– Joe D’Amato: On behalf of the Wisconsin Alumni Association, the International Division who will celebrate International Education Week next week, and PLATO, it’s my pleasure to welcome you to our Global Hot Spots lecture. It’s our second of three this fall. I’m quite excited to introduce Brad Chandler, director of the Nicholas Center for Corporate Finance and Investment Banking at the Wisconsin School of Business to speak about cryptocurrencies and their effect on the global economy. Please join me in welcoming Brad Chandler. [audience applauding]

– Can you guys hear me okay?

– Audience Member: Yes.

– Great. So yeah, so I’m really excited. Thank you for having me. Thank you for coming out. I think I will not probably deliver one core part of this lecture, which I don’t think I can make it a hot spot necessarily Wisconsin in November, especially when seems winter is arriving early.

I also wanted to try to find a really great quote for you to figure out, how to encapsulate cryptocurrencies, distill it down into its most important essence. And I decided to think about, I don’t know if you watch HBO, and John Oliver did this whole section on cryptocurrency, which I thought was pretty entertaining. He described cryptocurrencies as “combining everything you don’t know about money “with everything you don’t know about computers. ” [audience laughing] I thought that was a good definition. I have definitely have felt that before. And lastly, I’m really excited to be here at the university. I thought maybe it was part of this series with the Wisconsin alumni. Just a little bit about my story. I’m kind of new to Wisconsin. I’m in my third year now.

I married a Badger and she brought me back to Wisconsin; she’s from Wisconsin. But I’ve had a really good opportunity at the university to take some skills that I learned in New York and other places and really try to help students, or some of my students that are here today, in the finance department at UW and places like this, that give opportunities to try to engage with broader communities that are interested in topics that maybe, that I can help shed a little bit of light on. So it’s been really great, and I’d say a key part of it is I have a five-year-old, and Madison I definitely think is one of the best places to raise a family. And I think there were some stats around that, but we’ve definitely find it as a very welcoming community. I really love being here, and thank you for coming out and supporting, affording me. So I think it’s important for you at the outset to understand what informs my perspective. Why am I here? Why do I have anything to offer you with respect to cryptocurrencies? And so understand that my perspective is a finance perspective. So I was involved on Wall Street for a number of years. That’s where my career was, and now I’m in the business school, thinking about finance. And so I often think about it through a finance lens.

I teach a class at the business school on cryptocurrencies and blockchain. And I have prior experience in law and a little prior experience in technology. But importantly, I’m not a computer scientist. I’m not here to explain to you how the code works within cryptocurrencies. And I’m not building a business in this area. I don’t really have any horse in the fight, I don’t have any horse in the fight, if you will. I don’t have any allegiances, no conflicts. As I talk to you about this space, and this is my opinion. And I think that’s important to know, because often, none of us feel like we arrive at something that’s new with enough background. Often we think, “I don’t know anything about technology.

“I don’t know anything about finance. ” Or “I don’t know anything about X, Y and Z. ” But I encourage you to not let that stop you. Not let that stop you from learning about things that you’re really curious about. You don’t have to have some academic degree to think about what cryptocurrencies are and to learn and to find sources of information to help you understand. And I encourage you to, as the world gets more and more complicated, as technology moves forward into our lives more and more, I encourage you not to shy away from it, but to actually try to engage with it in the way that you can, and don’t feel like you need to have any special perspective or special education before you do that. So lastly, before we get started you know, I teach an entire class on this subject, so I can talk for days, and my wife hopes that I get all my talking out here and not at home later tonight. [audience chuckling] So I had to try to frame it in the right way, and I didn’t want– the way that I framed it was, how is it really getting traction in the real world? And that’s, I think maybe something that you care about. But inevitably, things that I cannot do today, just at the outset, I can’t explain everything about cryptocurrencies. I can’t explain everything about blockchain.

But I can start to give you some ways to think about it and some ideas. And then I hope that you take those ideas and if you’re curious about them, that you go think about them more. And there, I think we live in an age where there’s more information, there’s more knowledge, there’s more teaching online than there really ever has been. So to the extent you’re a student and you’re a lifelong learner, there’s no better place to live than where we live today. And so I hope you take that, take that opportunity if this is something that really interests you. But if that sounds good, let’s start. So rather than teaching you everything you need to know about cryptocurrencies, I definitely want to start with some definitions, some things that I think you need to know to understand where we are and how do I put this in context? I wanna give you a little bit of a history. It’s gonna be a very abbreviated history because you could spend a whole hour on that. Some of the history that I think is important to know where we’ve been. And then I wanna talk about where we are today and I see that very differently than where we’ve been in history.

So with that, let’s start with some definitions. So there are new things in the world now that are called digital assets. Digital assets just mean some form of value, something that has some kind of value that exist online or exist in a computer system, but it does not exist in the physical form. There is no dollar to put your hands on. There’s no block of gold that you can hold and store. This is all digital, and that’s the first thing we’ve got to think about is in this new world, there are a lot of digital assets and there are a bunch of them, and cryptocurrency is only one type of a digital asset. And so it’s important thing for you to have in mind, because you may encounter a lot of different types of digital assets. But the way that we’re gonna think about this is cryptocurrencies are these digital assets that only exist online or in a computer system, and what they’re seeking to do, their goal is to be a new form of money in the real economy. The real economy is what we in our daily lives interact with. They’re seeking to be a new form of money.

We’ll talk more about that. Just so you know what else is out there, but before, but we won’t really address this today. There are also these digital assets that have a very specific use. They’re not trying to be money in the real economy. They’re trying to be primarily used within an application, within a protocol, within a project that’s been developed. They’re a means for kind of interacting with a given application or some new protocol. You might hear the term utility token, protocol tokens if you follow much out there. But there’s a lot of activity in that space, and that has nothing to do with the cryptocurrencies that we’re gonna talk about today. And lastly, there are ways to take physical assets that we have in the real world and put them, we call them, tokenize them, put them into the digital space as a digital representation of a real asset. So there are things like, people have taken gold bars and said, “Okay, I’m gonna create a token “that represents ownership in this gold bar. ”

But it is really a gold bar that you’re owning, that you own and that’s, so there’s a lot of activities around tokenizing real assets, whether it’s houses or gold or other things of value. Those are value though that exist in the real world today, okay? And we’re not gonna talk about any of that stuff. We’re gonna talk about the ones that are trying to be a new form of money for us. So then we need to think about how do we evaluate whether it is being, it is useful as money? And so the economists tell us that, economists tell us actually that anything can be money as long as it serves some basic functions. So we don’t really say only X can be money or only Y can be money. Anything can serve some basic functions; it can be called money. And so the first one of those, which is really critical, is that it’s a medium of exchange, meaning I can, it’s accepted when I wanna go buy real goods and services. When I wanna go to the grocery store and I wanna buy milk or bread, it is something that they will accept to buy that good, but they’re not accepting it because they wanna just hold onto this object. They’re accepting it because later, they can take that same money and buy whatever they want to buy with it as well. So it’s a medium of exchange, a way to exchange goods and services.

I want certain goods and services, you want other things, how do I exchange that in the economy? If you think about the U. S. dollar, clearly that is great at that. The next is that it becomes a unit of account. And that’s a little odd. It just becomes a basic unit for measuring economic value. So when we think about in our mind, how much does a car cost? How much does a suit cost? How much does bubble gum cost? We’re thinking about it, that’s real economic value. Generally, we think about it in dollars, right? We think, “Oh, $10, $100, $1,000. ” But it’s a way for us to think about various different goods and how they are, what their value is in comparison to each other. And that’s closely linked to being a medium of exchange, by the way.

And then lastly, a store of value. So if money needs to be a store of value, it should be a place where you can preserve your wealth or savings for future use. So someplace that I can put the savings that I’ve earned and be comfortable that in the future, it will still be there, and it’ll still be of value, hopefully appreciate in value. And ensure a way it would store value, many things do that. Some people think of their house as a store of value. I’m gonna take my savings, invest it into my house, and my house will be this real estate asset that will preserve that wealth. Other people think about stocks or bonds. There are a lot of things that may be a store of values. So these are the yard sticks that we’re gonna use to think about if cryptocurrencies are gaining traction in the real economy today. And I also want you to understand that, you probably already know this, but that money has taken many different forms throughout history.

So money has not been a single object that only governments have done; there are shells, beads. There used to be gold coins that were worth the value of gold that was by weight of the coin. So really those gold coins were saying the gold is valuable, and that certain weighing of that gold was the economic value and the coin was just a method of delivering that. But today, we’ve moved very far beyond that. Now we have the U. S. dollar. That is a no way connected to gold. It’s no way connected to silver. It’s no way connected to a real physical asset that has any value.

It’s just the government saying that $1 is worth $1 because the government is pledging that they are backing that currency. So essentially, you accept a currency based on the faith of the various governments that are out there, and how that government is doing, how that economy is doing relative to the other economies. So we have today the accepted currencies, right? The U. S. dollar, yen, the euro, all the big global currencies. And then I just wanna highlight things that function like money at times that we might not always think about as money, but definitely gold bars. People certainly think– there’s certainly a certain type of person that thinks, “If I buy a gold bar, put that into a savings, “put that into a storage account, “that that will be the way to preserve my wealth “in the future. ” I think of American Express membership rewards, that’s kind of an odd thing. But if you spend money on your credit card and they give you some points and you can use those points to buy real world items, you could, you can get a whatever it is that they might sell, that’s a medium of exchange in some ways. It’s not a very widely utilized one, but it is one.

And then we talked about our houses. So money has taken many different forms. So think of cryptocurrencies as then maybe the next version of money. And cryptocurrencies take many different forms as well. There is no boilerplate, exact version of a cryptocurrency. Some of them are not backed by any real world assets, kind of like the dollar. They’re not backed by any real world asset. But even though they’re not, they may have real economic cost in the production and creation of that cryptocurrency. So if you’ve heard about Bitcoin at all, you’ve heard about maybe the mining and how much, there’s a lot of computer power that goes into the mining. And essentially what Bitcoin has said is it’s gonna cost participants in this system something to develop this currency.

And that’s what’s gonna underpin the value of it, is the economic activity that’s going into this currency. And so even though it’s not backed by a real world asset, it could have real economic cost. On the other side, there are cryptocurrencies that are asset-backed. And I think people in general feel more comfortable perhaps with a digital asset that has some backing of real assets in the real world. And so there are some that are, have the backing of currencies. So they say, “This is one unit of a digital asset, “but for every unit it has $1 of real U. S. dollar “associated with it. ” And so it is one-to-one backed by a real world currency. And people I think, think of that as maybe a really useful type of cryptocurrency.

The last thing we’ll talk about, which we could spend a long time on, is blockchain. And I’m sure you’ve heard about blockchain. It’s not that complicated from a computer science perspective. It’s simply a database, and it’s a really simple database. And it’s shared by all the participants. So if we were all using blockchain together, you would all have your own version of the database. I would have my own version of the database, and we would collectively agree on what the database– who owns what within the database. And when hundreds of people collectively agree on something, it’s very powerful because that means the chance that it’s not what all 100, 120 people think it is, is very low. Blockchain, the reason it’s called blockchain, there are records, and these records are just one transaction and another transaction and another transaction. They’re stored sequentially.

So it’s time, it’s based on the time that it happens. They’re linked together. The blockchain is the link. And then there’s cryptography that goes through it that ensures that it’s resistant to hacking or resistant to bad actors trying to upset the system. And blockchain has proven to be a very, very secure technology. And so why do cryptocurrencies use this blockchain? Well, the security of it, so the transactions that– because you’re only a digital asset, the security of whatever is underpinning that digital system is critical. And blockchain has been, so far, one of the most useful security features to make sure that people feel comfortable with the security of those digital assets. Secondly, blockchain, like I said, if there are hundreds of us that are using it together, it doesn’t require a central bank to say, “This is what it should be. “These are the transaction. ” It doesn’t require any bank.

It doesn’t require Associated Bank, it doesn’t require J. P. Morgan. It doesn’t require any centralized authority to tell you what this digital assets are. And so that’s a really attractive feature of blockchain. And lastly, what the blockchain protocols do is they can program in the features of the money that you want. So if you want the money to only be, you only want– Bitcoin only has 21 million Bitcoins that will ever exist. That’s programmed into the system. So no central bank can say, “Oh no, “I want it to be 25 million,” or “I want it to be 100 million. ” It’s programmed in that 21 million Bitcoin is all that’s ever gonna exist.

And so people like this idea of programming upfront how we want our money to act in the future. The idea of whether mining is required, whether there’s computer systems that need to produce these coins or not, these are all things that can be programmed in on the blockchain. All right, so then our working definition so far, at the surface, is a digital asset. Something that does not exist in the physical world, that its primary goal is to be money in the real economy, in our economy today. It utilizes blockchain. Unlike traditional currencies, it is not backed or guaranteed by any government. So the U. S. government is not telling you that Bitcoin is a valid form of money. No one’s telling you that it’s a valid form of money.

And then those currencies, they may or may not be backed by real-world assets. And maybe if you’re a little nervous about digital assets in general, you might want to see them really backed by real-world assets to at least help you understand why does this have the value that you say it has? Well, it has the value because underneath it is gold or U. S. dollars or whatever. So that’s the starting point of where we’re gonna go. So let’s keep going. The history here is really– It’s really interesting. It’s hilarious in a lot of ways. There’s a great book called Digital Gold that I recommend about the origins of Bitcoin and all the craziness that went into the creation of this. But what I love about it is that it represents true bottoms-up innovation.

That means innovation from entrepreneurs, and generally these are people, generally that are younger, very technology-savvy, but they’re creating new things and they’re doing things that, kind of the world has not seen before. And so it’s really interesting, and I’ve really enjoyed understanding more about it. We’ll talk about Bitcoin, which is the very first cryptocurrency, which arrived 10 years ago in 2009. We’ll talk about how Bitcoin led to the explosion of a lot of cryptocurrencies and other digital assets, and how that early history had both this really fascinating experimentation, fascinating things that maybe me, set in my ways of what finance is like, would never have imagined. But people tested the boundaries of finance and of other things. And so really fascinating experimentation. And then there’s ugliness, right? Innovation is not something that’s happens and is only positive, there are some ugliness to it. And so we’ll talk about that. And then lastly, the history, I think as a history of extreme volatility in this space. And we’ll talk about the boom and bust cycles for these assets.

Because if you can imagine, I think about traditional assets, I think about a lot. Let’s say Apple, Apple has a stock value of certain amount, and I may be able to get my heads around what is the value of that Apple stock, because I know they sell phones, they make money on the phones, they sell other products and they make money, and eventually an equity holder gets the money and the growth and the cash flows from those investment. And so I can put a value on that. A cryptocurrency, you know, there are no assets, most of them have no assets. There’s not any– you’re not making any products and selling. There’s no money coming in the door, and so it’s very, very hard to think about the value of it. And I think that’s what leads to this massive volatility that you see. It’s hard and it’s not an easy question about what the values of these should be. So let’s start with Bitcoin. In 2009, a single person who is still unknown, a person called Satoshi Nakamoto, which people think is either one person or multiple people, but we don’t know who this person is, came up, essentially wrote a paper, that’s all this person did.

They wrote a paper and they said, “The problem today is that, “all these, I can’t send money to you “without going through some government “or going through some bank. “I always have to go through some bank “that will keep a record of my transactions, “and I can’t just send you money. “And I find that to be–” They were thinking online, they can’t just send you money. And they thought of that as not optimal. They worried about privacy. They worried about, if someone knows everything I’m doing, might they try to profit from that? A lot of the things that we’re dealing with today around data security and privacy, they thought a lot about, and they were trying to build a system where individuals can protect their privacy more. And so essentially, it was also a huge reaction against central banks. So what happened in 2009, this is right in the heart of the financial crisis, right in the heart of banks who had over-leveraged themselves, who had made risky investments, who got burned on those risky investments, and now the central bank was going to give them more money to help stabilize them. You can debate the merits of that, it seems like that was probably a good thing from the economy’s perspective, the economy quickly recovered, but there’s something that seems unfair about that. Why is my money going to these banks, which are already rich because they made some bad bets on a couple things? And so in the very first block of, the very first block of this blockchain that is Bitcoin, there’s a message in there, and it’s a written message.

It says “3rd, January, 2009, “chancellor on the brink of a second bailout for banks. ” And so it was very clear why this was created. It was created to be an alternative, created to be outside the traditional system, outside of this centralized authority that some people felt was an unfair system. And so Bitcoin in 2009. . . And it’s just one or two people that are doing this. So when I talk about bottoms-up, I’m talking about a few people in a garage thinking this is a good idea, developing this thing, and what they developed was decentralized. That means there is no centralized authority. This blockchain idea, blockchain as we know it today would not have be here if it was not for Satoshi Nakamoto and what they did with Bitcoin.

So it’s not that they invented blockchain. Blockchain actually has its history in the ’80s and ’90s, but no one had ever implemented it to do anything in the real world or in the digital world. And it had a very limited purpose for Bitcoin. It wanted to be a new form of money for these transactions that this person wanted to do without having a bank involved or a central bank involved. That led to Ethereum, which is another big cryptocurrency project. Ethereum by the way, was created by a 19-year-old, really a 19-year-old kind of computer genius. And so I often think, I have the fortune of being with a lot of millennials and a lot of younger people, and they’re exceptional, they’re exceptional people. So this was an exceptional person. 19 years old, he built on top of– he looked at Bitcoin. Let’s see you tomorrow. [audience chuckling]

So he looked at Bitcoin and thought, “I can make this better. ” And so Ethereum, again, it’s a decentralized blockchain. It’s not backed by any currencies or assets. So it’s purely digital, but it’s a platform where essentially anything you can do on a computer, you can now do on this blockchain. And that’s a odd concept. But whereas Bitcoin wanted to just be money, “I just want to be money in the real economy,” Ethereum says, basically, “You can do any function “of a computer can do. “And I will have developers build on top of this platform “anything they wanna do on a completely decentralized basis. ” Maybe an example is a smart contract, a smart contract is simply, we’re gonna decide, me and you, that we have an insurance contract where if I miss the plane for whatever reason, you pay me an insurance on my plane ticket. And so the event happens in the future, you either made the flight or you didn’t, and the money either pays out or it doesn’t pay out. That’s all.

There’s nothing complicated about that scenario. And so what can happen is this platform can just program that in and automatically do it when the event happens. And then it also led to, what are these, all these altcoins, they’re called alternative coins. They’re altcoins because they’re alternatives to Bitcoin. So Bitcoin, you should think about as the cryptocurrency heavyweight, the altcoins are the lightweights that are trying to see if they can challenge the heavyweight. And there are a bunch of these, and they do various things. And it really led to an explosion of these cryptocurrencies. So since 2009, there’ve been 4,000 digital assets that have been created, 4,000. Now remember in the beginning we talked about digital assets. So only a subset of those are cryptocurrencies, meaning they’re trying to be new forms of money.

Other of them are doing the other things that we talked about. Today, they have a market capitalization of $239 billion. So all those cryptocurrencies are worth today, $239 billion. So it’s pretty, it’s big, it’s big. Bitcoin represents about 66% of that. So of all the cryptocurrencies, it’s still Bitcoin that is the big heavyweight, and still has about 66% of that value. And then the top 10, remember I said there’s 4,000 of them, the top 10 represent 89% of that value. So essentially you have a top tier of cryptocurrencies that people think are useful and are doing something, and all the rest, the other, 3,980 are kind of worthless. So that’s the way you should think of that. But there’s this explosion of experimentation in cryptocurrencies, and then some things happen in the world of finance that really confused everybody, especially at the business school, very confused by this.

These projects that people were doing. So again, these are technologies, young people who are starting new businesses, new ideas. They find a way to fund their ideas that gets around all the other players, all the traditional venture capital funds or the stock market. They know, I think, that if they go to those traditional sources, that no one’s gonna care about their projects, no one’s gonna give them funding. And so they create these new funding mechanisms and actually raised, they’ve raised $30 billion in these new funding mechanisms since 2013. That’s a huge number. So they call them initial coin offering, initial exchange offering, security token offerings, encourage you if you’re interested in to look that up. They’re very, very risky. I don’t recommend investing in any of them. But what it does, it says, “I’m gonna raise, for my community, funding, “and I’ll presale the coin, “and then I’ll develop the project. ”

Now some red flags should be going off in your head thinking, “Wait, you don’t have a product yet? “Wait, you don’t have your, you haven’t built anything yet “and you want me to give you a lot of money?” But guess what? A project that had not been built yet, no products, raised $4 billion, $4 billion. That makes, let me tell you, people on Wall Street are super jealous of that. [audience laughing] They are trying to help Uber, who has revenue, Uber doesn’t have cash but it has revenue, and they can barely sell this IPO to investors, and then it does really poorly. But these upstarts are raising $4 billion for an idea. And so obviously, there are some concerns and there are problems with that, but that’s, I think that’s fascinating. I think it’s great and it’s even continued. So some people thought, oh, well that– A number of people said that’s a sign that we’re at a bubble. That’s what people said, which I think is not, that’s fair. But it’s continued. The price of cryptocurrencies have come way down.

I’m gonna show you that in a minute, but it’s continued. That funding mechanism is still there. There is still a funding mechanism that is more democratic that exists for people that can convince, especially technology-savvy people, that their ideas have merit, and I think that’s a good thing. There are risks to it. The SCC has been– the securities exchange permission and who regulates offerings like these have been wrestling with these, and they’d been prosecuting scams and they’d been laying out the framework. But I think now we have a framework of, we know what a regulated offering looks like. We know, we know what it looks like. And so it’s developed and it’s very interesting. Now let’s talk about the ugly side of innovation. Of course, you’ve seen a lot of innovation in many different areas.

You’ve seen transitions of society where ugliness happens. Happens everywhere, happened here. Silk Road was an online platform to sell illegal drugs using Bitcoin. So you can pay in Bitcoin now, the banks won’t know about it, and you can buy illegal drugs and I’ll ship it to your door. Yeah. So we’re talking about things that, where that’s possible now. The FBI obviously is, it’s their job to ensure things like that do not exist. They found this, they shut it down in 2013. The person that created it, serving a life imprisonment without parole, maximum security in Arizona. So this, he’s 25 when the person did this.

But that clearly was a bad thing. Mt. Gox, so you’ll hear this term, Mt. Gox, it was an early Bitcoin exchange. So the exchange is where I take my U. S. dollars and buy Bitcoin or sell the Bitcoin back. And so it facilitates your transaction, and at one time, it had 70% of all the transactions in Bitcoin went through Mt. Gox, and it was hacked, hacked in 2011 and they stole $450 million worth of Bitcoin. Gone.

So now your digital asset that was so secure is now gone, and there’s no physical representation of it. So there’s no recourse. It’s gone. And so what you see, one of the lessons there is that even though the blockchain is very secure, by the way, Bitcoin has been around for a long time, the blockchain has had no issues. Blockchain has not had a single fraudulent transaction happen, but like an exchange, so when you take the exchange and have them hold your Bitcoin, they’re just like anybody else. They can get hacked. Equifax got hacked, right? All the people again. So there’s no immunity here to what is happening in the real world either. And then Ethereum, and I told you about the 19-year-old that created Ethereum, they had this great idea. It’s confusing, and I still get confused about it.

It’s called a decentralized autonomous organization. So some youngster came up with this idea that maybe we could take a whole organization and just program it to make it automatic so that it runs itself. So here’s the idea, we’ll have a fund together, we’ll put our money together, and we want to fund new entrepreneurs doing new things. All right, so how the system works, we’ll have our entrepreneurs send their proposals, we’ll have this system get votes from all the people, and it’ll just automatically happen. You’ll get a proposal, you’ll vote, and then if a certain percentage voted for it, then it will disperse the funds. There’s no, you don’t need a person that can tally the votes and you don’t need a person to disperse the funds. So this decentralized autonomous organization, so I thought, everywhere. I think it’s interesting idea. I think it’s interesting. I don’t want to put my money in it, but I’d love to see what happens. [audience chuckling]

They raised $150 million for this project. So real money, and then it was hacked in 2016, and 30% of those funds were diverted by the hacker due to a security problem. And so this is the ugliness of cryptocurrencies. And then uncertainty and speculation drive volatility that is very rare in the financial markets. So this is just Bitcoin. But remember, Bitcoin represents most of cryptocurrency, so you can take this as representative of cryptocurrencies in general. When we launched our course, Bitcoin had risen 2000%. All these new Bitcoin millionaires, and just as quick as it went up, it quickly went down. So then it lost almost all of its value in what’s called– they call that period the crypto winter, the winter of crypto. But of course, back up, what do I take away from this crazy, this speculation, these massive boom and bust cycles? Digital assets are harder to value because there are no physical assets associated with them.

So for us to really know what the right price of Bitcoin should be, it’s really, really hard. And so I would not expect a market to agree very steadily on what the price of Bitcoin should be because it’s hard to do the math and do the calculation. There is no math to do. It’s hard to do the calculation. Two, there are these hype cycles where people think blockchain is gonna save the world. It’s gonna feed the hungry, it’s gonna do all these things. And then there’s boom cycles where blockchain doesn’t make any sense. It’s not gonna be useful at all. And so I think we’re in a period, and I think this period is gonna persist, of we’re just not sure yet. We’re not sure how well it’s gonna do.

We see some value there, we see value, we think it’s interesting, but we’re not sure how well it’s gonna do. And that uncertainty is what creates up, down, up, down. And so by the way, if any of you were thinking about it, I do not recommend investing anything in any cryptocurrency unless you have the ability to lose that money, right? You don’t, you only invest what you’re comfortable losing. Okay, so then where are we today? So I talked about the first period was bottoms-up. I talked about these 19-year-olds, these two people in a garage that are developing these new ideas. Now we’re in a completely different phase. Now we are going top-down, and it’s changing everything. So the real traction, where are we getting real traction today? Well, the real traction is more coming from the top down than it is the bottom up. Bitcoin has proven to be durable. It lasted for 10 years.

So it’s not just a fluke, it’s by far the leading cryptocurrency. It’s had a lot of competitors out there, and it’s proven that it can withstand the competitors, but it has not achieved any broader market acceptance. How many people here have used Bitcoin at all? Anyone? One person. Great, excellent, great. So again, the broader acceptance, the broader market acceptance is not there. And now, large institutions are trying to drive cryptocurrencies in new directions, and I think that is more likely to have the large-scale adoption than what we’ve seen in the past. But now the goals though are different. The goals now of this top-down development diverge from the goals of what Satoshi Nakamoto was trying to do, or what Vitalik Buterin was trying to do. Large investors want new products so they can trade in these assets. By the way, large investors, so institutional investors, hedge funds, they love volatility.

Volatility helps them make money. They love it, they want access to this. Banks now wanna use it. So the, I think it’s very odd that a technology that started complaining about the bank bailouts will be used by the banks now to help them pursue their own purposes. It’s a little irony there, but they wanted to reduce costs and keep their large customers happy. Large corporations want to use it, if they could use it to attract more customers or build their businesses if it helps them in that way, and governments now want to use it for their own political purposes. And so now, so we’re in a very different place, but I do think that that top-down development will push the regulators to clarify what the regulatory framework is gonna be for these cryptocurrencies. The thing that we don’t really know right now is, is Bitcoin okay from the Federal Reserve’s perspective? Is it okay from the EU’s perspective? I think they’ve tolerated it so far because it’s pretty small, that it hasn’t really impacted. Again, it’s not impacting the real economy yet. But if there’s gonna be any large scale, if I’m gonna have half of you or more raise your hand, there’s gonna have to be a clear regulatory framework of what this means, okay? So let’s, I’ll take you through that.

And then after that, I’ll open up for questions. So let’s just reflect maybe on Bitcoin now that it turned 10. As I think about it, it’s a clear alternative to traditional currencies as a store of value. Remember the store of value idea? So it is functioning as a store of value. Some people call it digital gold. They say it’s better than gold because gold is, weighs a lot of money, you have to store it, there’s storage costs for it, you can’t transport gold internationally very easily. So it’s definitely a clear alternative. It’s the clear leader. I think it’s withstood any bottoms-up innovation to change. So I think it’s the clear cryptocurrency leader.

Its blockchain has been very secure. So there’ve been no fraudulent transactions that have happened on the blockchain in 10 years with people definitely trying. And so it’s kind of proven out, I think the security of the blockchain technology. It has ways of improving the transaction speed, which is a big negative right now, is how many transactions can it do. It’s pretty small, but that’s improving. And then there’ve been installed like almost 6,000 Bitcoin ATMs around. There’s some in Madison here where you can go get Bitcoin if you want. And I dunno, maybe you want to do that for $10 or something and just try it. I think it’s good to try. Not with a lot of your money, but.

They are trying to make that push into the real economy, but it’s not been easy. Okay, so what on the other side though, 10 years, we’re not gaining broader market acceptance. It’s just not happening. There are like 600,000 active accounts. One user could have multiple accounts, but let’s take the maximum is 600,000 maximum users, that active users right now, it used to be a million, but 600,000 globally, that’s a very small number. And it’s not being used as a medium of exchange. You cannot go out to Fluno here and buy anything in Bitcoin. You can’t go to your supermarket and buy stuff in Bitcoin. You can’t go to the car agent dealership and do that. And it’s definitely not a unit of account.

We don’t think about, what’s the value of this chair in Bitcoin? So it’s not as convenient and it’s not as user-friendly as a lot of these other methods that you have at your disposal, whether it’s your bank account that does quick electronic payments or Venmo or PayPal, things like that are very easy. And there’s continued volatility. So it’s even if you did think it was a good store of value, you probably don’t want your store of value to go up and down so much, right? You probably want it to be a little more stable. And so it’s impressive in a way, and not in another way. But some things have happened recently that I think are, some things have happened that are little less two people in a garage and more top-down. Coinbase is the preferred platform. If you’re gonna buy and sell cryptocurrencies as a retail investor, it makes it very easy. So this is something that my mother could do. She’s not, but she could. [audience chuckling] You could go for going to Coinbase, connect it to your bank account, tell her you want to buy a $100 worth of Bitcoin.

It’ll do that for you, and very easy for you. They now have 30 million users. May have already told you there was 600,000 active Bitcoin accounts. They have 30 million users on this platform. That’s more users than Fidelity has in their platform. And Vanguard hasn’t, not together, but they’re equivalent to what Fidelity and Vanguard do. From a user perspective. It’s worth $8 billion. They’ve raised a lot of money from venture capital, and it is fully regulated. So it’s U. S. domiciled, it’s regulated by FinCEN and D. C. It’s regulated by the New York state financial division. So it presents a above-board way to get into cryptocurrency. So this has been interesting. Stable coins are things you’ll hear about, we find there was a stable coin development phase. I think there’s finally, we’re finally there now. A stable coin is simply a coin, a digital asset, that is pegged to a traditional currency. So the most famous one is Tether.

Every unit of Tether has $1 in the bank, one U. S. dollar in the bank. So Tether only has value of a dollar, and that’s your stable coin, meaning it will be stable throughout that period, and you can see the stability there. But that now has become a significant volume of trading have happened there. So this has been a new development that has helped, I think, the situation. There have been exchanges. So the big exchanges, the exchange that owns New York Stock Exchange has created Bakkt. This is for now large, these are for these large investors, but they have futures now, custodial services that people need, and so there’s a lot of investment, again, top-down for their largest investors. And now J. P. Morgan has created a digital currency. So now these banks are driving cryptocurrencies in new directions. J. P. Morgan has a digital coin, but guess what? It’s only available to their clients. So now you’re starting to see the difference a little bit. It’s an acknowledgement of the value of the value proposition of having a digital currency that might do things. Facebook Libra has been announced. It’s been very controversial, but what, what does Facebook bring? Facebook brings instant global reach.

There are 2. 4 billion Facebook users in the world. They also own Whatsapp, which is a messaging platform, 1. 5 billion users. People check Facebook more than any other thing on the internet globally. They have an asset-backed digital currency. Theirs is backed by traditional currency, by U. S. dollars and euros. So you might think, oh, that seems a little bit better because now there’s a physical backing.

They brought in partners to like, to say, “We’re gonna use this in our networks,” like Uber is a partner, they’re gonna use it. Processing speed is very high. This is the next generation of cryptocurrencies, where it’s more likely to have broad-scale adoption. But you’ve seen, U. S. regulators hate it. EU regulators hate it, and I think they hate it so much because it really challenges the traditional currencies. So I don’t know if this will ever happen, but it is another iteration that is more likely to be, have large scale adoption. And then lastly, governments are using it as political tools. So China is supposedly weeks, months away from launching its own state-backed cryptocurrency.

The president there has said blockchain is critical to what China is gonna do in the future, and they see it as potentially making their currency a little bit more attractive internationally as on their rise, they hope their currency is the reserve currency around the globe, not the U. S. currency. So this is, can they help that transition a little bit through that process? Other central banks are looking at this as well. And so lastly, what should we expect next? I’ll stop here. Raising any questions. I think governments will definitely resist any cryptocurrencies except their own that might have the potential for large-scale adoption because if cryptocurrencies really did work, all of a sudden countries have less control over their monetary policy, which is very troubling for them. I think Bitcoin will continue to face steep competition from these new forms of digital currencies. So either central bank digital currencies, or from like Facebook and things like that. The asset class of cryptocurrencies will continue to professionalize, to make trading easier for those big traders that like this volatility, that really wanna trade.

Banks and large companies are still gonna use this as a tool to reduce costs and improve processing time. I think there will be what I call positive spillover benefits for all of us, to consumers and to society. Just as there’s more competition in currency and more competition in payments. I think that’s a good thing. And so I’m hopeful that this next phase, even though it’s top-down, there will be a broader benefits as well. And what are we doing at UW lastly? So we’re gonna publish a report. There’s some students here today that are gonna be doing a report on Facebook’s Libra currency. So be on the lookout for that. We’ll have something written on that. We’re doing a cryptocurrency blockchain class in the spring.

We opened it up to any student from any discipline that wants to take it. And we try to talk regularly on campus about these issues. So we’re really happy to be part of this lecture to keep an eye out if you see other things that we were doing. We published something last year of the top student perspectives on blockchain and cryptocurrencies, which was interesting. And we have been engaging with alumni that are in this space that are doing really interesting things. So that’s what we’re trying to do on campus. And that’s what I had today. Happy to-

– Thank you very much for giving me the opportunity and happy to answer any questions that you guys have. [audience applauding]

– Woman: If you have a question, if you’d like to raise your hand, Lizzie and I can come around. Oh, already. [laughing]

– Woman: Thank you. Can you tell us what you mean by mining?

– Brad: Yes.

– And am I correct in understanding that this is mostly about speed and facility of transactions of online monetary transactions?

– The mining part, is that connected to that you’re saying?

– No.

– Oh, oh, about this whole thing. Okay, right. Yeah, let’s start there. So is this whole idea about the speed of monetary transactions? I would say yes, in a way, but there’s a broader objective as well, which is to create an alternative to you, an alternative to U. S. dollars for you. So it’s trying to create an alternative money as well, but certainly trying to make faster payments online is critical.

Here’s the only problem I say about that is, if all we wanted was faster payments, there are better systems out there than like Bitcoin. We already have Venmo. We have a lot of very fast payments right now in many different ways. And so it’s really about an alternative currency as well. It’s not just about payments. Okay, great question. Mining. Mining is a part of Bitcoin. And it’s not a part of every cryptocurrency. The way it works is to help underpin the value of what a Bitcoin has, it requires that the production of new Bitcoin be done by a set of computers.

It can be, like I said, we’re all, let’s say a hundred of us here are on Bitcoin and we are on the protocol. Any of us could be miners. It’s open to anybody, and we’ll take the computational power of your computer to solve puzzles. It’s a cryptographic puzzle. It’s artificial, meaning that there’s no purpose for the puzzle other than trying to have people really have an economic cost associated with getting the Bitcoin. And then, so all of our computers would expend energy and computing power to try to solve a puzzle that the reward would be a new Bitcoin. And so all of us would do that. It would take us X amount of minutes to do that. Someone would randomly win that contest and then they would get new Bitcoin. And the only, think about it, the only reason you would ever do that is if you thought the value of the Bitcoin justified whatever costs is going in for you.

So mining costs these days are about half of the value of Bitcoin. So miners can feel comfortable mining it and then they’re getting an asset out that is worth more than the energy that they’ve put into that. That’s a pretty complicated concept, but I’ll start you there.

– Well done, thank you.

– Sorry.

– Woman: Could you please explain how a Bitcoin ATM operates? I mean, what does it dispense, vapor? I don’t– [audience chuckling]

– Woman: Where are the locations?

– Yeah, right.

– That’s great. Yeah, it’s a great question. My understanding is, so you never used one, but you feed in your $20, it has– There’s a exchange fee of Bitcoin to dollars and it gives you 20 U. S. dollars’ worth of Bitcoin.

By the way, it’s charging you a transaction fee like normal ATMs. And then it can give you a printed out account and, of, an account number essentially, that is your private number for those Bitcoin that you have. And then, so okay, you have this account number, you have apparently this digital currency somewhere. If you went to a vendor that accepted Bitcoin, you could tell them, “This is my number, “use my Bitcoin that’s in this account. ” Kind of like a, in some ways it’s no different than gift cards. You have a gift card and I put some value on it and I take you to give it to you. It’s just that it’s not in a physical card, it’s just a number. I think of it like that.

– Man: How do governments tax transactions using cryptocurrencies?

– That’s a tough one. All right, so the regulatory scheme is like, they think of cryptocurrency as very different. If you’re at the SCC, if you’re at the IRS or wherever, the IRS’s current view is that they treat it as property, and that is not great for people who want to experiment here. What that means is when I buy a Bitcoin, let’s say it’s worth a dollar, and then I spend it, if that Bitcoin has gone up from $1 to $1. 10, I spend it, and then I got a taxable event of 10 cents. So when I use it trade property for another property, I have to think about, did it appreciate or go down when I used it in that transaction? So a lot of people who maybe go Bitcoin to Ethereum to Tether, they have taxable events at every, every time they transact, it’s a taxable event. So it’s actually not very user-friendly at all. But there are services like Coinbase and these other platforms can help you prepare all the information you’d need for that. And it’s, given its volatility, sometimes you’ve made a profit, and a lot of times, you’ve lost money. So it kind of, maybe it evens out at the end. All right, thank you.

[applauding]

– Woman: Thank you for coming.