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Speaker 1: Since you're a subscriber to this Bloomberg podcast, we thought

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Speaker 1: you'd be interested in a new four episode sponsored podcast

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Speaker 1: called Evolving Money, produced by Coinbase and Bloomberg Media Studios.

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Speaker 1: It explores some of the monetary system's biggest changes over

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Speaker 1: the centuries and today's companies that are making big bets

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Speaker 1: that cryptocurrency could be money's next evolution. You can subscribe

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Speaker 1: wherever you listen to your favorite podcasts. Here's a recent episode.

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Speaker 2: It's nineteen sixty eight, Buffalo, New York. On a road

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Speaker 2: that runs along the Nagara River, a truck takes its

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Speaker 2: daily route, laden with boxes containing thousands and thousands of

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Speaker 2: small slips of paper, paper checks, birthday checks, rent checks,

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Speaker 2: big fat checks for local businesses. Now, these checks have

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Speaker 2: already been filled out, signed and cashed, but there's one

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Speaker 2: more crucial step. They're on their way to the Buffalo

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Speaker 2: branch of the New York Federal Reserve, where they have

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Speaker 2: to be recorded and reconciled, a process that ensures that

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Speaker 2: each bank actually gets the funds their owed. But the

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Speaker 2: truck swerves, It skids, It careens off the road. The

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Speaker 2: boxes tumble out, and checks totaling millions of dollars fall

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Speaker 2: into the river and float away downstream, never to be

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Speaker 2: seen again. Decades ago, a simple accident like this could

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Speaker 2: throw the financial system into temporary chaos, and even today

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Speaker 2: our system remains vulnerable to potential disaster. It's always been

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Speaker 2: a system begging for change. From coinbase and Bloomberg Media Studios,

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Speaker 2: this is evolving money, and I'm Paddy Hirsch, your host

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Speaker 2: on this podcast. We're taking a different look at cryptocurrency.

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Speaker 2: It's been cast as a radical departure for the monetary system,

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Speaker 2: But what if it wasn't radical at all, just the

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Speaker 2: next logical evolution of how we pay for things and

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Speaker 2: store long term value. Along the way, we'll explore how

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Speaker 2: money has changed over the centuries, looking for lessons that

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Speaker 2: predict its next evolution. You may think that today, in

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Speaker 2: an age where money has been reduced to a series

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Speaker 2: of ones and zeros on computers, the problem of paper

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Speaker 2: checks has been pretty much solved. Well, in a sense,

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Speaker 2: you'd be right. Records of transactions no longer travel on

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Speaker 2: the highways, for one thing. But in another sense you're

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Speaker 2: dead wrong. The cost of the paper check system, both

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Speaker 2: in time and money, are still very much with us.

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Speaker 2: But there's a new technology called blockchain that looks as

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Speaker 2: though it could provide a solution with an online ledger

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Speaker 2: universally accessible and completely transparent, that can't be hacked or altered,

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Speaker 2: and costs next to nothing. That may sound too good

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Speaker 2: to be true, but a look back at how the

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Speaker 2: paper check system was improved by the rise of digital

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Speaker 2: money demonstrates that what sounds like a revolution today can

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Speaker 2: often become commonplace tomorrow. So could blockchain be the next

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Speaker 2: big step in overhauling highwaymove money from one place to

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Speaker 2: the next.

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Speaker 3: Well.

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Speaker 2: Later in the show, we'll discuss with Sandy Cole, head

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Speaker 2: of Industry Advisory Services at Franklin Templeton.

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Speaker 4: The physical processing of checks with such a mess.

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Speaker 2: That's Roy Friedman describing the time before digital money. He

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Speaker 2: teaches financial history at New York University's Tandon School of Engineering.

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Speaker 2: He says, back in the late nineteenth century, clearing houses

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Speaker 2: allowed banks to settle their accounts in a central place.

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Speaker 4: The New York clearing House developed all kinds of standards

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Speaker 4: for clearing and settling checks and money. They basically would

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Speaker 4: meet in a in exchange paper according to certain protocols

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Speaker 4: and tally up their ledgers.

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Speaker 2: The system took a step forward in nineteen eighteen when

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Speaker 2: banks established a proprietary telecommunications system fed Wire to process

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Speaker 2: the transfer of funds. The system connected all twelve Federal

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Speaker 2: Reserve banks, the Federal Reserve Board, and the US Treasury.

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Speaker 2: The entities communicated by telegraph using Morse code, and for

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Speaker 2: decades the system remained largely telegraphic. But then in nineteen seventy,

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Speaker 2: the New York clearing House tried something radical, settling transactions

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Speaker 2: using a new technology, computers with an electronic system called chips,

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Speaker 2: the clearing House interbank payment system. Banks could do something

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Speaker 2: revolutionary settle payments in real time rather than once daily.

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Speaker 2: The system was a lot faster, but it was still

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Speaker 2: vulnerable to the occasional error, and those errors could be

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Speaker 2: unbelievably cost.

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Speaker 4: A major New York bank lost its fedwire connection.

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Speaker 2: So losing a connection midway through a transaction.

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Speaker 4: Yes, well that was expensive and the end result was

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Speaker 4: that the bank was short. So if I'm short at

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Speaker 4: the end of the day, I have to pay somebody

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Speaker 4: to stay solvent. In that case, twenty three billion dollars

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Speaker 4: with a b overnight four or five million dollars of

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Speaker 4: interest and that was a software error.

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Speaker 2: Eventually, as technology evolved, so did the process. Today, the

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Speaker 2: floor of the New York clearing house has been emptied

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Speaker 2: of couriers and bank exchanged large sums of money the

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Speaker 2: same way you probably do digitally. The system has evolved,

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Speaker 2: but it's still far from perfect. While computer systems have

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Speaker 2: allowed us to digitize ledgers and made it easier to

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Speaker 2: update or search them, they still require a lot of

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Speaker 2: human help. Different systems don't talk to each other easily.

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Speaker 2: They're always being upgraded and patched. They're kind of like

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Speaker 2: a bunch of ships sailing past each other in the dark,

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Speaker 2: only able to signal each other in different languages. I mean, take,

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Speaker 2: for example, how we settle equity trades.

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Speaker 3: We still, even after all of these years, cannot settle

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Speaker 3: an equity trade in less than an entire trading day

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Speaker 3: after and when you're settling a US equity and you're

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Speaker 3: buying that US equity as an Asian client, it's sometimes

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Speaker 3: three days.

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Speaker 2: That's Sandy Coal, she's head of Industry Advisory Services at

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Speaker 2: Franklin Templeton.

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Speaker 3: There is a lot of inefficiency still in this marketplace,

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Speaker 3: even amongst the efficiencies that we have put into the system.

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Speaker 2: The inefficiency comes from the fact that settlements are based

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Speaker 2: on different ledgers, with each side of a transaction owning

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Speaker 2: its own ledger.

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Speaker 3: You see all the trades you did with me and

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Speaker 3: with everyone else, and I need to reconcile my version

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Speaker 3: of truth, which is my leisure, with your version of truth,

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Speaker 3: which is your ledger, and any discrepancies in our versions

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Speaker 3: of truth require teams of people to come in.

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Speaker 2: Right, we're going to have a fight.

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Speaker 3: Well, this is why we have middle offices, and we

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Speaker 3: have back offices, and we have lots of people whose

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Speaker 3: entire job it is is reconciling different versions of everybody

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Speaker 3: else's ledgers.

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Speaker 2: Sandy and her colleagues at Franklin Templeton thought, hare's got

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Speaker 2: to be a better way.

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Speaker 3: Our CEO, Jenny Johnson, she was the head of Technology

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Speaker 3: and Operations, so she was very aware of the infrastructure

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Speaker 3: we had, the costs that we were accruing and running

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Speaker 3: that infrastructure. And then she said, Wow, we run so

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Speaker 3: many ledgers. There's this new ledger technology. Let's experiment and

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Speaker 3: see if we can actually maybe save some costs or

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Speaker 3: gain some efficiencies in using this new ledger.

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Speaker 2: That new ledger was a single public ledger shared by everyone.

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Speaker 2: It was blockchain.

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Speaker 3: There is only one version of the truth, and everyone

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Speaker 3: sees every transaction that takes place, and every transaction can

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Speaker 3: be linked back to the original or what they call

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Speaker 3: the Genesis transaction, which was the first transaction ever done

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Speaker 3: on the blockchain.

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Speaker 2: It's possible then to have a complete history and complete transparency.

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Speaker 2: The system is simple, streamlined, and it doesn't run the

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Speaker 2: risk of a tiny connection issue that can cost an

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Speaker 2: institution millions.

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Speaker 3: You do not have this delay of days or multiple days.

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Speaker 3: You have maybe at most a delay of ten minutes

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Speaker 3: between the transaction getting submitted in it being finalized and recorded.

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Speaker 3: So this takes out so much uncertainty and friction in

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Speaker 3: the system, and it would be able to create a

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Speaker 3: whole new foundation for us to run more efficial payments

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Speaker 3: and more efficient marketplaces.

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Speaker 2: Sandy and her team were intrigued by the possibilities.

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Speaker 3: What we found was that the blockchain based transfer agency

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Speaker 3: system was more accurate, fewer errors, and this gave both

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Speaker 3: us and it gave the SEC some confidence that we

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Speaker 3: could keep the transaction records for the funds where we

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Speaker 3: are the transfer agent on the blockchain, which was a

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Speaker 3: big improvement.

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Speaker 2: Sandy and her team saw a quantum leap forward in

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Speaker 2: the evolution of financial ledgers. They wondered, what could the

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Speaker 2: first decentralized public ledger mean for the entire financial system.

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Speaker 2: The move to the blockchain could represent a shift from

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Speaker 2: one kind of economy to another. The economy we rely

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Speaker 2: on today runs on various apps and platforms offering siloed services.

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Speaker 2: This is what's called the platform economy. There are a

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Speaker 2: lot of inefficiencies here, but one big one in in particular,

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Speaker 2: is that the apps that we use are each individually

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Speaker 2: their own platform. They actually don't work together. The move

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Speaker 2: to blockchain would be a move to a new economy,

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Speaker 2: the protocol economy, an economy that could provide scaffolding and

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Speaker 2: interoperability services that could actually speak to each other. That

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Speaker 2: means that transactions could move freely across the blockchain without intermediaries.

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Speaker 3: Instead of a platform sitting in the middle of multi

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Speaker 3: sided buyers and sellers, in the protocol economy, an open source,

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Speaker 3: easily accessible a completely free set of services sit in

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Speaker 3: the middle that are offering us plug and play capabilities.

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Speaker 3: In these new protocol economies, we're going to have protocols

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Speaker 3: that can do thousands of things. You can call up

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Speaker 3: a protocol that will allow you to hail a ride,

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Speaker 3: just like you could go to the Uber platform, or

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Speaker 3: you could go to Teleport, which is a new protocol

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Speaker 3: based ride sharing service. It's a free service that people

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Speaker 3: can access and then they can use it to connect

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Speaker 3: with each other to be able to transact, and then

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Speaker 3: they work out the terms of their transaction. But the

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Speaker 3: protocol that sits in the middle is free. They don't

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Speaker 3: have to give you permission to use it, and they

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Speaker 3: don't have the right to shut you out of the system.

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Speaker 2: The idea of a protocol economy is the first thing

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Speaker 2: you need to understand to know how this new frictionless

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Speaker 2: way of doing business on the blockchain actually works. For instance,

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Speaker 2: to transact on the blockchain, you need a token. Now,

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Speaker 2: the concept of a token may be confusing, so let's

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Speaker 2: get one very basic thing straight. A token is not

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Speaker 2: a currency.

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Speaker 3: I go back to this idea. You're going to the

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Speaker 3: amusement park. You need to buy something that's going to

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Speaker 3: get you able to ride the rides or purchase things

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Speaker 3: at the concessions. They don't take cash, they take tokens.

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Speaker 3: Think about that concept now, translated into this new blockchain economy.

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Speaker 3: I don't use money, I don't use a government fiat

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Speaker 3: based currency. I use tokens to actually engage and use

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Speaker 3: both the applications that are being offered in the space

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Speaker 3: and to pay the blockchain to record my transaction. And

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Speaker 3: I'm purchasing the block space on the transaction so that

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Speaker 3: my transaction could be recorded with the token.

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Speaker 2: But doesn't it mean that you have to buy those

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Speaker 2: tokens with fiat currency.

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Speaker 3: You can buy them with fiat currency, you can buy

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Speaker 3: them with other tokens, right, You can buy them with

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Speaker 3: a whole variety of different inputs. But the whole point

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Speaker 3: is that it is enabling you to do this in

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Speaker 3: many different ways, not just through one government dictated financial model.

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Speaker 2: Another distinction you should be aware of. A coin is

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Speaker 2: a cryptocurrency like bitcoin that can operate independently and has

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Speaker 2: its own platform. Tokens, however, don't have their own platforms. Instead,

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Speaker 2: they piggyback on another cryptocurrency's blockchain network, and today the

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Speaker 2: network that most tokens operate on is Ethereum.

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Speaker 3: When you get beyond Bitcoin and you start to look

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Speaker 3: at different, more advanced blockchains like ethereum. They have developed

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Speaker 3: a concept called smart contracts. If I'm creating a contract

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Speaker 3: with you that you're going to give me a ride

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Speaker 3: that I have requested from point A to point B,

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Speaker 3: that is a contract that you and I are creating

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Speaker 3: on the fly. That contract can get recorded in the blockchain,

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Speaker 3: and when that ride is completed, and there is proof

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Speaker 3: that this ride is completed, and they can use geolocation,

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Speaker 3: tagging or anything else to prove that the ride has

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Speaker 3: been completed, the money will be automatically withdrawn from my

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Speaker 3: account to you as I pay you for that ride.

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Speaker 3: And that can only happen because that smart contract is

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Speaker 3: sitting on the blockchain, and the blockchain has the business

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Speaker 3: logic to be able to execute that contract.

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Speaker 2: Of course, smart contracts don't just allow you to get

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Speaker 2: to dinner on time. They're self executing computer programs that

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Speaker 2: essentially play the role of the trusted third party, or

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Speaker 2: put another way, they eliminate the need for that third party.

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Speaker 2: When you talk about this, I mean, it's an incredible

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Speaker 2: it's a very seductive vision of the future. But I

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Speaker 2: am getting a little hung up on the issue of ownership.

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Speaker 3: In ownership, I own my transactions, right I am looking

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Speaker 3: for a ride, so I own my transactions and you

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Speaker 3: own the car that you're using to provide the transaction,

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Speaker 3: and so the contract between you and I is literally

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Speaker 3: between you and I. Right, the blockchain is simply the

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Speaker 3: passive recorder and enabler of us doing a peer to

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Speaker 3: peer transaction.

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Speaker 2: Those peer to peer transactions are seamless because the blockchain

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Speaker 2: addresses the siloing problem of the platform economy. With wallets,

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Speaker 2: not the kind of wallet in your back pocket, and

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Speaker 2: not even your Apple wallet that you used to buy lunch.

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Speaker 3: A cryptocurrency wallet holds your own personal record of all

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Speaker 3: of the tokens and all of the digital assets that

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Speaker 3: you have in your possession, and it allows you to

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Speaker 3: hold all of those assets without revealing your personally identifying information.

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Speaker 3: Because all the transactions on the blockchain are completely transparent

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Speaker 3: to everyone, and if I had my name attached to it,

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Speaker 3: everyone in the world would know exactly where I'm spending

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Speaker 3: all my money, right, I don't want that from a

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Speaker 3: privacy perspective. So this is a way of me having

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Speaker 3: a financial piece of infrastructure where I can hold my

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Speaker 3: assets and I can try transact, but do so anonymously.

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Speaker 2: Beyond improving existing financial products and infrastructure. The blockchain is

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Speaker 2: also creating opportunities for entirely new financial products through tokenization,

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Speaker 2: converting assets into digital tokens recorded on the blockchain. The

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Speaker 2: assets can be anything from real estate to bonds, to

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Speaker 2: intellectual property to bottles of wine. I mean, talk about diversification,

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Speaker 2: but there's still that voice in my head that says,

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Speaker 2: there's no intrinsic value to this stuff. Why are people

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Speaker 2: buying it?

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Speaker 3: If I told you you could now own part of

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Speaker 3: the Visa network, all those merchants that are plugged into

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Speaker 3: that network from all over the world. If I owned

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Speaker 3: part of that Visa network, what could I do as

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Speaker 3: a business entrepreneur with it? What might I be able

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Speaker 3: to save as a consumer by being an owner of

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Speaker 3: the network? Right? That sounds like a very interesting value proposition.

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Speaker 3: So Bitcoin actually did more transact since then Visa in

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Speaker 3: both twenty twenty two and twenty twenty three. So owning

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Speaker 3: bitcoin actually gives you access to a network that did

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Speaker 3: more transactional volume than Visa did. So I think that

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Speaker 3: it's a new way of thinking. Do you want to

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Speaker 3: own a network? And if you want to own a network,

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Speaker 3: this is a really new and interesting way of being

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Speaker 3: an owner of a network, not a company, but a network.

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Speaker 3: Why is this so interesting and new? I think that

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Speaker 3: the more people understand, the more they get towards these

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Speaker 3: aha moments of Wow, this could significantly improve the way

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Speaker 3: the economy works. And then all of a sudden, you

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Speaker 3: have now bought into the growth story.

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Speaker 2: So if this is also great, why are financial institutions

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Speaker 2: so slow to adopt.

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Speaker 3: A few things are holding people back? Right, So we

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Speaker 3: need to get regulatory certainty. We have to kind of

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Speaker 3: get to a new equilibrium around idea entity. We need

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Speaker 3: to get to a new equilibrium around understanding this new

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Speaker 3: ecosystem because it doesn't operate in the same way that

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Speaker 3: we are used to. So I think there's a big

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Speaker 3: educational hurdle and understanding hurdle that people have to get past.

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Speaker 3: But I think they'll get passed it through things that

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Speaker 3: they do and things that they enjoy.

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Speaker 4: Right.

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Speaker 3: I didn't know much about the platform economy, but I

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Speaker 3: know I lived in Manhattan and sometimes it was really

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Speaker 3: hard to get a taxi. So the first time I

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Speaker 3: took an Uber, I was like, I love this service, right,

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Speaker 3: So you know, now if I can get that uber

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Speaker 3: for a fraction of the price that might excite me

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Speaker 3: as a consumer. Right, So, I'm not going to care

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Speaker 3: that it sits on blockchain rails, or that I'm using

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Speaker 3: a cryptographically protected wallet, or that my transaction is pseudo anonymous.

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Speaker 3: All I care about is that I got a good

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Speaker 3: ride and I felt good about it.

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Speaker 2: A more seamless efficient and secure future, well, I think

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Speaker 2: that's something we can all get on board with, and

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Speaker 2: an online leisure for all might be the innovation that

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Speaker 2: gets us there. Thanks to Roy Friedman and Sandy Cole,

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Speaker 2: Tune into our next episode when we speak with coinbas

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Speaker 2: As CEO Brian Armstrong and look at how crypto may

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Speaker 2: help to alleviate the most dire financial crises. This is

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Speaker 2: Evolving Money, a podcast from Coinbase and Bloomberg Media Studios.

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Speaker 2: If you like what you hear, please subscribe and leave

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Speaker 2: us a review. I'm Patty Hirsh. Thanks for listening.