MICHELLE: Welcome to today's MIT Starr Forum on Bitcoin and the global economy. Today's event is co-sponsored by-- or sponsored by the Center for International Studies. And I'm Michelle, and I'm thrilled that you were able to make it.
Now, let's begin with an introduction of our speakers. Michael Casey is a senior advisor for the Digital Currency Initiative at MIT's Media Lab. He's a writer and researcher in the fields of economics, finance, and digital currency technology.
Most of his career was spent as a journalist. That involves 18 years at the Wall Street Journal, where he was a senior columnist covering global economics and markets, before leaving to join MIT in the summer of 2015.
Along with a Wall Street Journal colleague, Paul Vigna, he is the co-author of The Age of Cryptocurrency How Bitcoin and Digital Money are Challenging the Global Economic Order. He has also written two prior books, The Unfair Trade, about the global financial crisis, and Che's Afterlife on the international impact of Alberto Korda's iconic image of Che Guevara.
Cristina Dolan is an internet pioneer and MIT Media Lab alumni. She co-founded One Main, which grew to be the 10th largest internet service provider. The company was later acquired by EarthLink after a highly successful public offering.
She's currently head of marketing and head of content and communications products at TradingScreen, where she also leads initiatives in BlockChain. At Hearst and Disney, she headed up technology and built the first consumer internet websites.
In addition to executive roles at IBM and Oracle, she was CEO of WordStream. And in 2013, she launched the global student competition, "Dream it. Code it. Win it." which has been honored with a Trader Magazine Charitable Contribution Award and four Stevie Awards for best organization, best female innovator, and best executive of the year.
We will first hear from Cristina. So I just would like you to join me in welcoming Cristina Dolan.
CRISTINA DOLAN: Thank you so much, Michelle. And so I-- are you going to T that up? So I'm really excited to be here. I was a student at the Media Lab. And when I was here in the early '90s, it was the beginning of the internet revolution. And it kind of reminds me a little bit of what you were hearing today about BlockChain. We had all the leading media and entertainment companies come in. And they would say the same thing-- not scalable, you know, all the same issues from the incumbents.
And what was also kind of interesting was there was a professor at the Media Lab who said, hey, Steve Jobs is looking to hire some grad students. Want to go over and meet him? He was at NeXT at the time. And I thought, hey, sure, he's going to get this whole interactive thing. I'm so excited about it.
So I fly out to California. And I'm telling Steve all the things that I do. And he said to me, you know what, I invested in that company AOL for AppleLink. And you know what, it was a total disaster. There's CompuServe, Prodigy. I mean, you know, these systems that are out there, they're not interconnected. It's just never going to happen.
So needless to say, I came back to the East Coast. And I was involved with technology and the first consumer internet sites, went on to head up E-commerce for the Americas for Oracle and co-founded a company in this space.
So I'm really excited about this-- about BlockChain. Because I see it's a similar revolution. And-- oops, wrong slide. And I can't get the clicker to work. yeah, so it's-- so you hear all these different names, I mean all these different words-- immutable digital currency, trustless, frictionless. But I actually think about it as a next generation information and communications technology.
So before we get started-- so how many people know about Bitcoin, how it works, and BlockChain? So a lot of you-- I'm just very quickly going to go through this, just because-- sort of simplify things a little bit.
So let's just say Alice wants to give Bob one Bitcoin, right? So she has to provide her private key, his public key, which is his address, and she has to prove she has a Bitcoin. So that's where you get the transparency in Bitcoin that makes this so interesting on the BlockChain.
Then it goes out to the network. They verify that she actually has that Bitcoin. They go through that mining process. They get rewarded. Those miners get rewarded, and that's important. Because I think that that economic layer is one of the things that actually helped get-- make Bitcoin and BlockChain so popular. And then they get notifications in 10 minutes. And that's it.
So you can see from that example why it has a certain transparency and accountability. So that if somebody's going to ask questions on money laundering, this is probably not the best way to do it.
OK, so timing is everything. And what's kind of interesting-- obviously, you all remember the 2007-2008 economic crisis that took place. And Satoshi's paper actually wasn't-- you know, he wasn't the first to propose a cryptocurrency. But he was the first to solve in an interesting way. Because, as you know, 2007-2008 economic crisis had to-- it had to do with large banking organizations. And so the idea that you could have this distributed system for financial control made a lot of sense.
And so you've heard things like Mt. Gox. And unfortunately, that's given Bitcoin and BlockChain a bad name. Because people think, oh, it has to do with drugs and money laundering. As I've explained before, that's not the case. They just didn't put their keys in a safe place.
What's interesting is that at this point in time, there's about one billion of venture capital that has been invested. And over the last year, a very large percentage of that has been by financial organizations.
So, as I said before, I was involved in the internet and the birth of the internet and got to enjoy the opportunities from that. And there's been a number of disruptive technologies that have come about since then-- open source, really important because that's a building block on which people can use that to quickly build new products and concepts, put them out there on the internet, and test them out very quickly and inexpensively.
I actually believe that there's less business plan competitions and more hackathons as a result of open source. Because you can actually quickly get stuff out and prove that it works.
Wireless and cell phone and smartphone, actually, Steve Jobs proved me wrong. He went way beyond what I had ever accomplished. But those revolutions actually make [INAUDIBLE] a lot more disruption. And they kind of paved the road for what you can do with BlockChain and Bitcoin.
So I over-- I like to oversimplify this a little bit. Because I find that people get so caught up in Bitcoin itself that they don't see the jewels underneath this digital currency. And so I kind of think about it as having these two components. One is the conduit for which you can have these smart contracts and smart, efficient negotiations.
And then underneath it is this BlockChain, which-- have you all heard of BlockChain? Can you raise your hands so I know how many people-- oh, like everybody has. OK, great. So you all know that this is a-- it's sort of a next generation distributed database that has a lot of visibility. And as I showed you before, you can sort of follow the transaction.
What's really clever about what Satoshi did is he took these old technologies, like the Merkle tree, SHA-256, decentralized networks, and Hashcash, which had its birth over here at MIT. I believe Adam was here. These are old technologies. But he sort of bundled them together to solve an interesting problem.
So with this consensus, he created a way for a group of people to actually concur that the transaction was valid. So you don't-- it was an open network and doesn't require any trust or permission. And then he layered on top of it this economic layer that actually helped distribute Bitcoin as a reward for people who were building out this distributed ledger.
And so as a result of that, I would actually say that Bitcoin has actually built one of the largest financial applications. It's distributed all over the world. It's probably been tested more than a lot of financial apps that are behind firewalls and never see the light of day. Only the permissioned people are allowed to touch them.
And so because this is about economics, I thought I would just quickly go through the economics of transactions. Obviously, these are some obvious ones. I mean, banking is interesting. Because you have two billion people with-- that are unbanked. That number has gone down in the past year by 20%. 77% of those people only-- make less than $2 a day.
What's interesting is that 75% of those people claim that things like documents, and distance, trust are some of the issues that prevent them from actually having a bank account. I'm actually going to argue that maybe it's not so important. Because you have relationships with other mechanisms like mobile that might be more important.
Remittances-- remittances are really important. And although it's a $4 trillion business, you have about 500-- or 583 billion of them are cross-border. And of that number, 436 billion of them go to developing countries. The reason why that's important is that that number represents three times what world aid is. So this money actually helps people in these countries actually pay for education, brings them above the poverty level, it helps them with health care. And if you-- and most of those transactions are under $1,000. And so those are the people who pay the highest commissions when they're sending that money over. So if you could decrease that by 5%, that's $16 billion. And that really matters.
Third party payments-- I'm sure you all have Visa or Master Cards in your pockets. So we don't have to go into that and personally identifiable information that's been stolen out of databases. Mobile banking, that's my favorite. And the reason is because I believe that people have a stronger relationship with their mobile than they do with their bank.
And I'll get into it a little bit, but, of course, you have M-Pesa in Kenya. Have you guys heard of M-Pesa in Kenya? Very successful, it came from trading mobile minutes as cash. I think there was a statistic, 70-- 80-- 97% of the people in Kenya had actually used M-Pesa. And it has like 40-50% of the GDP.
But my last point there is that in using BlockChain, one of the things that we think about, these business efficiencies that come about require that business processes be changed. And that's a big thing. Because these large organizations, these stakeholders in these traditional organizations, would have to change their business models, more importantly, compliance. Because this is actually one of the most highly regulated industries.
I mean, the media industry back in the '90s wasn't that regulated. So you didn't have to worry about that when you were disrupting that one. And then the self-service models, the customer self-service models are going to change drastically, as well.
So I wanted to show you quickly-- and I think Michael's going to talk a little bit more on some aspects of this. But I just wanted to put this slide up. Because I got this from the World Bank.
And the green areas represent the highly banked areas. And there are areas like Brazil, Russia, and South China that actually have improved significantly over the course of the last four years. But if there was two billion unbanked people, 50% of them have mobile phones. So that's back to my point that maybe having a mobile phone is more important than having a bank account. And it's not quite as regulated. But I'll just leave that out there.
And this is another slide that shows the volume of those remittances. I talked about how important they were. And you can see the volume coming from the United States going to these developing countries. It makes a huge difference for these countries when the recipients in these third world countries receive this cash.
So kind of back to my feeling about mobile phones, because I actually believe that your relationship with your mobile phone, when you have a bank account, is even more important. I did some work in Mexico with Carlos Slim's organization. You know, they have one of the largest phone companies.
And one of the things that their team told me was that they were proud of the fact that, as a country, they spend the larger percentage of their salary on their communications, on their phone. That's a big data point there. And so I won't get into the details of this, but if you're banked, you can do a lot of different things with bank accounts, and cards.
But if you're unbanked, if you looked at the source of funds, you realize that, in that column, below the red line, the source of funds is not from a bank account. So your mobile phone starts opening up some opportunities.
So once again, you have 7.4 billion people in the world. And you have 7.5 billion mobile phone subscriptions. And that number is going to go up to nine billion. So this matters. And actually, Africa has doubled in the past five years.
Quickly, I just borrowed these slides from some people just to show you some data points. The number of merchants is up by 42%. The number of ATMs, 13%, the mobile banking-- if you look at that chart over there, the United States isn't even in the first third of the chart. You've got China and South Africa have the highest penetration of people using their mobile phones for banking.
OK, so this is an interesting slide. And I won't go into too much detail. But, as I said before, finance is probably the most highly regulated industry. And so, in terms of coming in and just stepping in and disrupting it, it's a little bit of a challenge. Because there's all these regulatory issues. And so, in Europe, they consider Bitcoin a currency. So there's no VAT tax. But in the United States, the federal government considers it a property, which is different.
And then if you're going to set up business, there are all different kinds of licensing requirements. Red means that you need a license. But the definition for what a license is differs in terms of what type of work you're doing.
And so here's a chart of all the different things that you could do with BlockChain. I'm not going to go into it. I mean, the print is too small to even read it from here. But my whole point is there's so much that could be done specifically with the BlockChain below the Bitcoin.
As I said before, I think that the Bitcoin application had this magical quality that allowed for this distributed ledger to be spread all over the world, and tested, and kicked around. And then I showed you a slide that had all the different layers in it in terms of the components. I think that a lot of the applications you're hearing about in the financial space, they've taken the consensus piece out, and changed that, because it takes up too much energy. And because they're in a private internet environment, they don't really need that.
So now that it's been proven, some of these parts will change a bit. But there's so many applications from the Internet of Things to human genome. I mean, there's just lots of different applications.
So I actually like to think about the BlockChain, these peer to peer decentralized transactions as a fourth type of marketplace. You have your traditional marketplaces everybody's familiar with. You had the internet marketplaces, which had a certain level of disintermediation. Then, of course, there's the shared economy, the Ubers, of the world, or Fiverr is my favorite. It's a marketplace for creative services.
But the peer to peer transaction is a frictionless, efficient new business processes. Incumbents will resist. And new entrants will disrupt.
So this is my last slide. But I just wanted to show the green part-- I mean, the sort of yellow part represents 66% of the investment is in the Bitcoin space. And the gray, which is 20%, is the BlockChain, which I think is the most fascinating part of this new wave of technology.
And there's a hybrid component, as well, which I talked about, those layers. Now that this has been proven, there's this hybrid capability, which you can come in and swap some pieces out, but still use components of this technology.
And so, with that, I'm going to leave you with this slide. It gives you some numbers. Some of them might even be outdated. I think there's actually more financial institutions. So I leave you with this slide. And with that, I introduce Michael to come in and speak.
MICHAEL CASEY: Thank you, Cristina. So I want to just start by saying-- so in my bio at the beginning, it mentioned that I was a journalist for 18 years. It was actually a little bit longer than that. It was about 23 years, so I'm showing my age. But I started out my career when I left college, or uni as we call it where I'm from.
As an accountant, I worked at Deloitte Haskins and Sells. Is anybody here pursuing a career in accounting? I've got one. All right, don't take this the wrong way. I hated it, hated it, hated it, hated it, hated it, and hated it, and hated it. And there I get the thumbs up. And so I quit my job. And I traveled. And I saw the world. And I got into stuff, you know, international economics, and things like that.
What's weird is all these years later, what is the one thing that is now the centerpiece of my career? A ledger, right? So it's remarkable, in fact. What is so powerful about the BlockChain is it speaks to this very, very important fact of life. And that is that, as a society, we must keep track constantly of our exchanges of value.
In fact, the beginning of writing itself dates back to the Hammurabi code. The very first forms of writing were to keep track of values.
So the problem is we've never been able to figure out how to keep track of those ledgers in a way that couldn't be corrupted by somebody. We've always had to have trusted third parties, institutions in which we've invested the trust to take control of that data.
And we put it in the hands of banks, effectively. Those are the most important institutions. And they basically took over the world. They did a fantastic job. They solved a major problem we had about how we would send money around the world when we couldn't trust each other.
The Renaissance, the Industrial Revolution, the modern world were created by banks. But we centralized all this information and power. So I'm going to use two words to describe to you why that's a problem-- Lehman Brothers.
Lehman Brothers was a centralized institution, a centralized repository of information. That's all it is. That's what banks are. That's what trusted third parties are. That's what Bitcoin tries to solve.
So we get this thing. It's a ledger. And it is-- it actually can't be broken. It can't-- it's immutable. Because if-- the cryptographic mechanisms that are built into it are such that if you were to tamper with one piece of the information at any point in its history, it would turn the rest of the information into gobbledygook.
It's this-- this Merkle tree connection that Satoshi used feeds through the data such that it just can't be changed. On top of the fact that we have this decentralized network of mining computers who are verifying this-- and they're working together to do this even though they are pursuing their own self-interest.
What's remarkable about that is it resolves, at least in this one use case, for now, the tragedy of the commons. This fundamental problem that we've struggled with through history is that how do you protect a public good? And that's what this ledger is. This ledger is a public good. And we need to think about it like that.
In fact, I think about all of the regulatory debates that are going to come as this technology becomes more and more important in the back offices and the infrastructure of the way that we run the global economy. We're going to have to debate around how and who gets to-- what is the structure behind this public good? This is a big important question.
Anyway, that point is critical. Because I think of Bitcoin-- it's interesting, because Cristine is looking about all the different words people are using. Everyone's got their own idea about what this is. And so-- and I think that's fine. Because it is sort of multifaceted. And it has so many different uses.
But I like to think of it as a governance solution. I think it as a way to resolve some fundamental problems of governance.
And what I want to do for you now is just talk through some of these use cases. Cristina, I think quite wisely showed you a list that you could never read of all of the multiple different use cases that are being developed. Because that's one of the sort of mind blowing things.
At the Media Lab, we're getting inundated with visits from NGOs, from Fortune 500 companies, from governments, from a whole range of different institutions wondering about how they might use this technology in some way to change their industry, or to better the governance of the way they keep records, or whatever. And so there's all these different use cases starting to bubble up. Because, to my point earlier, ledgers, record keeping, time stamping, keeping track of things, that's what society is built upon.
So once you start to unpack that, you realize that we could actually decentralize that process. Think of medical records as just one example. Think of how fragmented our medical system is with the labs, and the hospitals, and the doctors, and the government, and obviously, the insurers, all sitting on these honeypots of information, all incredibly bound by strict compliance laws, and therefore unable to share information with each other.
You know, Barack Obama handed Joe Biden what might be a poisoned chalice during the State of the Union address, saying he's going to fix cancer in a year. Well, good luck with that. But you know what might be useful is if you could unlock all that data and have it to work with. Well, really, the BlockChain is the solution. You have a capacity with this information to start to interoperate between all this disparate information.
Because you can have permissions systems built upon the BlockChain that give you specific-- that you can parcel out information on a-- in an encrypted manner, and protect this information. So there's all these different uses.
But I just threw that one in there. What I want to do is focus on some that I think are relevant to this international studies arena. And so Cristina talked about the unbanked. And when we do that, we tend to talk about that specific definition that the World Bank uses, which is to say two billion people-- that is adults, by the way, so we're talking 4-5 billion people in total, including their dependents, who don't have access to bank accounts.
And I agree with Cristina that that's really not the way we should be defining this. We should be thinking [INAUDIBLE] is do they have the capacity to transact financially? And if we can think about mobile phones as the way to do that, I think it's a much more constructive way to think about-- the question is financial inclusion, financial access, not whether or not you have a bank.
But another part of it that's critical is another number that I find really important. Who knows the famous Peruvian economist Hernando de Soto? OK, so Hernando de Soto wrote a book called The Mystery of Capital. And he's spent a lot of time investigating this idea that around the world, in the developing countries, people have their homes. They own their homes. They own their businesses. They own all these assets. But they have no way to collateralize them, which means there's no way to turn them-- to monetize them, to borrow against them.
And the problem is they don't have profound records. The man over here is actually working very, very hard to resolve this-- Julius [INAUDIBLE]-- in Africa. And you should talk to Julius later on about the incredible work he's doing.
But this fundamental problem, the BlockChain looks like it could have a really useful application here. Because what we're talking about is the failure of record keeping.
The chain of title between the moment at which a piece of land is transferred to one person, the moment at which an encumbrance like a lien is imposed upon it, and the various bits of information that happen over the lifecycle-- obviously, never ending lifecycle-- of a piece of land just breaks down when human beings don't keep good records, when papers get destroyed, when corrupt officials walk in there and try to manipulate the information. If we insert that information into an immutable ledger, one that cannot be changed-- and this is a very powerful concept, this immutability, by the way.
Through history, we've-- the usurpers have always come in and wiped out the records of the previous regime. The idea that we might have a regime-- have a pool of records that can never be changed-- change is the ballgame in terms of empowerment.
So in the context here of people who have their homes in Africa, or in Asia, in Latin America but have never been able to monetize them, well that's a pretty powerful thing. Hernando de Soto says there's $10 trillion of dead capital in the world. In fact, he thinks the number's a lot larger now, because that was 15 years ago when he came up with that estimate.
Unlocking that capital could have a profound impact on the global economy. All the transactions that get-- that come with that, the velocity of money that gets built up-- so that's one area that I think is really useful.
Another one that's probably not on people's radar screens is supply chain management. So if you think about the way that supply chains are managed around the world now, I like to think of Walmart as the sort of driving paradigm.
All right, Walmart came up with this concept of vendor-managed inventory, which meant that it took control of all of the data that its suppliers were giving to them, giving them unique access to Walmart as a customer, but locking them into this dependency. So the management of that record of where the inventory lies, how much you have, how much you are going to display, which is obviously a very important empowering position for anybody who is in business-- how much do you want to tell somebody you have of whatever product, right?
Well, if you're locked into Walmart's system, you're telling them everything. You're dependent upon a trusted third party. Lehman Brothers, Walmart, same concept. You've got-- not to say that-- that analogy is simply to say that there's a-- you know, the US government, the Federal Reserve, everybody-- MIT-- everything is a trusted third party. Everybody has this repository of information.
And Walmart, in this case, has power. And if you look at the maps that show how fast Walmart's retail outlets have grown in the last 30-40 years, it's because of this power that does this.
Another thing that I think is also indicative of it is that it meant that there was actual centralization of supply. So whereas we like to think of globalization as being this wonderful flattening-- Thomas Friedman told us that the world is flat. Well maybe somewhat, yes. We've brought more countries into the mix.
But if you look at a satellite picture at night of southern China, and you see all that light concentrated around the pearl river delta, that's because everything had to be centered around logistical concentration. That's supply chain management.
If we talk about a world in which all of a sudden inventory could be managed, the record of inventory could be managed in a decentralized way, in what I like to call partner managed inventory systems where everybody is just putting into a public ledger of sorts encrypted information that gives whatever information they want into that pool and withdraws what they don't want, you start to imagine a very much more efficient, but also a diverse and decentralized structure. That could radically change logistics in the global economy.
So there's two to think about, property titles and supply chain management. Another one that I think is worth thinking about is energy.
So what the BlockChain is really good at is precision. So it allows-- because this is just software. This is data. It doesn't-- you don't have all the encumbrances of a very inefficient banking system in the middle. And you are just sending information.
You can build very precise visibility of information. You can shift granular amounts of value without burdening the system. It's prohibitively expensive for banks to send small amounts of money. So they deal in big amounts of money.
But if we think about the BlockChain as being something that really deals with-- very efficiently-- small amounts of information, I like to think-- in fact, one of the big projects we're going to do at the Media Lab is that we might be able to build financing systems on top of very localized solar panels, for example.
So they take the solar panels, we embed them in the same way we're talking about property titles, as a securitized asset into a BlockChain. We build small microgrids around that and a cryptocurrency that efficiently is used to share value amongst the users and manage that system through smart contracts, which is a critical word you're going to hear a lot more of around BlockChains. It's the ability to automatically execute contracts.
You can start to imagine building, from this very small ground up level, higher levels of asset-backed securities that become a means to finance, at a high level, very local activity and maintain the power. Much as we have mortgage-backed securities and asset-backed securities here in the US, if you could take that down to a local level and build it into these communities in the developing world, you actually start to think about how we might finance, on a large scale, the massive rollout of renewable energy that this world's going to need over the next 20 years.
We have to think about these solutions, not just about how we're-- how much power we need, but how are we actually going to efficiently finance them? And how are we going to finance them in such a way that locals are empowered by them? This is the kind of technology that can help to do that.
And the other one I just want to leave you with actually is not thought of as a developing world solution. But it is going to be profoundly important. It's the one that's getting the most attention right now in the BlockChain world. And that is in finance.
So you may have heard about consortiums like R3, which has got 42 banks have now joined this group. Digital Asset Holdings, a company set up by Blythe Masters, who's from JP Morgan formerly, and famous for having effectively invented the credit default swap-- and these guys have realized that with this technology you could approach the holy grail of real time complete settlement of securities, post-trade securities in the world's capital markets.
And that's a long way off, because what these guys are trying to do, of course, is somehow non disintermediate themselves, you know, how to sort of not be Blockbuster, how to get ahead of the game. But in a way, it's kind of ridiculous. Because this-- the whole point of this technology is to disintermediate the third parties in the middle.
That said, any incumbent is going to try to do whatever they can to survive. So they're trying to figure out ways to build processes within their existing models, and what they can-- they can find efficiencies here, and not throw the baby out with the bathwater over there, and somehow muddle through in a way that everybody wins. It doesn't work like that. Disruption is always violent.
But the end game is what's really interesting. And that is that the trillions and trillions of dollars that sits on the sidelines of the capital markets, or gets locked up in collateral agreements while these cumbersome processes try to figure out who's got what and when the trade can be settled and transferred, what happens when that money is unleashed into the world? That's a fairly big idea.
And the other one I want to throw out to you that's also sort of part of this finance world is don't take central banks for granted. People have, I think, misunderstood Bitcoin because it was-- and I think rightly-- picked up and run with by kind of a libertarian crowd as if it's most radical offering is that it is an alternative to federally backed fiat currency.
I actually think the most important thing about it is it's disintermediating quality, that with the technology behind it, whether you're using Bitcoin as the currency or some other fiat token that might be embedded into that same BlockChain, you can now transfer that value peer to peer without a trusted third party. Whether or not that currency is being issued by the Federal Reserve or by the software behind Bitcoin might be less of an important question than that capacity to transact in a peer to peer way.
So in this context, it's interesting to look at what the central banks are doing. The Bank of England has launched a digital currency initiative of its own. And it is some way down the path of introducing digital currency.
The PBOC, the People's Bank of China, also talking about doing this. Reserve Bank of Australia was talking about it. We're talking to various developing world central banks about doing something similar.
This is really quite important. One of the reasons why it's so important is because if we make a central bank issued digital currency available to everybody, we don't need banks as part of our payment system. So banking, which is-- has-- because of the fact that we were never able to resolve this trusted third party problem-- has inserted itself into the fundamental task of how we transact value between each other.
Rather than just being in the business of intermediating credit over the long term, it has become this short term payments mechanism. Banks don't need to be doing that.
If we think of Bitcoin, or anything like it, as digital cash, you don't need a bank when I hand over a bank note. Well, if I can do that over the internet digitally, I don't need a bank, either. And if the central banks are allowing me to do that, they're effectively disintermediating for the banks from there.
Now, they don't want to do it in a hurry, obviously. Because in a flash, you're going to destroy the banking system. And we'd have something worse than what we had in 2008. So this would have to happen in a very gradual process.
But the fact of the matter is it's in everybody's interest to remove the banks from payments. This is a rent seeking activity. It's not really of any great value. All of the fees that we get charged for the process of-- for the purpose of processing this information is just a tax on the rest of us.
On the other hand, banking as a way to deliver credit to the 10-- to unlock the $10 trillion of Hernando de Soto's dead capital, that, to me, strikes me as a huge opportunity for banks. So the idea that we might shift banking out to the business of long-term capital development and capital generation and get out of this rent seeking business could be pretty powerful.
So central banks, ironically, which you were often thought of by the libertarians as being somehow in the pay of banks are actually looking like they're at loggerheads with them. Because they're all competing for currency and issuance right now.
So this is what's happening. It's all fairly dramatic and fairly big. And I just advise you all to keep your eyes on it. And don't shy away from exploring all the multitude of opportunities and the ways that the world could be reshaped through this.
So thank you for your time. And I think we're happy to take questions. Is that how it's going to work? Are we taking questions immediately? Have a bit of a chat, OK.
CRISTINA DOLAN: Here's your water.
MICHAEL CASEY: So yeah, we'll have a little bit of a chat, OK. How does it start?
CRISTINA DOLAN: Well, you had mentioned something about Africa. Because I put up that slide. And there were some-- you had some interesting points about Africa that I kind of wanted to hear about. Now you had mentioned de Soto and his-- and having these assets that are not valued. Do you want to talk a little bit about more of that?
MICHAEL CASEY: Right, yeah, so what's really interesting about that idea is we tend-- the simple example people use are people's homes, right? They say that you go to a slum in Lima. And everybody knows that this person owns this home. It's widely recognized by the community. But there's no way to prove that in a kind of financial, legal setting. So you just get this disconnect.
But the more you dig into it-- and The Mystery of Capital is a great book for this purpose-- you start to realize that that's-- this concept, this idea of entitlement, of turning something physical, or actually, for that matter, metaphysical-- that is to say, our reputations, our businesses, our intellectual property-- and giving it paper, this idea that we put a contract to it and it says-- this is a Western construct that has been incredibly powerful.
It's the foundation of our entire economy, our capital markets, our-- so his idea is that that's poverty. That's the cause of poverty, the absence of that capacity to entitle assets, to turn them into something that can be traded, and shared, and used, and leveraged. This is-- that's our economy. That's how it works. And so the ability to do that is very, very important.
And I think that it's always been held back by-- you need a rule of law. And you need banks that are willing to take a bet on these people. Just one other point that it's interesting as well is that even here, of course, where the mortgage market is huge because, despite-- we learned this a little differently in the lead up to the crisis, but it was always thought this was a secure land. This is what will secure me. You still obviously have the personal component to that, the reputation, the credit worthiness of the individual.
Well, the power of the BlockChain, again, and when you combine that with big data analysis, is that we have the capacity now, because of this immutable record of people's transactions to, in addition to having securitized assets on the BlockChain, sort of securitized credit reputations, as well. So these things are critical in the way that we are now thinking about how we might be able to empower small entrepreneurs and others in the developing world.
CRISTINA DOLAN: [INAUDIBLE], I'm half European. And what I find really fascinating in Europe is that if you have a contract, you take it to a notario. And they notarize the document. And if you lose it, you go back, and you pay, and you get another copy of it. But here in the United States, if you and I have a little digital contract, and I make a little change on it, it's kind of debatable as to which copy is the original copy.
And so I think about that a lot. And I know that we're never going to get rid of notarios in Europe, because they-- there is a government component on that. But you had also, at one point, had talked about government IDs, because there's a cost to producing IDs and paperwork. And I guess if you're doing it digitally, it's expensive. And then you talked about the property registers, which is another thing.
Because I'd heard this story when Brian Ford spoke about the Honduras situation, where I guess some leaders went in and they erased-- took some nice little properties and made some little changes in that property register, and went in and made changes. So I understand there's some people working on that now?
MICHAEL CASEY: Well, yeah, that's a-- well, I'm not sure how far that one's going. This is a company called Factum that's been working on a property title project in Honduras. That's specifically, again, dealing with this question of property title. But the ID component is critical. Because once we talk about trying to tie an asset to an owner, well how-- you can-- how are we going to identify the asset? And how are we going to identify the owner? So again, in places that don't have reliable ID systems, you have a fundamental problem.
But again, I actually think the BlockChain can be an incredibly powerful way to start to assert ID. And it's this idea of a-- have you heard of the idea of a web of trust? So in some respects, that's what Facebook and Twitter are in the way that they act as third party authenticators of our identity. Because we have all these friends who effectively agree that we are who we are. So there's this powerful way to have them effectively, in a digital way, indirectly vouching for us.
Well, if you could build that in more robust fashions and take it into places like Somalia, which is a place that I like-- I like to use this example, because Somalia is-- it's just a classic case of what is so drastically wrong with the way that we manage-- you know your customer in anti money laundering. Whenever there's some sort of terrorist attack, or some major concern in that part of Africa, banks just automatically shut down the remittance corridor to Mogadishu.
Because they're just-- they don't-- there's no infrastructure there for them to prove that this person who says who they are-- this system is built around a kind of a chain of trust. The individual who vouches to Western Union, who vouches to the local bank, who vouches to-- and so each has to commit this delegation of-- and the banks just-- the big banks here will just say, rather than risk getting fined-- even though the US government says you're actually allowed to do $3,000 a month in effectively non-ID changes, they're so terrified of being shut down by some regulator that they just shut the entire corridor down.
So what do we do? We starve people in Mogadishu. And we hand them over to the terrorists, which is kind of about as stupid a strategy as you could imagine.
So what if we just gave up on the idea of having to identify somebody by a name? It's actually not that important. And after all, I mean, Somalia is never going to have, I don't think, a reliable national ID system.
So what if we treat them as nodes? And they're on the network. And they're identified as a node. We don't even know their name. They're just a node. But because we are able to trace through a very transparent, immutable ledger-- the BlockChain-- every single transaction coming to and from that node, we can start to build a pretty comprehensive picture of whether or not they're connected to trusted and reliable people, such as their cousins back in New York, or whether they're connected to Boko Haram or ISIS. And from that basis start to build a really-- and then just shut it off. Shut off that channel, not the entire channel.
These are the sort of ideas that I think need to start to be developed. And it's a mix of the digital identity ideas that Sandy Pentland and others have worked hard at, and John Clippinger and others at the Media Lab. And mixing that in with the BlockChain, I think you start to get some pretty powerful ways of approaching things.
The problem, of course, is that governments-- their heads explode when you tell them that we're actually not going to have anybody's name attached to this. So we still have kind of a cultural and regulatory barrier to get over. But ID on the BlockChain is an extremely powerful idea.
One other little example I like to use here is that the BlockChain makes it transportable. And it allows you to parcel out information according to your attributes rather than all of the multi-- huge pieces of data that you have to submit every time you want to just prove that you want anything.
So the classic, classic example is walk into a bar. And right now, obviously, you have to hand over your ID. And it'll have your name, your driver's license number, it'll have your address, it'll have your age, it'll have-- on mine, it has my color of my eyes, you know, stuff that's irrelevant, of course, to the bouncer.
The only thing the bouncer needs to know-- he doesn't even need to know my age-- he just needs to know am I-- it's an answer to a binary question. Am I or am I not over the age of 21? And the idea that I could have control over that data and just parcel that out is something that BlockChain and digital identity constructs start to come together.
CRISTINA DOLAN: I think it's kind of interesting. I obviously have family in Europe. And one of the things that fascinates me is the amount of paperwork that gets generated. And yet, everybody has access to all this data. And the idea from your one where you had that little chart where it said this is kind of abstracted architecture, where you had Bitcoin on the top, you had this sort of communications layer where you can communicate all this information, and then the BlockChain where you store it-- and yet we still have reams, and reams, and reams of paperwork that we're constantly filling out.
And I think, why are we doing that if all this information sits there? But one of the things that's sort of interesting, I spoke to one of the database guys in my firm. And I was asking, what do you think about this? And I work in a financial trading firm. And we were talking about things like swift protocol, and ACH.
And it's interesting, because from his point, you have these protocols that take blocks and take it from point A to point B. But what do you really know about what happens in between? You actually don't know a lot about it. And so when things break, or you don't know, if you had had something in an immutable BlockChain, you would be able to follow the steps in terms of where it went.
So here we have all this compliance. And everybody talks about the reason why BlockChain is not going faster in the financial space is because you really need all this compliance. And the funny thing about it is if you actually implemented all this BlockChain, you would actually be able to see more of where the transaction's gone in-- than you do in today's traditional databases with these sort of protocols that have rules that things go from here to there. So it's kind of interesting.
MICHAEL CASEY: It is. And it's actually interesting around this idea, as well, about the transparency for individuals. And so one of the early impressions people had of Bitcoin was this, oh, it's an anonymous transaction system. So therefore it's really risky for money laundering and those things. And sure enough, it was being used for illicit drug trading, and still is, and so forth.
But your point earlier about it's not really an ideal-- if you're in the business of wanting to do a big arms trade, I thoroughly suggest that you don't use Bitcoin. Because it's pretty traceable. So ironically, they went from that-- people assumed that this was this anonymous, dangerous, illicit technology to now where the sort of push back we're getting from banks about whether or not they want to incorporate it into their models is they're actually worried that they're going to have to expose too much, that they're trading-- it might not say who they are, but with the analysis, you can pretty easily figure out who just put down that big sell order on IBM.
So there's a-- and interestingly, actually, over at the lab, there's this really exciting new implementation called Enigma that's being developed to try to have the best of both worlds-- a bit of a borrowed name from the past, of course. But it ultimately has the capacity to get the benefit of the public ledger, all of that aggregated data, and use that as proof. So you can see the changes in it and prove that it's all rich and correct but obscure the individual pieces of data within it, so--
CRISTINA DOLAN: But they're using the public ledger, right?
MICHAEL CASEY: They're using the public ledger, exactly. Yeah, yeah, yeah, which is-- which we think is one of the interesting ways to resolve that problem. Because the solution that the banks are coming up with is this private ledger model, where they validate it themselves amongst a consortium of banks.
And you know, that may or may not be a good idea. I just get very wary of bank consortia. We have had a history of problems with those.
CRISTINA DOLAN: It's funny, because you had mentioned Lehman Brothers. I was president of the MIT alumni club in New York a number of years ago. And Professor Lowe came. And we were hosted by Lehman Brothers.
And he put up this massive chart. And it talked about all the systemic risk that was in the system. It was literally-- I think it was-- oh, I think it was in June or July. And you know what happened in September. So we all sat around saying, now what could that systemic risk actually be? Well, we figured that out very quickly.
So it's sort of interesting that you can have all the data in front of you. And people are still looking at it and saying, hmm, you know, what is that?
MICHAEL CASEY: Because we didn't have all the data, right? That's the point. All the data was siloed. The idea that we could have all of the data-- and whatever, skew it in certain ways, and protected, privacies, there's a lot of figuring out that needs to go on in terms of getting that balance right. But the fundamental idea that our financial system could be much more publicly available is a very powerful idea for this concept of systemic risk.
In fact, it's one of the reasons why Blythe Masters says that she got into Digital Asset Holdings and set up this company. Because she was-- people like to Blythe for blowing up the world. The credit default swaps were, indeed, at the heart of systemic risk. But it really wasn't the instrument itself that was the problem. It was the lack of information, the opacity around all of the interlinked relationships and the incapacity to actually measure all that.
So she came to the realization that this problem of counterparty risk, never being able to fully understand all the second, third, fourth, fifth, sixth, seventh connected counterparty risks that you get-- you might know enough about your immediate counterparty, but what's that person's counterparty and the other person's counterparty?
Well, if we could have sophisticated complex modeling of all that over a very open BlockChain type ledger, maybe we would have a much safer system. And that's what she's-- she says that's what-- that was her motivation for diving into this company.
CRISTINA DOLAN: She's doing some amazing work. She now has the exchange-- was it in Australia?
MICHAEL CASEY: Right, yes. So the Australian stock exchange has granted them a contract to completely overhaul the clearing and settlement system for the Australian stock exchange. So this is actually a pretty big deal. Because it's not just a pilot. This is actually a fairly major stock exchange that's going to use this technology to try to clear and settle its post-trade transactions.
CRISTINA DOLAN: That's interesting, because I just saw Brian Ford. And I guess he spoke in San Francisco a couple weeks ago. And he was asked the question, what did the banks think about BlockChain? And he said, well, why don't you ask Jamie Diamond? He's on stage after I am.
And so I guess Jamie Diamond was like, oh, no, no. But it's interesting, because he did invest. He was one of the lead investors in Digital Asset Holdings. So it's kind of interesting. And I think they're also part of the R3 consortium, as well.
MICHAEL CASEY: Yeah, yeah, I mean every bank, they're all terrified about not being included now. And I think that banks learned their lessons from watching the Kodaks and Blockbusters of this world.
It's going to be a really interesting battle, though. Because this isn't your local video store. These are the biggest, most powerful companies in the world. Most importantly, they are also privileged to a regulatory barrier to entry. That may or may not be set up in our interests. And so there's a big challenge there.
The problem is the banks think that they can just have this sort of nice slice that they want, the private BlockChain, and not submit themselves to something far more dramatic, which is like the Bitcoin BlockChain. And the jury's out as to whether or not they're just packaging the same old model with a different structure. Some would argue that the only true infrastructure-- decentralized communications infrastructure-- is one that is completely permissionless. Because that's how you inspire innovation.
And if everyone if a consortium of banks control access to that ledger, will we allow the same kind of explosive innovation that we know happened on top of another famous open platform, TCP/IP? So that's where-- you know, people often make the TCP/IP analogy to Bitcoin. And I think it's not always a good one, because it's very different structure.
But that very principle of an open system that allows innovation is a challenge. And it means that we, as a society, don't get the benefit if it's closed. But I also think that it means that banks might find themselves being competed out. Because these developing countries are going to start building these systems. Because central banks are going to start issuing digital currencies that are going to compete with banks.
So it's not going to be a simple battle. Because, as I say, these are the biggest, most powerful companies in the world. But the forces are actually aligning in a way that might give them a bit of a run for their money. So we'll have to see how it goes.
CRISTINA DOLAN: Well, you know, I live in New York. And I work in the financial space. And there isn't a day that goes by where there isn't some news, or everybody forwards me these news articles about this alliance and that alliance. I think two years ago you'd hear that Goldman Sachs was going to go out of business because BlockChain and Bitcoin came out.
And now you see all these-- actually, the slide that I didn't show that shows all the recent-- over the course of the last year, most of the announcements in this area have been in financial institutions. And they're all aligning very nicely, and coming up with some innovations. But you're right. They're all in these little private arenas and not necessarily taking advantage of the consensus, which is where the whole beauty of this sort of BlockChain takes place. It's interesting.
MICHAEL CASEY: It is. And I think the thing that we just need to be conscious of is that we are going through a dramatic confluence of technological change. So this isn't-- BlockChain's just one piece of the puzzle. We've got the Internet of Things happening over here. We've got drone technology and a whole lot of other things that have started to create these decentralizing opportunities. Virtual reality's another one.
And we don't quite know how all of this is going to come together. A lot of it could really work against this sort of centralized financial system.
The Internet of Things is important. Because at some point we're going to have-- supposedly, we keep on being told-- billions of devices all talking to each other, but most importantly, transacting with each other.
So we're going to have to issue bank accounts to each of these gadgets? How do we identify what a gadget is? What is our KYC AML strategy for my automated lawnmower? I don't know. And do we want to have one company in the middle of all of those transactions, which, by the way, is kind of where Amazon Web Services is trying to position itself. With all due respect to Mr. Bezos, I don't know that I want him running my Internet of Things financial system.
So we kind of need a decentralized infrastructure for that. And that's where a Bitcoin or something like that becomes very important. Because it's just too impossible to imagine how you would centralize the ledger for the world's interconnected gadgets.
And so that's the kind of thing that banks need to think about is that that world is coming. And then how do they interface their existing financial system with that. How do they interface that with the developing world, and these newly empowered 2.5 billion adults, and everybody else?
So there's a lot of different forces at work in the global economy that are going to, I think, eventually make the existing financial system redundant. And that's one of the things that's quite exciting about all of this.
CRISTINA DOLAN: That's interesting, because one of the things that always comes to mind with that sort of fiat currencies is this capital controls. And you see-- I put up that slide with the regulatory-- it's not even a full picture. And things may have changed since that point. And just because it's red, it doesn't necessarily mean that all those red states have the same sort of licensing agreements.
But it's interesting to me how everybody's sort of-- all these governments have sort of said, oh, no, we have to control this. And they sort of want to define it and have all kinds of licensing and rules around it. And I think to myself, you know, I'm still thinking about it sort of like a painter does with colors and textures, and trying to figure out, well, what can you make out of this?
And so when you start putting those things up there, and you start thinking to yourself, OK, well, if I'm building something like-- you know, something in the health care, now I have to register as a license as a financial organization. And if I don't, I get fined. So I'm still starting trying to figure that out. Because the transparency layer, I would think, would make the countries think that capital controls would be easier.
And if I start sending people money with my cell phone, which I think in some countries, you just go to the local newspaper, or whatever store, put money on your phone, and-- I mean, a lot of these kids-- how many people use the Venmo application? And so do you always put the money back into your bank account, or you keep a balance on Venmo? You keep a balance on Venmo?
Right, so right there-- I mean, because there's no interest in bank accounts. So you're already using your cell phone as sort of like a wallet bank, right? And so the definitions-- I still believe that your relationship with your phone is still much stronger-- is much stronger now than it is with your bank. And with social media, now Facebook is getting into that. A lot of people transfer money with WeChat. So the relationships and rules are changing a bit. But I would actually think the governments would think that there'd be more visibility, not less visibility.
MICHAEL CASEY: Absolutely, yeah, that whole app, the app is your bank concept. And the idea that even financial advice could just be handed over to an algorithm-- in fact, it's not a bad idea. That'd probably do a lot better job than a lot of individuals. I'm sure there's going to be some great careers in financial analysis coming out of the Sloan School.
But it is another really disruptive component to all this. And I think it's just-- it's going to require a recognition of the fact that we need a paradigm shift. You just can't incrementally fix and tinker with this and that part of the process and have regulatory changes here.
This is a very different way of describing things. And so, in our book we had-- for the title that we titled the chapter on regulation, we just said square peg meets round hole. Because it is very hard to fit these ideas into the existing regulatory framework. So we really need a very different approach.
I actually think we need some sort of international approach to this. Because it's a borderless technology. So you know, it's-- do we want to take some questions? Yeah.
CRISTINA DOLAN: So I guess they have to go to a microphone? Is that--?
MICHELLE: Yes, for Q&A, just line up behind the microphones. And we'll take your questions. We have about 20 minutes left for that.
AUDIENCE: Thanks a lot for the presentation. It's been really enjoyable. Is this on? Yeah? OK, there we go.
So a question for either of you two is how do you think about identity theft in this system? Because if someone gets your private key, they can now basically control whatever asset was behind it.
So you can imagine that being a problem in the developed world where sitting behind that private key is a very large expensive asset like a large building, or a hedge fund, or something. And you can also imagine, on the other end of the spectrum, you know, you're Somalia example that a pirate shows up to someone's home, and says, hey, give me your private key. And they can sign over their home to that new person.
So yeah, the whole beauty of the ledger is that it's irreversible. But how do you deal with identity theft when you don't have a centralized authority who can say, oh, turns out that really isn't the right identity, and we're going to correct that mistake.
CRISTINA DOLAN: Do you want?
MICHAEL CASEY: I'll just grab it. Yeah, I mean, it's a very good question. It's a really important question, particularly when we're talking about pushing this technology out to individuals, not necessarily institutions.
Thankfully, there's some good solutions being developed. And just to be clear, I think this is one of the things that-- you made that dichotomy quite nicely-- is that no one's been able to hack the Bitcoin ledger. It's this distributed system. And it's worth $6.5 billion. And so there were hackers going after it all the time, because the bounty is huge.
But they can't, because of this very robust infrastructure. So distinguishing between the hackability of Bitcoin versus the hackability of Bitcoin wallets, which is a very different concept, is the critical point here.
So how do you protect the private keys to keep those wallets safe? And we've certainly seen loads of cases where they've been broken into. And people have lost a lot of money.
Well, one of the solutions that people have come up with is this idea of a multi-sig type of arrangement. So I like to think of the analogy of when you see those movies-- I personally don't have a lot of money sitting in a Swiss bank vault-- but if any of you do, you would walk into the vault and ask to get your diamond rings, or your handgun, or whatever is in there. And you would turn one key. And the banker would turn the other key.
Well, the software equivalent of that is multi-sig. And you can structure it so that some custodian has control of the key. Now, what's interesting about that is if they had control of the only key, that would be a trusted third party. That would just be like a bank, the custodial services of your bank, just-- and there are, indeed, Bitcoin services that do that. They own your key for you. And that's one solution. But you've just effectively reinvented the old system.
But a multi-sig arrangement where they literally cannot steal your money because they need your key in there as well, but on the other hand, nobody could hack and steal your key and get it, because you need the bank's key means that you've got this protection. And then you can create very complicated and-- you can have two keys of three are needed, or five of seven, or what-- there's a whole permutation of that. So that's one thing.
The other thing is a company called Case that's looking at an important part of this, which is the device itself. Devices now are becoming all the more important. If you want to hack something now, the more and more we shift to the devices. Hack somebody's apple phone, and then you can get access to their iPad. You don't hack the repository of credit card things anymore.
So they're working at a very sophisticated-- and I don't quite know how it works, but hardware-based key protection model. These things might be expensive. And they might be hard to understand.
The thing-- the key point is to-- how do you, on the one hand, make it completely accessible and understandable to somebody in somewhere like Ghana and at the same time completely secure? And so that's the challenge.
And so, you know, if you guys have got startup ideas, go and solve that one. Because it's an important one.
CRISTINA DOLAN: I just want to add to that point. I have a safety deposit box, because I like jewelry. And I was reading my statement that came in. It said, notice, we've changed the rules.
And it said that they're not liable for anything over $20,000. And I thought to myself, well, why do I want this big safety deposit box? Because I'm going to put things that are expensive in there. And if you're not taking the liability, then why would I put them-- put anything in there?
So it's kind of interesting to me, you talked about putting valuable things on BlockChain. To deviate a little bit, I guess recently there was a kidnapping in California. And the guy, or whoever it was, said they wanted to be paid in Bitcoin.
And I thought, that's really stupid. Why would you be paid in Bitcoin? Once again, people think, oh, nobody is going to know. Because then you could follow the steps, just like Satoshi's genesis and all his other holdings.
People figure as soon as he starts cashing that out, you're going to figure out who he is. So I do think that this peer to peer marketplace that I had on that last-- one of the last slides does redefine customer service. Because there is no central customer service.
I mean, even-- I would say it's being redefined anyway. For American Express, they force you, even with a platinum and gold card, to use your smartphone and help yourself before they help you. So I do think that there are some sort of shifts with respect to customer service and how you resolve these sort of disputes.
But the one thing I will say is that whereas in the traditional database model where one thing at one point was here, and then at another point it was here, now all of a sudden you see the paper trail. So my sense is that you could kind of go back and say there was no contract process by which that was taken.
So I mean, that's very theoretical. But I'm just sort of adding those random points.
AUDIENCE: Thank you.
AUDIENCE: Where's the jewelry?
CRISTINA DOLAN: Where's the jewelry? I'm wearing it. I just wear it. I don't care anymore.
MICHAEL CASEY: Let's stick on this side, because we're a little lopsided.
AUDIENCE: I have a question about the small exchanges. Because you can track, with the BlockChain, clearly any kind of exchange, regardless of how big it is. But it costs money. The cryptographic puzzle requires computing power, and so on. So if you have a million IoT interactions for 0.3 cents, it doesn't really make sense anymore, does it? Or am I missing something?
MICHAEL CASEY: No, you're absolutely right. You're actually hitting on-- we did, I think, want to avoid the big battle of the BlockChain size debate. But it is a problem. And it's a problem because of this fundamental block size issue whereby there's only, at the moment, a capacity to have one megabyte of data inside each block, which is a 10 minute period of transactions.
So inevitably, what you're creating is the potential for a fee market. Because in addition to being rewarded with Bitcoin, miners also can be rewarded by voluntarily granted fees by anybody who wants their transaction to be included. So the concern of this-- and I'm going to get to what I think is the interesting solution to this in a minute. But the concern around that is that it's just going to become a market for big players. So if I want to go and have my cup of coffee purchase confirmed with the BlockChain, I can't possibly put up enough money to entice a minor to include it in.
So the solution is-- at least the way people are looking at it-- one is to increase the size of the BlockChain-- sorry, the block. That's proving to be extremely contentious. Block-- the Bitcoin is managed as an open source system with a group of developers who have a certain amount of commit power. But they have to have this ongoing relationship and dialogue with the community.
And some people want it increased so that you could have all the small transactions. Some people want it kept small, because they worry that if you make the block size too big, you're going to shut out a lot of the miners. Because it's expensive to maintain all the data that's going to be needed.
The solution that others are looking at, though, is to think of Bitcoin as the settlement layer and to create these, what they call off-chain payment channels, the thing called lightning network. And what it does is it uses a different consensus structure and allows you to shift around a lot of small amounts of money. And then it aggregates that and then places that into the BlockChain.
It's never proven until that process happens. But with that, there's an aggregate fee that goes in. So this is an exciting idea. There's a company called BlockChain-- Blockstream that it's building something called side chains that's got similar ideas associated with it.
Ultimately, this is a big open source venture with literally thousands and thousands of very smart cryptographers around the world working on it. And they're all focused on this problem. So I think they're going to get there. And lightning network, I think, is an exciting solution to it. Chris.
AUDIENCE: Yeah, I had a question. Since you have all these companies coming at you and asking questions-- I mean, I'm working inside of a very large one, like 11,000 people, and meeting with the executives, and explaining where the value lies. But within an organization, they want to see where the value is going to come from. Like where are we going to make money on this so that we can get it going? They even want-- they want to support it, but it's-- and they are. But it's an interesting discussion to be had. Because a conversation can go everywhere.
For example, my COO in this last meeting I had, he's like, wait, can we transfer value internally from this place to this place, and like hold-- And I was like, yeah, but let's stay on point. How do we-- how do you narrow the conversation? How do you get something moving with an organization? And what do you-- are you responding to those kinds of questions if those kinds of questions arise, like how are we going to make money? And do you say it's sort of like an application on top of a big open source system, or what?
MICHAEL CASEY: I mean, I think it's all sort-- there's just so many different ways it can go that it basically comes down to every company looking at their own value proposition and saying, OK, what can we afford to lose? Because I don't think you get any benefit out of this unless you cannibalize something.
Because there's-- I mean, there are obviously companies who are going to just benefit from the access of it. My example of the supply chain, I think, is a good one. Supply chain-- BlockChain based supply chain based is going to empower small suppliers and small customers. So they're going to love that.
But everywhere there's going to be smaller players, perhaps, who now have access to that system who could compete with them. And with the bigger guys, there's-- you know, I met with a bunch of cable companies recently. And we started exploring ways in which the BlockChain could impact their business.
And it was interesting. You could see the split between those that saw that this could actually lead to unbundling. And for those that were actually on that side of the fence were worried about that idea that now digital rights could be placed in the BlockChain. And you could just pay on a per use basis, just on how much bits were being transferred back and forth.
And then others were saying, well, this is incredibly liberating. We can start to sort of get-- break free of the whole problems of net neutrality. And it's just-- once you sort of unpack it, it really upends a lot of business models.
And so companies just have to weigh where they're-- and sometimes, it's like abandon this business and go for that one. But it varies from place to place enormously.
CRISTINA DOLAN: I mean, I've worked in kind of disrupt-- sort of the leading edge of disruptive technologies my whole entire career. And I kind of look at this as being the same way.
And I'm an engineer, electrical and computer science. And so when I think about this, I think both from a communications point of view as well as application. It's a world wide application. You have these-- this layer of communications and your ability to contract, the internet of things. And then at the bottom layer, we kind of have this sort of database.
And so when you're thinking things like people have talked about the car rental scenario, or I think about in January one of the biggest applications out in Las Vegas, at that big consumer show that they have, was the Samsung refrigerator that orders food on demand, which would be really great for me. But do I really want everybody-- I don't want some central authority looking at my food orders.
So when you start looking at these discrete applications and building sort of a quick business model-- I mean, today, because of this open source component at the center of this application, it's not like you have to build everything from scratch.
So you could actually build something quickly, and see how it takes off, and pivot, and change it, and sort of go through this sort of agile development process, and kind of see where it goes. And so it has so many different aspects, facets, and textures that it's almost like you can retrofit it on anything.
I mean, that chart that I put up there, I didn't mean for anybody even to try to read it. But I was trying to get to the point that there's just so many things that you can do with it.
And then I had that other slide where I took the stack between-- where I had the financial layer and the, basically, consensus layer and talked about all these technologies. I think that people now have seen, OK, it does this. But I don't want to have this heavy consensus piece. So I'm going to substitute that. Because I'll put in the permissions.
So I think, basically, it's a proven application. It's this massive application that, as you'd pointed out, Michael, that people are trying to break it all the time. And so it's been out there enough that people realize, OK, this is what it does.
And now people are saying, OK, now I don't want to do it this way. Or I'll put this information on the BlockChain. But it won't be financial. But I'll use this financial incentive to get people to store it randomly.
So it's-- I think it's a disruptive technology that people who are sort of artists with technology are kind of trying to sort of retrofit this on problems that they see. And so it's not an easy-- it's kind of like everybody's looking at this thing and say, oh, it does this. And it does that. And I don't think you're going to do everything with it.
I think we're all going through this whole process of does this make sense? But I think there's some obvious applications out there that really make a lot of sense. And then there are other ones in which the disruption is high and the ROI isn't so great. And maybe those aren't the early adopters. But I bet you in 10 years they will follow along.
MICHAEL CASEY: It's also, just what threw me, the BlockChain only does so much. As you say, it's database layer. It can't resolve the questions of fact around the outside world. And people like to think-- there was a story that we had recently. I don't know where it came from-- how the BlockChain could make fire departments run their fire trucks more efficiently.
And you just couldn't understand what they were talking about. But it had that classic peak hype moment where you're like, you know what, you're all getting a bit carried away here. So it's important to remember that, I think, yeah. Yeah.
AUDIENCE: So I'm really interested in what you said about the $10 trillion of real assets that could be unlocked. And I think what you're saying is, like, I have a home, and a deed. And people trust that I actually own it, so I could borrow against it. And in Lima, per your example, it's not clear that that's an asset that somebody owns.
So how do you bootstrap. How do you go from nothing, no structure using this? It sounds like there's a lot of value. But I can't imagine how, without auditing or surveying the world.
MICHAEL CASEY: You get somebody like Julius [INAUDIBLE] to go and figure out-- do you want to answer that question? Well, I'm just going to set it up. But if you'd like to-- I mean, what you're getting at is, in a way, the point I just made. BlockChain is the data management step.
So for the importance of maintaining the chain of title, to ensuring that this transfer happened at this date, that this lien was imposed at this time, that this person has ownership and can prove it, that's great. How do you prove that you actually own it? That's still a human problem. That is a political problem. Can you--
AUDIENCE: So is it enough to say that you just need to prove it once? And then once it's in the BlockChain, you've got the story going forward?
MICHAEL CASEY: Well, yeah, you have to prove it once, but that proving is difficult. Because that's still a-- and in a slum in Lima, is the problem. I just want to just introduce-- Julius has got this-- and these things start to come together. So he's been working in Senegal, and Cameroon.
And he's trying to build a registry of poor African villager's assets, including their homes, but also their livestock, and everything else. And there's that there's an interesting social dynamic component to this that starts to bring us to this moment of attestation that we can then place that into the BlockChain. So Julius, will you give it a quick--
JULIUS: So in a brief summary, your question is, you know, we still have to, one way or the other, ascertain the ownership of that property. And in most cases, regardless of where you go, there's always a system in place that says, OK, if you go generations back, I know the father of the father of the father, or whatever, and all by oral transmission.
So what we are doing is now building a trust-- I call it a reputational index that allows individual local attestors to attest to the ownership of that. Once we get to that point, then putting it into BlockChain to make it immutable becomes very, very easy.
So you have to first attest to it, make sure that the right owner is the one that says he owns it. As a matter of fact, most governments are now saying, whoa, if you can do that, we want your data instead of them saying, well, we can give you the data, which is what they're supposed to do anyway. So that's kind of how we are trying to go around that.
MICHAEL CASEY: I love the fact that you've got this reputational component to it. And so there's a social pressure component that requires these village elders who could just lie and say that this is their brothers land. But if the system is built in such a way that they just-- their trust goes down, and their reputation goes down, and there's a cost for that.
JULIUS: Right, that's correct. So if you have-- typically, the way we would do it, we have that attestor in charge of x number of registry. And the-- I mean, the idea is that the owners, you sent the owners to make sure that the attestor does not test in their favor, which is kind of counter to what you will expect, the idea being that if you attest to a false information, when we downgrade the attestor, then it affects you, because we downgrade you, as well.
So you have a synergistic system that says, OK, if you are going to be my attestor, I don't want you to declare false information on me. Because it's going to catch up on me eventually.
AUDIENCE: Thank you very much.
MICHAEL CASEY: So we have one here that-- there was-- I thought there was a question there. That was the same question? OK, good.
AUDIENCE: So at the end of the talk, you discussed how the adoption of this technology by central banks might eliminate the need for more traditional banks. And immediately, I had a vision of my local savings and loan bank shuddering. And I said, OK, I get that.
But banks also lend. And they compete for customers, and have different risk tolerances. And I think-- so are you really talking about eliminating the need for banks, or just redefining what a lender is? Because lending is still going to be hugely important.
MICHAEL CASEY: Yeah, yeah, yeah, very much the latter. And that's the message I like to give when I say that in front of banking audiences, which have a lot. Otherwise, they're not going to invite me back.
I think that banks as the intermediaries in our payment system is a legacy of this fundamental trust problem that we didn't resolve. So the Medici solved the problem of how we actually send money in a remote context. How do we-- because once-- we could always transfer a bank note or some other form of currency because there was a mutual understanding that this was a transfer of value. But we couldn't do it in a remote setting. And so we ended up having the bank sit in the middle.
And they did it through the whole credit intermediation process. But what they were, in effect, doing was facilitating payments. And that just evolved and got bigger, and bigger, and bigger. And so we all know that as much as we think about Visa and MasterCard as being the big players in credit card, it's really the banks.
It's the Capital One's. It's the Chases. It's the Citibanks. These issuing banks are at the center of our payment system. And they extract fees of up to-- you know, as you see the 2.9% fee that merchants pay every time there's a credit card transaction, most of that's going to a bank.
Why? Because they own the ledger. And then so if we could remove that function and have payments be something that is much more peer to peer, I think we end up with a safer world. Because that payment system is critical.
And think about what might happen. We mentioned Steve Jobs. Well, Apple sits on $500 billion in cash, right? Is it-- something like that, $500 billion.
What if there was-- so OK, so that's cash. You don't treat it as an-- I mean, obviously, they've got short term investment on it. It has to be invested smartly. But a lot of it is just simply a custodial question. Because it's fluid. It's being used all the time.
If you could place at least some of that in a much more secure and easily transmittable painless environment like a central bank wallet, why not? So I think there's a huge disruption coming to short term money markets and that banks are going to have to eventually-- and it's going to be very gradual. Because no central bankers wants to turn that switch off in a hurry. But I think gradually moving toward longer term, out the end of the curve sort of lending is a better world, really.
CRISTINA DOLAN: So I just wanted to add to that point. Because I think interest rates are unusually low. And they have been for some time. And that is a huge factor in whether you keep the money in a wallet or you put it in a bank account. Because there were times where interest rates were, what, was it the height 17%, or some outrageous amount? So I probably wouldn't put that money in a wallet. I would put it in a bank account. Because it made much more sense.
So now with interest rates being almost zero, the definition of a wallet, and a bank account, and your mobile phone become a little bit different. Because you're not getting a whole lot for putting your money there. Sometimes you may actually have to go out of your way to go to the bank to get your money out.
So I think that timing is everything. And I think that, at this point in time, with interest rates so low, I'm not so sure what the value proposition is of-- and I understand Facebook is now getting into the payment business. So what's the difference? If they transmit and get it there quickly, I don't think, from a customer perspective, you're going to get that much differentiation.
Although I say credit cards actually do give you some insurance against, you know.
MICHAEL CASEY: It's also one of the reasons why Bitcoin's struggled in the developed world. Because you do have-- the thing about it is, the cost of the credit card system are hidden to us consumers. And it's a brilliant system. Because if you can build a big enough market of freeloaders, which is what we all are, right? We're riding off the backs of merchants to do this. The merchants are compelled to maintain this system. Because they need us as their marketplace.
But what we're all paying for it. I mean, we're paying for it in prices. We're paying for it in the interest rates. We're paying for it in the fees. It's there. Nothing-- there is no free lunch.
So it's an interesting dynamic, which to suggest to you, why would you want Bitcoin? Because it's a free credit card. And I get my frequent flyer points from my insurance, and everything else. But you are paying for it.
Yes, take one here.
AUDIENCE: Yeah, thanks. I had a question kind of jumping off the one that Chris asked earlier about convincing companies to take part in this. Apart from-- can you cite some examples of companies that have actually made business models off of this? And I don't-- I think Bitcoin miners is maybe not a good one, or Bitcoin-- people have made it off the currency itself. And governments, maybe those are one category, but actual businesses that have taken this, and we can point to them and say, look, this company did this. And they made such and such a process improvement. And--
MICHAEL CASEY: Yeah, there's loads of them now, all very small startups, but I mean-- you might have some examples, as well. But I just-- so within that long list of different applications that Cristina put up-- so there's a company called Stampery that is providing-- to you point about notarios-- is actually disrupting notaries.
And so they're saying this process of keeping corporate records and transferring data just from that simple level of making sure that the two parties to a contract have got the right details to it, well, as you say, we either have, in Europe, a model where there has to be this expensive notary in the middle. And we could disrupt that. Or we actually live with this inconsistency. And that's a problem in its own right. Well, now we don't have to have that inconsistency. That's their business.
There is a whole string of companies working in the digital rights management world, which is a very interesting field. I didn't mention that one there. But I find it fascinating, the idea that by using the immutable record of a BlockChain to be a time stamp record of when a creative work was created, in placing metadata around that, the date it was produced, the name, and so forth-- you can start to create these very powerful smart contracts around when a digital photo, for example, is then turned into a derivative work. And so I might pay to use the derivative. But that the smart contract makes sure that the original user always gets it, as well. Because that data is embedded into the system. So there is a bunch of companies that are doing things like that, a company called Verisart.
There are others that are doing similar things around keeping track of YouTube funds. But how-- there's no clarity how Google is charging people for, or is paying people on that. There's just-- there's a whole host.
CRISTINA DOLAN: Yeah, and I actually have this little theory that-- I mean, obviously the open source is one of these building blocks that sort of enables innovation. And we've seen that over and over again. But you think about Red Hat and Linux and the role that Red Hat played in helping companies utilize this open source technology, which, I have to say, was pretty revolutionary in its time. I see companies like IBM and a variety of other companies that are patenting these components that work with this technology.
And so I think that there are a lot of players that are positioning themselves around this open source software to sort of help companies innovate and use that. And then typically what they do is they'll have-- when I worked at Oracle, I was head of e-commerce for the Americas. One of the biggest issues with the financial companies was that everybody said, [INAUDIBLE] scalable, security-- same stuff you hear now.
And I remember, we worked with one of the financial institutions for a database for research. I mean, now you think about it and you laugh. What, so what's the big deal? You put research on the internet. And you password protect it. And you only give it to your customers. But it was a big deal.
And then once we did it with one bank, we created a white paper and showed it to everybody else and said, isn't this brilliant? And then, of course, everybody signed up for it.
But that first one customer was actually really hard. Because everybody was saying the same things that you hear right now. So I do think that there'll be a certain number of players that will do sort of the traditional business model of setting up shop and becoming the company that will hold hands of the big Fortune 500 companies and pick out these processes, target them, and then help them through that.
MICHAEL CASEY: One more. So Julius has the last word, yeah.
JULIUS: OK, I was just trying to be in defense of the bankers.
CRISTINA DOLAN: Oh, OK.
JULIUS: I remember when I was in the bank, we used to look at response time of transactions, an average of three seconds per transaction, roughly. So have we looked into-- since we are talking about BlockChain, distributed ledger, distributed processing-- are we thinking, or are we looking into what would be the response time that is acceptable for financial transactions?
MICHAEL CASEY: Yeah, I mean. Reconciliation, right, is--
CRISTINA DOLAN: Yeah, I mean, everybody-- the other day, I was with somebody from itBit. And they said, we're going from T3 to T0. And I was at this private dinner party with a lot of people from the financial space. And it was kind of interesting. Because I was like, wow, BlockChain. And then everybody at the table said, it's just technology. We could do that today if that's what you wanted to do.
But one of the things that's kind of interesting was that in order to go from T3 to T0, you basically have to put together all the information upfront. So when the two parties contract, all the information is available.
I mean today, even when I was talking about ACH, and Swift, and all these financial protocols, you know, you're hopping around. And you're giving instructions from point a to the final destination. But in terms of what happens in between, there is no ledger transaction being logged anywhere that lets you see where everything has gone [INAUDIBLE]. So I mean, I obviously am a big fan. Because I think that there's so many things that you can do with it. But it's interesting there are people who are saying it's just technology, and you can do it through other ways.
I mean, even the world wide web has actually announced that they're coming out with some sort of ledger. I don't really know exactly how that would work. But they're saying that it'll be-- I don't think there's consensus. And I don't think it's got some of the critical properties that you're seeing with Bitcoin and BlockChain. But they're actually saying that they have their own version with no consensus required.
I don't know what that means. Because I haven't seen anything written on it.
MICHAEL CASEY: There's a lot of those things happening. But I think the-- this idea-- because the DTTC would say this, that you can get to T plus zero immediately, because there's the technology. And the reason they don't is because regulators tell them they don't. So this is-- you hear this in the DTTC a lot.
I like to say, OK, so why do those regulators demand that it's T plus three? Because they're worried about the intermediaries owning all the information. And so they want to make sure that there's a frame in which these intermediaries couldn't rip off the guy in Peoria.
So it's kind of a roundabout way of thinking about the problem. But if you were to just do away with that problem and we all had provable capacity to see that this thing had transferred, then that problem goes away.
Now you might get other problems. Because you might have-- there's this finality of contract problem, and whether or not once this is done can we actually reverse it if it had to be done? Maybe you want some lapse. Maybe-- to your point, Julius-- maybe there is a time in which you want to say, all right, can we reverse this transaction right now?
But to say that regulators don't let us, it's just technology, we could do it, it really doesn't answer the full question.