WEBVTT - Evolving Money: The Blockchain Revolution (Sponsored Content)

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<v Speaker 1>Since you're a subscriber to this Bloomberg podcast, we thought

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<v Speaker 1>you'd be interested in a new four episode sponsored podcast

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<v Speaker 1>called Evolving Money, produced by Coinbase and Bloomberg Media Studios.

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<v Speaker 1>It explores some of the monetary system's biggest changes over

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<v Speaker 1>the centuries and today's companies that are making big bets

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<v Speaker 1>that cryptocurrency could be money's next evolution. You can subscribe

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

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

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<v Speaker 2>that runs along the Nagara River, a truck takes its

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<v Speaker 2>daily route, laden with boxes containing thousands and thousands of

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<v Speaker 2>small slips of paper, paper checks, birthday checks, rent checks,

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<v Speaker 2>big fat checks for local businesses. Now, these checks have

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<v Speaker 2>already been filled out, signed and cashed, but there's one

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<v Speaker 2>more crucial step. They're on their way to the Buffalo

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<v Speaker 2>branch of the New York Federal Reserve, where they have

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<v Speaker 2>to be recorded and reconciled, a process that ensures that

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<v Speaker 2>each bank actually gets the funds their owed. But the

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<v Speaker 2>truck swerves, It skids, It careens off the road. The

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<v Speaker 2>boxes tumble out, and checks totaling millions of dollars fall

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<v Speaker 2>into the river and float away downstream, never to be

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<v Speaker 2>seen again. Decades ago, a simple accident like this could

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<v Speaker 2>throw the financial system into temporary chaos, and even today

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<v Speaker 2>our system remains vulnerable to potential disaster. It's always been

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<v Speaker 2>a system begging for change. From coinbase and Bloomberg Media Studios,

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<v Speaker 2>this is evolving money, and I'm Paddy Hirsch, your host

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<v Speaker 2>on this podcast. We're taking a different look at cryptocurrency.

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

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<v Speaker 2>But what if it wasn't radical at all, just the

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<v Speaker 2>next logical evolution of how we pay for things and

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

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<v Speaker 2>money has changed over the centuries, looking for lessons that

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<v Speaker 2>predict its next evolution. You may think that today, in

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<v Speaker 2>an age where money has been reduced to a series

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<v Speaker 2>of ones and zeros on computers, the problem of paper

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<v Speaker 2>checks has been pretty much solved. Well, in a sense,

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<v Speaker 2>you'd be right. Records of transactions no longer travel on

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

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<v Speaker 2>dead wrong. The cost of the paper check system, both

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<v Speaker 2>in time and money, are still very much with us.

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<v Speaker 2>But there's a new technology called blockchain that looks as

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<v Speaker 2>though it could provide a solution with an online ledger

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

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<v Speaker 2>and costs next to nothing. That may sound too good

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<v Speaker 2>to be true, but a look back at how the

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<v Speaker 2>paper check system was improved by the rise of digital

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<v Speaker 2>money demonstrates that what sounds like a revolution today can

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<v Speaker 2>often become commonplace tomorrow. So could blockchain be the next

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<v Speaker 2>big step in overhauling highwaymove money from one place to

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<v Speaker 2>the next.

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<v Speaker 3>Well.

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<v Speaker 2>Later in the show, we'll discuss with Sandy Cole, head

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<v Speaker 2>of Industry Advisory Services at Franklin Templeton.

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<v Speaker 4>The physical processing of checks with such a mess.

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<v Speaker 2>That's Roy Friedman describing the time before digital money. He

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

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<v Speaker 2>He says, back in the late nineteenth century, clearing houses

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<v Speaker 2>allowed banks to settle their accounts in a central place.

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<v Speaker 4>The New York clearing House developed all kinds of standards

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<v Speaker 4>for clearing and settling checks and money. They basically would

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<v Speaker 4>meet in a in exchange paper according to certain protocols

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<v Speaker 4>and tally up their ledgers.

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<v Speaker 2>The system took a step forward in nineteen eighteen when

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<v Speaker 2>banks established a proprietary telecommunications system fed Wire to process

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<v Speaker 2>the transfer of funds. The system connected all twelve Federal

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<v Speaker 2>Reserve banks, the Federal Reserve Board, and the US Treasury.

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<v Speaker 2>The entities communicated by telegraph using Morse code, and for

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<v Speaker 2>decades the system remained largely telegraphic. But then in nineteen seventy,

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<v Speaker 2>the New York clearing House tried something radical, settling transactions

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<v Speaker 2>using a new technology, computers with an electronic system called chips,

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<v Speaker 2>the clearing House interbank payment system. Banks could do something

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<v Speaker 2>revolutionary settle payments in real time rather than once daily.

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<v Speaker 2>The system was a lot faster, but it was still

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<v Speaker 2>vulnerable to the occasional error, and those errors could be

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<v Speaker 2>unbelievably cost.

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<v Speaker 4>A major New York bank lost its fedwire connection.

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<v Speaker 2>So losing a connection midway through a transaction.

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<v Speaker 4>Yes, well that was expensive and the end result was

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<v Speaker 4>that the bank was short. So if I'm short at

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<v Speaker 4>the end of the day, I have to pay somebody

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<v Speaker 4>to stay solvent. In that case, twenty three billion dollars

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<v Speaker 4>with a b overnight four or five million dollars of

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<v Speaker 4>interest and that was a software error.

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<v Speaker 2>Eventually, as technology evolved, so did the process. Today, the

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<v Speaker 2>floor of the New York clearing house has been emptied

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<v Speaker 2>of couriers and bank exchanged large sums of money the

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<v Speaker 2>same way you probably do digitally. The system has evolved,

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<v Speaker 2>but it's still far from perfect. While computer systems have

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<v Speaker 2>allowed us to digitize ledgers and made it easier to

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<v Speaker 2>update or search them, they still require a lot of

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<v Speaker 2>human help. Different systems don't talk to each other easily.

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<v Speaker 2>They're always being upgraded and patched. They're kind of like

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<v Speaker 2>a bunch of ships sailing past each other in the dark,

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

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<v Speaker 2>for example, how we settle equity trades.

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<v Speaker 3>We still, even after all of these years, cannot settle

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<v Speaker 3>an equity trade in less than an entire trading day

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<v Speaker 3>after and when you're settling a US equity and you're

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<v Speaker 3>buying that US equity as an Asian client, it's sometimes

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<v Speaker 3>three days.

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<v Speaker 2>That's Sandy Coal, she's head of Industry Advisory Services at

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<v Speaker 2>Franklin Templeton.

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<v Speaker 3>There is a lot of inefficiency still in this marketplace,

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<v Speaker 3>even amongst the efficiencies that we have put into the system.

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<v Speaker 2>The inefficiency comes from the fact that settlements are based

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<v Speaker 2>on different ledgers, with each side of a transaction owning

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<v Speaker 2>its own ledger.

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<v Speaker 3>You see all the trades you did with me and

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<v Speaker 3>with everyone else, and I need to reconcile my version

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<v Speaker 3>of truth, which is my leisure, with your version of truth,

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<v Speaker 3>which is your ledger, and any discrepancies in our versions

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<v Speaker 3>of truth require teams of people to come in.

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<v Speaker 2>Right, we're going to have a fight.

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<v Speaker 3>Well, this is why we have middle offices, and we

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<v Speaker 3>have back offices, and we have lots of people whose

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<v Speaker 3>entire job it is is reconciling different versions of everybody

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<v Speaker 3>else's ledgers.

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<v Speaker 2>Sandy and her colleagues at Franklin Templeton thought, hare's got

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<v Speaker 2>to be a better way.

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<v Speaker 3>Our CEO, Jenny Johnson, she was the head of Technology

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<v Speaker 3>and Operations, so she was very aware of the infrastructure

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<v Speaker 3>we had, the costs that we were accruing and running

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<v Speaker 3>that infrastructure. And then she said, Wow, we run so

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<v Speaker 3>many ledgers. There's this new ledger technology. Let's experiment and

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<v Speaker 3>see if we can actually maybe save some costs or

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<v Speaker 3>gain some efficiencies in using this new ledger.

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<v Speaker 2>That new ledger was a single public ledger shared by everyone.

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<v Speaker 2>It was blockchain.

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<v Speaker 3>There is only one version of the truth, and everyone

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<v Speaker 3>sees every transaction that takes place, and every transaction can

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<v Speaker 3>be linked back to the original or what they call

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<v Speaker 3>the Genesis transaction, which was the first transaction ever done

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<v Speaker 3>on the blockchain.

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<v Speaker 2>It's possible then to have a complete history and complete transparency.

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<v Speaker 2>The system is simple, streamlined, and it doesn't run the

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<v Speaker 2>risk of a tiny connection issue that can cost an

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<v Speaker 2>institution millions.

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<v Speaker 3>You do not have this delay of days or multiple days.

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<v Speaker 3>You have maybe at most a delay of ten minutes

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<v Speaker 3>between the transaction getting submitted in it being finalized and recorded.

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<v Speaker 3>So this takes out so much uncertainty and friction in

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<v Speaker 3>the system, and it would be able to create a

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<v Speaker 3>whole new foundation for us to run more efficial payments

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<v Speaker 3>and more efficient marketplaces.

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<v Speaker 2>Sandy and her team were intrigued by the possibilities.

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<v Speaker 3>What we found was that the blockchain based transfer agency

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<v Speaker 3>system was more accurate, fewer errors, and this gave both

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<v Speaker 3>us and it gave the SEC some confidence that we

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<v Speaker 3>could keep the transaction records for the funds where we

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<v Speaker 3>are the transfer agent on the blockchain, which was a

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<v Speaker 3>big improvement.

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<v Speaker 2>Sandy and her team saw a quantum leap forward in

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<v Speaker 2>the evolution of financial ledgers. They wondered, what could the

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<v Speaker 2>first decentralized public ledger mean for the entire financial system.

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<v Speaker 2>The move to the blockchain could represent a shift from

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<v Speaker 2>one kind of economy to another. The economy we rely

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<v Speaker 2>on today runs on various apps and platforms offering siloed services.

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<v Speaker 2>This is what's called the platform economy. There are a

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<v Speaker 2>lot of inefficiencies here, but one big one in in particular,

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<v Speaker 2>is that the apps that we use are each individually

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<v Speaker 2>their own platform. They actually don't work together. The move

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<v Speaker 2>to blockchain would be a move to a new economy,

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<v Speaker 2>the protocol economy, an economy that could provide scaffolding and

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<v Speaker 2>interoperability services that could actually speak to each other. That

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<v Speaker 2>means that transactions could move freely across the blockchain without intermediaries.

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<v Speaker 3>Instead of a platform sitting in the middle of multi

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<v Speaker 3>sided buyers and sellers, in the protocol economy, an open source,

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<v Speaker 3>easily accessible a completely free set of services sit in

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<v Speaker 3>the middle that are offering us plug and play capabilities.

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<v Speaker 3>In these new protocol economies, we're going to have protocols

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<v Speaker 3>that can do thousands of things. You can call up

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<v Speaker 3>a protocol that will allow you to hail a ride,

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<v Speaker 3>just like you could go to the Uber platform, or

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<v Speaker 3>you could go to Teleport, which is a new protocol

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<v Speaker 3>based ride sharing service. It's a free service that people

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<v Speaker 3>can access and then they can use it to connect

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<v Speaker 3>with each other to be able to transact, and then

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<v Speaker 3>they work out the terms of their transaction. But the

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<v Speaker 3>protocol that sits in the middle is free. They don't

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<v Speaker 3>have to give you permission to use it, and they

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<v Speaker 3>don't have the right to shut you out of the system.

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<v Speaker 2>The idea of a protocol economy is the first thing

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<v Speaker 2>you need to understand to know how this new frictionless

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<v Speaker 2>way of doing business on the blockchain actually works. For instance,

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<v Speaker 2>to transact on the blockchain, you need a token. Now,

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<v Speaker 2>the concept of a token may be confusing, so let's

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<v Speaker 2>get one very basic thing straight. A token is not

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<v Speaker 2>a currency.

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<v Speaker 3>I go back to this idea. You're going to the

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<v Speaker 3>amusement park. You need to buy something that's going to

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<v Speaker 3>get you able to ride the rides or purchase things

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<v Speaker 3>at the concessions. They don't take cash, they take tokens.

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<v Speaker 3>Think about that concept now, translated into this new blockchain economy.

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<v Speaker 3>I don't use money, I don't use a government fiat

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<v Speaker 3>based currency. I use tokens to actually engage and use

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<v Speaker 3>both the applications that are being offered in the space

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<v Speaker 3>and to pay the blockchain to record my transaction. And

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<v Speaker 3>I'm purchasing the block space on the transaction so that

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<v Speaker 3>my transaction could be recorded with the token.

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<v Speaker 2>But doesn't it mean that you have to buy those

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<v Speaker 2>tokens with fiat currency.

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<v Speaker 3>You can buy them with fiat currency, you can buy

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<v Speaker 3>them with other tokens, right, You can buy them with

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<v Speaker 3>a whole variety of different inputs. But the whole point

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<v Speaker 3>is that it is enabling you to do this in

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<v Speaker 3>many different ways, not just through one government dictated financial model.

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<v Speaker 2>Another distinction you should be aware of. A coin is

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<v Speaker 2>a cryptocurrency like bitcoin that can operate independently and has

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

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<v Speaker 2>they piggyback on another cryptocurrency's blockchain network, and today the

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<v Speaker 2>network that most tokens operate on is Ethereum.

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<v Speaker 3>When you get beyond Bitcoin and you start to look

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<v Speaker 3>at different, more advanced blockchains like ethereum. They have developed

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<v Speaker 3>a concept called smart contracts. If I'm creating a contract

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<v Speaker 3>with you that you're going to give me a ride

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<v Speaker 3>that I have requested from point A to point B,

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<v Speaker 3>that is a contract that you and I are creating

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<v Speaker 3>on the fly. That contract can get recorded in the blockchain,

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<v Speaker 3>and when that ride is completed, and there is proof

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<v Speaker 3>that this ride is completed, and they can use geolocation,

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<v Speaker 3>tagging or anything else to prove that the ride has

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<v Speaker 3>been completed, the money will be automatically withdrawn from my

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<v Speaker 3>account to you as I pay you for that ride.

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<v Speaker 3>And that can only happen because that smart contract is

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<v Speaker 3>sitting on the blockchain, and the blockchain has the business

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<v Speaker 3>logic to be able to execute that contract.

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<v Speaker 2>Of course, smart contracts don't just allow you to get

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<v Speaker 2>to dinner on time. They're self executing computer programs that

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<v Speaker 2>essentially play the role of the trusted third party, or

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<v Speaker 2>put another way, they eliminate the need for that third party.

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<v Speaker 2>When you talk about this, I mean, it's an incredible

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<v Speaker 2>it's a very seductive vision of the future. But I

0:14:34.440 --> 0:14:36.640
<v Speaker 2>am getting a little hung up on the issue of ownership.

0:14:37.080 --> 0:14:42.280
<v Speaker 3>In ownership, I own my transactions, right I am looking

0:14:42.280 --> 0:14:45.520
<v Speaker 3>for a ride, so I own my transactions and you

0:14:45.920 --> 0:14:49.200
<v Speaker 3>own the car that you're using to provide the transaction,

0:14:49.920 --> 0:14:53.600
<v Speaker 3>and so the contract between you and I is literally

0:14:53.640 --> 0:14:56.840
<v Speaker 3>between you and I. Right, the blockchain is simply the

0:14:56.960 --> 0:15:01.680
<v Speaker 3>passive recorder and enabler of us doing a peer to

0:15:01.760 --> 0:15:02.680
<v Speaker 3>peer transaction.

0:15:03.160 --> 0:15:06.720
<v Speaker 2>Those peer to peer transactions are seamless because the blockchain

0:15:06.760 --> 0:15:11.400
<v Speaker 2>addresses the siloing problem of the platform economy. With wallets,

0:15:11.440 --> 0:15:13.520
<v Speaker 2>not the kind of wallet in your back pocket, and

0:15:13.600 --> 0:15:15.680
<v Speaker 2>not even your Apple wallet that you used to buy lunch.

0:15:16.160 --> 0:15:21.800
<v Speaker 3>A cryptocurrency wallet holds your own personal record of all

0:15:21.840 --> 0:15:24.640
<v Speaker 3>of the tokens and all of the digital assets that

0:15:24.680 --> 0:15:28.800
<v Speaker 3>you have in your possession, and it allows you to

0:15:29.000 --> 0:15:35.359
<v Speaker 3>hold all of those assets without revealing your personally identifying information.

0:15:35.560 --> 0:15:40.560
<v Speaker 3>Because all the transactions on the blockchain are completely transparent

0:15:40.600 --> 0:15:43.800
<v Speaker 3>to everyone, and if I had my name attached to it,

0:15:44.280 --> 0:15:46.640
<v Speaker 3>everyone in the world would know exactly where I'm spending

0:15:46.720 --> 0:15:48.960
<v Speaker 3>all my money, right, I don't want that from a

0:15:49.000 --> 0:15:53.320
<v Speaker 3>privacy perspective. So this is a way of me having

0:15:53.520 --> 0:15:58.760
<v Speaker 3>a financial piece of infrastructure where I can hold my

0:15:58.880 --> 0:16:02.960
<v Speaker 3>assets and I can try transact, but do so anonymously.

0:16:03.080 --> 0:16:06.760
<v Speaker 2>Beyond improving existing financial products and infrastructure. The blockchain is

0:16:06.800 --> 0:16:11.520
<v Speaker 2>also creating opportunities for entirely new financial products through tokenization,

0:16:12.120 --> 0:16:15.840
<v Speaker 2>converting assets into digital tokens recorded on the blockchain. The

0:16:15.880 --> 0:16:18.480
<v Speaker 2>assets can be anything from real estate to bonds, to

0:16:18.560 --> 0:16:22.880
<v Speaker 2>intellectual property to bottles of wine. I mean, talk about diversification,

0:16:23.520 --> 0:16:26.160
<v Speaker 2>but there's still that voice in my head that says,

0:16:26.560 --> 0:16:29.520
<v Speaker 2>there's no intrinsic value to this stuff. Why are people

0:16:29.560 --> 0:16:30.080
<v Speaker 2>buying it?

0:16:30.560 --> 0:16:34.240
<v Speaker 3>If I told you you could now own part of

0:16:34.280 --> 0:16:39.160
<v Speaker 3>the Visa network, all those merchants that are plugged into

0:16:39.200 --> 0:16:42.080
<v Speaker 3>that network from all over the world. If I owned

0:16:42.160 --> 0:16:45.880
<v Speaker 3>part of that Visa network, what could I do as

0:16:46.120 --> 0:16:49.760
<v Speaker 3>a business entrepreneur with it? What might I be able

0:16:49.840 --> 0:16:52.520
<v Speaker 3>to save as a consumer by being an owner of

0:16:52.560 --> 0:16:56.640
<v Speaker 3>the network? Right? That sounds like a very interesting value proposition.

0:16:57.320 --> 0:17:01.520
<v Speaker 3>So Bitcoin actually did more transact since then Visa in

0:17:01.560 --> 0:17:05.320
<v Speaker 3>both twenty twenty two and twenty twenty three. So owning

0:17:05.400 --> 0:17:10.040
<v Speaker 3>bitcoin actually gives you access to a network that did

0:17:10.160 --> 0:17:14.239
<v Speaker 3>more transactional volume than Visa did. So I think that

0:17:14.440 --> 0:17:17.480
<v Speaker 3>it's a new way of thinking. Do you want to

0:17:17.560 --> 0:17:20.719
<v Speaker 3>own a network? And if you want to own a network,

0:17:21.280 --> 0:17:24.600
<v Speaker 3>this is a really new and interesting way of being

0:17:24.640 --> 0:17:28.080
<v Speaker 3>an owner of a network, not a company, but a network.

0:17:29.119 --> 0:17:32.679
<v Speaker 3>Why is this so interesting and new? I think that

0:17:32.760 --> 0:17:35.600
<v Speaker 3>the more people understand, the more they get towards these

0:17:35.720 --> 0:17:40.640
<v Speaker 3>aha moments of Wow, this could significantly improve the way

0:17:40.680 --> 0:17:44.040
<v Speaker 3>the economy works. And then all of a sudden, you

0:17:44.119 --> 0:17:46.080
<v Speaker 3>have now bought into the growth story.

0:17:46.640 --> 0:17:49.320
<v Speaker 2>So if this is also great, why are financial institutions

0:17:49.440 --> 0:17:50.960
<v Speaker 2>so slow to adopt.

0:17:50.920 --> 0:17:53.840
<v Speaker 3>A few things are holding people back? Right, So we

0:17:53.960 --> 0:17:57.040
<v Speaker 3>need to get regulatory certainty. We have to kind of

0:17:57.119 --> 0:18:01.440
<v Speaker 3>get to a new equilibrium around idea entity. We need

0:18:01.480 --> 0:18:06.880
<v Speaker 3>to get to a new equilibrium around understanding this new

0:18:07.080 --> 0:18:11.399
<v Speaker 3>ecosystem because it doesn't operate in the same way that

0:18:11.440 --> 0:18:13.359
<v Speaker 3>we are used to. So I think there's a big

0:18:13.480 --> 0:18:19.080
<v Speaker 3>educational hurdle and understanding hurdle that people have to get past.

0:18:19.560 --> 0:18:21.959
<v Speaker 3>But I think they'll get passed it through things that

0:18:22.000 --> 0:18:23.600
<v Speaker 3>they do and things that they enjoy.

0:18:23.800 --> 0:18:23.919
<v Speaker 4>Right.

0:18:24.080 --> 0:18:27.320
<v Speaker 3>I didn't know much about the platform economy, but I

0:18:27.359 --> 0:18:29.400
<v Speaker 3>know I lived in Manhattan and sometimes it was really

0:18:29.440 --> 0:18:31.240
<v Speaker 3>hard to get a taxi. So the first time I

0:18:31.280 --> 0:18:34.760
<v Speaker 3>took an Uber, I was like, I love this service, right,

0:18:34.880 --> 0:18:38.040
<v Speaker 3>So you know, now if I can get that uber

0:18:38.400 --> 0:18:42.280
<v Speaker 3>for a fraction of the price that might excite me

0:18:42.600 --> 0:18:45.240
<v Speaker 3>as a consumer. Right, So, I'm not going to care

0:18:45.600 --> 0:18:47.960
<v Speaker 3>that it sits on blockchain rails, or that I'm using

0:18:48.280 --> 0:18:54.040
<v Speaker 3>a cryptographically protected wallet, or that my transaction is pseudo anonymous.

0:18:54.119 --> 0:18:56.400
<v Speaker 3>All I care about is that I got a good

0:18:56.480 --> 0:18:58.159
<v Speaker 3>ride and I felt good about it.

0:19:01.480 --> 0:19:05.280
<v Speaker 2>A more seamless efficient and secure future, well, I think

0:19:05.320 --> 0:19:07.679
<v Speaker 2>that's something we can all get on board with, and

0:19:07.760 --> 0:19:10.119
<v Speaker 2>an online leisure for all might be the innovation that

0:19:10.160 --> 0:19:15.119
<v Speaker 2>gets us there. Thanks to Roy Friedman and Sandy Cole,

0:19:15.920 --> 0:19:18.800
<v Speaker 2>Tune into our next episode when we speak with coinbas

0:19:18.840 --> 0:19:22.080
<v Speaker 2>As CEO Brian Armstrong and look at how crypto may

0:19:22.119 --> 0:19:27.000
<v Speaker 2>help to alleviate the most dire financial crises. This is

0:19:27.000 --> 0:19:31.320
<v Speaker 2>Evolving Money, a podcast from Coinbase and Bloomberg Media Studios.

0:19:31.760 --> 0:19:34.280
<v Speaker 2>If you like what you hear, please subscribe and leave

0:19:34.359 --> 0:19:37.080
<v Speaker 2>us a review. I'm Patty Hirsh. Thanks for listening.