2. Money, Ledgers & Bitcoin

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visit MIT OpenCourseWare at ocw.mit.edu. PROFESSOR: So today, what
we're going to be doing is– last week, you gave
us some feedback what you wanted to do in the class. We're going to go through that
and talk about the readings.

I'm going to do a
little calling on you and helping you take the
class through the readings. And then the six or seven
things I'm going to do– history of money; ledgers;
fiat currency, central banks, and credit cards;
the role of money; some early digital money. You had the Clark reading as
to a bunch of failed attempts. All the way through a
little bit of mobile money, all the way up to
Starbucks and Alipay. And yet, the riddle remains. We're going to get
really deep into Bitcoin in the next three classes. But this is to give
some foundational bits of money and ledgers and
central banking and technology. And then, of course,
I always like to finish the class
talking a little bit about why we're doing what we're
doing between now and then. Even though the
readings are required, I know you're all busy. I know that you've all
got a bunch of classes. And like good business
students and business people, you optimize. So I'm trying to give you a
sense of why you might read it, rather than it's required,
at the end of each class and how it fits into
the course narrative.

And then we'll do a
little bit of conclusions. So the survey results. What did you want to learn? This is really
your class, and I'm going to learn as much from you. But hopefully, we're going
to cover what you want. So here's a list of those things
that were at least written by two of you. First was technical things. 18 of you said understanding
blockchain technology. Hopefully, we get
to that, but you might find that you'll want
to do more after this class.

The ecosystem and being able
to have an educated discussion, sort of the dinner party
conversation around blockchain. I think we'll be successful. But at the end of
the semester, we're going to pull these
slides up again, and we'll see how
we did as a group. You all talked a lot
about applications. How can you actually apply it,
learning in the venture space and thinking about where it
really works in the world.

And I think we're going
to spend a lot of time on that in the second half. But all throughout,
we're going to be talking about the
economics and what's the reality versus the hype. You also wanted to understand
its impact on people's lives, the regulation. About six of you said
something about regulation. I'm glad, because we're only
doing one lecture on that.

But we're going
to spread it out, because as we talked
about in our first class– and I'm honored
Larry's here again– but we're going to always be
thinking about Larry's four ways. And I see– is it Jihei? What are Larry Lessig's– you shook your head yes. AUDIENCE: I know– let's see. It is code and architecture,
market, law, and norms. PROFESSOR: You got it. Does anybody want to say how
that relates to blockchain, why we're chatting about that? Oh, my god, I'm going to have
to cold call fast, right? You're from R3. Joe? AUDIENCE: No, I remember
we saw it last class, but I can't relate
it now to blockchain. PROFESSOR: Can you relate
it to anything in life? Maybe not. Alan, help your tablemate out. AUDIENCE: I'm waiting
for my moment to shine. PROFESSOR: This isn't it. AUDIENCE: This isn't it.

PROFESSOR: I'm having fun. This is what I'm going to do. I'm just going to have– don't worry about it. So why do markets, code, law– I can't see your name,
but is it [INAUDIBLE]?? Yeah, why? Why does that
relate to all this? AUDIENCE: Can you
repeat the question? PROFESSOR: Jihei, you're
going to repeat the question, because you went through it. AUDIENCE: So how does
Larry's four forces relate to our topic of blockchain. PROFESSOR: And the four
forces, again, are market, so business; law;
code or architecture, call it technology;
and social norms. AUDIENCE: So I think
it's because it brings a new way of
doing those things, like a new tool in order to– so what I got from the reading
is these ledgers already existed, but given that now
we have big data, for example, then more things going on helps
our society roll it out better. PROFESSOR: Good way to say it.

Look, it's unfair of me. It wasn't one of the readings. I'm just saying, in
everything in life, I find these things grind
up against each other. I spent a lot of time in
Washington in politics, but the markets and how
the commercial enterprise and the economy grinds up
against technology and sort of grinds up against the law– and then, of course, just
social normative behavior. These four forces, in almost
everything one does in life, you will find. And so I just ask you
to always, whether it's one reading or another
reading, bring that into your thought
process of this class. I'm not going to assign
Larry's assignment. I didn't know he was
even going to be here. But I've always thought
it's a good discipline to think, OK, what are
the commercial realities, the markets? What's the technology, even
if it's in an earlier day and it's the technology of
the car replacing the horse and carriage? How does government
or the official sector put it into a set of
standards that are required? And then how do
we, as a society, even if it's not required,
just have our behaviors? Those are the four forces.

So that's why. I probably just
failed Larry's class, but that's how I've
thought about it. I did, probably, right? No, he's shaking his head. But regulation is just
one of those four forces. And that's why I pause there. And so we'll have it in every
class, but only one lecture. Money and markets, that's
one of the other forces. Five of you said you
want to make money, and I applaud those who
said that, because own it. You're in a business school. Why not? But investing and trends. Now, there was a bunch of
other miscellaneous topics. I'm not going to
go through them.

I kind of thought the last two
were interesting– anecdotes from my past. I'm not sure who said that. I'm not sure what you want
to know about– my three daughters, my running, or this
Wall Street stuff and finance. And I'd like to understand
hyperbitcoinization, as well, but I don't know who
asked that question. I don't know what
it is, so I'll try to figure out what
hyper– does anyone want to own up to that question? They were anonymous.

All right. All right. So today's study questions. What's the role of
money historically and in today's digital economy? And this is when I'm going
to look for discussion. So does anybody
want to tell me what the role of money– what
would be your answer to this? Anton? AUDIENCE: The medium of the
transaction, and the unit of– like a counting unit. And also, the
state of the value. PROFESSOR: So the three
classic rolls of money that people talk about. Kelly, you want to
repeat what he just said? AUDIENCE: [INAUDIBLE]
the question, but I think historically,
it was pay off debts, starting and conquering
various lands and wards, and then also funding
trade wars, cutting taxes.

So a lot of societal things
that drove civilization forward. PROFESSOR: And what
we'll discuss today and what it is, is that
money is a social construct. It's something that
societies came together– it's hard to tell whether it
was 5,000 years ago or 8,000 or 10,000 years ago. Really, it's a social
consensus mechanism. But we're going to chat about
the readings in a minute and come back to that question. What is fiat currency? Does anybody want to– Tom, you want to tell us
what fiat currency is? It's a shame, Tom. See, I recognize you. AUDIENCE: [INAUDIBLE]. This is like a
established currency by a central government, by
a government that proposed a market or [INAUDIBLE]. PROFESSOR: Right. So you said it's a
central currency, and it's by government. Anybody else want
to add some things? Is it Kyle? AUDIENCE: I would just
add that it's not backed by any physical commodity.

PROFESSOR: So it's not backed
by any physical commodity. AUDIENCE: Yeah. Really just the good faith
and credit of the nation that issues it. PROFESSOR: Daniel, did
you want to add anything? AUDIENCE: I was just
going to say somewhere that it's not gold backed
or anything like that. PROFESSOR: But was
it always that way? AUDIENCE: It wasn't
originally that way. PROFESSOR: Right. A fiat currency might be
backed by something physical. Was there other–
remind me your name. I'm sorry. AUDIENCE: Josh. PROFESSOR: Josh. AUDIENCE: Specifically
used to settle debts, specifically those
to the government, so taxes. PROFESSOR: All right, so
it can be used for taxes. And remind me of your name,
because I can't see a card. What? AUDIENCE: Sean. PROFESSOR: Sean.

AUDIENCE: So, basically,
there's no inherent value in fiat currency. So basically, there's
no one recognize that specific currency itself. There's no government. PROFESSOR: So here's a
question for the class. Is there inherent value
to non-fiat currencies? Because Sean's saying that maybe
a distinguishing characteristic of fiat is it has
no inherent value. AUDIENCE: Terry. PROFESSOR: Terry. AUDIENCE: Well,
actually, the same applies to any commodity
that's used to– currency in general.

Because it's just the scarcity
of some specific resource and social common
agreement that that's going to be the parameter. PROFESSOR: So how many people
are more in line with Eric or– there's not one
right answer to this. This is a question
that's been debated for decades or centuries. How many are more
in Sean's camp? AUDIENCE: I think it depends. For example, gold is
definitely a social construct. We decide that, as
a human society, that gold is going to
be something valuable. But if it's, like, grains
that humans can [INAUDIBLE] and that, I think,
has an inherent value. So I think there are
non-fiat currencies that does have inherent
values and that does not have inherent values. PROFESSOR: All right,
anybody– what's your– Jihi, yeah. Tom? Tomas? AUDIENCE: Tomas.

I just want to say
that the [INAUDIBLE] is another component which the
fact that it is a legal tender. So the government
and some [INAUDIBLE] forced the society to use the
currency, which makes more comfortable for people to use. PROFESSOR: So Tomas is
saying that fiat currency is legal tender. So first, we have to discuss,
what is legal tender? Does anybody want to
knock that one out of the ballpark who hasn't
raised their hand yet? No? All right. AUDIENCE: I think that's
maybe my earlier comment. It can be used to settle
debts, and specifically those to the government. So you can use gold as a money. It can be a stored value. It can be a means of exchange. But you can't pay your
taxes in gold, right? You have to– PROFESSOR: Is that correct? So 19th century, could you pay
your taxes in gold in the US and in Britain and
other countries that had gold currency? This is just a yes
or no, but James? AUDIENCE: It's yes, but after
1970s, the paper currency is attached to
the gold standard.

So inherently, there
is an exchange of value that is picked by the
government or the central bank. So it's almost one of the
same thing at that time, until more recent years. PROFESSOR: James is saying you
could use gold as legal tender. Legal tender,
again, is something that a society comes
together and creates a law– back to the Lessig four. Society together
says– it's not just a social normative behavior. It's a law. One must accept this. And the US and the
UK and many countries it says for all debts,
public and private. So a debt to the government
or a debt in a store. We're going to get
to, later, as to when is it true that somebody
has to take your cash. But I'm going to hold
off on that in a minute and talk about it.

But I think, also, Jihei said– it was somewhere between Sean
and Eric, both physically in the class and in terms
of her articulation– that fiat currency
might not have anything inherently behind it. But gold mostly doesn't have
anything inherently behind it. And then some forms of
currency, like grain, had more. So maybe it's a continuum. Maybe it's not black
and white, 100% or 0%. And then we're going
to talk a little bit about how Bitcoin fits into it. And our next three
classes are going to be really into the
technology of Bitcoin, but just a little bit
of teasing out before I go through some lecture slides.

Who wants to talk
about how Bitcoin might fit into this history of money? And then I'm going to return
to that question in about 45 minutes and ask you again. Does anybody want to
say from the readings? And you remind me your name? AUDIENCE: Isabel. PROFESSOR: Isabel. AUDIENCE: So with
Bitcoin, it's kind of the same, where
the value is given by society, except
with Bitcoin, it's not backed by a central bank. So people don't think that
there is an inherent value. But the readings
pointed out that there's sort of that same history,
except it doesn't have [INAUDIBLE].

PROFESSOR: So Isabel
is saying that Bitcoin fits into the history of money
because, like fiat currencies and like Jihei said about
gold, it doesn't necessarily have any inherent
monetary value, but it's a societal set of norms
that people are accepting it as having value. But the key distinction
that Isabel said was that it's no central. AUDIENCE: It's not backed
by any kind of central bank. PROFESSOR: It's not
backed by a central bank or a central authority. Alan? AUDIENCE: Yes. So Bitcoin, in my
opinion, is unique, because I think the value of
Bitcoin changes over time, not the fluctuation that we
see like $6,000 or $90,000, but in terms of the
utility of the coin itself. So today, for example, we might
be able to buy pizza or coffee or whatever with Bitcoin, so
there is an inherent value in terms of medium of exchange. And it will change as society
adopts it more and more. So I think it's hard to define
if there is inherent value or not. PROFESSOR: So Alan is
raising that Bitcoin– if I can put some
words in your mouth, and tell me if I'm
correct, that Bitcoin might have some
distinguishing features from even fiat currency,
that its value is shifting over time with adoption.

Is that– I mean, you
didn't use that word. Please let me know
your name again. AUDIENCE: Brotish. PROFESSOR: Right. Like British, but with an
O, you told me earlier– Brotish. AUDIENCE: Another way I
was thinking of [INAUDIBLE] the evolution of the later
technology like accounting and the evolution of
money, along with– so initially, we
saw in the reading how it happened in the
prehistoric age and then the advent of the [INAUDIBLE]
and then [INAUDIBLE] later, which is kind of one
of the fundamental blocks of Bitcoin. PROFESSOR: Right. AUDIENCE: So that
is another way kind of natural progression
of how money [INAUDIBLE].. PROFESSOR: Brotish? AUDIENCE: Yeah. PROFESSOR: So what
Brotish has raised is also Bitcoin fits into
the history of ledgers, whether it's double entry
ledgers as recognized through T accounts or other
forms of ledgers, that it adds to this whole
long history of ledgers.

I agree with that. And it's a new form
of keeping ledgers. Alan? AUDIENCE: So Bitcoin is
also similar to gold. There is an element of scarcity. PROFESSOR: Of scarcity. AUDIENCE: Yeah. So you cannot generate
that many Bitcoin. PROFESSOR: Correct. AUDIENCE: You can only generate
50 bitcoins every 10 minutes, and it keeps happening
every four years. PROFESSOR: So it seems
like scarcity and ledgers are important components. Aviva? AUDIENCE: Yes. So it does have a fixed demand– sorry, a fixed supply, like
you said, in terms of scarcity. But the more we
adopt it, the more it becomes divisible
in terms of units. And so we can increase its use,
because now you can divide them up to [INAUDIBLE]. PROFESSOR: This is good. So divisibility is another
characteristic of money, scarcity, adoption as
Alan said, ledgers. Sorry, Tomas? AUDIENCE: We mention
decentralization, because this implementation
make feasible the Bitcoin and makes feasible to
implement this kind of thing in the decentralized
environment.

So without any central
authority to design or dictate the supply and all the
aspects of the concepts. PROFESSOR: We'll take
one more, and then I'll start to talk about the history. Why don't we go here? And remind me your name. AUDIENCE: Alexis. PROFESSOR: Alexis. AUDIENCE: [INAUDIBLE]
of like money and other forms
of currency, even if it's controlled by central
government or central bank, there's no fixed exchange rate. It trades extremely quickly
with other types of currency, so I mean, it's
still very different. PROFESSOR: So, Alexis, if
I understand Alexis' point, it's that there's no fixed
exchange rate about Bitcoin we're talking about. But couldn't we really broaden
that to all forms of currency? I mean, what really
is the exchange rate between an ounce of
gold and a bushel of corn? AUDIENCE: Yes and no.

I mean, yes, that, for example,
some states do control exchange rates with other counties. PROFESSOR: All
right, good point. So Alexis is saying yes and
no, because some governments try to fix. Now back to markets. How well does that
work when governments try to fix an exchange rate? I mean, just as a sense of the
class, does that work well? So it sort of might work well
in temporal, short periods. Works less well
for decades on end. I'll take one more,
and then I'm just– I want to go through a couple– AUDIENCE: Just one comment.

That way you can
teach hours of work. That's how economies define
it previously, right? But I just want to
ask, what is a ledger? PROFESSOR: What is a ledger? Very good question. I'm going to be chatting
about that in a minute. But does anybody
want to hit that? I'm sorry. No, over here. AUDIENCE: I was going
to say, it's just a numerical record of everything
recorded, in a fashion.

[INAUDIBLE] PROFESSOR: A numerical record. I think that's a good thing. A ledger is basically a way
to record economic activity or social relationships or
financial relationships. I would say it's both a way
to record economic activity, and it's a system of recording
financial relationships. And while I didn't
assign these readings, some very good academic
research suggests that the first methods of
writing and symbols of writing had to do with numbers and
had to do with ledgers, rather than words and communication. Because it's so
fundamental to society to record various
economic transactions or to record the
financial relationships amongst and between
members of a community, whether it was a
small village or when society burst out of villages
thousands of years ago.

Does that help? We'll be back to it. And better that
you ask that here than in your accounting
fundamentals class. I don't know. So the readings– we've sort
of talked about the readings. How many of you actually watched
the little three-minute video? What'd you think? I mean, just as a– I'm sorry, here. We haven't chatted yet. AUDIENCE: I think the
broad-based message was that any currency, or
anything, for that matter, has value equivalent to what
the society assigns it with.

Because the video
basically just showed a guy who created his
own currency and was just selling it to the public. And his whole claim
was that it is real if you believe it is real. PROFESSOR: So it was just a
nice little ditty, in a way. Matthew, I'm sorry? AUDIENCE: I would have
given him $1 for it. PROFESSOR: You would
have given him $1? Great. AUDIENCE: Seeing how
much the pizzas went for. AUDIENCE: Who knows? PROFESSOR: Would anybody else
have given him $1 for it? No? Oh, you would have? AUDIENCE: Actually, I'm
working with local currencies. And it's kind of the same, but
you can use them just locally. I mean, it keeps the
money inside the community that decides to use that
way of transactions. PROFESSOR: We're going to refer
back to each of these readings as we go through
the next 45 minutes.

Yeah? AUDIENCE: I was wondering
if he was actually breaking the law by
launching his own competing currency to the US dollar? Is that a legitimate– obviously, it didn't compete
with the US dollar, but– PROFESSOR: You raise
a very good question. I'm not aware of any
statute, federal or state, that says there's an absolute
monopoly on forms of currency as there is in other
things, like you know that slot in the
door that's called the– where you can put a letter
through the door or a mailbox? There's actually a law that says
that the US Postal Service has a monopoly, and
that's why UPS is not allowed to put their boxes
or anything in there. There's a government
fiat monopoly. But you raise a
very good question. What we've found in the
last 10 years with Bitcoin, with really
oversimplifying, is that it is legal to create
your own form of money, as Bitcoin is
possibly this money.

But you have to comply
with all the other laws. And all those other laws
that we'll talk about in other lectures,
in essence, fall into buckets of guarding
against illicit activity, so the Bank Secrecy
Act and all the laws related to anti-money
laundering and terrorism finance and so forth. One still has to pay your taxes
if you're gaining or losing on this investment. The Federal Reserve and other
authorities around the globe still want to insure
for financial stability. The fellow on the streets of– I don't remember what city. New York? Selling his dollars, when
Matthew bought it for $1 and I think over here– Brianna? AUDIENCE: [INAUDIBLE] PROFESSOR: What's that? AUDIENCE: My name? PROFESSOR: Yes. AUDIENCE: [INAUDIBLE] PROFESSOR: Bought it. The society's still
going to be stable. It's going to be all right. But if millions of
people were buying it, then people might worry.

And then there's
the third big bucket that we look at is investor
and consumer protection. But I think it's allowed. So we'll refer to
these, Joaquin, and then I'm going to go on. AUDIENCE: Can you
legally pay, for example, salaries in bitcoin in the US? PROFESSOR: Yes. And why is it that
you can legally pay for wages in bitcoin in the US? I know it's outside
of the readings, but why do you think it is
allowed in this society? Is it Kyle? AUDIENCE: Wouldn't
those compensation forms be allowed under any contract? PROFESSOR: Most things–
you could pay somebody in these placards. I doubt, really, that you're
going to value them much. But you could pay
somebody in this. You could pay somebody
in gold, euros, bitcoin.

And there are firms
that are paying– usually, they're developing
blockchain applications. And interestingly, they have to
compute the value of the wages to do withholding taxes, because
the US government will not accept taxes in bitcoin. So they figure out the
fair market value– and there are companies
in the US that pay people in bitcoin who are
doing development work around blockchain applications. But the taxes need to be
computed and analyzed and then paid in US dollars. There was a legislative
initiative in Arizona earlier this year where
a state legislature wanted to have Arizona be
the first state in the land to accept bitcoin for taxes.

But it failed in committee. It didn't even get
a full vote of– I can't remember if it was the
Arizona Senate or the Arizona House of Delegates. So just a little walk
through the history. I was going to do a
little history of money and have some fun. So in Ethiopia, people
put together salt bars. This is not that long ago. Salt, as Jihei said earlier,
is really valuable in society, and they standardize
the shape and size. And so here's salt bars. We're going to get to,
a little bit later, all the characteristics
of money. But what else do you think
a salt bar in Ethiopia, as opposed to maybe
some other country– what did it have, as well, as
to why people might use that? AUDIENCE: Oil. PROFESSOR: What's that? AUDIENCE: Crude oil. PROFESSOR: Crude oil. All right, I hadn't
thought of that. I'm going to keep
thinking about that. It's not a common
characteristic of money. But why salt bars? What else might it
have in Ethiopia? AUDIENCE: Are you
going to say that you can use salt to preserver food? PROFESSOR: Well, you
can preserve food, but because it was mined, there
was some scarcity, as well.

And a lot of currencies,
a lot of moneys over time, have that fundamental issue. Cowrie shells from West Africa. Does anyone know
the history of when cowrie shells got really
debased and stopped being used, from the readings? I can't remember if that
was in the readings or not. They got debased when
Europeans started to realize that they
were accepted as a value. And it's a very sad and
terrible history, too, because it's related to
the whole slave trade. But that the Europeans
could figure out that societies accepted
this as something of value, but they also
debased that currency and they debased the land and
captured people as slaves. It was quite a collection of
not particularly good things going on. Tally sticks in England. Does anybody, from
the readings– because there was a little
bit of the debate in the first reading about the
history of money– want to chat? And I'll pull up the
Rai stones from Yap. How this fits into that first
reading and the debate between did money come from
a history of barter, or did money come from a
history of ledgers and credit, which is kind of a setup
of that first reading? Any thoughts? Which ones of these four
bits of money, early money, are more about maybe barter? AUDIENCE: There are
two theories, right? Debt, which corresponds
to this one.

This was a way to measure debt. PROFESSOR: Which one? AUDIENCE: The sticks. PROFESSOR: The sticks. The tally sticks, yes, correct. Which is the second one on
here that has to do with debts, actually, and credits? AUDIENCE: The stones. PROFESSOR: The stone,
the Rai stones. So it's remarkable. The Rai stones were so heavy
that on this island of Yap, they couldn't possibly
lug it around and use it in a traditional
medium of exchange. But it was viewed as, well,
I have 1/6 of this Rai stone. You have 1/16. And then if I make an
exchange, we'd remember.

And the society was small enough
to keep a form of ledgers, even to the extent that when a Rai
stone was lost in a river, they said, you know,
the river Rai stone, we each have this piece. So on the island of
Yap, I can assure you, these stones could not be
used for anything else. Does anyone know, because it
was outside the readings, what made these stones so scarce? So Rai stones were quarried on
an island about 200 kilometers away from Yap, so
were they exceedingly hard to get, like gold,
like mining of gold. What else is mined these
days that might be a money? AUDIENCE: Lithium. PROFESSOR: What's that? Can I hear everybody? AUDIENCE: I'm saying lithium. PROFESSOR: What's that? AUDIENCE: For batteries. For batteries. It's going to be very
difficult in the future for electric
batteries and whatnot. PROFESSOR: But what's
mined right now that's at the center of this class? AUDIENCE: Bitcoin.

PROFESSOR: Bitcoin, right? The Yap stone was, in essence,
quarried a couple kilometers away. And what debased that currency
was when sailors from England came. There's a specific sailor– I think his name was O'Keefe– in the late 19th century, and
he realized that these stones were valuable. And he went to the other
island, and he started quarrying and came back and forth. And within a few years,
the whole economic system collapsed. We moved to metal money. At first, it wasn't
really stamped.

It was just heavy. It was hard to quarry. Bronze in Rome. There was some China and Sweden. These were starting to be
stamped by the official sector. And then we had minted money
starting somewhere around 2,500 years ago. And there's debates
as to whether it started in Greece or in China. But where an official emblem was
placed upon a scarce resource that was used. Paper money came along, in
a sense, for what reason? Why did society first
tip in to paper money? AUDIENCE: Because there's not
enough gold to back it up. I mean, like because there's– PROFESSOR: All right. One reason is not enough gold. I'm sorry, I haven't– AUDIENCE: I think
it's just easy to– PROFESSOR: Ease of use. It's kind of heavy, especially
if there wasn't gold and if it was copper or bronze. It was just heavy. Or if it was wheat, you'd have
to put it in a storage unit. So the first paper
monies from China were basically
warehouse receipts. And I spent five years
running something called a Commodity Futures
Trading Commission, and so I guess I learned a
lot about warehouse receipts, commodity receipts, where you
put a commodity in a warehouse.

And then you got
a piece of paper that said, yes, you have
that commodity there. So the first paper
monies were basically warehouse receipts in China. Because whatever it
was– grain or gold. And then you had a piece
of paper backing it. These are five pound
notes from England and the continental
notes of the US. But that note in China
is about 700 years old. But between that first paper
money and the 18th century, who do you think we're
kind of the first bankers in the late 17th century,
early 18th century? What craft had they been in
before they were in banking? AUDIENCE: Trading. AUDIENCE: Trading. AUDIENCE: Trading. PROFESSOR: Alpha? AUDIENCE: International trading.

PROFESSOR: International trade. They actually did
something more local. AUDIENCE: I just
talked about this. The ones that have
lands and all the– the ones that have lands
and all the [INAUDIBLE].. PROFESSOR: Lanes? AUDIENCE: Lands. AUDIENCE: Land. PROFESSOR: Land. Land. No, they had something
else that they were doing. Tom? AUDIENCE: Printmakers. PROFESSOR: They
were printmakers. I like that. We're not there yet. AUDIENCE: Money lenders? PROFESSOR: What's that? AUDIENCE: They're
underwriting insurance. PROFESSOR: A little bit later. AUDIENCE: They were
doing agriculture? PROFESSOR: It's definitely
outside of the reading.

They were goldsmiths. Some of the first dominant
bankers in London, they were small goldsmiths. And they took the gold, they
gave you a piece of paper, and then they went from there. And then, all of a sudden, they
figured out how to do credit. Later in the
semester, we're going to talk about Bitcoin credit. It's not there yet, by the way. I think in the next
18 to 36 months, we're going to start seeing
cryptolending and cryptofinance in the form similar to what
the goldsmiths were doing in the early 1700s in England. Alan? AUDIENCE: Is that scalable with
a finite number of bitcoins, in your opinion? PROFESSOR: It's a
very good question. Is it scalable to lend
against a finite currency? I think so, but it's
not done yet, right? AUDIENCE: Yeah, because when
you lend money to someone, I guess it could be in
the form of bitcoin.

But you lend someone dollars,
they could redeem in bitcoin. You'd be increasing kind
of the money supply. So you don't need– you're not moving money around. You're actually [INAUDIBLE]. PROFESSOR: So this is
exactly the central of commercial banking today. It's called fractional banking. We'll be talking
about that in a bit. But yes, you could lend and
then have a multiplier effect. You also had, then,
banks come up and started to issue private bank notes. Private bank notes effectively
a liability of that bank and saying it would trade. And the history of private
bank notes is usually what? Good until it's really bad. And the history of money,
a lot of private banks went bust in this country
around the revolutionary period, again around the Civil War.

And in essence, that's
what we have now with 1,600 different
cryptocurrencies. We have sort of a new
period of a little bit of private currencies. And I only ask you to
remember that as we start to look at ICOs, Initial
Coin Offerings, and so forth. So ledgers– the earlier
question is, what was a ledger? You asked it. Can you remember,
what's a ledger? AUDIENCE: It's a way to
record economic transaction. PROFESSOR: There you go. Principal recordings
of accounts. And 5,000 years ago– you had a little reading on
this, just a medium post. It wasn't meant to be a deep
economic, academic paper. But it was to try to get the
class thinking about ledgers. This is the personal ledger
of George Washington, our first president. He was 15 years old when
he kept this ledger. And he apparently kept
ledgers until his death in– let's see. 52 years later. So ledgers could be
kept just to record the transactions of the day.

He's got one up there– Mary Washington. It must have been a
cousin, or I can't remember if it was his mother. So if they're the principal
recordings of accounts– and I've already sort
of said this– they record economic activity
and financial relationships. Economic activity in a
sense of transactions. Financial relationships– what's
a key financial relationship a ledger might record? I'm sorry? AUDIENCE: Debt. PROFESSOR: Kelly said it– debt. And it goes back to the
debate you had in the reading. Is money a history of barter– did it come out of barter? Did it come out of
a sense of debts and credit and store of value? For this purpose today,
it doesn't really matter.

It may have come from both. But know that it has both sides. And ledgers have
both sides, too. And when we're talking about
Bitcoin, Bitcoin, you will see, is a mechanism to
store transactions. Some other blockchains, like
Ethereum, stores balances. So even in the
blockchain world, you will see some that are
balance ledgers and some which are transaction
ledgers, not to lose you and confuse you. It's an important part
of what is blockchain. Some types of ledgers.

I just mentioned one–
transactions versus balance. George Washington's
ledger, by the way, I think was a
transaction ledger. He was just keeping a list
of sales and movements. But I haven't studied President
George Washington's ledger close enough. Does anybody know
enough accounting to tell me the difference
between a general ledger and a subledger or a general
ledger and a supporting ledger? I mean, I don't want to do
the whole lecture myself. How many of you have
taken accounting? Uh-huh. I taught undergraduate
accounting once. Sorry. So those of you who just put up
your hand who took accounting– did I see, in the back of the
room, did you take accounting? And that's Aviva.

AUDIENCE: I'm an
accountant, actually. PROFESSOR: You're an accountant? All right, all right. Did you pass the CPA? Oh, we have a Certified
Public Accountant who's going to tell
us the difference between a general
ledger and a subledger. AUDIENCE: So a
general ledger is one that records all
kinds of transactions. Any kind of activity
that takes place, you record in the general ledger. And subledgers, you can call
them as like a specialization. So let's say if there's
a salary to be paid, you have your salary subledger. But it'll also go in
the general ledger, and the other part
of the transaction's in the salary ledger. Or if there's capital or if
there's new stuff that you buy, so all of that goes specifically
in the general ledger. And each of them have
their own specific ledgers. If you want to say
how much you spent on Saturdays for the month, then
you go to your Saturday ledger and see.

But if you want to see, overall,
how much money you've spend and how much has
moved around, then you look at your general ledger. PROFESSOR: Aviva clearly said
it better than I could have. Thank you. Now we know we have
one CPA in the class. But the importance– it's
not just a passing note. The importance of a general
ledger and subledgers is there is a
hierarchy, as well. Subledgers have more detail,
and maybe the net number is kept in the general ledger. That is at the heart of
our system of banking and is at the heart of our
system of financial markets, where the central bank is like
a general ledger for money, and every commercial bank, all
9,000 of them or so in the US, in essence keep a
subledger for money. But they do not
have control of what I will call the master ledger
or general ledger at the Federal Reserve. Then, a third distinction
about ledger is a single entry. A little, young, 15-year-old
George Washington was keeping a single
entry ledger– just a list of things
that was going on. And I didn't think I was going
to bore the class with readings about double-entry
bookkeeping, because you've taken accounting.

But does anybody want to
tell me, other than Aviva, what double-entry bookkeeping–
and she'll bail you out. [INAUDIBLE]? AUDIENCE: Double-entry
bookkeeping basically means any transaction has two
places in the lender– one on the credit side
and one on the debt side. Because every
transaction involves one person lending,
whereas the other person is getting the thing. PROFESSOR: It works for me. Anybody else want
a different view? AUDIENCE: In other
words, [INAUDIBLE] asset and liability [INAUDIBLE]
two sites and then [INAUDIBLE] to balance each
other [INAUDIBLE].. PROFESSOR: So there's a
balancing between assets and liabilities, and
then the resulting bit of capitalism in it is if assets
are more than liabilities, the rest is capital. So at the heart of
capitalism, in a sense, is double-entry bookkeeping. And in fact, while it
probably goes back a little over 1,000 years, when
it was truly written up by the Italians in
the 1300s, it started to help Europe come
out of the Dark Ages.

I mean, the commercial
Renaissance of the Middle Ages, some would say, was in part– not entirely, but in part– on the backs of
double-entry bookkeeping. So ledgers matter is my point. They're not going to be the
heart and soul of this class, but Bitcoin, which is a
transaction ledger, Ethereum, which is a balance ledger,
our financial system, which is all set up on ledgers is
a relevant sort of subtext. You don't have to
be afraid of it, just as you don't have to
be afraid of hashing power that we'll be talking about
on Thursday and cryptography.

You have to have some sort
of basic sense of where does Bitcoin fit in,
in terms of ledgers. I didn't feel this slide in. You'll find out it's blank. Does anybody want
to tell me what are some characteristics
of a good ledger? Because again, as you start
to think about your blockchain projects later in
the semester, it's like, what makes a good ledger? I don't have any answers here. AUDIENCE: The bitcoin
were immutable. PROFESSOR: So you want it
to be immutable, maybe. Thalita can you do me
a favor and keep these? We'll put them on the slides.

We'll keep the class's list, and
we'll put them in the slides. Immutable, I like that. Anybody else want
to grab something which is a good ledger? AUDIENCE: Time stamped. PROFESSOR: What's that? Time stamped, all
right, so that you know when you made your entry. Kelly? AUDIENCE: Ownership. PROFESSOR: Ownership. What do you mean by ownership? AUDIENCE: Essentially, the
receiver and the person giving. So essentially, who's taking
what and who's giving what. PROFESSOR: So if
there's a transaction, the two counterparties to
the transaction, right? And if it's a balance,
then who owns the balance? I was just adding a little bit.

Let's see if we have
a new name or face. Back here, on the back table. I haven't chatted with you yet. AUDIENCE: Ross. PROFESSOR: What is that? AUDIENCE: Ross. PROFESSOR: Ross. Thank you, Ross. Good to meet you. AUDIENCE: Pleasure
to meet you, as well. Accuracy. PROFESSOR: Accuracy. So Ross says accuracy. And can we take one
or two more, just to– AUDIENCE: So a description
of the transaction. PROFESSOR: Andrew says a
description of the transaction. And last, Mr. [INAUDIBLE]? AUDIENCE: Comprehensive. PROFESSOR: What's that? AUDIENCE: Comprehensive. PROFESSOR: Comprehensive. So all good attributes of a– characteristics. Somebody's burning desire
that we missed one or two? Jihei? All right. AUDIENCE: I just was curious. Consistency, maybe? But I don't know if that's– PROFESSOR: Consistency. Well, I think that's inside of
immutability, that, in essence, that it's valid, that
you can't change it. You can't counterfeit
it and the like. And what you'll find
is the characteristics of a good ledger is
also, in some part, similar to the
characteristics of good money.

They're not identical,
but they overlap a lot. Payment systems– I'm just
going to say one line about it. It's a method, basically,
to amend and record changes in a ledger for money. I know it's not what you usually
think about a payment system. But if you go into Starbucks
and buy a cup of coffee and use your cell phone,
aren't you really just amending a set of ledgers? Starbucks' ledger goes up, and
yup, your ledger goes down. Well, your monetary
ledger goes up. Your utility, your fulfillment
from that latte might go up.

I'm talking about
the financial ledger. So I just wanted to ground–
when we talk about payment systems, think about it's really
just a way to amend, usually, two parties ledgers'– one
going up, one going down. Now, in an earlier time, it was
handing somebody a bit of gold or a bit of silver,
and it was not recorded on central ledgers. But we already live in
an age of electronics, so this is really what a
payment system largely is. It's not entirely. There's still some other
ways to do finance. So what were some early
forms of payment systems that did just that, that
moved and changed ledgers? They're called
negotiable orders.

I would dare say
that most of you probably have not used
negotiable orders of withdrawal that much in the last
week or the last month. Has anybody here
written a personal check in the last week? But in an earlier era, it would
have been the whole class. Anybody in the class not
even have a checkbook? 3/4 of the class. Larry, how's that make you feel? AUDIENCE: Old.

PROFESSOR: But a
checkbook is, in essence, with a– what do
you put on a check? This is all about Bitcoin now. I'm not doing this
just as a walk down memory lane for
Larry and myself. What are the important pieces
of negotiable order, withdraw, or a check? AUDIENCE: Signature. AUDIENCE: Put your
signature on it. PROFESSOR: So
there's a signature. What else is there? I want to get to people
I haven't talked to. In the back. I can't remember your name. AUDIENCE: Me? I'm Dana. You put who you're paying to,
how much, and what it's for. PROFESSOR: All right,
so there's a bunch.

So a signature, a payee, how
much, and what it was for. What else? AUDIENCE: There's an account
number and routing number. PROFESSOR: Account numbers
and routing numbers. So think about it. Account numbers and
routing numbers is to say, in essence, what ledger
is this coming from? And the payee is the
ledger to whom it's going. And I'm sorry, Dan? AUDIENCE: Also a
date, and a day. PROFESSOR: So there's a
timestamp, a signature, a payee, the payor in the
form of the account number, and an amount. Those five are really
critical, and you'll find them all are going to
be right in the middle of all this Bitcoin. And then the reason why you're– you know, some
other information. I'm sorry, was there
something else? AUDIENCE: Kyle. PROFESSOR: Kyle. AUDIENCE: I just
have a question. Would you consider something
like PayPal or Venmo like a negotiable order? PROFESSOR: They may be.

They may be new forms. They're certainly parts
of the payment system. They might not be negotiable
orders to withdraw. They might not be a
direct authorization for a bank with one ledger to
move money to another ledger. They might be moving
it on their own ledger. You're asking the
right question. So some early money that we
already talked about that was ledger where
the tally sticks in England and the Yap stone. These were ledger types
and forms of money and was kind of interesting. So ledgers didn't just come
with electricity and computers.

So now let's get back to
fiat currency, the heart of the earlier question. We already talked
about it, so let's see how the professor did,
because you already said some of the things that
you said were fiat currency. One, social and
economic consensus. I'm in the school that it's
just part of the history. It's not that different
than everything that came, even though it built on that
promissory note from China 700 years ago and the private
bank notes and the goldsmiths in the 1700s. But ultimately,
governments took control. It represents central
bank liabilities, and that's important. It's a liability
of a central bank.

It's not an asset. It's their liability side. But it's also– guess what? There's a second form of money. And that's when
you have a deposit in a bank, that's a liability
of a commercial bank. Central bank is the top
gold standard, in a sense. Using the word gold,
but it's the top ledger. Commercial banks are like
subledgers, in a sense. Please, Alan? AUDIENCE: Sure. I'm not an economist
or anything, but what does it mean
for a coin or a note to be a liability
of the central bank? What does that actually mean? PROFESSOR: So before
I answer, does anybody want to try to
answer what it is? Eric? AUDIENCE: Liability is basically
an obligation to, in this case, pay someone an amount. PROFESSOR: So because
it's a social consensus, it's a very good question that
Alan asked, is what does it mean to be a liability
of a central bank when it's just the currency
in our pocket, right? This Federal Reserve
note, this says Federal Reserve note on it. We can pass it around.

I'm not afraid. It's only $1. Right? If you want me to pass around
20's, then I want them. But it says Federal
Reserve note, right? So it's a liability of
the commercial bank. In an earlier day, it
said you could exchange it for gold or silver. AUDIENCE: Right, so that's
what I don't understand. PROFESSOR: By the 1930s,
for retail deposits in the middle of the
Depression, President Roosevelt said, no more. You cannot redeem
gold and silver. And then President
Nixon, in the 1970s, said in the official sector
that he was going off of the– until that point in
time, other governments could redeem in gold.

But when paper money started,
it was not backed by gold. We had a period of
the gold standard. We were on and off of it. We fell off of it during World
War I. We went back on it. It would be a false
narrative to say that we were on the gold
standard for our first 140 years. I just wanted to clear that up. I mean, we sort of went on the
gold standard, we went off, we went back on, and so forth. But it is a liability on
the books and records. So it is a matter of accounting
in double-entry bookkeeping. I will show you in
a minute the balance sheet of the Federal
Reserve, and I'll come back to this question. Is that all right? AUDIENCE: Can you clarify
what is the bank liable for? So before, it gave me
$1, and I could go to $1 and get back the gold, right? PROFESSOR: Right. AUDIENCE: Now, what are
they liable for now? PROFESSOR: It is, in
essence, a social– it's the first point.

I'm going to separate it. The central bank is liable that
they will move on its ledgers if you want to move
that to somewhere else. So you could take that
physical $1 in and say, I want to deposit
this in a bank. And they have to record it
on the ledger of that bank. That is what they are– and the US government,
which is technically separate from the central bank– or the UK government or
the Chinese government. they're all technically
separate from their banks– People's Bank of China
or the Bank of England. Their governments are
saying they will accept it for payments against taxes. So there's a set of
social constructs. I'm going to just go through
this to answer your question. It relies on a
system of ledgers, and it's an integration of those
ledgers between the banking system and the commercial banks. In the US, we have about
9,000 commercial banks. And what the Federal
Reserve is saying– but it's true about the
People's Bank of China. It's true about the
European Central Bank. Each of these central
banks are basically saying, if you bring
your paper money in, we'll record it on the
ledger of a commercial bank.

And you can pay your
taxes to our sister over here called the government. I'm sorry to let you down. It's not more than that. Sorry, Alan. AUDIENCE: I have a
potential answer. I might be totally wrong. PROFESSOR: Please, no. AUDIENCE: I think it's a
legal and sustainable way to conduct a Ponzi scheme with
a proper Ponzi scheme, where the value will
increase by 1% to 3% if the central bank reaches
the goal of inflation. PROFESSOR: All right, any
other points of view on that? I saw– I'm not
sure of your name. Oh, no, you don't
want to say anything? No? All right. AUDIENCE: I think I'll
go back to point one. It's a construct that someone
would give you something.

So your dollar with the
central bank, the central bank owes you that dollar's worth
of whatever you desire. And someone will
happily take that dollar from the central bank and give
you the goods that you want. So it's a roundabout
way of– it's a way of transacting something,
whatever value that dollar has. AUDIENCE: It's also
central bank liability, because whenever the
government has sovereign debt, it can't just issue new notes. It's liable. So that's why it's a
liability, because you can only issue notes against a
certain amount of reserves that you carry. So that's why you refer
to it as a liability. Because you can't just issue new
notes whenever you need them. You can't just make new
money out of thin air. So you're liable
for every new note. PROFESSOR: I'm going to take
one more comment on this and then give a
couple more things. Eric? AUDIENCE: The
currency is actually a small part of the total
reserves of the Federal Reserve System. I think maybe the bank
reserves are maybe a more applicable application,
because a bank can actually require the Fed to print
money by making more loans.

So in that way,
there's this mechanism to ensure that
liability [INAUDIBLE].. PROFESSOR: I'm very pleased
with this discussion, even Alan's contributions
about the schemes. This is the debate. If Jay Powell were
here– how many of you know who Jay Powell is? Who's Jay Powell? AUDIENCE: It's a lab. PROFESSOR: Jay Powell. No. Who's Jay Powell? AUDIENCE: Head of
the Federal Reserve. PROFESSOR: Head of
the Federal Reserve. Thank you. Sorry. But if Jay Powell
were here, he'd have a laugh along with
what Alan just said, but he would say,
also, the liability is a social liability, as well.

That a central
banker, to their core, believes what they
are trying to do is ensure for the stability of
this social thing we call money and to make sure that
it doesn't get debased and it has some value. So it's accepted for
taxes, we talked about. Notes and coins are legal
tender for all debts, public and private. I walk into a Starbucks and I
say, I'd like a cup of coffee.

Here's my $5 or whatever
it costs these days. Does the person
behind the counter have to brew the coffee? Is just a yes or no? Can I see? Who wants to go for it? There's a no from Christopher. What, Chris? There's a no from Chris. Who agrees with Chris? OK. They brew a cup of coffee. I go to the other
side of the counter. The coffee's sitting there. Now, do they have to
accept my $5 at that point? Yes. Before they brew the coffee,
nobody has to take dollars. But once a debt is established,
they've produced the good, they've provided the service,
they have to take it. Just a small, little thing. That's what legal tender is.

And so there's
many establishments around the globe
that are basically now putting little signs out,
we don't take Swedish krona. We don't take this. We don't take that
in paper form. They'll still take
it electronically. And there's a new little
bit of definitional thing going on about legal tender. There's also some
unique tax treatments, but I'm not going to go
through the currency. So central banking and money
we talked about a little bit. This is a kind of
chart that I borrowed from somebody else's paper. But the central banks at
the top is at the center. And if Alice and Bob– and we'll
be talking about Alice and Bob in Bitcoin time, so you can
pull this chart down later– want to transact and they're
at the same commercial bank, Bank Number 1, then
commercial Bank Number 1 has to change their ledgers,
moving money from Alice to Bob.

In essence, if you're both
two people at Bank of America, you can move your balance
at Bank of America. But if you're at Bank of
America going over to Citicorp, then something has to go between
two ledgers, Bank of America's ledger and Citicorp's ledger. And the only way to transact
between two banks' ledgers is some balancing
act has to happen at the top ledger,
called the central bank. And later, when we talk about
payment systems– and I'm going to use this slide
again later in the semester. That's why I'm not going to
spend as much time now on it. We're going to
talk about ledgers. And when you move money
between two banks, it's all within
one closed system– that country's or that society's
central banking system. But then it gets really
a little bit more iffy and woolly when you're
moving from one currency to another currency. Because how do you make two
closed ledger systems operable? Not for today, but
we'll go through that later when we do
payment systems and the like.

The central bank, the
US central bank– this was the only good slide I could
find, which was about a year old. Its liabilities and assets
are about 4 and 1/4 trillion dollars, $4.3 trillion. $1.7 trillion of
that is in currency. Do I get my $1 back, by the way? I mean, my liability. So $1.7 trillion of those
greenbacks are in circulation. And remarkably, even
though half of you probably don't use cash
that much, you don't even have checking accounts, the
amount of cash in circulation is growing faster
than the economy in most developed nations.

Why do you think that is? What probably one word? AUDIENCE: The amount of
2008 crisis [INAUDIBLE].. PROFESSOR: Oh, that's
more than one word. AUDIENCE: Trust. PROFESSOR: Drugs. AUDIENCE: Trust. PROFESSOR: Oh, trust. I thought you said drugs. Trust. Well, it does have
to do with trust, but it also has
to do with drugs. Paper currency is
a wonderful method of money laundering, drug
running, and a store of value.

So there's certain segments
of our economy and segments of the worldwide
economy that does not want to be in the
electronic banking system. I'm going to slip
through these quickly, but there's another piece that
we need for this whole class and for the semester is credit
and credit intermediation. But just a little thing– credit cards started
only 60 or 70 years ago, but they go back to a book
a little over 100 years ago. The word "credit
card" is used 18 times in this book, where a science
fiction writer in 1887 said, what would the world be
like in the year 2000? And it was the first use
of the word "credit card." And he said that society
would have a form of money, and you would have
credit against it. And it's a fascinating
thing that somebody could be that visionary. But there were merchant
cards starting, so maybe he wasn't so visionary. Oil companies in the 1920s,
charge cards were starting, but they were
single-merchant cards. You could have credit
from that merchant. In 1946, in a bank
in Brooklyn, a guy named Biggins started with that. That was the first
real charge it.

You could charge things in a
few dozen places in Brooklyn, literally. And then, all of a
sudden, it took off. Diner's Club started
in the early 1950s. They found that they could get
a bunch of restaurants to say, wouldn't you want to extend
credit, and we'll back it? American Express
in the mid-1950s. And then, finally,
in the mid-1960s, Bank of America, which at that
time was a California bank, figured out they would
create a co-operative with a bunch of other US
banks to extend credit. And the credit boom took off. And what was interesting,
the laws to regulate all this didn't come until the
1970s, at least in the US– the Fair Credit Reporting
Act and all the other laws. There's three big
ones in the 1970s. I go to conferences sometime and
talk about Bitcoin regulation, and they say, well, why can't
the government solve this now? I sort of remind them that
it took 15 to 20 years from the introduction of credit cards
kind of in the early to mid 1950s and the real
take-off in the 1960s– it was 1974, 1970, '77,
the three big credit laws.

So if you're going to be
an entrepreneur in Bitcoin, know that it could be
15 years until there's some cryptolaws in the future. That was the processing
machine from the 1950s. I made it too small, sorry. Visa made it better. And then, of course, that's
what we all see today, how your cards get processed. So the role of money
we've talked about. So I'm going to skip over that. But now the
characteristics of money. What makes a good money? We talked about some
of this earlier. It's durable, meaning that that
salt cube wasn't the greatest, because if a lot of rain
came, that would wash away.

Gold and silver,
metals, are durable. They're portable. The heavier it is,
the less portable it is, and that's why gold was
a better money than silver. You could move it– and better than
copper and bronze. It was divisible easily. You could slice things up. Uniform and fungible. And anyone who's who down the
rabbit hole on this stuff, if you really want
to learn about money, read about Crawford
versus Royal Bank in 1749. There was a gentleman at the
early part of paper money that mailed two 20-pound notes,
and he wrote his name on them. They got lost in the mail,
and he took the banks to court to say, those were mine,
when they were found. And there was no law in Scotland
or in England at the time as to what to do about it. But if you lose or somebody
stole a piece of art, you get it back.

And the law was settled
in 1749 that you actually don't get your money back. Does anybody want to guess
as to why the courts– it was a matter of
first interpretation. The courts had no jurisprudence
on this before 1749. Why did the courts decide
that a piece of art was different than currency? And it goes to the
fundamental of what money is, fiat money is. Anybody want to take a
guess as to why the courts– they could have
gone the other way.

AUDIENCE: How could you tell
if someone really owned money? How could you [INAUDIBLE]? PROFESSOR: He signed it. Actually, the facts were clear
it was the currency he signed. I'm just helping
you out so that– that's a good point,
but he signed it. AUDIENCE: It can't be used
as a medium of exchange if it doesn't belong to
the person [INAUDIBLE].. PROFESSOR: In
essence, if you were to go back and read–
there's some history on this, and read the court cases. This was the point. The court basically
said, we have to make this a
medium of exchange, the greater social good. It has to be fungible. And the Royal Bank of Scotland
was, of course, kind of closer to the courts than
this gentleman, Crawford.

But the banks were also saying,
we can't keep track of this. So it was a mixture of the
two, but it made it fungible. Eric? AUDIENCE: Was it
those specific notes that he had signed [INAUDIBLE]? PROFESSOR: Yeah. Yeah. AUDIENCE: [INAUDIBLE]. PROFESSOR: And in 1749,
they all had serial numbers, and they were signed in
a way that not today. Of course, they're acceptable,
and they're stable. And we're going to talk a
lot about the last point. They're stable because
they're hard to mine, and Bitcoin has that
embedded in it, as well. The design of money is
really important, as well. You can make it a token– a token is like
something physical– or account based. We're of course now living in
a world of account-based money, and it's digital, not physical. It can be issued by
the private sector, just like banknotes
in the 18th century, or private sector like
Bitcoin, or it can be central. It can be widely acceptable
or just wholesale. There are forms of
wholesale money.

One of the biggest
forms of wholesale money is the central bank's
reserves are only available to the
commercial banking system. We're going to study
this money flower later, but I put it in the
slides because this– I didn't create this flower. You have a reading
later in the semester from the Bank of
International Settlement that has this money flower in it. But it's basically across
these four things– is it token our account
based, physical or digital, private or central,
or widely accessible? And then all monies fall into
one piece of this money flower.

There's a Professor Garrett
that came up with this flower, and there's an optional reading
later in the semester from him. You had a reading from Clark. There's not enough time,
but all this stuff failed. Does anybody want to
give me a flavor for one or two reasons why a bunch
of digital cash failed? Did anybody read
the Clark reading, the history of some DigiCash? Oh, Alan read it. Anybody else read it? Over here. I can't remember– AUDIENCE: Zhan. PROFESSOR: Don. So what did you– AUDIENCE: Zhan. PROFESSOR: What? AUDIENCE: Zhan. PROFESSOR: Zhan. Zhan, what did you
take from the reading? Why did these all fail? What's the one or two
biggest reasons they failed? AUDIENCE: Most of
them still relied on kind of some form
of a central authority. PROFESSOR: All right,
they relied on central– DigiCash certainly did
it, David Chaum's case, and some of the others. Any other big reason? Alan, did you have– AUDIENCE: There wasn't
enough adoption by merchants, I recall. PROFESSOR: Definitely not
adoption by merchants. Very good. Third reason why they failed? One that's at the core
of what Bitcoin solved.

AUDIENCE: Incentivizing
like a decentralized network to keep that ledger,
maintain the ledger. PROFESSOR: All right,
incentivizing the ledger. Behind Eric. AUDIENCE: They couldn't solve
the double spend problem. PROFESSOR: That's it. Couldn't spend the
double spend problem. Could a currency be spent
not just once, but twice? So there's four things
that were raised. Four things about
centralization, the double spend. They couldn't get
merchants to adopt it, and there was couldn't– some
form of consensus as to what the ledger was.

I'm going to flip
through these quickly, but digital and mobile
money did happen. We were asked about
PayPal earlier. It was 1998. In Norway, Ericsson and Telenor
had the first mobile app. And it was to get movies
on your mobile phone. 1999, Alipay comes
along that we'll talk a lot about when
we do payments later. And of course, M-Pesa that we
talked about a little last week in Kenya, where Safaricom
noticed that a bunch of money– near money. It was mobile minutes that was
being used as money in Kenya, and now there's 20
million users of that. And of course, there's
a bunch of regulations now and so forth. Starbucks started in 2011. And then, of course,
it's now off to the races in mobile money. One of the key things
about mobile money we will discuss
and learn together is the question
each one of these is, where is the stored value? And I have to tell
you, sometimes I get quite confused when
I research a new app. Are they storing the value? Or are they just a
processing provider to move– as we said earlier,
payment systems move and change and
amend other ledgers.

In a number of these, like
M-Pesa, initially they were storing the value. And mobile apps Starbucks
stores the value. But many of them are just
applications, computer code, to move the ledger
somewhere else. But the riddle remained. You remember that riddle– how to move money peer to peer
without a central authority. And that's what I'm asking
for next class, Thursday, to actually read. I wouldn't wing it, and I
wouldn't be afraid of it. Satoshi Nakamoto wrote
a paper that everybody in this class– if you're
at MIT, and a few of you are at Harvard. I'm telling you,
you can read it. You'll understand
maybe 1/2 to 2/3 of it. It's not deeply technical. And it's only eight
or nine pages. I've also assigned
National Institute of Science Technology, about
20 pages of reading from NIST. The question is
whether that's Bitcoin. I'm going to skip through
the study questions, but the study
questions are really about cryptography and how
append-only timestamping.

We are going to get into
the nitty-gritty over three lectures. I couldn't commit the whole
course, the whole semester. But I think three lectures– Thursday and the two next week. Anytime you want
to come to see me– Sabrina is somewhere
here on the floor, who's one of our TAs, who's a computer
science master's student and knows more
about all of this. Madores, who was
here last week– I don't know if Madores is
here, who's part of the Digital Currency Initiative. Over three lectures,
we're going to try to work through what's
the cryptography, and why does that matter? How does the time
stamping happen? How's this look like money, and
how are the transactions kept? Yes? You get to close it out, almost. AUDIENCE: Can you just
answer the question posed about the longest
running blockchain? PROFESSOR: I can answer
that, but the assignment was to answer it
by Thursday, right? AUDIENCE: Oh, Thursday. OK. PROFESSOR: So by Thursday. What's your first name? AUDIENCE: Caroline. PROFESSOR: Caroline. Did I say I was going
to answer it today? AUDIENCE: [INAUDIBLE]. PROFESSOR: Oh, did I say today? No, is there a mutable
record of what I said? I'll answer it now if you want.

Does anyone have the
answer in the whole class? AUDIENCE: Yeah. It's a service called
Surety that Gillespie begun working in
1995, was a timestamp service for digital documents. And the way they did
it was use a hash function to create a seal with
a timestamp on the document. And then present the
weekly batch of seals. And they actually published
it in the New York Times [INAUDIBLE]. PROFESSOR: So Caroline, it's
good to raise the question. I thought it was for
Thursday, but thank you. Stewart Haber, a
cryptographer, and a colleague at Bell Labs in the
early '90s, said, how do we notarize information,
digitally notarize? And we're going to be talking
about this Thursday a lot. They used a cryptographic
method called hash functions.

And they were just trying
to notarize information. And by 1995, they took– they were entrepreneurs. They created a
company called Surety. And once a week, they published,
in the New York Times– and they still do it. You can get a New York Times– I believe it's on
Saturday or Sunday. And they take– it's in
the classifieds section. And they have the hash function,
which you'll read about between now and Thursday. They have the hash of all
the pre-existing information. And so they timestamp it by
using the New York Times, and they use cryptography. And it's currently
23 years in running. AUDIENCE: So that's
the longest in terms of time, not the longest with
how many ledgers or how many– PROFESSOR: Correct,
because Bitcoin is about 550,000 blocks,
and this would be whatever 23 years times 52 is. Longest in time. Thank you. I look forward to seeing you.

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