» » The Innovation Is the Blockchain

The Innovation Is the Blockchain

20 February 2018, Tuesday
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we're here with David your Mac chair of the finance department at NYU Stern a colleague and the catalyst behind a fin tech specialization that was the first in graduate education wasn't it can you talk a little bit more about that we offered our first course in Bitcoin in digital currency back in 2014 and basically due to student interest and demand from industry we've scaled this up we now have a specialization in the stern MBA program let's start with the basics please explain what a crypto currency is a crypto currency is a currency that is driven by computer code it's also sometimes called an algorithmic currency but rather than being issued by government it's issued by a computer network with code that is usually very transparent so that people can understand when coins will be created and at what rate and how they'll be stored and so forth so you're putting your faith not in a central bank but in the integrity of the computer code itself how does it maintain value though how do you create confidence that there's gonna you're gonna have scarcity such that why don't people just keep mining it over and over and explode start printing more currency if you want well the rules of the code that govern the currency usually prohibit that so in the case of Bitcoin which is by far the best known there's a certain rate at which bitcoins are competed for every ten minutes that at current rates there's going to be twelve and a half bitcoins entering the network every ten minutes people compete for them but all you can do is hope to win that prize and the supply will not explain expand beyond the constraints set by the network when you say compete for them how do you how do you compete for them what happens in the case of Bitcoin is that you have to essentially guess random numbers in a way that completes a set of computer codes and solves the block as it's called so there are people all around the world with supercomputers trying to enter this contest because the prize at the moment is very valuable and whoever can complete the block in a certain way the quickest wins the 12 and a half bitcoins that are up for bid every ten minutes so it's not it's not a fixed amount it's just its increasing at a very slow rate yeah the the current rate of increase is twelve and a half coins per 10 minutes and the software behind Bitcoin cuts this in half roughly every four years so in the year 2021 it will be cut to 6 and 1/8 bitcoins and or 6 and a quarter bitcoins and so forth until it eventually tapers off to zero in the year 2140 all of this is transparent to the people on the network so you can see the rate of money creation which is very different than a central bank which uses its judgment but will change it from time to time whenever it ultimately concludes that it should and there's some mythology here what who is the god of the Jesus cry who gave birth to to Bitcoin how did it start who originally got the money for this where did where did who initially cashed the first check for the first Bitcoin well the way it began is still something of a mystery we know that late in 2008 somebody using the name Satoshi Nakamoto posted a white paper on a cryptography bulletin board on the internet and at first almost nobody noticed this except a small clan of people who frequented these kinds of places but the ideas spread by word of mouth and volunteers helped Satoshi code this up it went live on January 3rd 2009 and it took a while it wasn't until May of 2010 that the first bitcoins were actually spent on anything and this was two pizzas for 10,000 bitcoins and very slowly other merchants began to accept Bitcoin and network of companies grew that somehow participate in the industry and it's been completely organic from the bottom up there's no sponsor no investor who launched this and Satoshi Nakamoto vanished after a couple years we still to this day don't know who this person is but they haven't been involved in the project since some time around 2011 2012 so it seems that ok so two pillars of a cryptocurrency one you have to convince people that there's a mechanism for regulating supply and then you have to get people to accept it as a store of value right so who so it sounds like bitcoins been able to do that what are some of the other cryptocurrencies that have been able to do that the strong number two in the market right now it's called aetherium and etherium is rather different from Bitcoin Bitcoin was really intended to be a general use currency that in principle could be spent anywhere that people would accept it but etherium is internal to the ethereum blockchain and it's used just to execute smart contracts within a closed system so some people would call aetherium not even a currency but a token since it's a single use type of type of asset but there's no question it's valuable that lately bitcoins total market value has been somewhere in the neighborhood of 65 billion and aetherium has been trending between 20 billion and 30 billion so a lot of people put value in these are those the two primary ones there are some others there's more than 1,100 currently ripple would be the strong number three which has had a value approaching 10 billion lately and there's an offshoot of Bitcoin called Bitcoin cash which at the moment is among the big four in terms of value but I think there are as many as 15 or 20 that have values north of a billion dollars if you look at their total market capitalization so I'm already trying to think about ways to game this if you were Walmart Home Depot the biggest retailers are the biggest the biggest airlines and you said we're gonna buy a lot of this and then in uniform announced that we take this as a currency thereby dramatically increasing the value isn't there all sorts of opportunities for bad behavior and market manipulation here there might be and whether you could ever hold anyone accountable for this in many ways turns on where it fits legally in the legal system if Bitcoin were a security you might worry about people manipulating it and being liable under the securities laws but it's hard to make the argument that it really is Bitcoin doesn't have voting rights or dividends you know the other things that you would typically associate with the security and some people have said maybe it's a commodity but again you don't see many of the characteristics of a commodity present in this virtual asset that doesn't even exist physically I think it's a new type of property and exactly what regulations might apply to it is far from certain and you'll get different answers in different countries about that so okay so a baseline understanding Bitcoin etherium ripple now explain what feels like the building blocks if you will I don't know if it's the paper of the currency a blockchain what is blocked in what's the technology why is it what role does it play in all of this a blockchain is simply a database but it's a very different type of database than we've historically used for financial data so typically you would have a ledger with debits and credits and a balance sheet with assets and liabilities it's a whole system of double entry bookkeeping that came in during the Renaissance and has been really for 600 years the backbone of capitalism the blockchain is totally different it puts records into a sequence and it links them together using something called a hash code where if you change one entry in the ledger it throws off all the future entries what this means is that it's very easy to spot fraud much easier than in double entry bookkeeping in fact so blockchains not only are very transparent in that you can see when they've been changed but typically with these crypto currencies they distribute a copy of the blockchain to everybody which allows you to crowdsource the auditor function so it's not just that a mistake would be obvious if somebody changed the ledger but everybody on the network would be able to see it at once you wouldn't have to rely on an auditor investigator whatever to find it you would see it in real time so this sounds as if it strikes or could potentially be an innovation or around credit card fraud or one of the these are good problems but one of the one of the pain points in my life is wiring money and then having the institution call me and ask me questions that even I don't know yeah because they need to validate it what you're saying that puts the validation in the form of several thousand people that creates multiple points of security check or barriers so are all these things up for disruption in terms of credit cards wiring fees and I think you understand this very well that the real the real achievement here is not Bitcoin but the application of the blockchain technology and basically anything tracked on a database can probably be tracked more successfully on a blockchain than on the databases that we've used for a long long time so blockchains hold out the promise of defeating cyber fraud and hacking of making international payments much simpler without all the levels of credit checks and redundancy and so forth that have to go into that The Economist magazine called the blockchain a trust machine because the cryptography is such that you can unconditionally rely on it once it reaches you at the at the customer level so it has the potential to really revolutionize financial markets and if you want to sell shares of stock or bonds or the title to your home or automobile titles or send money around the world any financial transaction could be recreated on a blockchain at potentially greater security more savings you know faster transmission all kinds of benefits that have been long sought-after in the financial markets for a long long time so what's the link between Bitcoin and blockchain Bitcoin resides on a blockchain and the blockchain probably dates from 1991 seems to have been the first time it was really proposed and discussed and the authors of the original paper imagined it as a registry for intellectual property like recording ownership of digital tracks of music and things like that and it wasn't until 17 years later that Nakamoto wrote his paper and proposed putting these bitcoins onto block chains and this turns out to be the first compelling use case where block chains were really applied on a large scale was for Bitcoin and all of the eleven hundred other currencies that have imitated Bitcoin each has its own blockchain and this is essentially an architecture a data structure that seems to be in many ways superior to what the world has been using up to now the real breakthrough is the blockchain so and can the black blockchain be the underlying trust engine of not only Bitcoin but other more traditional currencies it seems like one of the applications often discusses that central banks may want to take the bills and banknotes withdraw them from circuit and just put the national currency into an electronic blockchain so you would have a digital dollar a digital pound and so forth it would give the central bank much closer control over the money supply and it would defeat things like money laundering and tax evasion very simply I think I'm it's a matter of time it's not a question of if but when a country will do this and my expectation is that the benefits will be so large that all of the other countries will quickly follow suit that ten years from now you'll see many central bank digital currencies like this so bitcoins value is skyrocketed I read an article by Robert Shiller the Nobel prize-winning Yale economist saying that one of the reasons that explains bubbles is there's an idea epidemic that people latch on to a narrative and then pump something up beyond a kind of a rational irrational price and that the idea epidemic behind Bitcoin is that people have lost faith in governments but they still recognize the need for store value transfer payments and here we have a currency that's no longer dependent upon a government and the government's can't control and the government's can't screw up by just you know every fiat currency I think over time has eventually gone out of business so to speak what's your view on what are the things driving the two three hundred percent gains we've seen in in crypto currencies you know first of all I think the introduction of Bitcoin could not have been better timed because it's launched in January of 2009 which is right at the bottom of the financial crisis so it catered to a belief by many people that central banks around the world had failed in their mission and it made people consider whether money wouldn't be better issued on a decentralized computer network than by sovereign governments who had done a very poor job of overseeing the stability of their financial systems now what accounts for the rise in value I think recently you can actually point to a couple of precise factors one is that Bitcoin for a couple of years now has had a backlog where more and more people wanted to use it but it wasn't growing in storage capacity enough to supply demand right and you had some choke points and bottlenecks only very recently in August after a of years of delicate negotiations was a solution actually implemented so I think this was actually quite important that the anticipation of this and then finally the the achievement and the implementation caused the price to rise considerably but a lot of it has also been tied to the introduction of initial coin offerings that really just in the last six months you've seen a flood of new assets into the market and to buy these initial coin offerings to be a customer typically you have to pay either an ether which is the etherium currency or in Bitcoin and so many people think that the demand for Bitcoin and ether is really derived from the demand for these new tokens and that they're using Bitcoin and ether really just to bid in the auctions for this new wave of speculative assets so initial coin offerings walk us through that instead of issuing stock in exchange for ownership rights to board seats a company does an initial coin offering what's the difference it's sort of like forward selling the revenue and using it for product development so tokens are meant at least they're represented to the public as a similar thing it's a way of a company to raise startup capital but it doesn't give any kind of ownership right to the person who buys the token do your customer rights enable to enable you to cash flow not really no it doesn't seem like it so what's so what's the and this is where I you know my mind starts circling and it goes nowhere what what's the benefit then and why are these initial coin offerings raising so much money if you don't have a right to future cash flows is it just that you're creating something that supposedly has currency and creates a synthetic where other people will buy it from or is it just pure speculation with these tokens it's hard to see why privileged access to the product in the future may be so valuable and I think the motivation of many of the people who buy them is to flip them quickly really as short-term speculative investments up to now this is kind of work that there's been so much capital flooding into the market that a number of these things as a round trip investor you can make a quick killing in a matter of minutes or days obviously this can't go on indefinitely the three things we talked about cryptocurrencies blockchain initial point offerings the thing that sounds the sketchiest and the scariest is an initial coin offerings but that the other observation is that because it's not doesn't represent ownership there's no potential it doesn't warrant oversight by the SEC or any other regulatory agency the regulator's around the world wish they could regulate this and you look at a company raising capital you say well this is a security under the securities laws but the people who've designed these have designed them very carefully to get around the classical test that we have for securities laws and regulators have been pretty flummoxed by this we had an event at NYU just last week where the head of the SEC was here and said he was very interested in these but to date the SEC has only taken a position on exactly one of these and the one that it issued the letter about was probably most like a security of all the ones that they might have picked but I think the people who designed the coins not only have cleverly maneuvered around the securities laws but they've been careful about geography many of them have ruled out investment from people in the US and physically they're typically not located anywhere so that it's hard to say who might have jurisdiction when they exist only in the cloud in cyberspace so it sounds I'm put out a thesis if you're advising different stakeholders involved in initial coin offering if the company can raise money off the initial coin offering I see very little downside to creating a synthetic raises why you wouldn't do it it sounds like a great idea let's do an initial coin offering for the person who's sophisticated and has a stomach of Steel - and risk capital for 30 seconds or less and hoping to flip it it sounds like on a risk-adjusted basis an interesting way to make up to make a living for anybody else this sounds awful I would not recommend these as investments I wouldn't you know to use a great deal of caution learn what you're buying all of these are a little bit different and one or two of them may have value in that they are connected to a product or service that will be scarce and your access to it may be valuable in the future but I think for most of them this is probably a long shot do your homework don't jump into the market and expect to be able to flip them quickly because sooner or later these things end it's an application of what we call in finance the greater fool theory that I know I'm a fool for buying it but there's an even greater fool than me I'm going to unload this on do you think this technology or cryptocurrencies create a swash risk in the financial markets or increase it I'm not sure that they actually interact with the regular financial markets I've wrote a research paper early on that showed that bitcoin is completely uncorrelated with other currencies and with gold and it just seems to be a risky asset risky asset out there all by itself and in that sense if bitcoin does well or does poorly it doesn't really affect macroeconomic variables like interest rates or the stability of the money supply or anything like that I think it's a curiosity and at this point it's really so small that it can't be much trouble one way or the other for the real financial system so this isn't this isn't a Moore's this isn't long-term capital management 2.0 you don't you don't see a scenario where potentially the next financial crisis the epicenter is as cryptocurrencies no because the total value of all the money in the world in crypto currencies is on the order of a hundred billion dollars and that's just tiny relative to the size of the capital markets in the world this is it's fun and it's a curiosity but the real value of this is the technology behind it and how it's probably going to be integrated into the mainstream economy so I think bitcoin is of historical importance for bringing this technology to our attention but I don't think bitcoin is either the money of the future nor is there any risk of Bitcoin destabilizing the currency markets but it sounds as if you're zeroing in on blockchain versus Bitcoin or initial coin offerings that the innovation here and writing likely to stand the test of time is blocked and that's absolutely right and that's why we put blockchain right into the title of our course and what we talk about are very mainstream problems like international remittances supply chain management logistics managing the flow of collateral and letters of credit among banks that secure goods in transit settling trades on the stock exchange these are very big markets and applications that can probably be done much better on a blockchain than they're done with the old technology that's in use now and that's that's the real promise and the real source of value you see the companies beginning to apply this as vendors serve people like IBM and Microsoft that are recruiting blue chip clients like Maersk and Walmart and so forth to integrate this directly into supply chain management working capital management and so forth how do you invest in and make money potentially in blockchain it's an interesting question because you do have basically a disruptive technology here but this is open source technology that anyone can access for free it's really a way of designing a ledger or a database I think the best way to make money on it is probably to identify companies that have been especially aggressive and forward-looking at bringing it to the market and investing in their stocks and this requires some equity research I think some firms are rather secretive about what they have going on from a research point of view but in the long run I think some financial firms will adopt this quicker than others and companies who are in the shipping or the transit business also industries like Electric Power healthcare and so forth there seem to be clear applications for it and I could see someone starting for instance a mutual fund called the blockchain fund that would identify companies that were very forward in their adoption of this and then you could invest at least indirectly in the technology by owning that basket of company stocks that had bet long on this technology so companies that you feel are good at this can you have all the bulge bracket or all the financial institutions the JP Morgan's the Goldman's the UBS is do you see any standouts it seem to be be doing the best job or kind of get this it's interesting that JP Morgan Jamie Dimon gave a speech just a day or two a thrashing denouncing Bitcoin saying it was a fraud and that he would fire anyone who he caught trading in it now he wasn't specifically denouncing the blockchain but the the message I think to the Troops was pretty clear that JP Morgan is not that company that's going to be forward-looking I'm octant to pick out anyone Bank simply because so many of them are looking at it at this point many of them are really reacting from a defensive posture that they realize this is a technology that cuts out the middleman you know if you do international remittances you can do it with ripple and maybe not need the network of banks on the Swift Network so I think many of the people in industry are trying to do what I would call the bare minimum to co-op this into their business models in such a way to protect the franchise's they have the problem the banks have is that all of them have to comply with existing regulations in their current lines of business and as soon as they start moving assets under block chains or dealing in virtual currencies as investments they open a can of worms about whether they're still in compliance and for a start-up that doesn't have the burden of the overhang of regulations for their existing business you have a lot more freedom in this space so at a retail level how is a consumers life going to change with the innovations around blockchain cryptocurrencies etc I think first of all physical money will disappear almost entirely and for most people that's already happened that we use not only credit and debit cards but mobile payments like venmo and I think that trend will only accelerate I think the biggest change that you may see is that if central banks issue digital currencies you won't have branch banks engaging in fractional reserve banking anymore in other words your paycheck wouldn't be deposited into the Bank of America or JP Morgan Chase it would go into an account at the Federal Reserve everyone would just bank at the central bank branch banks would disappear so your point of interaction with a financial system may be just through one giant national blockchain run by the central bank and this would fundamentally change the way that you handle your personal finances because you wouldn't be interacting with the consumer banking system that you have grown up with him that you have been using for now and this wouldn't necessarily be a bad thing I mean it's worth remembering that these banks all failed multiple times and required taxpayer bailouts and you wouldn't have to worry about any of those kinds of disruptions in the future either taxpayer or as a customer so banks go away reduction in fees more confident or secure that you won't be a victim of hacking and/or fraud that's the big benefit is that the security of your financial data should be much higher in a blockchain so you're not going to wake up and learn that 143 million social security numbers have just been hacked from a credit bureau or that you know somebody opened a bunch of accounts and your name by taking your information all of that hopefully will be in the past if banks are central banks are able to co-op the blockchain technology and use it as a line of defense against what is a huge problem with cybersecurity so the legacy players might get hurt and might shed value because they don't want to risk their current businesses by running afoul of regulators and it sounds like Jamie Dimon pooh-poohing you know that reminds me a lot of retailers in the 90s saying no one will ever buy anything online it sounds like they might collectively lose market capitalisation or value startups gain because they they're too stupid to know they're gonna fail and they can be crazy and aggressive and really go after stuff what about do see any legacy industries that will likely increase in value or do see any big winners in existing marketplace from this technology not obviously in fact I think the best analogy is to consider the peer-to-peer economy and the example I usually bring up at the start is the music business so you must remember Tower Records and Sam Goody I know Tower Records used to go to the tower records on Westwood Boulevard I love Tower right yeah and it's not there anymore and that is what is really going to happen to the banks of the brokerages that you're going to move to much more of a peer-to-peer interaction between savers and investors to send international remittances you won't need a chain of four or five banks on the Swift Network you'll just send a ripple token with the transfer attached to it so it's not so much that banks are going to gain or lose is that they'll just become unnecessary so my prediction that sounds like a loss well yeah I mean they're just gonna be gone like Tower Records and you think banks you think large financial complexes will disappear I think they will be greatly reduced they will preserve some parts of their businesses but you'll see many defensive mergers and consolidations of the financial services industry banks brokerages exchanges and so forth and many of these things recreating themselves on a peer-to-peer basis using blockchains as a substitute for the trusted third party the payments process or the Clearing House the bank the whole point of the technology is to make the middleman disappear and I think one by one you're going to see this happen in different product lines and financial services so in finance are one of the basic tenants of Finance our investing is diversification across a bunch of asset classes do you recommend that cryptocurrencies be part of someone's portfolio as an asset class may be a very tiny amount there's still very very small relative to the community of investable assets you know well below 1% and it's a little funny because they're not a hedge for anything you would think that there and move inverse to some industries or provide some insurance against the sovereign currencies in the market but they seem to be out there by themselves as a type of pure risk so I think the case for an investor to hold these is pretty minimal and I I wouldn't advise holding the currency I would advise learning about the blockchain technology and thinking how it may change different industries do you own any cryptocurrency absolutely not it's very risky professor David Yurman chair of the finance department and the catalysts behind our FinTech specialization we appreciate your time thank you Scottскачать dle 11.3
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