Gary Gensler Keynote

ELIZABETH FERRIE: Thank you,
everyone, for coming today. The event is a keynote address
of the 2019 Blockchain, Fintech, and the Law Conference
at Harvard Law School. We are very pleased to have
Gary Gensler with us today as our keynote speaker. So Gary served as the chair of
the Commodity Futures Trading Commission from 2009
to 2014, leading the Obama administration's
post-crisis reform efforts of the $400 trillion
over-the-counter derivatives market. He is currently Senior Advisor
to the Director of the MIT Media Lab and a senior
lecturer at the MIT Sloan School of Management. As part of MIT's Digital
Currency Initiative, Gary lectures students on
blockchain technologies and cryptocurrencies. Gary has worked on various
political campaigns, most recently as the CFO of
Hillary Clinton's 2016 presidential campaign. He was a senior advisor to
Hillary Clinton's 2008 campaign and subsequently
an economic advisor for the Obama 2008 campaign. Prior to his public
service, Gary worked at Goldman
Sachs from 1979 to 1997, having become a partner
in the mergers and acquisitions department.

Gary earned his undergraduate
degree in economics in 1978 from the University
of Pennsylvania and his MBA from
the Wharton School at the University
of Pennsylvania. So finally, this event
is being recorded. So without further
ado, Gary Gensler. Please give a warm
welcome for Gary Gensler. [APPLAUSE] GARY GENSLER: Thank
you, Elizabeth, for that kind introduction. Thank you for the– let me remember–
it's called Blockchain and Fintech Initiative club? Just Initiative. All right, it's even bolder. It's just Initiative. Thank you.

Thank you, Harvard
Law, for hosting this. You were kind to say my
resume and everything. One thing you left out is
that in 1979 I applied– how many people here are
Harvard Law students? You all have done
something I couldn't do, because in 1979, exactly 40
years ago, I applied to and got denied acceptance
from Harvard Law and chose instead to
go to Goldman Sachs. I turned down a fancy
law school in the West. Stanford did accept me. I didn't go. But life treated me fine. I'm going to chat– I teach over at MIT now, very
involved in finance and fintech and blockchain technology. And I'm going to talk about
blockchain technology. Because it's a law school, I
will be chatting about the law as well. I don't know how
to get that down. There we go.

There we go. And– there we go. All right, I knew how to do it. So I'm going to try
to cover a few topics. First, blockchain
technology and money and how it fits into money. And that's just kind of a
fine grounding of the subject. Then, just a little bit
of bit because your club– initiative– has fintech in
it, just finance and fintech, and what does that mean,
just to bring it together. I promise you, I
will get to the law, but I thought, just a little
bit about money and fintech before that. And then the markets– cryptofinance, what do the
crypto exchanges look like? What are the sectors
in this market? It's about $175 billion
asset class right now, but what's involved in that
asset class, and where do these assets stray? And then really then talk about
the public policy frameworks, because I think this space is
in the midst of its third hype cycle.

I want to talk about the first
two and the third hype cycle to close it out. So that's what I'm
going to try to do. I'm glad to take questions
going throughout. You're eating dinner. Elizabeth tells me to save
time at the end for questions, but I'm glad to take it at
any point in time as we go. So that's what I'm
going to try to cover. So first, on Halloween,
Halloween night just 10 and 1/2 years
ago, Satoshi Nakamoto wrote this and started an
email with this sentence on a cypherpunk mailing list. That's actually cypherpunk. It was a cryptographers'
mailing list, and I am working on
a new electronic cash system that is peer to peer, no
central authority, in essence. That's this initiative. Now, I start with
just a safe setting. Does anybody in the room
know who Satoshi Nakamoto is? Oh, please, please. We're recording. You know when we're
going to find out? Who's Satoshi Nakamoto? AUDIENCE: Well, he's basically
the creator of [INAUDIBLE]..

GARY GENSLER: We know that. Who is she? Or he? AUDIENCE: The person? GARY GENSLER: Yeah. AUDIENCE: [INAUDIBLE]. GARY GENSLER: Oh, [INAUDIBLE]. All right. So I ask every
audience because I'm waiting for somebody in
some audience to tell us, but it's sort of a
nice foundational story that we don't actually
know who the inventor is. I mean, whoever
she is or he is has chosen not to reveal
themselves at all, or if it was a committee. But it started
with this concept. So what does this mean? And where do we go from this? Well, a little
thought about money, because that's what Satoshi
Nakamoto was trying to do is something about money. Money has three roles– economists and
anthropologists and even archaeologists debate
what was its initial role. Was it a medium of exchange
or a store of value? It certainly took on quickly
a unit of account as well. But these three
principal roles of money. So I'm going to hand out a
little bit of money here.

You're not going
to get all of it. But, you know, everybody
is eating here. You look like you
want some money. AUDIENCE: [INAUDIBLE]. GARY GENSLER: Yeah,
yeah, all right. I don't want to
say that I'm only favoring the left-hand
side or only favoring women or anything like that. But here, pass some
of this around. So here I am. I think I'm done. Oh, that's a lousy piece of
money there to uncover it. So would you accept that? Would somebody take that from
you as a unit of account, medium of exchange, or a store
of value, what I just handed? Anybody? Chocolate wouldn't
do it for you? I handed out, for those who
didn't see, chocolate bitcoin. You can eat them. It goes with the dinner. So you wouldn't
take it because why? You wouldn't take it because
the rest of your classmates wouldn't take it? It's not– money is
just a social construct.

Money is an invention
of thousands of years ago by humans. There is no natural law
that says there's money. It's absolutely
the first fintech, to talk about
financial technology. In fact, here's
some early money. And if we had more
time, we could talk about each one of these. All of these physical
representations of money– and I can't remember
what I put up, the bronze and the
gold, the coin from Rome and so forth, actually
pre-date the cowrie shells of West Africa or the Yap
stone, actually the Rai stones from the island of Yap,
all forms of money. But they're just a
social construct. And what I'm going to
contend is blockchain technology, underlying what
Satoshi Nakamoto is trying to do, was to form
a new form of money, kind of a private
sector money to compete with other forms of money. But all of these have been
money at one point in time. But then we know there's
something called fiat currency. Back to the paper, on the
bottom left-hand corner, about 700 or 800
years ago, money started to take the form of
paper in certain circumstances.

And those circumstances
were warehouse receipts. And anybody here who goes
into commodities law, I can assure you, in a
narrow niche of what you do, you will study
warehouse receipts. When I shared the Commodity
Futures Trading Commission, I had to learn about it– that is, you put
something in a warehouse and now you have a receipt. And you could put corn,
grain, gold, copper, anything in a warehouse
and have a receipt. And guess what you can
do with that receipt. You can actually take that piece
of paper and borrow against it. You can use it to
finance things. And in fact, some of the
first commercial banks were goldsmiths,
because they were taking warehouse receipts for gold. Well, in the bottom left on this
is about 700 or 800 years ago in China, a warehouse receipt. Why would you use warehouse
receipts rather than gold or silver? Because it's more portable. It's easier to chart around
and things like that. And even today, in
2019, you can finance against warehouse receipts.

And some of you somewhere will
be at Sullivan and Cromwell studying this and doing it,
but not many of you probably. Fiat currency grew out of that. Fiat currency is what? It's basically the
sovereign issuing something that's a socially
acceptable form of money. Now, in fact, we now know that– now watch this. Watch this. I'm guessing that if I hand
you this, will you take it? AUDIENCE: Sure. GARY GENSLER: Right? You would get
something for that. You can keep it for a while. [LAUGHTER] Because we're going to
ask a couple of questions. What does it say on the
top of it on the front? AUDIENCE: The front? Federal Reserve note,
United States of America. This is not legal– this note is legal tender. GARY GENSLER: So what
does it mean to say it's a Federal Reserve note? Have you taken
corporate law yet, or are you a business student? AUDIENCE: I'm actually
a recent graduate.

GARY GENSLER: You're
a recent graduate. AUDIENCE: Of law. GARY GENSLER: Of the law school. Of this law school? Oh, fine law school. So did you take corporate law? AUDIENCE: I did. GARY GENSLER: Yeah. So what is this in relation
to the Federal Reserve? AUDIENCE: It is a– I guess it's a– could it be
considered a contract? GARY GENSLER: All
right, it's a contract. What side of the
balance sheet is it on? We all carry it around? What's that? AUDIENCE: Asset. GARY GENSLER: I've got
one person for asset. Anybody want a go? AUDIENCE: It's the
bank's liability. GARY GENSLER: It's
a bank liability. So it's actually debt
of the Federal Reserve. 1.8, $1.7 trillion
of liabilities of the US Federal Reserve
right now as we sit here. We have a $20 trillion economy,
and our cash in circulation is about 7% or 8% of
our economic size, so $1.7 trillion.

In Sweden, it's only 2%. Swedes don't use much cash. But also, it's not an
international reserve currency, and drug lords don't
use much Swedish krona. You know, and half of our $1.7
trillion is in $100 bills. And probably most– not all,
but most of those $100 bills are overseas. It's great to be
the Federal Reserve. That is a zero
interest rate liability of the Federal Reserve.

But there's actually three
forms of fiat currency. When you go into Starbucks,
you think you're spending this, but you're already
spending digital money. And when we go into Starbucks
and we spend digital money, we're really spending
bank deposits, removing the liability– I bank with Bank of America. I'm either moving
my bank deposits at Bank of America to Starbucks'
Bank of America account, or Starbucks' Chase Manhattan
Bank or JP Morgan Chase. I'm moving it from my
Bank of America account to their Bank of America
account, which is really ledger entries, data
entries, from one bank account to another bank
account, but all liabilities. You can keep that, because
we're going to come back to that in a just a little bit.

All right. And yeah, it's only $1. But there's three
significant advantages that fiat currency has. And one is it's
socially acceptable. Everybody in this
room will take $1. I bet you if I handed out more
of them, you would take them. And those bitcoin
chocolates, you're probably not going
to do much with them except for eat them maybe. Or you might keep
them as a souvenir. But the three advantages
are, number one, it's socially acceptable. And people accept it, except
in times of real extreme pain, like the late 1940s in
China or in Venezuela right now or in
Germany in the 1930s, when a country loses control of
their currency because of lousy fiscal and monetary policy. But other than that,
it's socially acceptable. But number two, we embed in law. And since we're at Harvard
Law, we embed in law two things to give it a big advantage.

One is you can pay
your taxes with it. And since normally somewhere
between a third and a half of all modern economies
are the government, that's a big advantage. And number two, there
is another thing that– what was your first name? AUDIENCE: Emily. GARY GENSLER: Emily
read on there, which was, it's accepted for
all debts, public and private. All right so who's
going to tell me what that means under the law? There is actually a
US law that says that, and then we print
it on the currency. What's that? AUDIENCE: US Constitution. GARY GENSLER: It's not the US
Constitution that says that. But that would be cool
if it was constitutional. But what does it
mean if it says it's acceptable for all debts,
public and private? Does it mean that
Starbucks has to take it if I buy a cup of coffee? What's that? AUDIENCE: They have to.

If you want to pay for coffee. GARY GENSLER: OK. So in fact, they don't
have to unless they hand you the cup of coffee. If they hand you
the cup of coffee, then you have a
debt to Starbucks, and you can extinguish that
debt with your dollar– or, well, more than $1
actually, the last time I was in Starbucks. If they do not hand
you a cup of coffee, they do not have to enter into
a contract to take the dollar. So always make sure you
take the cup of coffee and then argue
about it afterwards. And Amazon now has
book stores that will not take US dollars,
physical US dollars.

I'm waiting for somebody
to take them to court. But you have to
physically get the book, and they won't
hand you the book. So that's what all debts,
public and private. Big advantage is that bitcoin
has got to compete with that. So what is blockchain
technology? I was told that you
have some sense of it. There's two really big things. One is it's a data structure. It's a data structure
invented in the early 1990s by two scientists at Bell Labs. And those two
scientists at Bell Labs were not thinking about
currency or money. They were thinking
about notaries. You know when you notarize a
document and say it's official, it was signed by these people
on a certain day, everything, and they actually started
a company, [? Surity, ?] a little venture firm in 1995.

But they were thinking
of a data structure that had lots of data. That were connected
like fingerprints– did my little fingerprints come up? Cool, cool– like
fingerprints through a cryptographic primitive
called hash functions. And all a hash function is
is a data commitment scheme. You can take all the
data in the universe and put it into a
cryptographic hash function and get a unique ID for it. You can take the
Library of Congress, you can take a picture of me,
or a picture of this class, whatever you want.

And you get– so by putting
data commitments or data fingerprints on lots of data
and then timestamping them, these two Bell Labs scientists
figured out a data structure that some people call immutable. I ask you, don't use that word. It's tamper resistant. There is no such thing as an
immutable thing in science or in cryptography. It is tamper resistant. And these hash functions
have been broken in the past, and then we move to the next
harder to break hash function. And even the cryptography
inside of bitcoin will be broken at
some point in time. And Satoshi Nakamoto wrote about
that, even in 2009 and 2010. And there's bright
scientists over at MIT like Ron [INAUDIBLE] and others
who come up with this stuff, usually math types. The second thing was not
invented in the 1990s. So it's really
Nakamoto's innovation, which was how to form
that consensus of what the next block of data is. So you have a block of data,
a data commitment fingerprint. Block of data, fingerprint,
block of data, fingerprint. The question is, who gets to
write the next block of data? And Nakamoto came
up with something using another 1990s
invention called proof of work, a scientist
named Adam Back had this little thing
called proof of work, said, why don't we use a
computer and the computer has to expend a little bit of
energy and a little bit of work to make sure that we
don't get email spam? In the middle of Bitcoin
was an earlier innovation to protect against email spam.

Adam Back's work in the
late '90s was proof of work. Adam Back, by the way, now
is the CEO of Bitstream, a blockchain company. He has been successful, as
compared to those two Bell Labs scientists. So it's just different folks,
or different entrepreneurial skills. But Nakamoto said, what if you
use a little bit of computer programming work, proof
of work, and in a network solve an old problem, a
game theory problem, that was written about
in the early '80s called the Byzantine
Generals Problem. In essence, if you had multiple
generals in Byzantine– and I think that the
computer scientists who wrote the paper in
1981 on this used Byzantine because it
was socially acceptable.

There's no real Byzantine
generals that had this problem. But there is something in
computer science called the Byzantine Generals
Problem, which is basically, what if you had
multiple generals that have to attack
simultaneously on a town, and they send messengers
to each other? They all have to attack
to be successful. And if any one of them doesn't
attack, five out of the six that do attack are dead. What if you can't
trust everybody? What if some of the
messages are lost? This was an old computer
science game theory issue. Nakamoto solved the
Byzantine Generals Problem through these proof
of work concepts. Glad to take questions
on it, but I've got to go on to the law. That's the center of it. The center of it is a
data structure, blockchain with these data commitments. And secondly, no
central authority, but consensus among
multiple parties. And we get a database. It's boring, kind of
back office stuff. It's like the carburetor. It's a database.

That's what is at the
center of all this. The other thing was an
idea it's about contracts. And so I put it up here. Nick [? Savo ?] wrote a
paper in the late '90s as well about what
if we automate contractual arrangements? Now, my dad had a
vending machine company, never went to college. He kind of laughed that I
was lecturing at Harvard Law about his vending machines. But a smart contract
is no different than a physical vending machine. You can put three quarters or
maybe these days more quarters into a vending machine.

And you have a contractual
right that that machine with no human interaction
can give you the pack of gum. You know, you pull the lever. So I think of these two words,
smart contracts, maybe because of my youth, was hanging around
cigarette machines and pinball games. Smart contracts is, how do
I automate in a computer the same thing as
a vending machine? How do I take something that's
contractual, conditional right, and move something of
value, a property right, with no human intervention? But it's not really
something smart.

My dad's vending
machines were not smart. They didn't have
artificial intelligence. And then I'll leave it
to you to figure out whether there's actually
contractual rights, whether courts
will enforce them. But the term smart
contract just means automated conditional
rights that can move something of property value. That's important, because we'll
get to a lot of [INAUDIBLE].. Finance– finance, a
quick word [INAUDIBLE].. It's been around 40 years. It's basically the movement,
the allocation, and pricing of two things in economy– money, that social construct–
you've still got my dollar, I got it. It's moving around money,
and it's also risk. And if you think you're
going to Wall Street and don't understand
risk, learn about risks.

And if they're not teaching
it to you at the law school, find it somewhere. Find it in a business school. Finance is about money and
risk, allocating, pricing, and moving it around. But it lives in a symbiotic
relationship with tech for 10,000, [? $20,000. ?] It's
thought that written numbers were before written words, and
money itself is a technology. So what are the
technologies of now? What are the technologies
facing us now? How are we going to
[? write ?] something called fintech at the Computer
Science and AI Lab over at MIT? And I will tell you,
the top left box is most of the donors or funders
of fintech at the Computer Science and AI Lab
are much more interest in the top left box, artificial
intelligence, machine learning, deep learning, than
they are in blockchain.

But probably a quarter to
a third of our projects are related to blockchain. 50% are probably related
to AI and machine learning. And this is just what
they're coming to us with. They're not necessarily
coming to us to figure out their next
mobile app or open API. But I would argue if
you're Barclays Bank, you're much more interested
in open API, which means opening up
your bank system because the
government in England said you have to open
up your bank system. The law is influential there.

You have to open up your APIs. But it's in this context. Blockchain is important
and relevant to finance. But it is not the
leading thing in fintech, is what I would say. Finance is a fertile ground,
particularly for fintech and for blockchain, but
mostly because we've dematerialized money and
securities decades ago. I started on Wall
Street in 1979. We still had something
called the Cage. The Cage was where we physically
kept stock certificates. That word still
exists, but nobody is keeping physical stock
certificates in a cage. And we've dematerialized
money largely. I mean, you still
have this chocolate and the $1 bill over there.

So it's very fertile
ground for everything. Now, before we get
into the law, I want to say that finance, the
financial sector incumbents, are not really that
interested in bitcoin. It's a $175 billion asset
class, but they're still using traditional databases. Traditional databases, by and
large, are more efficient. They're not going to this
block, data commitment, block, data commitment,
block data commitment. And if they are,
they're using what's called permission blockchain.

Permission blockchain
says, I am not going to let this
live out in the wild. I'm not going to let it live
out in the wild like bitcoin. I mean, bitcoin has survived 10
years fundamentally in a swamp. When I say swamp, I say that
in an affectionate, caring way. I mean, it has lived, and
so many different people have tried to take it down
and corrupt it and attack it. And it hasn't by and
large been taken down. State actors have tried. Commercial actors have tried. Just let's have some fun,
let's see if we can take down, kind of computer
scientist tried. But most of finance
doesn't want to have something out in the wild. They want to
permission blockchain, which means I'm going to have
a separate number of permission people writing for the network. And then lastly,
public blockchains. And you'll hear this term,
public versus private, or private versus
public blockchain.

All the action in traditional
finance is on the left. And when you read
about IBM Hyperledger, you read about other things
that's in the middle. But if you go to work at a
law firm and you're advising, you might be all the way on
the right-hand side on this. And here are some of the use
cases or some of the areas that are use cases. In finance, the biggest
thing has been crowdfunding. We're going to talk just for
a moment about initial point offerings, but it's been $25 to
$30 billion that's been raised.

And I am glad to share
my slides with Elizabeth. I'll put them in a
Dropbox if anybody wants them publicly sourced. I think they're recording this. You can take pictures too. AUDIENCE: I'm tweeting. GARY GENSLER: You're tweeting. Wow, Gary Gensler tweeted. I don't think you're going
to have a lot of followers, but all right. My girlfriend might look at it. I don't know. So the main use
cases so far has been as a form of crowdfunding that
we're going to talk about. And then there's a
little bit of nibbles in the payment system place. Most of these are
proofs of concept. There's five big
projects of trade finance that I could talk
about, but they're all permission,
not open source and permission-less public systems.

So it's still kind
of new in this area. Non-finance– I
think there's going to be a lot that
could be interesting about self-sovereign identity. And what's the word privacy
mean but ownership of our data? And you can use
blockchain technology to form a better tamper
resistant control of one's data. You can. The question is
whether it will be commercially feasible to do so. Facebook is not going to
lose this battle easily, nor is any of the
big tech companies that basically commercialize
our data for their benefit. But blockchain
technology could be part of an evolution of whether
we as individuals control our data. It's not the only
way we as individuals can control our data,
but it is one way that we could control it. So I think that's kind
of the digital ID area to me, is one of the more
interesting possibilities.

But I wouldn't get
too excited too early. There's two trade-offs. There's centralization
versus decentralization. [? Cost ?] wrote about
this in the 1930s. He was a famous economist. There's costs of centralization. It's usually about
single points of failure. When you get really
highly centralized, you get to monopolies, and
you collect economic rents. You get kind of [INAUDIBLE],,
like a lot of central banks are right now, and
some commercial banks. The US financial system takes
7 and 1/2% of our economy. That's $1 and 1/2
trillion a year. That's a lot of juice. That's why some of you are
going to work in finance. I worked in finance
for 18 years. It was terrific.

It was terrific,
and actually it was terrific for lots of
reasons– because it was great colleagues, great
clients, but also paid a lot. Some of that creates
economic rents, and not disparaging what I
did or anything like that. But I didn't really
earn what I got paid. I got paid a lot more. It's the nature of our
lopsided economy and system. But there's also costs
of decentralization. And the bitcoin purist,
the bitcoin maximalist, if I might say, would say,
this is about decentralization, and the really important
thing is decentralization. And I would say, yes. But let's take Uber. You could create Uber on
a blockchain technology. I have no doubt
that we could do it. We could take a couple
of computer scientists from the Digital Currency
Initiative over where I am, probably a couple of
good lawyers from Harvard Law, and we could create Uber on
blockchain, between customers and riders and so forth.

But you still have
the question of who is going to put the effort in
to negotiate with each town and each locality to get Uber
into London and into Paris and into every town. Who's going to sort of
update the software? So there's trade-offs. I think that orange line,
the slope of the orange line will come down in 5 or 10 years. I think we're really at the
early days of blockchain technology and bitcoin. But we will never
get it to be flat. There's still going
to be a trade-off, or decentralization ain't easy. So now we get to cryptofinance. This asset class is $175
billion as of a few hours ago. If I would have talked
to you two weeks ago, it would have been $120 billion. And as you can see, it's
got some volatility in it. A little over half
of it is bitcoin. I like to think of it in four
or five sectors, subsectors, because I was at Goldman
Sachs for all those years. So you think of asset classes. Their payment
tokens is about 2/3 of the overall,
2/3 with of course bitcoin being about
$90 billion out of 175.

Then there's these protocol
platforms like Ethereum. Vitalik Buterin created
Ethereum to say, let's create
something that you can build applications on top of. So in a sense, think of the
operating system, the IOS that's in your cell phone. Think of the operating
system in your laptop. These protocol
layers are about 20% of the asset class, 30,
35 billion the total, with Ethereum being the big one.

There's five or six others,
that remarkably some of them are $5 billion of value,
and $3 billion of value, and $2 billion of
value in the market. They're not going
to all succeed. And then on top of
these protocol layers, there's decentralized
applications, just like the apps that we
all download onto our phones. And you can build decentralized
applications on top of a blockchain technology. The question is, will
anybody use them? But this is how the
asset classes are now. The [INAUDIBLE] about 10%. There is also stable
value tokens, which means, let's just custody an
asset underneath it. Custody dollars, yen, Swiss
Franc, oil, gold underneath it.

So crypto exchanges– there's
about 200 crypto exchanges. I can't tell you how
many of them are real. Probably 150 or more of them
are really fakes and frauds. Don't take my word on it. Bitwise just did a wonderful
application into the SEC in March. Bitwise is– again, if you go
working for a big law firm, you could be working on
a Bitwise application. Bitwise is applying to the
Securities Exchange Commission to do an exchange trade fund. And under Jay
Clayton's leadership, the SEC has denied
every application for exchange traded funds. And Jay and the team
there might be right, because he's saying, underneath
this market I'm not comfortable whether it's easily manipulable. So Bitwise comes along and
puts in 108-page application, and it's under review right now. So they're trying to
be that first person to get over the line and get an
ETF when the Winklevoss twins– they went to
Harvard, didn't they? Yeah, I think so.

The Winklevoss twins
have applied not once, I don't think twice, but three
times and have been denied. They have a firm called
Gemini, and they've been denied their [? extensure ?] fund. If you're really deep
down the rabbit hole, go read the Bitwise application. By the way, it's easy to read. It's a slide deck. One page writing, and
the rest is a slide deck.

But they would say
only 4 and 1/2% of the volume of crypto
exchange is real volume, and the other 95% is fake. It's wash trades, and it's just
promoted to build the efforts. How many of you have ever
owned a cryptocurrency, other than the chocolate
in your pocket? OK, about half. How many of you have done that
with your own private key? 1, 2, OK, 3. All right. I'm at Harvard, not MIT. At MIT, more people would
have their own private keys. But it's never more
than half, even at MIT. So about 40% of you own
cryptocurrency, which is, let's say, 30 of
you, and only three of you have had your own private
key, meaning the other 27 or so have done it on a
crypto exchange. You're trusting their custody. What's that? AUDIENCE: [INAUDIBLE]. Sorry, I misunderstood. GARY GENSLER: All
right, you've done it with your own private key.

You've downloaded a
wallet, and you hold it. AUDIENCE: I don't
trust the exchange. That's why. GARY GENSLER: You don't
trust the exchange. But most people trust the
exchange to hold their asset. If you trade on
the New York Stock Exchange or the
London Stock Exchange, it's a little different. You're trusting a whole
regulatory regime, but you're also trusting in
something embedded in the US law that all the
custody is ultimately at something called Depository
Trust Corporation, DTCC, or in other countries'
similar mechanisms. So we have a central
banking system for cash, that dematerialized
thing called money, and then we have the
central clearinghouses to hold what somebody would
call the golden record of securities. But here, the golden record,
a legal property right is held on a technology
called blockchain technology, and you're trusting in
the crypto exchanges to hold what's called
your private key.

Or you can pick
up your password, if you wish to use that word. The right for scam and fraud,
none of them, none of them are registered with the
Securities Exchange Commission at this point in time. And as I said, 95% of
the market goes here. So this is the reported
monthly trading volume. CryptoCompare puts
up a monthly chart. It's not hard to find. This is the reported
volume, and I'm going to tell you, ignore it. Most of it is not real. This is from Bitwise's
application a few weeks ago. You'll see finance, $110 million
a day, is about 3 billion a month. And if you went back, the
chart, these are all, like, 10, 15 billion a month. They just make up their numbers. They just make it up, because
it's good marketing and it doesn't– well, nobody's been
sent to jail yet. And even here in the US,
many of the exchanges, even on this page, Poloniex is
run by and owned by a company here in Boston called Circle. AUDIENCE: Circle,
slash [INAUDIBLE].. GARY GENSLER: There you
go, Jeremy over here, and [? Sean ?] Newell.

But Coinbase, Poloniex, Gemini,
Kraken are all in the US. They're not registered
with the SEC either, and they probably should be. So right now we're
living in a world where there's both
regulatory uncertainty and regulatory
forbearance, which is not usually something
you hear about in school, but it goes on. ICOs– this fella
never got rich, but I like putting him
in some of my talks because I just think,
wow, isn't this neat? Audacious as it was,
he convinced his wife he was going to buy $300
bitcoin back in 2011 or 2012, and he went around marketing. He said, somebody
should figure out how to make bitcoin
an application layer– I mean, an operating
protocol layer like your computer system,
your IOS, and put applications on top of bitcoin.

Nobody would give
him the time of day. He said, but you can
raise money off of this. And he wrote a paper in
2012, which is literally the first paper
promoting this concept, crowdfunding on top of
a blockchain, and not use Kickstarter, not GoStartMe,
but crowdfunding on top of a blockchain, JR Willett. And he never got
rich, and he started something that became Omnicoin.

And Omnicoin has a total market
value of $2 million right now. He wasn't the [INAUDIBLE]. But he's kind of
the inspiration. Now, what are initial
coin offerings? Initial coin offerings
are a way to raise money before you have an application. And they basically are
used to build networks before the network
is functional, and the purchasers
are absolutely buying for price appreciation. Why do I know that? 97 or 98% of this is done
before you can use the token for anything of value. So economics will tell
you that if you're buying something
that can't be used, you're going to buy
it at a discount. You have to anticipate
an equilibrium that it will appreciate. And thus, this gets caught
up in securities law– in the US, particularly, but
also in Canada and Taiwan. You might say, why Taiwan? Because Taiwan in the year
2011 adopted the US approach to this. And Ernst and Young did a
study a year, six months ago, and said, well, what happened
to all the ICOs from 2017? And these are the statistics. About 2/3 of them had failed. 86% were trading
down, or 2/3 down. And only 13% even had a working
product 10 months later.

But it's not dead. The first quarter of '19, $300
billion a month was raised. It's not like it was. Crypto winter is
supposedly here. But 100 of these were
done a month, raising not a big amount of money. And you're not going to create
a legal career on this stuff any longer. But it's still going
on– or maybe you will.

I don't know. I don't want to [INAUDIBLE]. Public policy days– I've had the honor
to be speaking at different conferences around
the globe and with the OECD and the Bank of International
Settlements, and other places. This is my summary of it–
three big slipstreams. How do we guard against
illicit activity? How do we protect for
financial stability? How do we protect investors? So guarding against illicit
activities– the challenge is that this all came out of a
kind of libertarian cypherpunk world. It still has that ethos,
but also the technology itself doesn't have Gary
Gensler's name on it, my social security
or passport number. It has a long bitcoin
address, or if it's one of the other coins it has
some other public key, private key, pseudonymous– I could never
pronounce the word.

It's why I didn't
get into Harvard. But that's the problem. And so then regulators
around the globe are kind of fussy about this. And they should be. They want to make sure that
the tax base doesn't shrink and that we don't
promote bad things, whether it's drug
running or other things. And so it's how does it fit
into the Bank Secrecy Act laws? Here in the US, by
2011, 2012, and then finalized in 2013, the US
Department of Treasury, through the Financial
Crimes Enforcement Network, said, this is under
the Bank Secrecy Act. You have to keep
any money laundering and counter-terrorism
finance and all this sort of requisite stuff around that.

Of 180, 190 countries around the
globe, pretty much all of them agree with that. But many of them are doing
a lousy job tracking it, and it's not that
hard to get around it if you want to trade
on what's called a crypto-to-crypto exchange. The on-ramps and off-ramps
for official enforcement here is the bank network. It's when you go
from crypto to fiat. How do some people avoid that? Sometimes they even avoid it
with exchanging thumb drives for bags of currency,
back to the $1 bill. And there's places
where criminals are doing drops
between suitcases of cash and thumb drives.

So that's one of the challenges. Lots of uniformed agreement,
but tons of challenges. Financial stability– I
put up a bunch of things here because I recently taught
a Financial Stability Board forum on this stuff. Most central bankers aren't
terribly worried. $180 billion, it's a small asset class. Worldwide equity market
is about 90 trillion. And the worldwide
debt and bond markets are 200 to 300 trillion. So kind of, it's small. But they are looking
at it closely. Central bankers around
the globe say, well, if you put a lot of
leverage in here, or if the financial sector uses
this blockchain technology, what's its governance? What's its cybersecurity? What's its privacy? All the kind of words
that I've put up here. But what the central bankers
are really interested in is they've started
to say, hey, there's this private sector new money.

How do we react? And Canada and Singapore
are the furthest along in various projects called
Project Jasper and Project Ubin where they're saying, maybe we
can use blockchain technology to update our payment system. And the challenge
for central bankers are that their payment
systems, the ones we all use– we're all customers of
central bank payment systems– is that they're only open
about eight or nine or 10 hours a day, five days
a week, and they're kind of yesterday's technology. I mean, they're not 30
year ago technology, but they're kind of 10 and
20 year ago technology. And so this new
private form of money, bitcoin, is pressing at its
ankles, nipping at its ankles. Most central banks
don't like that. The second thing
they're looking at is, well, should we give
a tokenized representation of money. Like, when this– and I'm going
to get that dollar back later, but when this goes away,
when this goes away, and I will contend, for
anybody in here who's a former law student,
your children won't recognize this stuff.

And your grandchildren
will surely not recognize this stuff. They won't use it. It's going the way
of the dodo bird. We've already digitized our rent
payments, our pay, our coffee. How many people in here today
have used physical cash? It's about 6 o'clock. Oops, you haven't. So wait, wait, how many was it? Fewer than the number of
people that have bought crypto. Now, you didn't
buy crypto today. I know, it's not
a fair comparison. And how many people
have written a check– written a physical
check in the last week? It's tax time. Come on, some of you have. I did. It's tax time. But I wrote a physical
check because it's tax time. So we're dematerializing
all this right now. So the central banks
are looking at it. I've listed a bunch of countries
that are looking at it. Should they tokenize
money that's available 24 hours a
day, seven days a week, not built on a
blockchain technology? Then there's
investment protection. The countries around
the globe are all over the lot about this. They are just completely
all over the lot about it, but let's go to the
US and have some fun.

The Howey test– do they teach
the Howey test in law school? What is it? AUDIENCE: It's
how they determine whether it's a security. GARY GENSLER: Right,
how to determine if something is a security. But actually, it's how
to determine if something is an investment contract. Because in the early 1930s,
when the securities laws were passed, our
Congress decided to put a list in the black letter law. And having personally
worked on a few laws, those debates sometimes
have consequences. Well, that debate, 1933, when
they put equity, comma, bond, comma, option, comma,
investment contract, had consequences
13 years later when an orange grove in Florida
by one said Mr. Howey, the question was, they
were selling land– selling land, and the
purchasers of the land could then contract with
an affiliated company to grow oranges on it. And the question was, is that
investment contract, and thus the security under
the securities law? And the US Supreme
Court in 1946 said, yes, that was an investment contract. It was part of what Congress's
intent was in the 1930s.

And it's been upheld at the
Supreme Court three or four times, as recently as
about 10 years ago. So it's kind of settled
law for 70 years, and this is the four-part test. Sometimes people call this a
three-part test because they put– the first is easy, is it
investment money or assets? Is it a common enterprise
and expectation of profits on the efforts of
promoters [? of it? ?] I think that 99% of initial
coin offerings pass this test.

And by the way, if
you're advising somebody, you do not want to pass it. You want to fail this test. But if you pass this test, you
are an investment contract, you are a security, you're
under the US securities laws. But you don't need to
take my word for it. Jay Clayton said
this a few times in front of
congressional hearings.

And a week or two ago,
the SEC gave their first no action letter. Does anybody know what
a no action letter is? I never knew what a no
action letter was when I was at Goldman Sachs, by the way. And if I went to
Harvard Law, I probably wouldn't know what it is either. But when I was at the
chair of a commission, I knew what a no
action letter is, because the lobbyists
and the lawyers are always coming in
and saying, we just want to do this activity. But we want to make
sure– we don't think it's under the commodities
law or securities law. But could you confirm it's not? And could you issue
us this letter, that you will take no action
to enforce the securities or commodities laws? In fact, if you go into
regulatory practices of any law firm, you will be in
the no action business.

It's a mother may
I business where you walk into a regulator, you
explain your client's business. You kind of say,
I don't think it comes under the communications
law or the securities law, but I'd like you
to confirm that. And you get what's called
a no action letter. It's regulatory discretion. It's a regulator saying, we
are choosing not to lean in and enforce this bit of a law. We're going to lean back. And I don't know. I got to the CFTC, there were
600 or 700 no action letters that had existed. And I committed in my
confirmation process that we'd make them all public. That upset a few
people, actually. And in my time
there, we probably issued another 100 to 200. So it's a big thing. But they issued a
no action letter. For the first one, it
was a stable value token.

It was a custody token
on fiat currency. I don't think the SEC is going
to let many ICOs off the hook. I think they're going
to scare the market and enforce the market, try
to bring it into compliance. These are the cases
they've brought so far, or actions they've
brought so far. But there's 2,000 or 3,000
ICOs that have happened.

There's not enough
enforcement staff to do more. But, you know, you keep
bringing these things, and it's slowly bringing
the market into compliance. Crypto exchanges
lose a lot of money. It gets stolen. These private keys get stolen. This is another issue– custody. Custody is a very tough issue
the SEC is grappling with right now, as to how can
crypto exchanges get relevant important custody? I think over the
next 18 months, you will see numerous of the
exchanges, the Krakens and Coinbases and
Geminis, Poloniexes, try to register as a broker
dealer under regulation and Alternative
Trading System, ATS. Why is that relevant? Well, then they'll be inside
the regulatory perimeter rather than outside the
regulatory perimeter.

I would guess that the SEC
would rather them fully comply with
regulation ATS, which came out of the internet age. It was published in 1998. It took three
years to figure out what to do under Chairman
Levitt's term in the Clinton years. But I think that
the problem is none of these crypto
exchanges can fully comply with regulation ATS. So they've got to
negotiate with the SEC. And as I've said
to some exchanges– I'm not paid by any– I've said, listen, figure
out what you can do. Figure out what you can't do. Figure out what's hard to do. And you've got to go
into the SEC and say, that which I can't do I
need a no action letter– I mean, if I don't
have to do it. That which is hard to do,
give me 18 months to do it. That which I can do, jail. But the SEC is probably,
if I had to speculate, in negotiation with
all these exchanges, trying to see which one will
come into compliance first.

But I like this test the best. It's better than the Howey test. We used it often at the CFTC. It quacks like a duck,
it waddles like a duck, it talks like a duck,
it's a security. I didn't make it up. A poet made it up
over 100 years ago. But you hear it when
you're in Washington. The lobbyist leaves the room
and somebody says, duck test. You know, it's just a shorthand. So when you're
representing a client, even if they want to get between
the wallpaper and the wall and just get in that
little sliver of ambiguity, when they leave the room,
say to your colleagues, wait, wait, let's just
use the duck test.

Use common sense. And then call your
client back up and say, can I just tell you– I'm going to be
your advocate, I'm going to fight hard
for you, but this– you know, we should have a
little ground truth discussion. And the best lawyers
that came in when I was chairing a
commission kind of had those conversations
with a client. They still advocated. They still asked for
some things that you would just think were crazy. But at least the clients kind
of knew that it's a negotiation and that there's still the
spirit of the law that's underneath it. I said about hype
cycles, and I'm going to close on this
in the next chart. This is the Gartner hype cycle. Any technology goes through it. Railroads did, television
did, the internet did.

It's like, you get enthusiastic,
it comes down, comes back. Where are we here? I think we've been
through three hype cycles. We had ought coin cycle in 2013,
we had the crowdfunding cycle, and if I'm hitting
this right, I think we're into something called
the security token cycle now, the tokenization. And remarkably, these are all
the token projects going on. And one of my
favorites is, NASDAQ is contracted with the
Estonian Stock Exchange to tokenize US listed
securities and offer them around the globe
at a [INAUDIBLE],, that bastion of
financial activity. I mean, I love Estonia
because, of course, that's where Skype came
from and TransferWise.

I mean, it's a great
entrepreneurial country. But really? Tokenizing US securities
out of Estonia? So I think this is our
next hype cycle on this. I don't think there's
enough there there, but their argument is, you could
buy this stuff 24 hours a day, seven days a week. The US securities markets
and the US clearinghouses and the US payment
systems aren't open 24/7. JP Morgan has JPMorgan coin. 15 major banks have something
they're trying to do around the [? settlement ?] coin. So it's kind of a really
interesting catalyst that's happened here. Conclusions– finance has
been symbiotic with technology forever. And we dematerialized
money a long time ago, before many of you
were probably born. I think that there's plenty
of scams to go around.

And if you go into this space,
just know, it's a swampy area. And we don't have any of the
crypto exchanges regulated yet. I've contended to
Congress, we've got to at least bring
the crypto exchanges inside the regulatory perimeter,
rather than leaving them out. Get it in the SEC or
CFTC, it's not about turf. Just bring them in. But it's not there yet. Most ICOs are probably
non-compliant, meaning breaking the law. But there's some regulatory
forbearance right now going on. I think that adoption
rests on real viability. Do you need
[INAUDIBLE] only law? Do you need this data structure? There's three things–
do you really need a data structure, do you need
multi-party consensus, meaning multiple parties writing
to this ledger, and thirdly, do you need a
native, unique token? You might like the
data structure, but if you don't
need this token, just do a permission blockchain.

But [INAUDIBLE]
masquerade as fact. A lot of hype will
masquerade as fact. This has already been
a catalyst for change. So I don't want to be
remembered as a minimalist here. I'm kind of in the middle. I'm not with Tim Draper, who
you heard from last night. I interviewed Tim last
summer, and I mean– for those of you who watched,
did he have his bitcoin tie on? No, he didn't have
his bitcoin tie on? When I interviewed him,
he had bitcoin socks and a bitcoin tie. He's wonderfully successful. He's wonderfully enthusiastic. I just don't think it's going
to go the path he thinks of replacing fiat currency. I think fiat currency
has a place because you pay your taxes, and it's all
debts, public and private, and all that. But I also don't– I'm not such a minimalist.

I'm not over there
with Nouriel Roubini or Paul Krugman or Joe Stiglitz,
and so forth, who say, ah, this is nothing. No, I think this is a
catalyst for change. I think this data
structure and potentially, in some places, in
extremis– maybe Venezuela or some other country
in the future– will say, we'll just put this
on a computer code. So I ran a little bit
over, and I didn't– whatever you want to do here.

So I should have– I should have broken early. All right, two
questions, I'm told. So here, one here, one here. And maybe a third
one [INAUDIBLE].. AUDIENCE: Excellent
presentation, Gary. But usually, you suggest by some
of your experience in theory and practice, when
it comes to someone who's interested in the
best program in the world– GARY GENSLER: The best
what in the world? AUDIENCE: Program in the world. GARY GENSLER: Best program. AUDIENCE: As far as theory and
practice, what all this means. GARY GENSLER: All right,
best program in the world.

But what's your question,
because [INAUDIBLE].. AUDIENCE: What are
your views on proof of state as an evolution
from proof of work? GARY GENSLER: All right. So two technology questions. Is there any
non-technology question? Here. AUDIENCE: Can you talk
about how [INAUDIBLE]?? GARY GENSLER: How
did Hillary Clinton– what am I doing for Hillary? I was her chief
financial officer. I love her.

AUDIENCE: I mean,
I voted for her. GARY GENSLER: I did too. I worked on her early campaign. AUDIENCE: And then [INAUDIBLE]. You know how there's
a lot of money going into having politics as usual. [INAUDIBLE] GARY GENSLER: All right. All right, so experience
with politics. Let me do the two
technology questions. I think that the
technology– we're still in the 1980s on the internet. I think that money– $30-plus billion got
thrown at this early, this crowdfunding craze.

But the performance isn't there. Bitcoin does about a
transaction every– or seven or 10
transactions a second. Visa is 25,000
transactions a second. And DTCCs we shop-tested for
100,000 transactions a second. But I do think that five
to 10 years from now, we'll be through all
the performance issues. And the question about proof
of state or proof of work relates to that. Not the [? motor ?]
sign use proof of work, this [INAUDIBLE] technology,
where the computers have to use a lot of
electricity and build something with a little risk in
it, a little work in it. Proof of stake, about 10%
of the $180 billion market is proof of stake coins now. Proof of stake as
well, can we move away from using a lot
of computer energy, like we're mining for gold,
and do it more efficiently? Less electricity,
and also quicker.

I don't know if proof of
stake will be the solution, but I think it's part of the
answer to the first question that we've got to get
better performance and still say decentralize,
and that the risk is to get the performance, you
tend towards centralization. And proof of stake has
some of those risks on those technology questions. The politics, what is
your central question? AUDIENCE: Like how did
the allocation process– GARY GENSLER: How does what? AUDIENCE: How did the
allocation process went in 2016? Because it seems to me that
there will be a lot of money flow into the 2020
presidential election. So, I mean– GARY GENSLER: Well,
it's not that hard to– AUDIENCE: Based on your
experiences, [INAUDIBLE].. GARY GENSLER: So I was a
chief financial officer. It's a challenging job
like no other thing.

It's a startup. You never know when
you're going to end. There's now 15 or 20
Democratic candidates, and they all have to
plan for ending shortly after Iowa, or even before. In the Republican, similar
thing in the off year. In 2015, Governor Walker
didn't even make it to Iowa. So you don't know
as a financial model how long you're going
to last, and you can't be assured of your revenue. In the Hillary situation,
we stood up over 500 offices over that period of time. We raised and spent $1 billion. We hired and let go
over 5,000 people. And we had to land, as I would
say, to Hillary and to Rob E. Mook, the campaign
manager, I said, where do you want to land this? But I'm planning to land this
with no fuel in the tank. So on Election Day, the goal
was to have no money, zero, or a few hundred thousand. And we didn't want to land
playing with 10 or 20 million. And we didn't want to
run out beforehand. So it's a really
interesting sort of finance set of questions.

And allocation, you ask, it's
not really that confusing. There's one metric in
politics ultimately. It's the polling and the public
and ultimately the votes, the caucuses. And so it's having
you connect to voters, what money is spent
to connect to voters. Get the message out to
candidates, message out that connects to voters. But ultimately, it's about
getting more of your voters to the polls than somebody else. Oversimplify in this moment,
even though we're talking about blockchain technology. Should I wrap it up? Thank you so much. [APPLAUSE] .

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