16. Central Banks & Commercial Banking, Part 2

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visit MIT OpenCourseWare at ocw.mit.edu. GARY GENSLER: So we're
going to sort of come back to central banking. I thought it was appropriate
to have two classes on this when I was laying out the whole
semester in August, thinking about how to build the class. In part because central banks
play such a significant role to the world of
finance, but it's really about their role in money. I mean, money and
central banking have been so intertwined
for 300 or 400 years, and they are the custodians, the
essence of what Fiat money is. And of course, this course
is blockchain and money. And many of the things we're
talking about here actually do relate to Bitcoin
and crypto finance, even though a central bank
digital currency doesn't have to be tied to a
blockchain technology.

So I'm going to do
a little bit back to what we talked about Tuesday,
partly because Robleh Ali was with us on Tuesday, I moved up
some of the content from today to then as well just
to go through that. And of course if we do end up– end early, we can always talk
about Tuesday's election too. That's all right. So we're going to, as always,
sort of touch on the readings. I'm going to be asking you all a
bunch of questions about things like Ecuador and
Senegal and Sweden and maybe the Philippines
that were in the readings and so forth.

But it's all experimentation
by those four countries and others. We're going to talk
a little bit about– I'm just going to
try to come back to what we were
talking about Tuesday and why, again, I think
it's relevant to any course in blockchain technology,
and particularly if you're interested in
Bitcoin and crypto finance. Introduce a new
subject, really, which is stable value
tokens, which are a significant part
of experimentation right now, again, in the
world of crypto finance, but relate them back to the
world of private banknotes. Because I see in the current
approach to stable value tokens something similar
that we saw in the past. Central bank digital currency,
which we introduced on Tuesday, and that's going to be the bulk
of what we talk about today, and you're going to– hopefully we'll have
a nice discussion to see what all of you think of
these Sweden, Senegal, Ecuador and the Philippines a bit.

And so that's what we're
going to try to do. And again, we're going to sort
of dive into these questions as we go through
those four countries. We talked a little
bit about MasterCard when Sriham was with us– right? Priya's husband was with us
because he was with MasterCard, but we can touch back. That was really a
reading for today, and MasterCard took a out of a
patent on fractional banking.

So central bank,
goals and functions. Anybody remember we
talked about Tuesday as to what are
central banks about and what their main goals
are and their functions? Anybody want to– STUDENT: Maximum employment
[INAUDIBLE] stability and also the moderate long
term interest rates. GARY GENSLER: Wow,
that's pretty good. You've got the three– the three things that go
into the US dual mandate. So there's an economic
function, that central banks in almost every country
have taken on some role to promote the economy. But dominantly, it's
about price stability. And how does price
stability relate to money? Anybody? James. Is that a hand up? STUDENT: No, but I
can give a guess. Inflation? GARY GENSLER: All
right, inflation. STUDENT: Inflation,
making sure– STUDENT: I would
add [INAUDIBLE].. GARY GENSLER: So
that's cost of money. Right. So price stability and
money relate because, what's the three functions of money? STUDENT: Dependable
unit of account. GARY GENSLER: So a
dependable unit of account. It's right in that. So the third function of money– store value, medium of
exchange, a unit of account. So stable pricing
is about making sure that unit of accounting,
that unit of pricing, has some stability.

So price stability is
really about money. And it also promotes an economy. They sit at the center of the
money system, central banks. At first a check on
the king to make sure that the king didn't
overspend when he was at war with another
king in another country. That's where it all
started, but they sit right at the center of money. So the four things
we talked about, they managed the nation's
Fiat money in every country– the supply, the price,
the payment systems.

Payment systems are how
we move money around. So if you really want
to just boil it down, you can take a whole course. There's wonderful
professors here that teach central banking. But I'd say manage the
nation's Fiat money. Oversee the banking system,
because the banking system is a way to basically move
money around the system and provides credit– Tom, what does a bank do
when it provides credit? Just use the word "money"
somewhere in your definition.

STUDENT: It expands
the quantity of money. GARY GENSLER: Expands
the quantity of money. And how does it do that? STUDENT: Lending money. GARY GENSLER: Lending money. So banks stand in between
investors or savers. We can call them depositors. So on the one hand, you have
depositors or investors. On the other hand,
you have borrowers. And banks are just
in the middle.

And that's why it's called
financial intermediation– intermediates, they're
just in the middle. It's more than just
being in the middle. I mean, it's a big role, but– So the banks in the middle
are all about money. And so central banks
want to get involved to manage those institutions. Initially, commercial banks
came before central banks. Commercial banks
were around, and they kept failing, even in a time
of the small Italian states. They would fail, and there
were some family usually, or central authority
that helped out.

And ultimately, the
central banks seem to– today, it seems like the
central banks came first. But the commercial
banks kind of came first and then there was a central
way to protect the system. Central banks are bankers
to their own governments. Paul Tucker, who now teaches
over at the Harvard Kennedy School, but Paul Tucker
just came out with a book– he was the deputy governor
of the Bank of England– about the unelected power. Central banks are
unelected usually. They're don't stand
before the voters, but they have a tremendous
amount of authority. So the four types of
buckets of things they do. So we talked about– I used this chart the
other day a little bit, but the three different
types of money. Please. STUDENT: In the
context of currencies, I would add also that
the central bank have a key role in
international payments and international reserves. GARY GENSLER: Well,
so the question is, will the central
banks have a similar role for cryptocurrencies? Anybody want to take one
side or the other about it? Eileen, you think
it's going to go to 0.

So you would probably say
central banks will not have any role if
cryptocurrencies go to 0. STUDENT: I'm trying
to understand the question, what
do central banks have to do with cryptocurrencies? GARY GENSLER: All right, so
Alin just took the other side. He said, what do
central banks have to do with cryptocurrencies? STUDENT: I mean,
there's going to be a currency for one country. They will still need to
manage international reserves and manage international
cross-border payments. If it's going to be
a global currency, they need to [INAUDIBLE]. GARY GENSLER: So
it's a hypothetical. STUDENT: But it's
a choice, right? It's whether you
want your currency to float versus
Bitcoin, or whether you want to defensively buy Bitcoin
and hedge your currency.

I think the central bank has a
choice to pursue [INAUDIBLE].. GARY GENSLER: So any other
views on whether central banks will get steeply involved in
Bitcoin and cryptocurrencies? Brotish. STUDENT: I think if your
currency can [INAUDIBLE] of its own [INAUDIBLE] where it
does not interact with the Fiat currencies, then the
role of central banks would be completely restricted
to the governance of activities [INAUDIBLE],, whatever it
takes to get involved in that [INAUDIBLE] attracting the
Fiat currency at any level, then the central banks' role
becomes more involved in that. GARY GENSLER: The
more [INAUDIBLE],, the more it's more central. So isn't it possible that– I mean, we don't know what
the future will bring. And Alin might be right. If cryptocurrency
doesn't take off, then central banks
can kind of just wave it away as some experiment
on the side of finance. But if it starts to
take off, I think– do you pronounce it Guillermo? Guillermo says that if it
becomes somewhat central, as Brotish and
others have said, I think that there would be
a role for central banks.

If a country actually
was going to use it as its medium of exchange,
a unit of account, a store of value– and particularly if there became
fractional crypto banking. This Mastercard patent. Like if you actually saw
somebody taking crypto deposits and making crypto loans,
and you had credit facility through crypto– we're a far way away from that. We're not there. But I'm saying,
if that happened. Sean? STUDENT: So I was just curious. A follow up on that,
if that happened, and it becomes a fraction
of the monetary supply, in order for the central bank
to carry out its functionality, just like [INAUDIBLE]
operations, does that also apply to– kind of if the
cryptocurrency plays a role, does that also
apply to [INAUDIBLE] to the crytpocurrency project? GARY GENSLER: Well so
Sean's asking, if we really were in this world
we're not yet in, and cryptocurrency was a
dominant form of finance, banking and so forth,
would you envision the central bank trying to
do an open market operation? Anybody want to
tell the class what open market– it's
not in the readings, but what open market
operations are used for? GARY GENSLER: Is it increasing
or decreasing the money supply? So yes the central bank
can buy some of the money or sell some of the money
which affects the supply and thus affects the price.

So open market operations
effectively affects the interest rate. You have often probably read
the interest rate targets. The Federal Reserve
has a target. But what they're doing in
an open market operation is really buying and
selling supply of money. And when you influence
the supply of something, you change the price. And the price of money is
measured in interest rates or foreign exchange rates. So Sean, I would say
that if it becomes a dominant part of an economy,
then some central authority might want to try to
influence its price. But there's a challenge. Does anybody want to guess
what challenge I'm thinking about why cryptocurrency– let's say Venezuela was adopting
Bitcoin as a central means in that country. What would be their
challenge of trying to influence the price
of Bitcoin in Venezuela? Alin. STUDENT: Well if the other
economies outside Venezuela are using Bitcoin– GARY GENSLER:
[INAUDIBLE] so Venezuela might be only a small portion
of the overall Bitcoin usage around the globe. So it's one thing if you're
one country and trying to influence the price
of the currency that's in use in that country.

If Sweden wants to influence the
price of the krona, or Israel the– Shekel? But it's far more problematic
if it's a worldwide currency. Hugo and then Tom. STUDENT: I mean, I could
see that being kind of like what we saw
earlier this year or last year when there
was like a Korean– the price of
Bitcoin in Korea was higher than the price of
bitcoin in the rest of the world because there was so
much demand there.

So if you get like the Central
bank of a certain country buying Bitcoin in
their currency, they're basically devaluing
their currency in relation to Bitcoin and it might not– like it might not affect
the world market in the way that they think it would. Right? Unless they're effectively
buying Bitcoin on all open markets around the world. GARY GENSLER: Right. And do you have a view as
to why the pricing went up in Korea versus elsewhere? It's called the kimchi premium. Literally, I don't make this up. But that was what it was called
in Bitcoin, the kimchi premium, which was that Bitcoin
was valued at a higher price in Korea than elsewhere. Hugo, do you have a– you had
one reason you said it's just thought that the Koreans were
trying to buy a lot of it, so there was a kimchi premium. Other? Tom, we're going to get to you.

STUDENT: In order to open an
account on a Korean exchange and [INAUDIBLE]. So you weren't really
able to arbitrage very– GARY GENSLER: All right. So Hugo, you're on to something. You're saying arbitrage. Ben? STUDENT: [INAUDIBLE] it
was difficult to arbitrage because of the capital
controls in Korea. Is that something– GARY GENSLER: All right. So it was difficult
to arbitrage. So the basics of finance– we're moving a little
away from Bitcoin. But the basis of
finance is arbitrage has been a part of finance
for, again, thousands of years. If I can buy something
in France and sell it for a different
price in Switzerland, and it doesn't cost too much to
travel the roads between France and Switzerland, I might
buy it in one country, sell it in another. And that's called locational
or geographic arbitrage. In a modern digital
age, digital assets don't have much
locational arbitrage. Oil still has
locational arbitrage because you might be
buying it in the Gulf Coast and selling it in Africa.

Or, you know, there might
be locational arbitrage in physical commodities. But in digital financial
assets, there's far little locational arbitrage. And it's interesting,
in Korea's case, there was a
locational arbitrage. What was this about? And it was because it was
hard for regulatory reasons. So there was a kimchi
premium, literally, for quite some
time, because it was hard to move Bitcoin
across the borders for regulatory
constraints and so forth. But now, we've got– Tom, you [INAUDIBLE]. STUDENT: Yeah, when we
talk about bank capital requirements, does
US Federal Reserve require banks to hold dollars? Or are banks allowed to hold
any currency [INAUDIBLE]?? GARY GENSLER: Has
anybody been in banking? Want to answer Tom's question? STUDENT: Whether or not
bank capital, bank reserves, have to be held in
dollar denominated– GARY GENSLER: Josh, you've spent
a lifetime in banking, right? STUDENT: Yeah, so
there's a lot of rules.

A lot of the rules are based
on the liquidity of the assets that you're holding. So if you're holding
capital, if you hold it in treasuries, which
are very liquid, and you could get out of them
in a certain amount of time, there's a big premium
to hold your capital in those types of assets. So I think the rules
don't necessarily specify whether it's
dollars or another currency, but they heavily
favor very liquid.

GARY GENSLER: So Josh is right. It's basically–
it's all brought back to the home nation's
currency unit, dollars or euros or renminbi. In some accounting books
it's brought back into that, but there's different
haircuts or weights depending upon some
perceived model of liquidity. So a US treasury bond versus
a German government bond might have similar
liquidity and the regulators will count it the same. But you're, in a
very real time basis, using the foreign exchange
rate to bring it back to the unit of
your home country. STUDENT: Yeah. I'm jumping the
shark a little bit on my knowledge of finance
and central banking. But thinking about
whether or not Bitcoin becomes a
reserve currency, or whether or not banks hold
it, to Guillermo's point of– if central banks aren't
allowing financial institutions to get credit for holding
bitcoin [INAUDIBLE].. Why would they have to do it? GARY GENSLER: Well,
currently, central banks are not that favorable to
Bitcoin and cryptocurrencies, but they're probably right.

There's not a deep history,
there's not a lot of liquidity, and there's high volatility. And the underlying
markets are highly susceptible to manipulation. We don't know for sure
what the real pricing is at any given time. But in the hypothetical
world, where it's be becoming
largely adopted, I would suspect that central
banks around the globe would have some capital
regime that would treat it more favorably than
it's treated today but less favorably than
government Fiat currency. STUDENT: Right. I mean, you trust
the German bond because you trust the German
government [INAUDIBLE]..

GARY GENSLER:
Generally speaking. STUDENT: More so than you
do decentralized governance structure. GARY GENSLER: So there
are three types of money that central banks
are involved in. Does anybody remember? There's even a chart
up here you could see, you can grab it from. Akira? STUDENT: [INAUDIBLE] central
bank databases Fiat authorized? GARY GENSLER: Fiat what? STUDENT: Fiat collateralized. GARY GENSLER: Fiat
collateralized. No, we're going to get there. That's going to be about
stable value tokens. I'm talking about– STUDENT: M1 M2 and M3. GARY GENSLER: All right, so
we talk about M1, M2, M3. So what's the what's
the first thing that you might think about? What's that? I heard the word "cash," but– some deposits. But starting with
just cash is money.

So did I make it green? Yes! There we go. Thank you. I got some help here. Cash. That's one form of money,
and we all have it or– actually, I've never asked. I always have cash in my pocket. How many people in this room
actually currently have cash of some country in their pocket? So we're down to
about 70%, but 30% have no cash in their pocket. You're putting yours away? STUDENT: $1.00. GARY GENSLER: $1.00. If we were in Japan, it would
probably be higher though. Right? So one form of money is cash. Another form of money
that the central banks– STUDENT: Central bank reserves. GARY GENSLER: Central
bank reserves. Let's see if I made that green. Yes! So central bank reserves. Again, I'm just going back
through this from Tuesday. Reserves started, but because
they were commercial banks– and when governments set up
central banks, they said, you have to save and
put some of your money– a reserve– with
the central bank.

So that we might give
you deposit insurance. We might give you
access to liquidity in hard times, which
is called opening up some liquidity or
lending facilities. So you have to keep
a reserve from us. That's where the word came from. But it's a form of money. And the third form of
money, the form of money that almost everybody in this
room uses on a daily basis? The real form of money that
we use almost all the time? So we had cash. We had central bank reserves. What do we actually
use almost every day? What's that? STUDENT: Deposits. GARY GENSLER: Deposits. So our bank deposits,
we are actually transacting– when
we go into Starbucks, I know it doesn't feel this
way, but you're actually moving some of
your bank deposits to their bank deposits. That's how we're
really moving money. So those are the
three forms of money. We never see Federal Reserve
or central bank reserves, we just see the cash
in the bank deposits.

Kelly? STUDENT: You talked about being
able to facilitate lending when times are tough. So we go back a decade, how
have the rules sort of change to prepare for that
scenario where banks– were the central bank
would need the ability to have a lot [INAUDIBLE]? GARY GENSLER: So Kelly's
asking, you know, we all lived through
the financial crisis. How many of you in
2008 were in banking? In any way? All right. Oh Josh, you– Alpha, where were
you working in 2008? You were at Goldman Sachs. Yeah, I've heard of them. The other people that
raised their hands? Who else raised their hand? Where were you working? STUDENT: I was working for
Bank of Tokyo Mitsubishi. GARY GENSLER: Bank
of Tokyo Mitsubishi. I've heard them. Very big bank. Josh? A hedge fund, right? STUDENT: A mortgage hedge fund. GARY GENSLER: A
mortgage hedge fund. Yeah. Yeah, uh-huh. We thank you, Josh. So the question is, how
would Josh, Alfa or Kira get money today? Who– did anybody work
in central banking? No. So the 2008 crisis came along,
and Josh, we let him fail. He was a mortgage hedge fund? STUDENT: We did pretty good.

GARY GENSLER: OK. What's that? STUDENT: He let us fail. GARY GENSLER: He let us fail. Goldman Sachs got a bit
of government support. Bank of Tokyo Mitsubishi, did
you get any government support? STUDENT: No. We had some [INAUDIBLE],, but
not critical [INAUDIBLE].. GARY GENSLER: It
was not critical. But the central banks
around the globe, particularly here in the
US, provided liquidity in multiple ways. But it wasn't
going to be enough. They were providing
liquidity, one, for some banks that were
failing, Bear Stearns in 2007 failed. And through a legal
authority they had from Congress
from the 1930s, where you could actually lend
to a financial institution– actually, you could lend
to any company in society. But they had never
used the authority. But they used the
authority that you could lend versus collateral.

And that was done with
Bear Stearns in 2007, and then it was done
again in 2008 for others. And what did they do
with Lehman Brothers? On the fateful weekend that
Lehman Brothers failed, what did the Federal Reserve
say to Lehman Brothers? STUDENT: Let them go bust. GARY GENSLER: James said
they let them go bust. That is correct. They said, we can't
use this authority. And then we all know
in the history books it's written how that fateful
week in September of 2008, then everything falls bust. Because there was uncertainty
in the marketplace. And so what they
did next, Kelly– so they were using
traditional authorities. And what they did
next is they started to test the limits of
their legal authority, along with the Treasury
Department and the Federal Deposit Insurance
Corporation, and they put a series of other things in.

And under an old authority of
the Federal Deposit Insurance Corporation, they
actually guaranteed all debts of the banking system
in the US for a period of time. Under other authorities,
they figured out how to put a guarantee
on money market funds. It was about $2 trillion
in money market funds. All of these almost
extra legal authorities. I mean, they were not written
right into congressional law, but they pushed the
outer boundaries. And we knew when
Larry Lessig was here he said that every contract
has some ambiguity. Every law has some ambiguity. And the best lawyers at the
Federal Reserve, the best lawyers at the US Department
of Treasury and elsewhere were thinking, where
is the ambiguity? And can we use that uncertainty
in the law to save the system? And then they went to Congress. They went to Congress and
asked for $700 billion. When Hank Paulson Treasury
Secretary went to Congress, they sent a four
page, but it might have been three page legislative
request for $700 billion. I remember I first read
that three or four page request, because then a senator
from New York, Hillary Clinton, asked me, this thing's come up.

Will you read it and
give me your advice? It didn't take me long
to read three pages. It was an outright
request for $700 billion. It finally did pass. It first failed in the
House of Representatives. It became, I think, a couple
hundred page document. But $700 billion of US taxpayer
money went to the treasury, and the treasury then
lended out and so forth. So it was multiple things. 10 years later– 10 years later, a
law here, Dodd-Frank, limits some of what the
federal government can do. It tightened the ability
to be the fire department in the midst of a raging fire. And there's lively
public debate recently. Tim Geithner, who was Treasury
Secretary at the time, has come out publicly,
and Ben Bernanke, I think, and they've written
an Op-Ed and some other pieces saying, it would be good to
loosen some of those Dodd-Frank restrictions.

But there's others
on the other side who have said, no, we need to
keep those restrictions tight. Because if the restrictions are
loose, then we have something called moral hazard. Does anybody know what
moral hazard might be? STUDENT: I think it's
you run a risk that is not commensurate
with what you can do. But if you're confident
because [INAUDIBLE].. GARY GENSLER: And who
will run the risk? STUDENT: It could be a
bank or it could be– GARY GENSLER: So the banks
or financial institutions, if you know you're
going to be bailed out, will take more risk. It's human– it's who we are. So my father had a small
business in Baltimore. He never had more
than 30 employees. It was a cigarette and candy
and pinball machine business. If he couldn't make payroll on
Friday, the city of Baltimore was not going to help
him out on Monday.

His employees might give him
another week or two– hey, Sam! My dad's name is Sam. We'll give Mr. Sam another week. But two or three weeks later,
they would have all quit. But the banks, so large, so
tied into their economies– for many decades. 2008 wasn't the only time. The sovereign steps in. The central bank steps in. So Kelly, the answer
to your question is, there's probably less
ability for the central bank in the US to step in. They still have very
real tools to be the firefighter in the
middle of a raging fire, but they're a little
bit more constrained. We as a society spoke through
our Congress and said, we don't want bailouts. But in the midst of the
next crisis, some Treasury Secretary, and some
Federal Reserve chair, and maybe some president,
will be testing the limits of those statutory authorities.

And they might be knocking on
the doors of Congress again. STUDENT: I guess my
question is more testing out the implications
of if we were to have– for example, if Bitcoin were to
be backed by central banks what those implications would be that
say, all of a sudden, instead of a ton of Bitcoin
had to be issued, we probably all know there's
a restriction on the supply there. So– GARY GENSLER: All right. Anybody want to take the other
side of Kelly's question? Bitcoin's now the
currency that's– hypothetically, the
Bitcoin or some crypto. Alin would tell us it
would be some other crypto. Maybe it's Algorand
or something. What happens? What's going to happen to the
flexibility of a central bank and a government to bail
out their economy if it was a crypto? STUDENT: It goes down. Kind of like the
example of the EU. GARY GENSLER: Remind
me your first name? STUDENT: Isaac.

GARY GENSLER: Isaac. So Isaac says it goes down. What do you mean? It means their
flexibility goes down? Tom? STUDENT: I mean, if
it's a crypto currency, like we know from
today, it's impossible. Right? I mean, there has to be
a finite set of coins, tokens, whatever they are. And there has to be consensus
protocols. it has to be– GARY GENSLER: Eric? So Tom contends– Isaac says it gets a lot harder.

Tom says it's not just
harder, it's impossible. Eric? STUDENT: It depends
on the design of the cryptocurrency
platform that underlines the crypto that's being used. Because we will see
maybe later in this class there are some known
collateralized stable coins that actually have
smart contracts that enforce money supply policies
to keep [INAUDIBLE] stable, which is really similar
to handling money supply in an automatic way. GARY GENSLER: So
Eric is saying– we'll take one more. STUDENT: Well in the
case of Bitcoin rates– GARY GENSLER: Remind
me your first name. STUDENT: I'm Santosh. GARY GENSLER: What's that? STUDENT: Santosh. GARY GENSLER: Santosh. STUDENT: [INAUDIBLE]
like the mining system contains protocol. [INAUDIBLE] GARY GENSLER: So what Eric
and Santosh are saying is there's some flexibility–
either flexibility written into the algorithm,
or flexibility in that the 51%, if there's
a consensus or a hard fork, you might be able to adjust. But at its core, it's probably– as Isaac introduced
it, it's harder. I don't know if it's impossible,
but I think it's a lot harder.

Just like the European Union has
a lot harder time helping out Greece because you now have
multiple countries involved in the decision making. The consensus– what
satisfies German economics and German politics
is different than what might satisfy Greek
economics and Greek politics. [INAUDIBLE] STUDENT: So I'm a bit
confused, because I guess we're switching terminology. So when you say central
banks and cryptocurrency, you don't mean central
banks and CBDCs? You mean something else? It's not– [INAUDIBLE].

GARY GENSLER: Yeah, yeah. I think we're dealing in
a hypothetical discussion. What if a cryptocurrency
were to actually take hold, like a Bitcoin, in the future? I think that's what your
questions were about. Eric? STUDENT: [INAUDIBLE]
popular enough and used. GARY GENSLER: Popular enough. Used enough as a store
of value, used enough as a medium of exchange. And then there was a crisis. Very different than a central
bank digital currency. Yes. [INAUDIBLE] STUDENT: [INAUDIBLE] sort
of like an old days stat specialist on the
foreign exchange. Would they make markets
know that there was– if there was hard selling, then
they could actually come in, be a backstop or [INAUDIBLE]. GARY GENSLER: Andrew's asking,
could the private sector be– STUDENT: [INAUDIBLE]
the central bank serve sort of like a
private sector really works.

GARY GENSLER: So could a
central bank in essence come in and support
a cryptocurrency? To some extent, for sure. Depends on what
their reserves are. And they also, of
course, are part of a government that has
a taxing authority, has a military. I mean, there's a
lot of extra might that comes with being
part of a government. So I think the answer is yes. But multi-jurisdictional
currencies usually fail on some level. The euro is still an experiment. It may still fail some
decades in the future. It's been tested. But multi-jurisdictional
currencies in the past, high probability
is they usually fail.

Because you don't have one
political system, one unified set of government accounts,
one taxing authority. You know, there's a
bunch of challenges. But let's move on and try to
hit some of the things on– so that's kind of a review a
little bit of the other day. We said, what's Fiat currency? We've talked about it of course. Fiat currency then
represents all three forms– bank deposits and notes
and reserves, and it's accepted for taxes
and it's legal tender. In this hypothetical
case, we hadn't even gotten to whether would
Bitcoin be accepted for taxes with
Bitcoin, or crypto be accepted as legal tender.

But I would remind everybody,
whatever the future holds, I think wide adoption in any
country you'd have to address, will the government
accept it for taxes? Will the government say it's
accepted as legal tender? And until and
unless that happens, usually it wouldn't
have wide adoption, even in a country
that's in distress. Again, we're not talking about
central bank digital currency, but you could say the same
thing about central bank digital currency.

Unless it's accepted for taxes,
which it probably would be, or accepted as legal tender. So I wanted to go back
to private banknotes. So commercial banks have
issued notes in the past. Think of this as
basically a piece of paper that represents a bank deposit. The same way that we might
be moving mobile money now, think of it– but most of this was
done before there was a time of central banks.

And in the US, it was called
the free banking area. Andrew Jackson was the seventh
president of the United States, and he really didn't
like a central bank. It was called the second
bank of the United States, but he let it
expire in the 1830s. Andrew Jackson–
does anybody know what piece of currency
Andrew Jackson is on? Where is his portrait? $20 bill. The one that we keep passing
around and everything. Andrew Jackson also was
president in a period of time that it paid off
the national debt. Paid it off to zero. He was a Tennesseean that had
a strong view about finance. We had a very tough
time in the 1840s, so I'm not sure we should have
paid off the debt completely. But the free banking
era, the notes that went around in the
US for 20 to 30 years, were all banknotes. And then the Civil
War came along, and the US government
needed to finance a war. And the word "greenback"
comes from 1863, when the North, the union,
wanted to raise some money. And they literally started
printing greenbacks.

And also the first
National Bank Act passed during the Civil War. And the National Bank
Act set up something called the Comptroller
of the Currency. And the Comptroller of the
Currency– those two words, they confused me a lot
when I was on Wall Street. Why was the bank regulator
called the Comptroller of the Currency? But in the 1860s, it was to
control all these banknotes that were being issued by a
bunch of commercial banks, most of which that failed. Hundreds failed. Many of the pieces
of paper would trade at different values,
discounts to each other and so forth. And some say that
the world we're living in now with
cryptocurrency, this new market, is a little bit
like the private note period. Interestingly, there's two
countries or two areas that still use private banknotes. Anybody from Hong Kong? James and Anton. So who issues your
currency, your cash? STUDENT: There are three banks. GARY GENSLER: Bank of China,
HSBC and Standard Chartered. Bank of China represents the
People's Republic of China. HSBC represents local
Hong Kong and Standard Chartered represents Britain.

STUDENT: Actually,
we should also add the monetary authority. Because they issue
[INAUDIBLE] $10. GARY GENSLER: They do, but it's
not really a private bank note. STUDENT: [INAUDIBLE] GARY GENSLER: No. So in Hong Kong, the notes– the dominant notes, am I right? STUDENT: Anything over $10. GARY GENSLER: Anything
over $10 is by a bank. They have to follow the
rules of the central bank. And anybody from
Scotland or Ireland? Is that too far north? But similarly, in
the United Kingdom, there's Sterling Bank notes. So we still do
have some of this. There's still a little
legacy of it left– a tightly, highly
constrained legacy because it's– the
monetary authority, it's called in Hong Kong? STUDENT: Actually, no. GARY GENSLER: Is it
called a central bank? STUDENT: It's not called
central [INAUDIBLE].. STUDENT: It's called
[INAUDIBLE] financial authority. GARY GENSLER: Monetary
and financial authority. So the word "monetary"
is right in there. Just like in the
1860s in the US, the bank authority was
called the Comptroller of the Currency. And it still is called the
Comptroller of the Currency.

James? STUDENT: [INAUDIBLE] UK. If anyone ever travels to the UK
and gets a Scottish bank note, give it back to the
person who gave it to you, because you [INAUDIBLE]
in England, everyone panics. It's like, what is this? This does not look
like a usual banknote. It is technically legal tender. But people go, ah! Don't want it. GARY GENSLER: So it's not
good north of a certain– STUDENT: It's not good south– GARY GENSLER: [INAUDIBLE]
south of something. STUDENT: I read that it's
not legal tender in South– but it's also not legal
tender in Scotland.

So you can use them in
Scotland, as a matter of custom. That's a question I had. But as a technical legal
matter, it's actually not– it doesn't extinguish the debt,
but somebody won't sue you. GARY GENSLER: I
believe Ross is right. But for those who
don't know, Ross spent a career as a bankruptcy
lawyer, as a partner of a firm, before he came back
for a Sloan MBA. So I'll go with
Ross on this one. [LAUGHTER] STUDENT: Moral of the
story is, if you've got a Scottish banknote,
just give it back.

Because I don't want this. GARY GENSLER: There you go. So stable value tokens. What's the moral on this, James? If you've got a stable value
token, do you give it back? STUDENT: Well, in theory,
it's stable value. So you can exchange it for
whatever it's tethered to. STUDENT: [INAUDIBLE] GARY GENSLER: So what
are stable value tokens, and what value might they have? What pain point in
the crypto space? Why did they come about? There was a reading on
it, so maybe it was just– STUDENT: [INAUDIBLE]
off the volatility of the cryptocurrency in a
way that it's backed by– [INAUDIBLE] currency so that
the [INAUDIBLE] volatility.

GARY GENSLER: Volatility. So ease to dampen
the volatility. Why would somebody want a crypto
asset but ease the volatility? What are the use cases for
crypto without volatility? STUDENT: Well they just
mentioned like loans and savings accounts
as an example. But the thing with
the volatility is that it struggled
as a store of value, because it's not stable and it
just goes all over the place. GARY GENSLER: So– STUDENT: They use it
a lot for trading. GARY GENSLER: Trading. What type? STUDENT: Different
cryptocurrencies. GARY GENSLER:
Cryptocurrency trading. STUDENT: You want to sell– you're going back
to the stable one, then going back to
another cryptocurrency.

You don't have to go
into the banking system. GARY GENSLER: All right. So maybe it's also
being used for trading. So I've heard that it
dampens volatility. I agree. It could be used for trading. Because you might go
crypto to crypto to crypto, but you want to keep a
better store of value and a stable token as well. And that's what it's been. I list four different
approaches to it. These are design features. They are trying to
do the same thing– have a cryptocurrency
that's not centralized, or at least not backed
by a government.

Not centralized that way– it might be centralized that
the algorithm in the software is centralized– and four different
design features. And I think there was a
reading on this if I remember. Does anybody want to say
anything about tether? What– basically
backed by US dollars? STUDENT: I think one
of the big issues with it is that, if it
were to be really adopted, you would need to have
a ton of collateral to make it useful to people. And then the other issue
is that you'd also probably need a central bank
like the Fed to actually be there intervening.

And that kind of goes
against the purpose. GARY GENSLER: Stephanie is
saying, if it really took off, you'd need a ton of collateral. What if tether, or any Fiat
collateralized currency, was not just a couple
billion dollars but it was a trillion dollars
or a couple of trillion? The whole US banking system
is about $16 trillion. There's $13-ish
trillion of deposits. What if you had a coin
that's 1 trillion of that? STUDENT: If it's supposedly
backed by– if it's that large and it's supposedly backed by US
dollars, you have two choices– three choices, right? You either have a stack of
$100s for a trillion dollars.

Physical– GARY GENSLER: Paper. Linen. STUDENT: Paper. Or you have bank
deposits, which is what you're trying to get out of. Or you've got the money with the
Federal Reserve, which you're also trying to get out of. So those are your only
three choices for, where actually is
the collateral? It has to be somewhere. GARY GENSLER: But the reason
to drill into this, this is part of the motivation
of why central banks are looking at central
bank digital currency. They've been watching not just
Bitcoin and the whole crypto space, but then they've
watched stable value tokens come along– stable value tokens
that are generally backed by some blockchain
technology and blockchain initiative that, frankly, they
don't have to be blockchain.

I think you could build
something without it. STUDENT: Something– if you have
a Fiat collateralized stable coin like Heather, I can
understand why there's a technological use case. Maybe you want to use it
as [INAUDIBLE] trading, or you want to lock value on a
blockchain that's not volatile. And there's also a
business case where, if it does go above a dollar– the coin goes above
$1 or below $1, you can either issue more
and keep the difference or buy that coin and
keep the difference. And you can potentially–
if it's small enough, you can invest that in a
bank and you can get interest on the collateral. But I do agree with you. The problem comes
along when you have this huge scale of a trillion. Then at that point– I don't know if it's a
trillion, the $10 trillion, a couple billion or whatever.

But when you run into
the same type of scenario where the US dollar went off the
gold reserve or we just became untethered to the
reserves of the coin. Because it's so
widespread and ubiquitous, that stability is now– GARY GENSLER: So is
your thought being that if it really grew
and it was accepted in commerce that
maybe it wouldn't have to be tethered
to the Fiat currency, it would then become– trust the trusted? The way that the paper
currency became trusted. And Richard Nixon
in 1971 could say, we're no longer going
to follow Bretton Woods. Or in 1933 when FDR
and our country said, we're going off
the gold standard.

STUDENT: With that,
you would probably need to create some kind of
central authority that manages monetary policy [INAUDIBLE]. GARY GENSLER: I think you
raise an interesting point. I think we're well,
well before that. I think right now, though,
the interesting thing is there's a lot of
entrepreneurial activity in stable value tokens. My observation is one
of the leading reasons was stated right here. In the crypto exchange
markets, which we'll talk about next Tuesday,
in the crypto exchange markets, a lot of people
want to go and trade crypto to crypto and
not crypto to Fiat. And what are some of the
regulatory or economic reasons they don't want to
trade crypto to Fiat? Tom? Taxes? Anything else? That's another big thing
that the government– STUDENT: It could
potentially be traced.

GARY GENSLER: It
could potentially be maybe more readily traced. STUDENT: KYC and AML. GARY GENSLER: So KYC. You want to remind the class
what those letters mean? STUDENT: Know Your Customer
and Anti Money Laundering. GARY GENSLER: So there's a
whole regime around the world– in the US, it's called
the Bank Secrecy Act– but around the
world about knowing one's customer, tracking anti
money laundering and so forth. One of the dominant things
in crypto that's going on– maybe mistakenly, maybe just
because it's an early stage– is that some people who
have crypto assets feel, I don't want to trade
that for a Fiat asset. I don't want to trade it
to euros or dollars or yen.

Because then, it's more
likely the official sector can track me for taxes. I think there is a false notion
that if I sell something crypto and I buy something
else crypto, I do not have to report my
gains or losses in my taxes. Now the US has
clarified that you do. But for a couple of
years, people were going, well, maybe it's just what's
called a like kind exchange, like selling one
piece of real estate for another piece
of real estate. By the way, if you sold
gold and bought silver– gold for silver, that was not a
like kind exchange under US tax law. But they were tax advisors going
around saying, well, there's some ambiguity.

Maybe you don't need to
pay your taxes if you went from Bitcoin to ether. The tax bill that was passed
in December, that's called the Trump tax bill,
that closed that window. One of the few things it closed. But I think because of illicit
activity, because of taxes, there's still a lot of
people that would say, I'd just rather go
crypto to crypto. But there's one other
thing, the reason why people might want a stable
value token about the payment system. We talked about it last week. Do I see a hand up? Are you going to help me out? STUDENT: I was going
to say, it's quick and it's very cost efficient. GARY GENSLER: So it's quick
and it might be cost efficient. We talked about–
and I had a chart about using crypto
as a bridge currency to move cross-border payments.

If you're moving from US
dollars to Mexican peso, that can take 2, 3, 4 days
in correspondent banking systems and the like. But what if you
use from US dollars to crypto to Mexican peso? Very legitimate
use case that can lower your cross-border
payment down to seconds rather than days. Very legitimate use case that
may be stable value tokens would be a good use case. So again, if
anybody's interested in the different
design characteristics, it's interesting, there's
a professor over at Harvard that came to see. He teaches Harvard Business
School, came to see me, that he's creating a non
collateralized seigniorage based stable value token. So just even here
in Cambridge there's a bunch of people looking at
trying to create things and do things, and a lot of energy. They're always asking me,
what's a real blockchain use? Some of it's just in this area. Hugo, and then we'll move on. STUDENT: One other
thing that with a couple of the Fiat collateralized
ones that you don't have up on there. So like Gemini, the exchange
recently created one, and Circle created one
that Coinbase adopted.

And those are both
on top of Ethereum. And I think actually–
at least with Gemini. I'm not positive
about that Circle one. Coded into the smart contract
is the ability to freeze tokens. So you could say that's an
AML type of thing, right? If I see something weird
with transactions with GUSD, then they could actually
stop and seize tokens. GARY GENSLER: So what's
the mood of the class around stable value tokens
that can be frozen right in the smart contract? Does that seem in the
spirit of Satoshi Nakamoto? What's that Hugo? No? Ross? STUDENT: I have a question. Who's they? STUDENT: Gemini, whoever
wrote the smart contract. GARY GENSLER: Whoever
controls the smart contract. In that case, that would
be a crypto exchange run by– who's Gemini run by? STUDENT: Winklevoss brothers.

GARY GENSLER: A couple
of identical twins. Not the Genslers. Well, the Genslers
weren't in the movie and didn't make a lot
of money on crypto. The Winklevoss twins, by
the way, who were at the– the wonderful story with
Mark Zuckerberg at Harvard, if you remember the
Winklevoss twins, and they're rowing,
part of a rowing elite, too, have made a lot
of money in crypto.

And we'll talk a little bit
about them next Tuesday. So then central banks
and cryptocurrencies. There was– we talked
about this the other day. There's four things
they're really doing. They're monitoring and studying. Some are restricting the use,
like the Central Bank of China, some are trying to do payment
system experimentation. We talked about
Singapore and Canada. Those are real
blockchain initiatives, the payment systems. School's still out as to whether
they need to use the blockchain technology. But they are seriously
leaning in, particularly in Singapore and
Canada, saying there might be a more
resilient payment system if we use a decentralized
distributed blockchain technology based on Quorum or
Quarta or Hyperledger Fabric. I think we're a few years away
from them sort of coming– is there enough there? Enough there there
that it would be better than traditional databases? But they are definitely
putting a lot of energy– and even the European Central
Bank, with the Bank of Japan, has an initiative as well. But in the fourth category,
central bank digital currency initiatives, I
caution everybody. You don't necessarily need
to use blockchain technology.

This is the part of
the course to say, this is something
clearly inspired by Satoshi Nakamoto's innovation
and inspired by stable value tokens. But when we talk about the
bank of Sweden's initiative and some of these
other initiatives, you'll find that,
to my knowledge, they're not built on
blockchain technology. That doesn't mean they
couldn't be in the future, but I think they're
important, because they're really important to
blockchain and money and how central banks are
thinking about this area right now, We talked about this last week,
the first wave of payments were all on Ethereum.

And as I said, they've
moved on from Ethereum. And the second wave of the
payment system initiatives are all permission blockchains. And now they're looking
at a third wave. If there's further questions
about how central banks are looking, I'll take
them now, or we'll go on to the central
bank digital currencies. Please. STUDENT: What do
central banks currently use to manage whose
deposits are whose? GARY GENSLER: Whose what? STUDENT: Like if it's Morgan
Stanley's deposits or Goldman Sachs' deposits, when
they exchange deposits within the central bank, what do
they currently use to manage– GARY GENSLER: They use various
forms of traditional databases, and I'm not going to
pretend that I know exactly each of those databases.

But usually, for
interbank money, as you've talked about Morgan
Stanley or Goldman Sachs, they would call it the Real
Time Gross Settlement System, RTGS system. But the actual underlying
database structure frankly probably goes
back to batch processing. Most of them are still
batch processing. In the US, I think we'll
roll out a faster payment structure in 2020. And Sriham who was
visiting with us, was on a whole big advisory
group to the Federal Reserve to do that. Does that help a little bit? But the question really is,
could blockchain technology inspire the next generation
for the mid 2020s for any of these countries? To have 24 hour,
seven days a week, but also no one
central place where the ledger is kept, with
multiple parties sharing the ledger.

And as Alin said,
but wait a minute, wouldn't a central
bank still want to have authority
over the protocol? The protocol amongst
20 or 50 banks. And the answer is
probably yes, but they're trying to explore what's
the most resilient system. So central bank
digital currencies. Central banks, of course,
already issue digital reserves. So the real question is this. Should access be
given to others? Should it be expanded
to the retail public? And so these were the
ones we chatted about. And we're just going to
go through four of them quickly just to say– you had a little reading on
each of Ecuador, Senegal, Sweden and the Philippines. These are the opportunities
that the central bankers even talk about.

Basically, in
Sweden's perspective, they want to stay in the
business of providing a means of payment. And the krona is so barely used. Nobody's here from Scandinavia? No. The krona is so barely
used they want to keep it having some influence. I'm trying to think if
I put that chart in. I'm going to skip over
a couple of things. No, I didn't put the
chart in, so I apologize. So what challenges do you
think are really there from our readings? Which of these challenges
do you think scares the central banks the most? Is it financial stability? Is it changing the credit
intermediation of banks? Is it monetary policy? Is it a payment structure? Or is it all of the above? Alin.

STUDENT: I guess
financial stability. GARY GENSLER:
Financial stability. Basically, a run on the banks. I don't know. I would say that in
my conversations– and Robleh Ali has
many more of them. But my conversations
with central bankers, it's a mixture of the first
one– the one Alin did say. And then, basically
the third one. Credit allocation. That they feel like if we insert
the central bank more directly into taking retail
deposits, are we going to be inserting
the central bank more into credit allocation? Or in essence, if we shrink
the need for commercial banks, are we somehow shrinking
the credit allocation in the economy? So in normal times,
they worry, in essence, about credit and the
extension of credit.

And in crisis, they
worry about being– that it would
destabilize the system. That's been my experience
talking just in these eight months to central bankers. Isaac? STUDENT: The central bank is
taking the deposits, rather than the commercial bank. Wouldn't that just be reflected
in a change of the interest rate? Because they would have
the underlying funds. And so that might just
flow back through. When the central bank is
determining the federal funds rate, it would be adjusted. And so corporate borrowers would
be able to borrow [INAUDIBLE].. GARY GENSLER: So what
Isaac is saying is, couldn't you just address
this as a central bank through interest rate policy and
some differential interest rate and the pricing of money? And I think some would
contend you could.

But on the other side– anybody want to
take the other side? The question really is
is, does the central bank want to start making loans? Now the US central bank
has a $4.5 trillion balance sheet, as we
talked about two days ago, and owns about $2– a little less than $2 trillion,
$1.5 trillion of mortgages. So in a sense, the
central bank is already making a credit decision. They're lending to
the mortgage market. But the question is, do you
want to go even further and have the central bank picking
individual companies or individual
homeowners to lend to? And that's what– if it
got to any scale or size, they talk about.

Of course, they could just lend
to the commercial bank system, and then the public would be
lending to the central bank, and the central bank
would be lending to the commercial banks. So the design considerations–
and we didn't talk about these. These eight design
considerations are all in the loop. Does everybody get it? Only a few people get it. It's a token or
account and so forth. This little money
flower that Garrett has put out there–
and central banks talk about the money flower. Where is Bitcoin on this? Who wants to tell
me where Bitcoin is? We'll bring it
back to blockchain. Eilon. STUDENT: Private digital
tokens, wholesale only. GARY GENSLER: Wait, wait. So where am I pointing? STUDENT: Blue and orange. GARY GENSLER: Blue and orange. Oh, it's written there. You mean right there. STUDENT: [INAUDIBLE]
without the red. GARY GENSLER: Without
the red, right here. Private digital
tokens, wholesale only? No. [INTERPOSING VOICES] GARY GENSLER: Tell me
where you want me to point. So you're saying
it's orange and what? And blue. [INTERPOSING VOICES] GARY GENSLER: It is
widely acceptable.

Bitcoin's widely accessible,
meaning anybody can get it. [INTERPOSING VOICES] GARY GENSLER: I would say
you can put any form of money into one of these
little blocks– government backed and
not government backed. Where is stable value tokens? Look at this. You're the closest, and I
can't remember your name. STUDENT: Connery. GARY GENSLER: Connery,
where's stable value tokens? It's not central bank issued. I'll give you a hint. So it's not in the green. STUDENT: [INAUDIBLE]
private digital? GARY GENSLER: Yeah. It's private digital tokens. You could make it
wholesale only, or you can make it widely
accessible like this.

STUDENT: [INAUDIBLE] but they
can be, and most of them are, central issued even if
it's not central bank. I mean, I guess it depends on
how you define central bank. It's not a sovereign
central bank, but it's one entity that
issues a token that's tethered to the US dollar. It holds the US dollar. GARY GENSLER: So I think
it's an excellent point. A stable value token that
is backed by a Fiat currency is not central bank issue. I would say that it's
not in the light green. But it's highly dependent
on the central bank. It's highly dependent on putting
deposits in commercial banks. Tether, which purports to
be a little over two $2, $2.5 billion crypto which
is all backed by US dollars, at one point in
time last year, they lost some of their
commercial bank accounts. Meaning the commercial banks
would not take their dollars. The commercial banks in many
countries said, forget it, I can't have you
as a customer, I can't follow you for any money
laundering and otherwise.

And so in essence, you
are highly dependent, if you're a custodial stable
value, on the central bank. I agree with that. But I think you're
not not central bank. [INAUDIBLE] a little– STUDENT: It's just central. GARY GENSLER: It is central. Right. So there's a lot of
paradoxes and irony in the blockchain crypto space
as to how centralized something it is and how decentralized. And from Satoshi Nakamoto
is a very decentralized way. So we're going back to these. And so Ecuador. Anybody read the Ecuador thing? Want to tell us a
little bit about– Leonardo? STUDENT: Well, I think it
was a story of failure. GARY GENSLER: A
story of failure. STUDENT: Because [INAUDIBLE]
issue the [INAUDIBLE] money. It was backed by
the central bank. But the central bank had
no credibility or trust from the users. So it never took off. So the government of Ecuador
had just defaulted a few years before they launched this. The economy was [INAUDIBLE]. So they issued something
where people didn't really know whether it would still
be there within a few years.

The usage was
extremely disappointing compared with the
initial expectations. STUDENT: But another interesting
point in that article was that financial
institutions were not obliged to use it whatsoever. And I sort of
wonder if there had been a minimum level of balance
sheets at these institutions, where they were required
to have a minimum level of the cryptocurrency,
could that have helped it a little bit? I don't know. STUDENT: That's
[INAUDIBLE] they also failed to manage expectations. Because even in the
first year, what they are saying, what
they are claiming is, there are going to be
500,000 users or something. [INAUDIBLE] turns out just
5,000 accounts or users came up. So it's a great
story of failure. [INAUDIBLE] STUDENT: Bitcoin was also these
matching benefits and costs that were associated
with the project. They kind of [INAUDIBLE]
calculations were made. The benefits were
less than $1 million compared to almost $7
million [INAUDIBLE] From the start, from
the outset, the design wasn't conceived in
an appropriate manner.

GARY GENSLER: And
again, this is somewhat inspired by crypto finance. No blockchain technology
involved in it. Which, by the way, is going
to be true for the next three examples as well. But it's relevant. This is sort of also
inspired by initiatives like [INAUDIBLE] and so forth. It's like, how do we get more
inclusion and use dollars? Kelly, and then we'll go to– STUDENT: I just feel
like it was less of a– I feel like it was
less of an attempt to take some new digital
currency initiative and more of an attempt
to make profits. Because they said that
basically the state had a monopoly on this. And as Leonardo mentioned, there
was previously hyper inflation. So once they discovered that
it wasn't really getting them the profits they
wanted [INAUDIBLE] GARY GENSLER: [INAUDIBLE] STUDENT: Right.

So I'm sort of wondering– the motivation I
don't really think was to do a proper job
on the technology side. GARY GENSLER: And you're
probably right about that. One good thing that
came out of it, they finally sort of admitted
that they shouldn't maybe be in the monopoly, and they
let– mobile phone payment alternatives were authorized
for the phone companies.

But I'm not close enough
to Ecuador to know whether that was really done. Maybe it's now just
a duopoly of a couple of phone companies doing it. So they might have just
shifted some economic rents from the government to a
couple of major companies that are friends of the
government or something. The Philippines. I think there was a reading on– anybody want to say
something about– anybody from the Philippines? No.

Anybody want to say
something about what happened in the Philippines? And you're going to
see something that's similar about this in Senegal. There's a software
provider called eCurrency Mint Limited in Ireland that
is marketing around the globe to do digital Fiat currency. I think they're
careful and they call it digital Fiat currency
rather than the central bank digital currency. But nonetheless,
every time there's a press release, whether from
the Philippines or Senegal or elsewhere, somewhere
in the press release you see blockchain
technology use for– I've done my best to read
everything I can on these two since last summer, when I
stumbled upon them in July. I do not believe that either
are using blockchain technology. But they're sort of using
the gloss of the terminology.

But it's still– Senegal, more than
the Philippines, is something that central
bankers are looking at. Importantly, it's issued
by a commercial bank. It's not technically
issued by the central bank. The central bank has actually
put out a statement and saying, this is a test, and
a learned thing, and a regulatory sandbox. The central bank is sort of
saying, all right, we'll let– this is a little bit more
akin to private banknotes in the 19th century in the US. And I'll flip to
the Senegal one. This is in the West African
economic and monetary union. So there is a monetary
union, I think, of 14 countries all
using a currency. It's called the Franc, I think. The F– STUDENT: They call
it the [INAUDIBLE].. GARY GENSLER: What is it? STUDENT: [INAUDIBLE]
They use [INAUDIBLE].. GARY GENSLER: [INAUDIBLE]. Have you ever used it? Do you know it? STUDENT: [INAUDIBLE] GARY GENSLER: So one
country in a 14-nation block said, we can maybe get
more financial inclusion. Good. I think there's a
good motivation there.

We can get more
financial inclusion. We can put [INAUDIBLE]—-
did I say it right? [INAUDIBLE] on an
electronic platform. We'll use this
software provider out of Ireland that keeps
knocking on our door. And we'll see if we can
push it out a little bit under some e-money regulations. Technically, it's e-money
under pre-existing regulations. But I would say a lot of
central bankers are kind of– elsewhere around the globe sort
of watching, what does that do? What does that mean? Does it increase
financial inclusion? And probably the
most interesting one really is in Sweden. Sweden has said, these
are the benefits. These are written in a document. They've written now the
third document on this. It came out a
couple of weeks ago. It was not assigned reading
because it just came out, and it's 50 or 60
pages, if anybody wants to log through it. They say, it's going to
continue the public access to the risk free guaranteed
means of payment. That's the key thing to them. You have cash in your
pocket right now– krona– but very
few people have it.

So few people have it that
most retailers in Sweden are now saying, I
will not accept krona. And it's not such a big
country that a bunch of people want to own krona
for a store of value. So the total outstanding– is there a question? STUDENT: Because like all the
companies that are listed, they're listed in
kronas in Stockholm. So how come it's not used at
all but the stock markets use it widely? GARY GENSLER: The
stock market what? STUDENT: Like the
companies which are listed, they're listed in kronas. GARY GENSLER: Correct.

STUDENT: So like how come
it's not used at all? GARY GENSLER: It's not used– no krona is used digitally. I'm saying paper
krona is not used. Paper krona. But they're saying,
we maybe want to make sure that
there's a government's direct relationship to
electronic government money. The properties. They've said– they
were willing to put a comprehensive
range of services in, make it widely available. They've answered the
design considerations. And they actually
say that they're looking at putting
interest rate on this. They think that putting
an interest rate on it makes sense. And that it should
have e-identification. They say, it will be traceable. They've already said
in their documents they're not going to go with
totally anonymous e-money. This is out of their report. But as you can see, the
blue line is Sweden. That their total
outstanding cash– this is physical,
tokenized cash– was 4% of their GDP.

It's now less than
2% of their GDP. The US and Europe would
be the green line. We're up to about 10%. But as we talked
about on Tuesday, 8 of those 10 points in
the US are $100 bills. And 4 or 5 of the 10 points in
the US are outside of the US. STUDENT: [INAUDIBLE]
is part of this because bank
deposits or reserves or what we would hold involves
in dollars in the United States? The banks here are
holding in Euros. GARY GENSLER: No, this
would be cash that's outside that the public holds. Or the public can– STUDENT: Not held in banks. GARY GENSLER: That is correct. So if it's– if it's cash
that JP Morgan is holding physically, just because they're
putting it in that daily ATM machine, it might be included.

STUDENT: Or like the
x number of dollars in everyone's bank accounts
[INAUDIBLE] bank deposits. GARY GENSLER: That's
[INAUDIBLE] bank deposits. STUDENT: [INAUDIBLE] M1. GARY GENSLER: This is actually
only about half of M1. This is the $1.6 or
$1.7 trillion of– it's about $1.8 trillion. $1.8 trillion in the US, of
which $1.6 trillion or $1.5 trillion is $100 bills. There's only $200
to $300 billion of US currency, paper currency,
that is not $100 bills. And well over half of
$100 bills are outside of the US per Federal
Reserve statistics. I think 57%. How they trace
that, that would be another story for another day. But Sweden doesn't have
a bunch of people holding the equivalent of
$100 bills or 500 euro notes as a store of value. And so you see a
decline of their paper. You see the retail
merchants aren't taking it. People aren't using it. So Sweden feels
compelled to say, I want to do something here. Tuesday, we're going to be
talking about crypto exchanges. It's a bit of a setup
also for Thursday when we've got our outside
speakers I keep chatting about.

I think Talida– Talida had to leave
early today, but I think Talida is going
to send you a message or put up on the website,
Jeff Sprecher and Kelly sent a list of readings. I guess they're used
to being– they're not actually used
to doing– they're doing this as a favor for me. I got to know him very well when
I was at the Commodity Futures Trading Commission.

They're rolling out the– both a crypto exchange
and a payment alternative. And so they sent
a bunch of things that they thought you
might want to read. So we put them up on the
website midday today. I know that you've got a
lot of other things to do, and it's getting to
that time of year where there's fewer and
fewer things you're reading. But what we're trying
to do on Thursday is, I'm going to open up with
a little fireside chat. They want me to ask them a few
questions for 10 or 15 minutes. And then we're
going to open it up. It's all going to be your time. They're with us about an hour.

Now we might encourage
them to stay till the end, but they're here
from 2:30 to 3:30. Now I know we always
start at 2:35. But if they're ready
to go at 2:32 or 2:33, I might start with them and
start the fireside chat. And then it's going to be
you're asking them questions. So to the extent that you
read the things that they sent around, better for you. I will say this in advance,
because one or two of you have already come
saying, I want to see if I could go work for the
company that owns the New York Stock Exchange and owns
[INAUDIBLE] and everything. I will be glad to
send whatever resumes or anything you want
to Jeff and Kelly. I'll act as a clearinghouse and
send it if that's your goal. But in advance, I'm not going
to give their private emails to you and everything like that. But I think that would be
an interesting conversation next week. So central banks play an
important role in the economy. We already live in
an electronic age. But they really are absolutely
at the epicenter of money and how money's been defined
for 300 or 400 years.

Payment systems and Fiat
currencies have had challenges. I still continue to
think blockchain– I told you, I'm
not a maximalist, but blockchain technology
can be a catalyst for change. Central bank digital
currencies is evidence of that, even if it's not based
on blockchain technology. I think it's partly inspired
and urged on by this. It doesn't solve what
blockchain technology would do for it, but– I think that central banks
by and large are monitoring. They're exploring
payment systems, and a handful are looking
at the central bank digital currencies. I think– and this is
my own prediction– that with 180
countries, somebody, Sweden might be
the one to do it, will be there to do some
central bank digital currency. Venezuela says they're
doing one backed by oil. So it might be the other end. Iran says they want to do one. They would avert sanctions. We didn't talk about that,
but sanctioned countries are looking at ways
to avert sanctions. So there could be countries
in distress, countries looking to avert sanctions, or, you
know, kind of first tier economic countries like
Sweden that are looking at it.

So I will see you next Tuesday.

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