right there we go there we go so
we're gonna spend some time next Tuesday
talking more about money and the role of
money in the history of money which i
think is sort of lays a foundational
piece of this what about the role of
Finance I've already sort of said a few
things about that but and I'm sorry I
don't know your name but I'm right here
the woman yeah role of Finance sorry I'm
not going to tell any financial finance
professor what your answer is to raise
money so keep going I'm gonna anybody
else want it can connect savers and
borrowers connect savers and bars so
connecting is sort of moving money
moving valuations so that's the pieces
of it sort of moving making valuations I
use the words moving allocating and
pricing pricing is the valuations of
money well let's not forget it's also
about risk when you buy insurance
that's a transference of risk when you
buy an equity stock that's a
transference of risk if you enter into a
complex credit default swap it's a
transference of risk so finance is not
just the movement of money it's the
movement of risk as well throughout the
economy and I always think finance I
always I've thought this when I was at
Goldman Sachs for 18 years that finance
sits at the neck of an hourglass and
it's why it collects so much economic
rents from society because when you sit
at the neck of an hourglass and billions
literally trillions of grains of sand go
by if you collect some of those grains
of sand you get uber wealth and that's
those are for other classes but finance
can collect a lot of economic rents the
financial sector though has a bunch of
challenges we'll have one lecture later
in the semester about some of those
challenges and we have a reading I think
sheila bair wrote something recently
that I asked you all to read later in
the semester but we'll talk about the
financial crisis and some of the
problems but it's had a lot of crises
fiat currencies have a lot of what
instabilities of course we have
centralized intermediaries as I laid out
and we'll talk about collect a lot of
economic rents so there's there's
opportunity blockchain has real
opportunity to kind of come under this
world of Finance and maybe do some
things better central banking also have
a bunch of legacy payment systems and
there's legacy payment systems or slowly
adapting but it's slow and why did Ally
pay do so well in China is part of the
story because there were so many
unbanked just like m-pesa in Kenya but
here in the US we still pay 2 and a half
to 3 percent for our interchange charges
for Visa MasterCard and the like and a
lot of clearing and settlement still has
a lot of counterparty risk and one that
I care deeply about Financial Inclusion
there's still 1 point 7 billion people
in this world who are unbanked and so we
don't think of it as much in the
developed countries
but it's certainly true in many products
even here in the US and these are to me
the opportunities finance is 7 and a
half percent of the US economy that's
one and a half trillion dollars of
revenues so any of you that are thinking
about entrepreneurial opportunities the
payment system just here in the US is a
half a percent to one percent of our
economy that's 100 to 200 billion
dollars or revenues
I think these is about 18 billion just
you know but if you you know when you
add up the whole payment system that's a
hundred to two hundred billion dollars
in payment revenues so that's kind of
the opportunity can blockchain
technology come in it's got problems
it's slow its its performance issues
but can it compete with that here are
some of the problems the financial
sector would say with blockchain
these are real live things that we're
going to study later in the semester
they say it doesn't have the performance
scalability a modern payment system you
need to be able to move about a hundred
thousand payments a second a modern
securities clearing the the Depository
Trust Corporation the Securities and
Exchange Commission says you do about
thirty thousand transactions a second
but we need you to scale and your
computers and everything have to be
resilient to a hundred thousand
transactions a second Bitcoin you can do
about seven transactions a second visa
currently depends on the the second does
anywhere from twenty two seventy
thousand a second yeah so it's just a
sense of scalability and performance we
might get there it might be three to
seven years away I'm optimistic but
there's still a bunch of performance and
scalability issues privacy and security
blockchains by their nature or public so
they're not fully censorship resistant
but there's a lot of innovation about
making them more private but then that
makes the public sector a little nervous
interoperability they don't necessarily
work yet with other legacy systems or
with each other the internet one of the
great innovations of the internet it
became interoperable that all of these
different websites could kind of speak
with each other governance is a very big
issue we'll talk about and one of the
things about governance is it's hard to
update the software of a blockchain
because if you create a decentralized
where no one's in control no one can
collect economic rents you also don't
have sort of somebody with the ability
to necessarily update the software and
we'll talk later about how Bitcoin
updates its software and what Bitcoin
core developers are and so forth but
Facebook you do know one thing though
there there a company that collects a
lot of profits and economic rents off of
their two billion members they know how
to update their software it's it's a
governance issue that's a real life
challenge and that's why the financial
sector says I'm not sure this works this
is ready yet for me and then thus what
are the commercial use cases and what
are the public policy issues so right
now the financial sector favors
permission blockchains versus permission
list this is going to be about four
weeks from now we'll kind of go through
these two differences but I want to just
frame this briefly permission
blockchains have a noun group of people
who actually participate the half of you
that said you've owned Bitcoin you know
it to be something where anybody can
update the ledger permission blockchains
you can't do that in essence you pick
the three or twenty the Australian Stock
Exchange is updating their clearing and
settling they announced they're doing a
blockchain project they're doing it with
digital assets and they're using the
hyper ledger blockchain which is an IBM
software open source software but the
Australian Stock Exchange is going to
put it on three computers which is
called three nodes that they control all
three of them
the Depository Trust Corporation is
looking at blockchain inspired solutions
for some of their data warehouses but
they too are gonna control the nodes I'm
just giving it that's permission
blockchains there's nothing wrong with
that that's just how they are the
they're looking at this permissionless
block chains are like Bitcoin unknown
participants securities based on
incentives a crypto currency and crypto
economics crypto finance is about two
hundred billion but it you know you have
to update these slides daily two days
ago it was two hundred and thirty
billion and this little pie chart is a
little over half as Bitcoin the next
slice is something called if the
and then ripple and down the line we're
not going to spend a lot of time in this
this semester if you if your goal is to
how can you profit and trade a trade
Bitcoin and day trade ether god bless go
prosper you could stay in the class
I just won't give you much advice on it
you know this is not a crypto investing
centered class but I'm okay if that's
what you're doing does anybody know what
the worldwide capital market size is
anybody want to guess you know this is
200 billion what's it look like I've
already said it's modest hundreds of
trillions global equity about 80
trillion global bond and debt markets
250 trillion so it's still quite modest
compared to that broad breadth of
capital formation and gold
if bitcoins digital gold what's the
value of gold all the gold that's ever
been 7 trillion so just give you sense
of scale so there's also something
that's interesting about this space is
that it's out sized public attention
even as evidenced by the hundred of you
in this room versus the size it is real
relative to the capital markets today
you know there's a bunch of public
policy issues we'll have a lecture I'm a
former regulator I ran the Commodity
Futures Trading Commission so but this
course is not about regulation though we
have to always come back to regulation
we always have to infuse what we're
doing with the regulation but let me
just give you a little framework and
then you'll have to be bored and a
handful of weeks and read I gave some
congressional testimony on it yes it
will be required reading sorry but it's
guarding against illicit activity a lot
of Bitcoin and crypto currencies started
out in the cyber
Punk sort of movement and and
libertarian movement so forth and it is
true you can use this for illicit
activity absolutely but I would say
crime is not new just the mechanisms and
means are new and and so the criminals
yes will use this and have used it for a
listed activity financial stability
central bankers around the globe sort of
will this shape finance well it's only
two hundred billion the financial
markets are three hundred trillion plus
not yet is generally what they're saying
but for some countries it's a way to get
around capital controls and so for those
countries worried about capital controls
it's a very real and live set of issues
and then protecting the investing public
and when we do this in a few weeks I'll
go through each of these the investor
protection issues and yes the sec how we
test and and the like for those who wish
to do their own initial coin off right
now
give some you know broad sense of what
the sec is trying to accomplish but it's
a moving target so this is a very
interesting as opposed to many of your
sloan classes or your c cell classes or
media lab classes this is a very
unsettled area of public policy so it
makes it interesting and and and and if
you all go off and form companies you
will actually be helping sort of set the
the the edge of that public policy of
debate I had always say just remember
poet Riley the duck test this is a poet
Indiana poets those that aren't from the
US might not know the duck test but
basically if it quacks like a duck and
walks like a duck it's a duck so
whenever you're thinking about public
policy folks like myself who once was a
regulator we think in the duck test and
then we secondarily think about the
actual words in the congressional act
you know where's the common sense and if
it quacks and walks like a duck it's
probably a security or it's probably
this or that
the incumbents like this Linus in the
corner are eyeing this space because
there's a lot of volatility and Wall
Street makes money on volatility
volatility is the friend of Wall Street
it might not be the friend of investors
but it's a friend of Wall Street they
also like the trading volumes and the
spreads coinbase the largest crypto
exchange here in the US has 20 million
accounts they might not all be active
but that's the size of Fidelity's
membership or account list and twice de
Shaw and Robin Hood how many of you have
ever used Robin Hood is a trading app
Wow half of you so you know free trading
right 5 million members for those who
don't know you can download Robin Hood
and you can trade stocks for free
no Commission and if anybody's
interested show up and I'll do office
hours when the hell Robin Hood
commercializes they commercialize your
your order flow and they make money
without charging your commissions but
it's a sort of wonderful app Millennials
love it 5 million members already so you
better believe de Shah and the
incumbents are worried about things like
that the startups are also more willing
to beg for forgiveness from regulators
they're willing to sort of take risks
and beg for forgiveness whereas
incumbents tend to have to ask for
permission so there's an unlevel field
that always it's a asymmetric business
set of risk about regulatory risk not
always I'm not like crying for JP Morgan
I mean the big incumbents have also they
have their advantages and coinbase is
becoming an incumbent rather than just a
you know startup in a sense and we'll
talk during the semester about some of
the incumbents where we're probably
going to get Jeff sprecher here in
mid-november he's going to talk to you
about what IntercontinentalExchange in
the New York Stock Exchange is doing
with Starbucks and Microsoft and the
like the financial sector use cases I'm
not going to go through these but this
is the second half of the course is
going to go through
each of these and we'll do one to two
sessions on each payment system central
bank digital currency secondary market
trading the venture capital and initial
coin offering space we'll do two a
course on that and move through so what
are we gonna do in this whole course
basically our goal is to learn the
fundamentals
it's about roughly the first half of the
course pivot to two sessions on the
economics we're gonna be talking about
the economics throughout the whole
course but I want to I want to really
just focus drill down on the economics
of 1/2 of the discussions and then riff
through the financial space for the
second yeah that's our journey together
to me it's for anybody who wants to gain
critical reasoning skills this is not
just kind of a hey this is going to
change the world and revolutionize
everything class and so I basically
think of an old Defense Department term
called ground truths it's when the
general doesn't really know what's going
on but needs to figure it out and needs
to talk to that you know that that
corporal on the ground who's got dirt
you know all over woman and it's been
shot up and says here's the real ground
truth we're gonna try to talk about
ground truth in this in this in this
class and separate the mere assertion
from the hype and some of your readings
will be some real Bitcoin and blockchain
minimalist from Nouriel Roubini that
uses words I'm not supposed to repeat on
a recording about this stuff to Paul
Krugman who and and Joe Stiglitz and
other Nobel laureates who say no it's
not gonna work or Warren Buffett to to
maximalists we're gonna we're gonna try
to cover both sides Larry Lessig is
honoring me because he's in the back of
the class who's an enormous Lee esteemed
professor from Harvard I didn't know
Larry was gonna be here and I did the
slide before but in 1999 I think you
wrote this book Larry is that right
code and other laws of cyberspace I put
you in though but I think it's
worthwhile to think about Larry's four
bits here and I don't know Larry if you
want to say anything but I'm gonna try
to infuse this course in just how you
think about this the tech we're at MIT
the technology and we're gonna get you a
lot of technology if you want more than
I can give you is is is a former finance
sort of type my whole life there's gonna
be a bunch of computer science people in
the class we're gonna hook and you up
together with the folks from the Media
Lab and see Sal and and try to connect
you to the technology side if you want
to swim deeper in that pond but the
technology really really matters and
that's why we are going to go through
hash functions and go through asymmetric
cryptography and so forth from a
business perspective markets matter why
is it that incumbents or startups or are
not doing this and that why is it ten
years in and nobody's got an
enterprise-wide solution yet to payments
that use block J the law matters the
public policy side matters and the forth
of Larry's layout social norms that's a
little harder for me to teach that's not
what this class is about but it is also
a flex all this it's not just the
technology the markets and the law so
it's not just a three-legged store it's
kind of a four legged stool how'd I do
Larry
I really didn't know Harry is gonna be
here so but I wanted to give you a
framework for how your faculty member
thinks and will be on this journey
together range of perspectives we're not
gonna be a Bitcoin minimalist or
maximalist I'm probably to be self
disclosed here a little bit center
minimalist on Bitcoin smart contract
minimalist max list I'm probably pretty
Center Larry's probably a little bit
center maximalist I'm guessing so you're
still you're still center or Center
minimalist what smart contracts and then
blockchain maximalist or minimalist I'd
say a few weeks ago I was kind of Center
maximalist and I'm sort of skidding back
to the middle permissioned blockchain
I'm a little bit more you know and
there's some in here Allah is one of
your Sloan cohort that you might know
six months ago when we met was working
on a permissionless system and now
you're working on a permission system
you have a startup yeah cuz like you've
bounced up into the market realities is
and we're gonna talk a lot in this
course about critical thinking about
when do you really need the advantage of
a decentralized peer-to-peer system
where the costs of trusts are such that
that's the right way to go but I am one
who thinks that there's also so much
economic rents in the financial system
that's that one and a half trillion
dollars of revenues or seven and a half
percent of our economy or just two
hundred billion in the payment systems
for instance that there may be times
that you don't really need a
decentralized system but it just might
be your opportunity to tuck in
underneath all of those economic rents
and all those revenues now in
Vince will react you poke an incumbent
commercially pokum I mean and they're
gonna react and that's why I think
blockchain may well be a catalyst for
change even if incumbents then adopt a
lot of that inside the requirements of
the course class participation is a hard
thing to judge is a faculty member when
I have this many people so but I always
think class participation matters we
made it 30% it which if you have any
advice on this a next semester
30% to to individual write-ups one in
the first half which is up to I think
lecture 10 which is basically the
blockchain fundamentals you pick a topic
I don't care which one
but it's you'll get you'll get a much
better grade if it's about critical
reasoning if it's really taking whatever
those sets of writings are and and and
and and not just repeating that which is
in the readings but really going the
next step in saying here's what's going
on and this is a business goal you don't
have to you know convince me that you
know something about computer science
it's like critical reasoning about the
economic opportunities the strengths the
weaknesses the opportunities the threats
that old business school sort of saying
of swaths with regard to that week's
whether it's about hash functions early
on cryptography or you sort of wait
during the foundational period to
permission versus permissionless you
pick but to please hand it in before
that classes lecture because I might
during the lecture say who wrote today
do you want to tell us what you think
and it might help spur the class
participation and then a second write-up
in the second half when we're riffing
through the use cases again critical
reasoning and then lastly the usual
approach of teams of up to four no I
don't want teams of five
to handle that right now three or four
just and and and somewhere in the second
half of this semester we'll talk about
more the content and there's a couple of
you in here that worked with me last
semester and a smaller group you know I
want you to do well so I'm gonna sort of
give you a sense of like what do we want
to do but it's basically the idea is
you're an entrepreneur or you're an
incumbent and what sort of use case or
you're gonna pick and and and whether
it's permissioned or permissionless sort
of make a proposal do a use case use
your critical reasoning around this new
technology somewhere in the broad world
of finance
I mean you know and I'm glad that define
finance really broad you know you'll
pick so that's that's kind of a peace
act one or the fundamentals I won't go
through each of the pieces but you know
that's in the syllabus of course Act two
is the pivot of the economics and Act
three our financial sector use cases and
hopefully throughout law will have a lot
of fun so the study questions for next
Tuesday real quick what are the roles
and characteristics of money so I really
want to sort of dig behind money money
is but a social construct or a social
convention medium of exchange store
value unit of account there's some
readings about the debate whether money
first came from the border system or a
really good set of anthropologist and
and and and archaeologists and
everything say no it actually came as a
ledger system and no one knows for sure
at ten and fifteen thousand years ago
whether money came from the out of the
border system or more as a unit of
account keeping account of credits and
ledger but I'd say when you read through
some of those readings you start to
think well this is just a societal
construct and so that I will get behind
that what is
fiat currency fiat currency which is an
invention really only over the last few
hundred years and we take for granted
Dale but how does that fit into that
whole history and importantly how to
Ledger's accounting Ledger's I know
boring stuff but it's probably why we
came out of the dark ages so about five
or six hundred years ago with double
entry bookkeeping sorry hi I like
Ledger's we'll talk a little bit about
Ledger's and how that fits into money
and securities and so forth and then
layering in how Bitcoin fits on top of
that history next Tuesday is not deeply
about Bitcoin it's just a little dollop
on that there'll be five or six readings
one of them is a three-minute video the
third one it's fun watch it's just a
funny little video on what money is
there's no need to read nakamoto's full
paper when I said the email I mean just
the cover email it's one paragraph my
goal in the readings each week was not
an each session was by and Lord to try
to keep less than 50 pages you'd say
you're gonna look sometimes you go it
looks like it's more and maybe it is I
figure you're all gonna figure out for
yourself how to sort through the depth
of your knowledge but I will predict
that some of you may be as much as a
quarter or a third of you are gonna go
down a rabbit hole one day and you're
gonna be doing blockchain for the next
48 hours and you won't know where the
time went because it is an addiction at
some point that some of you will get
because this is curious notion I'm not
predicting that infirmity for all of you
I'm just saying some of you will have
that happen to you so occasionally I
have readings just white a lot it's
happen to you let me just conclude and
then take any other questions and light
up their blockchain I think does provide
a peer-to-peer alternative I think that
I hope Larry I'll be able to convince it
does provide and that peer-to-peer
alternative addresses cost of trust it
doesn't mean it's the only way to
address
cost the trust but addresses cost a
trust the financial sector does have
challenges not just that it has
seven-and-a-half percent of our economy
in the US and similar ratios around the
globe but resilience how it survives
shocks the financial crisis and things
like that are real and inclusion one
point seven billion people unbanked but
then if you look at other products who
has access to credit cards and mortgages
and the like and then fiat currencies
Ken Rogoff and others have written a lot
about the instabilities that come that
fiat currencies and we'll talk about
some of the history why central bank's
exist and how they they came about next
key point is we already live in an
electronic age Satoshi Nakamoto and
Bitcoin didn't create electronic cash
electronic cash I mean Sandra Bullock
couldn't pay electronically that was
1995 they did a sort of berated movie
about it all but by today you pay your
tuition online those of you who work get
paid online you pay your auto loans
online most of our lives are electronic
cash not a hundred percent but in some
countries like Sweden it's getting very
close to a hundred percent we'll learn
together and discover that monies but a
social and economic consensus blockchain
technology along the crypto finance
might be a catalyst for change and
they're much masquerades as fact but
it's only mere assertion we're gonna try
to sort through you know that those
differences that doesn't mean that all
of you are gonna walk out agreeing with
Paul Krugman a Nobel laureate or Nouriel
Roubini that this is just a bunch of
nonsense some of you might by the way
but but I think you'll come out with
real critical
thinking skills and I hope that some of
you will say I figured out actually
where there's a real opportunity in the
world of finance to use blockchain
technology and make it a better
financial sector democratizing finance
or somehow providing a service at a
lower cost of better service throughout
I hope throughout that we'll learn
together and we'll have a bit of fun
along the way
that's kind of my thoughts questions we
have exactly what 18 minutes there you
go but we can cut it short - I don't
care there we go did you tell me your
name and we're gonna do placards Ryan's
gonna work to figure out you do placards
cuz it's I wonder how our team's form
traditionally anybody it's slow and can
speak to this too but students do it
their own so that the faculty doesn't
sort of try to insert themselves to help
you but we tend towards the latter half
and say well who's formed up in groups
and when you know if it's a smaller
group it's like well anybody has not yet
formed in a team why don't you move to
the left hand side of the room and just
get together but we could do that
electronically - and you know whether
talita and Sabrina who you know good
help Internet
basically have a social network to help
form the teams because this is a big
group you're right but that's
traditionally people those students do
it on their own
other questions is anybody gonna go out
and sell their Bitcoin now Larry what
why are you here
no no let to the whole feel and you're
incredibly informed about the finance
side so I want to see the combination of
those and whether at the end I am
convinced there's a there there as we've
spoken because I could radically change
the cost of trust around the world
benefit the developing nation
substantially but I think there's a lot
of questions I still have I thank you
for coming in any week you could be here
any day we benefit and I hope it's
really this is meant to be a
conversation I'm not that far ahead of
you Simon Johnson approached me last
October and said what do you think about
coming up to MIT and and Tom knows this
story and and and we were sitting down
for lunch in DC and it was a good time
in my life my three girls I have three
daughters and I'm a single dad and they
were two were in grad school and one our
undergrad it was a good time in my life
I said why not you know come up here and
get engaged in this digital currency
initiative over at the Media Lab and
I've spent a life I was 18 years ago mid
sax on the investment banking side
helping people buy and sell companies
called mergers and acquisitions and then
I went to the trading side fixed income
and went off to Asia and did a bunch of
I ran the fixed incoming currency and
swap trading in Asia and then my last
job was the co Finance Officer so we
were about a quarter of a trillion
dollar balance sheet at that time go
goldman sachs this is we were so private
which meant if we lost money we were
personally I was a general partner was
kaput that's a technical word and but we
had we had 700 legal entities and one
thousand people who could commit the
capital of the firm those are people we
generally call traders but you know is a
fascinating period of time I then went
on to
public service because Bob Rubin knew
that I'd be a soft touch - it's a
service
he was the Treasury secretary I was a
former partner at Goldman Sachs and I
went off to the US Treasury as a
assistant secretary and undersecretary
in the late 90s a little different times
than we have now for many reasons but we
were paying down the debt we were
dealing with the Asian debt crisis
long-term capital management that
Russian debt crisis is it was sort of a
fascinating period of time I worked on a
bill with John McCain I didn't get to
know Senator McCain that well but it was
just remarkable to work with even for a
short period of time called ie signature
it was a bill that basically said you
can sign everything electronically and
he was the chair of the Senate Commerce
Committee at the time I was a wonderful
little yes sometimes in government you
can work on small things I worked on the
redesign of the currency and I could
tell you stories about why it looks the
way it does and how you can redesign
paper currency and for a future lecture
I'll tell you the one design feature
that I it's still in the currency and
you can visually say it's because and
when I asked for it the fella that
rather Bureau of Engraving said why and
I said because it looks better and I'm
the guy that's approving it and maybe
could we get it done can we work this
out and and it did look better and he
loved it he was worried about the
political risk of doing it it was a
better design he just was I said I'll
cover you politically let's do it but
then I worked with Paul sarbanes and
what became sore Baines Oxley I was his
senior advisor I worked and kicked
around some political campaigns we lost
two of them that would be the o8 Hillary
campaign and the 16 Hillary campaign I
was her chief financial officer I was in
a way the senior advisor doing economic
policy and outreach and hand-holding and
and and then in the middle of those two
campaigns I ran something called the
Commodity Futures Trading Commission
which was post-crisis what do we do this
is a real public policy shortcoming
and and I looked at as an opportunity to
as I said democratize finance a bit and
lower risk and so we tried to bring
transparency to a three or four hundred
trillion dollar market caught swaps
which are just contracts for
transference of risk and in their form
of a derivative that that were
unregulated and we were trying to bring
transparency to that and lower risk
through central clearing so that's sort
of my professional life and as I said I
got three daughters and they they're
well situated so when Simon said come on
up I said great and I love MIT it's just
terrific and and you you all are great
unless there's other questions I'm gonna
let you go early I
[Applause]
you