16. Central Banks & Commercial Banking, Part 2
The, following content, is provided under, a Creative Commons, license. Your, support will help MIT, OpenCourseWare continue. To, offer high, quality educational, resources, for, free to. Make a donation or to view additional materials, from hundreds, of MIT courses visit, MIT. Opencourseware at. Ocw.mit.edu. So. We're going to we're going to sort of come. Back to central banking I I. Thought. It was appropriate to have. Two. Classes, on this when I was laying out the whole semester and in August, thinking about how to build the class. In. Part, because central, banks but play. Such a significant. Role to the world. Of Finance but it's really about their role in money I mean. Money and central, banking have been so intertwined, for, three or four hundred years and, they. Are the. Custodians. Of essence, of what fiat money is, and. Of course this course is blockchain, and money. And. Many. Of the things we're talking about here actually, do relate, to Bitcoin, and crypto finance, even. Though a central, bank digital currency, doesn't have to be tied. To a. Blockchain. Technology. So. I'm going to do a little bit a little bit back, to. What we talked about Tuesday. Partly. Because Rob. Ali was with us on Tuesday I moved. Up some. Of the content, from today to that as well just to. Go. Through that and. Of. Course if we do end up and, early, we can always talk about Tuesday's, election - that's all right. So. We're gonna do is always sort of touch on the readings I'm gonna be asking you all bunch of questions about things like Ecuador, and, Senegal. And. Sweden. And maybe the Philippines, that were in in the readings and so forth but you know it's all it's all. Experimentation. By those four countries and others. We're, gonna we're, going to talk, a little bit of that I'm just gonna try, to come back to what we were talking about Tuesday, and why again. I think it's relevant to any course in blockchain. Technology. And particularly if you're interested, in Bitcoin. And crypto finance. Introduce. A new subject, really which is stable, value tokens. Which. Are a significant. Part, of experiment, Station right now again. In the world of crypto finance, but, relate them back to the world of private banknotes, because. I see in the current approach, to stable, value tokens. Something, similar. That we saw in the, past. Central, bank digital currency. Which. We introduced on Tuesday, and that's gonna be the folk of what we talk about today and you're gonna hopefully. Will have a nice discussion to see what all of you think of these Sweden. And Senegal, Ecuador. And the Philippines, a bit, and. So that's that's what we're gonna try to do. And. Again. We're going to sort of dive into these questions as. We go through those. Four countries. We. Talked a little bit about MasterCard. When. Shreya. Was with us right. Priya's, husband, was with us because he was with MasterCard. But we can touch back that was really a reading for today and. MasterCard. Took. A. Out. Of a patent. On fractional. Banking. So. Central. Bank goals and functions, anybody remember we talked about Tuesday, as to what what what are central bank's about and what what their main goals are and their functions. Anybody. Want to. There's. An economic function. That central bank's in almost every country have, taken on some role to promote. The economy but dominantly. It's about price. Stability, and. How. Does price stability relate, to money. Anybody. James. Is that a hand up no. But I can give it ghost. That's. Cost, of money right, so price stability and, and. Money, relate. Because. What's, the three, functions of money. Hannibal. Unit of account it's right in that so, the third function, of money store. Value, meaning of exchange, a unit. Of account so. Stable pricing. Is about making sure that unit.
Of Accounting. That. Unit, of pricing, has, some stability. So. Price. Stability is, really about money. And. It also promotes an economy. They. Sit at the center of the money system central, banks at. First, at chekalin, the King to make sure that the King didn't overspend when he was at war with, another King in another country. That's. Where it kind of all started. But. It's sit, right at the center of money, so, the four things we talked about they. Managed, the. Nation's fiat money. In, every, country the supply, the price, the payment, systems, payment. Systems are how we move money around so. If, you really want to you. Know just boil down you can take a whole course there's wonderful professors, here that teach central banking but I would, say manage, the mace nation's, fiat, money. Oversee. The banking, system, because the banking system is a way to basically. Move. Money around the system and provides. Credit, Tom. What does a bank do when it provides credit just. Use the word, money somewhere, in your definition. Experience. The quantity money and how does it do that. So. Banks stand in between. Investors. Or savers, we can call them depositors. So. On the one hand you have depositors. Or investors, on the other hand you have borrowers, and, banks. Are just the in the middle and that's why it's called financial. Intermediation. Intermediates. They're just in the middle. It's. More than just being in the middle I mean it's a big role but. So. The banks, in the middle. Are. All about money and says central bank's want. To get involved, and manage those. Institution. Initially. Commercial. Banks came before central, banks. Commercial. Banks were around and they kept failing. Even. At a time of the small Italian states. They, would fail and there was some family usually. Or. A central, authority that, helped out and ultimately, the central bank seemed still today, it seems like the central banks came first but the commercial banks kind of first. And then there was a central, way to protect. The system. Senator banks are bankers, to their own governments. Paul. Tucker who. Teaches. Over at the Harvard Kennedy School but Paul Tucker just came out with a book he was a deputy governor. Of the Bank of England about the unelected, power. And, and. Central. Banks are unelected usually, they're not they don't stand before the voters there. But. They have a tremendous amount of authority so. The, four, types of buckets and things they do so. Then we talked, about I use this chart the other day a little bit but the, three, different, types of money, please. This. Is how without also the central bank says about, key role in, international. Payments. And international, research. So. The question is will the central banks have a similar, role for crypto currencies. Anybody. Want to take one, side or the other about it Ali. And you think it's going to go to zero so you would probably say central banks will not have any role if crypto. Currencies, go to zero. The. Question would do central banks have to do, all. Right so Elena just took the other side he said what is central banks have to do with crypto currencies, he's. Going to be a principal. One country they will still need to manage. International. Reserves and. Manage. International. Cross-border. Payments. The like. A global currency they need to read over, so. It, it's a hypothetical. Currency. To float versus, Bitcoin or whether you want to defensively, buy Bitcoin, and have your currency I think, like the central bank has a choice Brazil. So. Anyway, other views when whether central, banks will get deeply. Involved in, Bitcoin and crypto currencies. Perish. Can. Circle. Of its own in terms of transactions, where it does not need to interact with the fiat currencies, then.
The. Role of central bank could be completely. Restricted. To the governance, of the activities, is handli whether. It needs to get involved in that yes from the risk it poses to the picture but, if it is interacting with the fiat currency at any level then the central bank's move becomes, more, important. So. Isn't it isn't it possible that I mean we, don't know what the future will bring and allene, might be right if cryptocurrency, doesn't, take off then central banks can kind of just just. Wave it away some, experiment. On the side of Finance, but. If it starts to take off I think. You're. Pronouncing qml, yeah. Guillermo. Says. That. If, it becomes somewhat central, is brutish. And others have said I think that there would be a role for central, bank's if a country actually, was going to use it as its medium, of exchange a, unit of account a store value and, particularly. If there became fractional. Crypto. Banking, this. MasterCard. Patent, like. If you actually saw, somebody. Taking. Crypto, deposits, and making. Crypto, loans and you had. Credit, facility, through crypto, we're. A far way away from that we're not there but I'm saying if that happened, Shawn. The. Monetary supply and. In. Order for the central bank to you, it's, functionality, just. Like the completely, open, open market operations, so, does that also apply to kind of the, cryptocurrency, plays, that are all does that also apply to. Sean's. Asking, if we really were in this in this world we're not yet in and. Cryptocurrency. Was. A, dominant. Form of finance. Banking, and so forth would. You envision the, central, bank trying to do an open market operation. Anybody, want to tell the class what open market it's not in the readings but what open market operations, are used for. The. Central bank can buy some, of the money or sell some of the money which affects the supply, and, thus. Affects, the price so. Open, market operations, effectively. Affects. The interest, rate you, have often probably read the interest rate targets. The Federal Reserve has a target, but what they're doing in an open market operation, is really buying and selling supply. Of money and. When you influence, the supply of something you change the price and the price of money is measured. In interest rates or foreign, exchange. Rates so. Shaun I would say that if it becomes a dominant part, of an economy. Then. Some central, authority might, want to try to influence, its price but. There's a challenge. Does, anybody want to. Guess. What what challenge, I'm thinking about about why cryptocurrency. Let's, say Venezuela, was adopting, Bitcoin as, a central, means, in, that country what. What what would be their challenge, of trying to influence the price of Bitcoin in Venezuela. So. Venezuela, might be only a small portion of the overall Bitcoin. Usage. Around, the globe. So. It's one thing if you are one. Country, and trying, to influence the price of the currency, that's in use, in that country, if Sweden, wants to influence, the price of the corona, or. Israel, the shekel. But, it's it's for more. Problematic. If it's a worldwide, currency. Hugo. And then Tom, I mean, I could see, that being kind of like what we saw earlier, this year last year when there was like a Korean. The. The price of Bitcoin in Korea was higher than the price of Bitcoin the rest of the world because there was so much demand there so, if you get like the central bank of, a certain country buying, Bitcoin. In their currency, they're basically devaluing, their currency, in, relation to Bitcoin it might not. But. It might not affect the world market in the, way that they think it was right unless, they're like effectively, buying Bitcoin, on all open markets all around the world, and. Do you do when, do you have a view as to why the pricing. Went up in Korea versus, elsewhere, is, called the kimchi, premium, those. Literally. I don't, make this up but that was what. It was called in Bitcoin, the kimchi premium, which was that Bitcoin, was valued. At a higher price in Korea than elsewhere, Hugo. Do you have, a you. Had one reason, you said it just thought that the Koreans were trying to buy a lot of it so there was a kimchi premium, other Tom, we're gonna get to. It. Late, in order to open an account on a Korean exchange I think it'd be very interesting so like you weren't really able to arbitrage very so. Hugo. You're onto something you're, saying arbitrage. Been. So. It's difficult to arbitrage, so the basics, of Finance, we're moving a little way from Bitcoin, but the basis of finances. Arbitrage. Has been a part, of Finance we're again thousands. Of you, if I can buy something in France and sell. It for a different price in Switzerland. And it, doesn't cost too much to travel.
The Roads between France and Switzerland I might buy it in one country sell. It in another and that's, called location, or Geographic, arbitrage, in. A modern digital age. Digital. Assets, don't have much, locational. Arbitrage. Oil. Still, has locational, arbitrage, because you might be buying it in the Gulf Coast and. Selling. It in Africa. Or so you know there might be locational. Arbitrage and physical, commodities, but in digital, financial. Assets there's for a little locational, arbitrage and it's, interesting in Korea's case there was a locational, arbitrage, what. Was this about and it, was because it was hard for regulatory, reasons. So, there was a kimchi premium, literally, for quite some time. Because. It was hard to move Bitcoin. Across the borders for regulatory, constraints. And, so forth but. Now we got, Tom you orcas yeah. The. User probes are wire. Banks, to hold dollars. Anybody. Been in banking want to answer Tom's question. Josh. You. Spent a lifetime in banking, right. If. You hold it in Treasuries, which are very liquid and you could get out of them in a certain amount of time. There's. A big premium to. To. Hold your capital and. So. I think the. Rules don't necessarily. Specify, whether it's dollars or. Another currency. So. Josh, is right it's basically, it's all brought, back to the home nations. Currency. Unit, dollars. Or Euros or remember. And. Some accounting. Books it's brought back into that but there's different haircuts, or weights depending. Upon some, perceived. Model. Of liquidity, so. A US, Treasury bond, versus. A. German. Government. Bond might have similar, liquidity. And and. And. The. Regulator's will count it the same but you're in, a very real, time basis, using. The. Foreign exchange rate to bring, it back to the unit of your home country, I'm, jumping the shark a little bit on my knowledge. About. Bitcoin. Becomes a, reserve. Currency or, or whether or not things hold, it here, most point. If. Central, banks aren't allowing. Financial. Institutions to get credit for holding. Well. Currently central.
Banks Are not that favorable, to Bitcoin and, crypto, currencies, but they're probably right, there's not there's, not a deep history there's not a lot of liquidity and there's high volatility. And the underlying. Markets, are highly susceptible, to, manipulation. We. Don't know for, sure what. The real pricing, is in an income and time but, in the hypothetical world. Where it's becoming. Largely, adopted, I would suspect that central banks around the globe would. Have some capital, regime, that would treat it more favorably, than its treated today but. Less favorably. Than government. Fiat. Currency, I mean. More, so than you do. Decentralized. Three. Types of money that central, banks are involved in us anybody remember, there's even a chart up here you can you can see. You can grab it from. Akira. Life, see, ya collateralized, no that's we're gonna get there that's gonna be about stable, value tokens, I'm talking about. So. We talk about m1 m2 m3 so. What's the what's the first, thing that you might think about. And. I heard the word cash, but. Some. Deposits, but starting with just cash is money so. Did I make it green yes there. We go thank. You I got some help here cash that's. One form of money and we all have it or, actually. I've. Never asked, I always, have cash in my pocket how. Many people in this room actually currently, have cash of some, some. Country, in their pocket, so. We're down to about seventy percent but. Thirty percent have no cash in their pocket. You're. Putting yours away one. Dollar, we. Were in Japan it, would probably be higher though, right. So. One form of money is cash another. Form of money that the central bank's. Reserves. Let see if I made that green yes so. Central, bank reserves, again I'm just going back through this for from Tuesday, reserves. Storied. But because they were commercial, banks, and, when government. Set up central banks they said you have to say and put some of your money a. Reserve. With. The central, bank so, that we might give you deposit, insurance we, might. Give. You, access. To, liquidity. And hard times. Which. Is called. Opening. Up some liquidity, or lending facilities, so. You have to keep, serve from us that's that's where the word came from but it's a form of money and the, third form of money the form of money that almost everybody in this room uses, the one of daily, basis, the real form, of money that we use almost all all the time. We. Had cash we had central bank reserves, what, do we actually use almost, every day, what's. That, deposits. So. Our bank deposits. We are actually transacting. When we go into Starbucks I know it doesn't feel this way but. You're actually moving, some of your bank deposits to their bank deposits. That. That's how we're really moving, money. So. Those are the three forms of money we never see Federal. Reserve or, or. Central. Bank reserves, we. Just see the cash and the bank deposits. Or. The central bank. So. Kelly's asking you. Know we all lived through the financial, crisis, how. Many of you in 2008. Were in banking, in anyway. You. Were. At Goldman Sachs I got heard of them, the. Other people that raised their hands who. Else, raise their hand like where were you working. For. Them very big back Josh a hedge. Fund right. Mortgage. Hedge fund. Yeah. Yeah. We. Thank you Josh. So, the question is how would Josh. Alpha. Or a cure I get money today. Who. Did. Anybody work in central banking No. So. The 2008. Crisis, came along and Josh, we. Let him fail, he. Was a mortgage. Hedge fund. Okay. What's. That. Goldman. Sachs got a bit of government. Support. Bank. Of Tokyo, mr., Pitts see did you get any government support. But. The. Central banks around the globe particularly, here in the u.s.. Provided. Liquidity in, multiple, ways but it wasn't going to be enough they, were providing, liquidity one. For. Some. Banks that were failing bear stearns and 2007. Failed and through. A legal, authority, that had from congress from the 1930s. Where. You could actually lend, to a financial, institution actually, you could lend to any any company.
In Society. But but they only. They. Had never used the authority but. They used the authority that you could lend versus, collateral. And. And that, was done with bear stearns in 2007. And then it was done again in 2008. For others and what. Did they do with Lehman Brothers when the fateful weekend, that Lehman Brothers failed, what did the Federal Reserve say to Lehman Brothers. James. Said they let him go bust that is correct they, said we can't use this Authority and and, then. You. Know we all know the history books are written how that, that, fateful week in September 2008, then everything falls bust because. There. Was there, was uncertainty, in, the marketplace and so, what they did next Kelley so they were using traditional authorities. What they did in excess they started, to test. The limits of their legal authority, along, with the Treasury Department and the Federal Deposit, Insurance Corporation and. They, put a series, of other things in and under. An old authority, of the Federal Deposit Insurance Company, Corporation, they actually guaranteed. All. Debts. Of the banking system in the US for a period of time under, other authorities, have figured out how to put. A. Guarantee. Or money market funds, was about two trillion dollars in money market funds all. Of these almost extra. Legal. Authorities. I mean they were not written right in the concur in to, congressional, law into law, push. The outer boundaries, and we mean we knew when Larry Lessig was here he said that every contract has some ambiguity, every law has some ambiguity. And the best, lawyers, at the Federal Reserve the best lawyers at the US Department, of Treasury and elsewhere we're, thinking where is the ambiguity and, can. Can we use that, uncertainty. In, the law to. Save the system and then they went to Congress they, went to Congress and asked for 700. Billion dollars. When. Hank Paulson treasury secretary went to Congress, they. Sent a four page but it might have been three paged legislative. Requests. For 700, billion dollars, I. Remember. I first, read that three or four page requests because then, a senator. From New York Hillary, Clinton asked. Me what this thing's come up will you read it and give me your advice it. Didn't take me long to read three pages it, was an outright, request, for 700 billion dollars it, finally, did pass it first failed in the House of Representative. It became. I, think a, couple of hundred page document. But. 700, billion dollars, of US taxpayer, money went to the Treasury, and the Treasury, then lend it out and. So forth so, it was multiple, things ten years later ten, years later a law, here dodd-frank, limits, some of what the federal, government can do it, tightened. The ability, to, be. The fire department. And the. Midst of a raging, fire. And there's, lively. Public debate recently Tim, Geithner who was Treasury secretary, at the time has come out publicly and Ben Bernanke I think and they've written an op-ed and some other pieces saying it, would be good to loose and some of those dodd-frank. Restrictions. But. There's others on the other side who said no we need to keep, those restrictions, tight, because. If the restrictions, are loose then. We have something called moral, hazard, does. Anybody know what what what moral hazard might be I. Think. It's, you. Run a risk. That. He's not. Commensurate. So. The banks are financial, institutions, if you know you're going to be bailed out we'll take more risk it's human.
It's. It's. It's. Who we are so. My father had a small business in Baltimore, he never had more than 30 employees, it, was a cigarette and candy, and pinball. Machine business. If. He couldn't make payroll on Friday the city of Baltimore, was not going to help him out on Monday. His. Employees, might give him another week or two hey Sam like. That's named Sam you. Know well give mr. Sam another week but, two or three weeks later they would have all quit. But. The banks so. Large, so. Tied into their economies. For. Many. Decades 2008. Wasn't the only time, the. Sovereign, steps in the central bank step said so, Kelly the answer your question is there's probably less, ability. For. The central bank in the u.s. to step in they. Still have very, real tools to, be the firefighter, in the middle of a raging fire but they're a little bit more constrained. We, as a society spoke. Through our Congress and said we don't want, bailouts. But, the. In the midst of the next crisis, some Treasury secretary, and some Federal Reserve chair and maybe some president, will. Be testing, the limits of those statutory. Authorities, and they might knocking, on the doors of Congress, again I guess my question is more touchy on the implications of, it we were to have for. Example if Bitcoin, were to be, backed. By central, banks what those implications would, be, you. Know. So. Anybody. Want to take the other side of Kelly's question bitcoins, now the the, currency. That's. It, hypothetically. The Bitcoin or some crypto. A. Lien, would tell us it would be some other crypto, it's. Maybe it's Al Gore and or something. What. Happens what what's going to happen to the flexibility. Of a central, bank and a government to bail out their economy, if. It was a crypto. Remember. Your first, Isaac. So I success, it goes down what do you mean it means it their flexibility, goes down. And. There has to be. Consensus. Protocol, that has to be. So. Tom content.
Isaac. Says it gets a lot harder Tom says it's not just harder, it's impossible, Eric in, some the design of the conspiracy, platform, that underlies, that peep-toe has been used because we. Will see maybe. Later. Discuss there, some. Non. Collateralize. Simple. Coins that actually, have smart. Comfort that enforce, the. Money supply policies. To, keep the stable which is really, similar, to handling, one a supply in, an automatic way, so. Eric, is saying. It's. The coin I. Santosh. If. You control like the mining system can change the protocol. What. Eric, and Santosh, are saying is there's some flexibility. Either flexibility. Written, into the algorithm, or flexibility. In that, the. 51%. If, there's a consensus, or hard fork you might be able to adjust. But. At its core it's probably. As Isaac, introduced it it's harder, I don't, know if it's impossible. But I think it's a lot harder. Just. Like the European, Union, has a lot harder time helping out Greece, because. You now have multiple. Countries involved in the decision, making the, consensus. What. Satisfies, German. Economics. And German politics, is different than what might satisfy Greek, economics, and Greek politics. So, when, you say central banks in cryptocurrency you don't mean central, banks in CBBC's. Yeah. I think we're dealing in a hypothetical. Discussion. What. If a cryptocurrency, were. To actually take hold. Like. A Bitcoin, in the future I think that's what. Your questions, were about, the. Aronoff. Used enough as a store of value used, enough as a medium of exchange and. And then, there was a crisis. Very. Different than a central. Bank digital currency yes. It. Was hard. Selling then they could actually come. In be. Asking. Could the private, sector, be. Sort. Of like. Really works you. Know the central. Bank in essence come in and support a, cryptocurrency. To. Some extent for sure depends. On what their reserves, are and they also of course are part of a government that as a taxing, authority has a military, and, there's a lot of extra might.
That Comes with being, part of a government, so. I think the answer is yes but. Multi jurisdictional, currencies. Usually. Fail on, some level, the European, the URL, is still an experiment. It may still fail some, decades in the future it's, been tested, but. Multi jurisdictional. Currencies. In the past. High. Probabilities. They usually, fail because you, don't have one political, system, one. Unified, set of government, two counts, one taxing. Authority, you, know there's a bunch of challenges. Let's. Move on and try to hit some of the things on so. That's just that's kind of review a little bit of the other day we, said what's fiat currency, we've talked about of course fiat. Currency, then represents. All. Three, forms bank deposits. And notes. And reserves and it's, accepted, for taxes, and it's, legal tender, in this hypothetical case, we hadn't even gotten to whether would Bitcoin be accepted, for taxes, with Bitcoin or crypto, be accepted, as legal. Tender, but, I would I would might remind. Everybody. Whatever. The, future holds I think wide. Adoption in, any country, you'd have to address will the government, accept, it for taxes, well. The government, say it's accepted, as legal, tender, until. Unless that, happens. You. Know usually, wouldn't have wide adoption even. In a country that's in distress and again we're not talking about central bank digital currency, but. You could say the same thing about central, bank digital currency, unless it's accepted, for taxes, which, it probably would be. Or. Accepted, as legal tender. So. I wanted to go back to, private. Bank notes. So. Commercial, banks, have issued, notes in the past think. Of this is basically a piece of paper that represents. A bank deposit, the, same way that we might be moving mobile, money now. Think. Of it but, most of this was done before there was a time of central, banks and, in. The u.s. it was called the free banking, era. Andrew. Jackson, was the seventh President of the United States and he really, didn't like a. Central. Bank it was called the second bank of the United States, but he let it he let it expire, in the 1830s. Andrew, Jackson does, anybody know what what piece of currency Andrew, Jackson, is on where. Is his portrait. $20. Bill that one that we keep passing around and everything. Andrew. Jackson also as president a period of time that he paid off the national, debt. Paid. It off to zero. Is. It Tennessee and then had a strong, view about finance. We. Had a very tough time in the 1840s. So I'm not sure we should have paid off the debt completely, but. The. Free banking, era the notes that went around in the u.s. for 20 to 30 years were all. Bank. Notes. And. Then the Civil War came along and. The. US government, needed to finance a war and the. Word greenback. Comes from 1863. When. The. North the Union, wanted, to raise some money and they, were there literally started, printing greenbacks. And. Also, the First National. Bank Act, passed during the Civil War and the, National, Bank Act set up something called the controller, of the currency and. The. Controller, of the currency those, two words they confused, me a lot when I was on Wall Street why was the bank regulator, called the controller of the currency, but. In the 1860s. It was to control all of these banknotes that were being issued by, a.
Bunch, Of commercial, banks most, of which that failed hundreds. Failed. Many. Of the pieces, of paper which, different, values. Discounts. To each other and, so forth. And. Some. Say that the world we're living in now with cryptocurrency, this, new market, is a little bit like the private, note period. Interestingly. There's, two countries, or two areas that still use private, banknotes anybody, from Hong Kong James. And. Anton. So. Who, issues your your currency your cash there. Are three banks. So. Bank of China represents, of People's Republic China, i, HT. HSBC. Brand represented, a local Hong Kong and standard, County represented. They. Do but it's not really, a private bank. So. In Hong Kong the, notes the. The, dominant, notes my right or. Anything. Over ten dollars is, by. A bank. They. Have to follow the rules of the central bank and. Anybody from Scotland, or Ireland oh. What's. That - for North but, similarly. In the United Kingdom there's sterling, banknotes. So. We still do have some of this there's still a little legacy, of it left tightly. Highly. Constrained, legacy. Because it's the, Monetary. Authority it's caught in Hong Kong. Because. It caught a central bank. Monetary. And financial Authority, so the word monetary, is right in there just like in the 1860s. In the u.s. the bank authority was called the controller of the currency and, it, still is called the controller for the currency. The. Person given to you because you're, spending the. Bread in England everyone, panics it's like what is this this does not look like the usual bank though it. Is technically. Legal tender, but people go. So. It's not good north of a certain. Sort. Itself is something red. That it's not legal tender in. South. But, it's also not legal tender in Scotland. So they, can, use them in Scotland, as a matter of custom I got a question I had but, as a technical, legal matter it's actually, not it. Doesn't extinguish the debt that somebody wants, I. Believe. I believe Ross, is right but for. Those who don't know Ross, has spent a career as a bankruptcy, lawyer as, a partner, of a firm, before he came back for a slow and MBA so, I'll go, with Ross on this one. So. Stable, value tokens. What's. The moral on this James if you get a stable value token, do you give it back. So. What are stable value tokens, and what what what, value, might, they have what, pain point in the crypto, space why. Did they come about. There. Was a reading on it so maybe. It was. Volatile. 'ti eased, to. Dampen, the volatility. Why. Would somebody want a crypto, asset. But. Ease the volatility. What, are the use cases for, crypto without, volatility. Trading. Betray. What kind of cryptocurrencies, crypto. Currency, trading you want to tell you, go back to the, stable, one thing going back to another crispy crunchy you don't have to go into, the banking system all, right so maybe it's also being used for, trading. So I've heard that it dampens, volatility. I agree, it, could be used for trading, because you might go crypto, -. Krypto, - crypto, but you want to keep a better, store value, in a stable token. As. Well, and and, that's what what it's it's been I, I list, four different, approaches. To it these are design, features. They all are trying to do the same thing have, a crypto currency that's not centralized. Or. At least not backed by government, not centralized, that way it might, be centralized, that the algorithm, and the software. Is centralized. And, for. Different design features. And. I think there was a reading, on this if I remember, as anybody want. To say, anything about tether, I mean what. Basically. Backed, by u.s. dollars. Were. To be like really, adopted, you would need to have a ton of collateral, to make it like, useful, people and, then the other issue is that you'd also probably, need a central, bank like the Fed to actually, like you, know be there intervening, and. Stephanie's. Saying if it really took off you'd need a ton of collateral what if tether, it.
Or Any, fiat. Collateralized. Currency, was not just a couple billion dollars but, it was a trillion, dollars, or a couple of trillion, the. Whole US banking, system is, about sixteen, trillion dollars. There's. 13 ish. Trillion. Dollars of deposits, what. If you were head. Of coin that's one trillion, of that. It's. Supposedly backed, by if it's that large and it's supposedly backed by US dollars the. Two choices with three choices right, you either have a stack of a hundred four trillion dollars, physical. Okay. Where, you at bank deposits, which is. What you're trying to get out of or. You've got the money with the. Federal observer which you're also trying to get out those. Are your only three choices for where. Actually, is the collateral it has to be something, but. The, reason it drill into this this is part of the motivation of why central, banks are looking at central, bank digital, currency, they've, been watching not, just Bitcoin, in the whole crypto, space but then they've watched stable. Value tokens, come along stable. Value tokens, that are generally, backed by some blockchain. Technology. And blockchain initiative. That frankly. They don't have to be blockchain, I think. You could build something without it. And. Why there's. And. There's. Also a business case where let's, just. Go above a dollar the coin goes above another below a dollar you, can either issue more, difference. And. You can potentially. If it's small enough. A. Bank you can get interest, on. Collateral. But. I do. Agree, with you the problem comes along. When you have like this huge scale a trillion, at. That point. Trillion. Wouldn't. You run into the same type, of. Scenario. Where at the US. Reserves. So. Is your thought being that if it really grow and it there was it was accepted. In commerce. That. Maybe. It wouldn't have to be tethered to the fiat currency, it would then become. Trust. The trusted, the way that the paper, currency, became trusted, and and. Richard. Nixon in 1971. Could say we're, no longer going to follow. Bretton, Woods or in. 1933. When FDR. In our country said we're going off the gold standard I. Think. You raise an interesting point, I think we're well well. Before. Before. That I think, right now though the interesting, thing is there's a lot of a, lot, of entrepreneurial. Activity and stable, value tokens. My, observation. Is one of the leading reasons is it, was stated right here, that, in the crypto, exchange, markets. Which we'll talk about next Tuesday and the crypto exchange, markets, a lot of people want, to go and trade crypto, to crypto, and not, crypto, to fiat. And, what are some of the regulatory, or economic, reasons they don't want to trade crypto, to Fiat, Tom. Taxes. Anything, else. What's. Another big thing that. Potentially. Be maybe, more readily traced. Ben. Okay. Well I see you were gonna remind the class what those letters mean. So. There's a whole regime around, the world. In. The u.s. it's called the Bank Secrecy Act, but around the world about knowing, one's customer, tracking, anti money, laundering and.
So Forth. One. Of the dominant things, in crypto, that's going on. Maybe. Mistakenly. Maybe just because it's an early stage, is that, some people who have crypto, assets, feel I don't want to trade that for a fiat asset, I don't want to trade in two euros, or dollars or, yen because. Then. It's. More likely the official sector can track me for taxes, I. Think. There was a false notion, that if I sell something crypto, and I buy something else crypto, I do not have to report my gains or losses in, my taxes. Now. The US has clarified, that you do, but. For a couple of years people were going well maybe it's just what's called a like-kind. Like. Selling one piece of real estate for another piece of real estate by, the way if you sold gold and bought, silver. Gold. For silver that was not a like-kind, exchange. On a US tax law but. There were tax advisers, going around saying well there's, some ambiguity. Maybe. You don't need to pay your taxes, if you went from Bitcoin to ether, the. Tax. Bill that was passed in December let's, call it the Trump tax bill that closed, that window. One. Of the few things that closed. But. But. I think because of illicit activity, because of taxes. There's. Still a lot of people, that say I just rather go crypto, decrypter but there's there's, one other thing the reason why people might want to stable value token about the payment, system, we talked about it last week. Do. I see a hand up help, me out. So. It's quick and it might be cost-efficient, we talked about and. I had a chart about using. Crypto as a bridge currency. To move cross-border. Payments if. You're moving from US Dollars to Mexican, peso that. Can take two three four days and, correspondent. Banking systems, and the like but. What if you use from u.s. dollars, to crypto. To. Mexican peso, very. Legitimate. Use case, they. Can lower your your, your, cross-border, payment, down to seconds, rather than days. Very. Legitimate, use case that may be stable, value tokens, would be a good use case, so. Again. If anybody's, interested in the different design characteristics.
There's. A, interesting. There's a professor, over at Harvard that came to see me Harvard he teaches Harvard Business School came to see me that he's creating, a non. Collateralized. Senior, age based, stable. Value token, so just, even here in Cambridge, there's a bunch of people look, looking, at trying to create things, and do things and, a lot, of energy. They're. Always asking me what's a real use blockchain, you're some of it's just in this area you go and then we'll move on. Yeah. Collateralized, ones that you don't upon there it's, like Gemini the exchange, recently. Created one and circle. Created. One that coinbase adopted, and those are both on top of aetherium and. I think actually at, least with Gemini I'm not positive about the circle one like, coded, into the smart contract is the ability to freeze. Tokens. So. Like you could say, that's a like, an a ml type of thing right like if, they see something. Going weird. With with. Transactions, with, like G USD then, they could actually like stop, and see. What's. The mood, of the class around stable. Value tokens, that can be frozen right in a smart contract does that seem, in the spirit, of Satoshi, Nakamoto, what's, that Hugo no. Whoever. Controls, the smart contract in that case that would be a crypto. Exchange. Run, by whose Gemini run by a. Couple. Of identical twins. Not. The genzler's. Well. Again. Slurs weren't in a movie and didn't make a lot of money on. Crypto, the. Winklevoss, twins by, the way who were at the wonderful. Story with Mark Zuckerberg at Harvard if. You remember the Winklevoss, twins and, their rowing part. Of a rowing. Elite to. Have. Made a lot of money in crypto and we'll talk a little bit about them next Tuesday. So then central. Bank's and crypto currencies, there, were there was we. Talked about this the other day there's four things they're really doing they're. Monitoring, and studying. Some. Are restricting, the use like, the Central Bank of China some. Are trying to do payment system and experimentation. We talked about Singapore, and Canada. Those, are real blockchain, initiatives. The payment, systems, schools. Still out as to whether they need to use the blockchain, technology. But. They are seriously, leaning, in particularly, in Singapore, in Canada, saying there, might be a more resilient payment, system if we use a decentralized. Distributed, blockchain. To ecology based, on. Quorum. Or corridor hyper, ledger fabric, I, think. We're a few years away from them sort of coming. Is, there enough there enough they're there that, it would be better than traditional databases, but they are definitely putting a lot of energy and even. The European, Central Bank with, the Bank of Japan has an, initiative as well.
But. In the fourth category central. Bank digital currency initiatives, like caution everybody you don't necessarily need, to use blockchain, technology, this is the part of the course to say this, is something clearly, inspired, by. Satoshi. Nakamoto's. Innovation. And inspired. By stable, value tokens. But. When, we talk about the Bank of sweden's initiative, and some of these other initiatives you'll find that to, my knowledge they're not built built on blockchain technology. That. Doesn't mean they couldn't be in the future but I think they're important, because, they're really important, to blockchain. And money and how central, banks are thinking about this. Area. Right now. We. Talked about this last week that the, first wave of payments, were, all on aetherium and as I said they've, moved on from aetherium, and the, second, wave, of the, payment, system initiatives, are all permission. Block chains and now, they're looking at a third wave, if. There's further questions, about how central, banks are looking I'll, take them now or we'll go on to the central. Bank digital currencies. Please. Only. Use two matically, whose deposits are. Like. It's. More recently some positive goldman sachs deposits one day like exchange deposits, within the central bank what do they currently use vanish, use. Various. Forms of traditional databases. And I'm not, going to pretend that I know exactly, each. Of those databases but, they're. Usually for, interbank. Money as you've talked about Morgan, Stanley or Goldman Sachs, they. Would call it the real-time gross, settlement system. Or TGS, system, but, the actual, underlying database. Structure. Frankly. Probably goes back to batch processing. Most of we're still batch processing. In the US I think we'll roll out a faster. Payment. Structure. In. 2020. And. Shreem. Who. Was visiting with us was on a whole big advisory, group to the Federal Reserve, to. Do that does, that help a little bit. But, the question, really is could, blockchain, technology, inspired the next generation.
For The mid-2020s. For, any of these countries to have, 24, hour seven. Days a week but also no one central. Place, where the, ledger is kept with. Multiple, parties sharing, the ledger and as. Lene said but wait a minute witness, central bank's still want to have authority over. The protocol, the. Protocol, amongst, 20 or 50 banks and, the. Answer is probably yes but. Trying. To explore what's the most resilient system. So. Central bank digital currencies, the, central. Bank's of course already issued digital reserves so the real question is this should, access, be given, to others should. It be expanded. To the retail, public, and. So. These, were the ones we chatted about and, we're just going to go through four of them quickly just to say. And. You had a little reading on each, of Ecuador Senegal. Sweden. And the Philippines. These. Are the opportunities that the, central bankers, even talked about. Basically. In Sweden's, perspective, they want to stay in the business of providing a means of payment and. The. Krona is so. Barely, used. Nobody's here from Scandinavia. No. The. Corona is so barely, used they want to keep it you. Having. Some influence. I'm trying to think if I put the chart in. I'm. Going to skip over a couple things you know I didn't, put the chart in so I apologize, so, what challenges. Do you think are really there, from. Our readings, which, of these challenges, do you think scares, the central banks the most. Is, it financial stability is, it changing, the credit intermediation. Of, banks. Is. It monetary, policies, at the payment structure. Or. Is it all of the above allene. Financial. Stability basically. Are a run, on the backs I. Don't. Know I would, say that in my conversations. And Rob Ali has many, more of them but my. Conversations. With central, bankers it's a mixture of the first one the one a lien did say and then. Basically. The third one credit allocation that. They feel like if we insert, the central, bank more, directly. Into, taking. Retail. Deposits, are, we, going to be inserting. The center Bank more into credit allocation. Or. In essence if we, shrink the need for commercial. Banks or, we, somehow shrinking. The credit, allocation and, the economy. So. In normal times they worry in essence about credit, and the. Extension, of credit and in, crisis, they worry about being, that. It would be destabilize. This system. That's. Been my you. Know experience, talking just in these eight months to central bankers. And. So that might just flow back through when, the central bank is determining. Isaac. Saying is couldn't you just address, this as a central, bank through interest, rate policy, and some differential, interest, rate and the pricing, of money and, I. Think some would contend, you could. But. On the other side anybody. Want to take the other side. Question. The question really is is, does. The central bank want to start making loans. Now. The US central bank has a four and a half trillion dollar balance sheet as we talked about two days ago and owns, about two, little. Less than two trillion won a half trillion dollars, mortgages. So. In a sense the central bank is already, making a credit. Decision they're, lending to the mortgage, market.
But. The question is do you want to go even further and have the senator Bank picking. Individual. Companies. Or individual, homeowners, to lend to and, that's, what, if. It got to any scale or size, they. Talked about of, course they could just lend to the commercial, bank system and then. The public would be lending that a central bank and the central bank would be lending to the commercial, banks. So. The design, considerations. And we didn't talk about these these, eight design, considerations. Are, all in the loop does, everybody, get it - only a few people get it as a token or account, and. So, forth. This. Little money flower that, Garrett, has put out there and central bank's talk about the money flower. Where's. Bitcoin, on this who. Wants to tell me where Bitcoin is we'll bring it back to blockchain. I'll. On. Wait. So where where am i pointing you, an orange, blue. And orange oh it's written there right, there. Without. The red right here private, digital tokes tokens, Jose lonely no. Tell. Me where you want me to point it sits so, you're saying it's orange, and, what. And. Then blue. It. Is widely, acceptable. Bitcoins. Widely. Accessible. Meaning. Anybody can get it. I. Would. Say you can put any form of money into, one of these little blocks. Government-backed. And not government-backed. We're. Stable, value tokens. Look. At this you read the closest, and I can't remember your name. Connery. We're stable value tokens, well. It's not central, back issue it I'll give you a hint so it's not in the green. It's. Private digital, tokens you could make it. Widely. Accessible like, this. So. I think it's an excellent point, a. Stable. Value token, that is. Backed. By a fiat, currency is, not central. Bank issue I would say that it's not in the light green but it's it, it's. It's highly, dependent, on the central, bank it's. Highly, dependent on putting. Deposits, in commercial, banks tether. Which. Purports, to be a little over two two-and-a-half billion dollar, crypto. Which, is all backed by US dollars, at one point in time last, year, they. Lost some of their commercial, bank, accounts. Meaning the commercial, banks would not take their dollars, the. Commercial, banks in many countries said forget it I can't, I can't, have you because customer. I can't follow you for any money laundering, and otherwise, and. So that in, essence you're highly, dependent, if. You're a custodial. Stable, value on, the, central bank I agree with that but I think you're not central. Bank there's, a little. It's, just central, it, is central, right. So. There's a lot of paradoxes. In irony, and the blockchain crypto. Spaces, - how centralized, something in us how decentralized. And from, Satoshi nakamoto's very decentralized way. So. We're going back to these and so Ecuador. Anybody. Read the Ecuador thing want to tell, us a little bit about, Leonardo. Well. I think it was a. Story. Of Vader. Was. Backed by the central, bank but. The central bank had no credibility or trust from the users so. You, never to call so this, the government, of Ecuador had just defaulted. Cuba. For the launch this the.
Economy, Was memorized, so. They issued something, where people didn't really know whether, it would would. Still be there within a few years the. Usage, was extremely. Disappointing, compared with the initial. Financial. Institutions. Were not obliged. I. Sort. Of wonder if there had been like a minimum, level of you, know bound, sheets, at these institutions. Where they were quite about tapping using one level of the. Crypto, currency could, that have helped a little bit. As. Far as I remember they also failed to manage expectations because. Even. In the first year but they are saying what they are claiming is there. Are going to be. 500,000, users or, something, I mean what turns out just 5,000. Account, so users. So. It's. It's, a it's a great story. Was. Also there's mismatching, benefits, and costs, that were associated with the project they kind. Of. Africa. Calculations. Were made the benefits were less, of a million dollars compared to almost, 7 million that the whole implementation. Was. From the start from from the outside the design wasn't conceived. Again. This is somewhat inspired, by. Crypto. Finance, no. Blockchain, technology. Involved. In it which. By the way is going to be true for the next three examples as, well but. It's relevant this is sort of also inspired, by initiatives. Like M pace and so forth it's like how do we get more inclusion, in use dollars, Kellee and then we'll go to. An. Attempt to make. Profits, because they said that basically. Like this, and. As. Leonardo mentioned, there, was previously. Hyperinflation. So once, they discovered, that it really. I. Don't really think. You're. Probably right about that one. Good thing that came out of it they finally, sort of admitted, that they shouldn't maybe be in the monopoly, and they let mobile, phone. Payment alternatives. Were authorized, for the phone, companies, but, I'm not close enough to Ecuador to know whether that was really. Done maybe, it's now just a duopoly of, a couple of phone companies doing, it so they, might have just shifted some, economic. Rents from the government, to a couple of major. Companies, that are friends of the government, or something. The. Philippines, I think, there was a reading on. Anybody. Want to say something about anybody, from the Philippines. No. Anybody. Want to say something about what happened in the Philippines and. You're, gonna see something that's similar about this in Senegal. There's. A software, provider called, a currency, mint limited, in Ireland. That, is marketing, around the globe to do digital fiat. Currency, I. Think. They're careful, they call it digital, fiat, currency, rather than the central bank digital currency but nonetheless, every. Time there's a press release whether from the Philippines, or Senegal, or elsewhere, there's. Somewhere in the press release you see blockchain, technology. Use. For. I've. Done my best to read everything, I can on these two since last summer when, I stumbled, upon them in July I do, not believe that either are using blockchain, technology, but. They're sort of using the gloss of, the terminology. But it's still. Senegal. More than the Philippines, is something that central. Bankers are looking. At. Importantly. It's issued by commercial, bank it's not technically, issued, by the central, bank the central. Bank has actually put out a statement. And saying. This is a test and a learn thing in a regulatory sandbox. So the central bank is sort of saying all right we'll let this, is a little bit more akin. To private, banknotes in the nineteenth century in the US and, and. I'll, flip to the Senegal, wine. This. This. Is in the West African economic and monetary, union so. There's a monetary, union I think of 14 countries all using, a, currency. It's. Called the franc I think the F is, that. What. Is it. Have, you ever used it do you know it. So. One country. In a 14 nation, bloc has said, we. Can maybe get more Financial Inclusion good, I think there's a good motivation, there we can get more financial, inclusion we, can put safer. Did, I say it right safe. On, an electronic, platform we'll use this software provider, out of Ireland that keeps knocking on our door. And and, we'll see if we can push it out a little bit under, some emoney regulations. Technically. Its Emani. Underwrite. Pre-existing, regulations, but. I would say a lot of central bankers are kind of elsewhere. Around the globe sort of watching what does that do what does that mean does. It increase. Financial, Inclusion. And, probably. The most interesting one really, is is in Sweden. Sweden. Has said these are the benefits, these are written in a document, they've written now they're the third document on this it came out a couple of weeks ago it was not assigned, reading, because it just came out and, it's 50 or 60 pages anybody, wants to log.
Through It. They. Say it's going to continue the public access to, the risk free guaranteed, means a payment that's. That's. The key thing to them you. Have cash in your pocket right now. Crona. But, very few people have it so. Few people have it that, most retailers. In Sweden are, now saying I will not accept Crona, and. It's. Not such a big country that a bunch of people want to own, Crona. For a store of value. So. The total, outstanding. Is. Our question. It's. Not cute at all but they stock, markets. Like. The companies, which, are listed they're, listed in crona's, right, so. They how come it's not use at all it's, not, what. No Crona is used digitally, I'm saying paper crona's not used, paper. Crona but. They're saying we maybe want to make sure that, there's a government. Direct. Relationship. To electronic. Government money. The. Properties. They've said they're, willing to put a comprehensive, range of services, in make it widely available they've, answered the design considerations. And they, actually say, that they're looking at putting interest, rate on this they think that putting an interest rate on it make cents, and. That. It should have a identification. They say it will be traceable, they've already said in their documents, they're not going to go with the totally. Anonymous. Imani. This. Is out of their report, but. As you can see the. Blue. Line is Sweden, that, their total outstanding cash, this is physical, tokenized, cash was, four percent of their GDP it's, now less than two percent of their GDP, the. US and Europe, would be the Green Line we're up to about 10 percent, but. As we talked about on Tuesday. Eight. Of those ten points in the US or, hundred. Dollar bills and. Four. Or five of the ten points, in the u.s. are. Outside, of the US this. Because. Reserves. What. We would hold in. Vaults. The. Banks here are holding in rows. This. Would be this would be cash that's outside, that. The public calls or. The public in banks. That. Is correct, so if it's, if. It's. Cash that. JP Morgan is holding. Physically. Just because they're putting it in that daily ATM, machine it might be included I like. The. X number of dollars in, everyone's bank accounts, is. Bank. Deposits. This. Is actually only. About half of m1, this. Is the 1.6. Or 1.7 trillion. Dollars, of. It's, about 1.8, trillion 1.8. Trillion in the u.s. of, which. 1.6. Trillion. Or. 1.5, trillion, is hundred-dollar bills. There's. Only two to three hundred billion dollars, of US, currency. Paper, currency, that is not $100. Bills. And. Well. Over half of the hundred dollar bills are outside of the US perfect. Reserve statistics, I think 57%. How. They trace that that would be another story for another day. But, Sweden doesn't have a bunch of people holding the, equivalent, of $100 bills or 500, euro notes as a, store of value and, so, you see a decline of their paper you see the retail Merchants, aren't taking it people aren't using it so Sweden feels compelled, to say I want to do something here. Tuesday. We're going to be talking about crypto. Exchanges. It's, a bit of a set up also for Thursday. When. We've. Got our outside. Speaker so I keep chatting about I think. Talita. What Selita had to leave early today but I think Tilly is gonna send you a message or put up on the website. Jeff, Sprecher and Kelly sent a list of readings I guess. They're used to like being you know denote they're not actually used to doing they're doing this as a favor for me I got to know him very well when I was at the Commodity Futures Trading Commission they're. Rolling out the. Both. The crypto exchange, and a payment alternative. And so, they sent a bunch of things that they thought you might want to read so we put them up on the website midday, to day I know, that you've got a lot of other things to do and it's getting to that time of year where there's fewer and fewer things you're reading but what we're trying to do on Thursday is I'm going to open up with a little fireside.
Chat They, want me to ask them a few questions for. 10 or 15 minutes and then, we're going to open it up it's all gonna be your time there. With us about an hour, now. We, might encourage them to stay till the end but they're here from 2:30, to 3:30 now. I know we always start at 2:35, but if if they're ready to go at to 32, or 33, I might start with them and start, the fireside, chat, and. Then it's, going to be you're asking, them questions, so to the extent that you read their the. Things that they sent around. Better. For you I will say this in advance because one or two of you have already come saying I want to I want to see if I could go work for the, company that owns a New York Stock Exchange and Owens backed and everything I will. Be glad to send whatever resumes. Or anything you want to Jeff and Kelly I'll. Act as a clearinghouse, and send, it if that's your call but, in advance, I. Not going to you. Know give their. Private, emails to you and everything like that but but, I think that will be an interesting conversation. Next. Week. So. Central bank's play an important role in the economy we, already live in an electronic, age but. They really are absolutely. At the at the epicenter. Of money, and how money's been defined for three or four hundred years, payment. Systems and fiat currencies, have had challenges I, still. Continue to think blockchain, I told, you I'm not a maximalist, but blockchain, technology, can, be a catalyst, for change central. Bank digital currencies, is. Evidence. Of that, even. If it's not based on blockchain technology. I think it's partly inspired, and urged. On by by, this it. Doesn't solve what. Blockchain, technology, would do for it but I. Think, that central, banks by and large are monitoring, they're. Exploring, payment, systems, and. A. Handful. Are looking at the central, bank digital currencies, I think. And this is my own prediction though with 180 countries somebody, Sweden, might be the one to do it we'll be there to do some central bank digital currency Venezuela. Says they're doing one backed by oil so, it might be the other end Iran. Says they want to do one to avert sanctions. We didn't talk about that but sanction. Countries, are looking at ways to avert. Sanctions. So there could be company, countries, in distress, countries. Looking to avert sanctions, or or. You. Know kind of first tier economic, countries, like Sweden that are looking at it so. I will see you next Tuesday. You.