Since you're a subscriber to this Bloomberg podcast, we thought you'd be interested in a new four episode sponsored podcast called Evolving Money, produced by Coinbase and Bloomberg Media Studios. It explores some of the monetary system's biggest changes over the centuries and today's companies that are making big bets that cryptocurrency could be money's next evolution. You can subscribe wherever you listen to your favorite podcasts. Here's a recent episode.
It's nineteen sixty eight, Buffalo, New York. On a road that runs along the Nagara River, a truck takes its daily route, laden with boxes containing thousands and thousands of small slips of paper, paper checks, birthday checks, rent checks, big fat checks for local businesses. Now, these checks have already been filled out, signed and cashed, but there's one
more crucial step. They're on their way to the Buffalo branch of the New York Federal Reserve, where they have to be recorded and reconciled, a process that ensures that each bank actually gets the funds their owed. But the truck swerves, It skids, It careens off the road. The boxes tumble out, and checks totaling millions of dollars fall into the river and float away downstream, never to be
seen again. Decades ago, a simple accident like this could throw the financial system into temporary chaos, and even today our system remains vulnerable to potential disaster. It's always been a system begging for change. From coinbase and Bloomberg Media Studios, this is evolving money, and I'm Paddy Hirsch, your host on this podcast. We're taking a different look at cryptocurrency.
It's been cast as a radical departure for the monetary system, But what if it wasn't radical at all, just the next logical evolution of how we pay for things and store long term value. Along the way, we'll explore how money has changed over the centuries, looking for lessons that predict its next evolution. You may think that today, in an age where money has been reduced to a series of ones and zeros on computers, the problem of paper checks has been pretty much solved. Well, in a sense,
you'd be right. Records of transactions no longer travel on the highways, for one thing. But in another sense you're dead wrong. The cost of the paper check system, both in time and money, are still very much with us. But there's a new technology called blockchain that looks as though it could provide a solution with an online ledger universally accessible and completely transparent, that can't be hacked or altered,
and costs next to nothing. That may sound too good to be true, but a look back at how the paper check system was improved by the rise of digital money demonstrates that what sounds like a revolution today can often become commonplace tomorrow. So could blockchain be the next big step in overhauling highwaymove money from one place to the next.
Well.
Later in the show, we'll discuss with Sandy Cole, head of Industry Advisory Services at Franklin Templeton.
The physical processing of checks with such a mess.
That's Roy Friedman describing the time before digital money. He teaches financial history at New York University's Tandon School of Engineering. He says, back in the late nineteenth century, clearing houses allowed banks to settle their accounts in a central place.
The New York clearing House developed all kinds of standards for clearing and settling checks and money. They basically would meet in a in exchange paper according to certain protocols and tally up their ledgers.
The system took a step forward in nineteen eighteen when banks established a proprietary telecommunications system fed Wire to process the transfer of funds. The system connected all twelve Federal Reserve banks, the Federal Reserve Board, and the US Treasury. The entities communicated by telegraph using Morse code, and for
decades the system remained largely telegraphic. But then in nineteen seventy, the New York clearing House tried something radical, settling transactions using a new technology, computers with an electronic system called chips, the clearing House interbank payment system. Banks could do something revolutionary settle payments in real time rather than once daily. The system was a lot faster, but it was still vulnerable to the occasional error, and those errors could be unbelievably cost.
A major New York bank lost its fedwire connection.
So losing a connection midway through a transaction.
Yes, well that was expensive and the end result was that the bank was short. So if I'm short at the end of the day, I have to pay somebody to stay solvent. In that case, twenty three billion dollars with a b overnight four or five million dollars of interest and that was a software error.
Eventually, as technology evolved, so did the process. Today, the floor of the New York clearing house has been emptied of couriers and bank exchanged large sums of money the same way you probably do digitally. The system has evolved, but it's still far from perfect. While computer systems have allowed us to digitize ledgers and made it easier to update or search them, they still require a lot of human help. Different systems don't talk to each other easily.
They're always being upgraded and patched. They're kind of like a bunch of ships sailing past each other in the dark, only able to signal each other in different languages. I mean, take, for example, how we settle equity trades.
We still, even after all of these years, cannot settle an equity trade in less than an entire trading day after and when you're settling a US equity and you're buying that US equity as an Asian client, it's sometimes three days.
That's Sandy Coal, she's head of Industry Advisory Services at Franklin Templeton.
There is a lot of inefficiency still in this marketplace, even amongst the efficiencies that we have put into the system.
The inefficiency comes from the fact that settlements are based on different ledgers, with each side of a transaction owning its own ledger.
You see all the trades you did with me and with everyone else, and I need to reconcile my version of truth, which is my leisure, with your version of truth, which is your ledger, and any discrepancies in our versions of truth require teams of people to come in.
Right, we're going to have a fight.
Well, this is why we have middle offices, and we have back offices, and we have lots of people whose entire job it is is reconciling different versions of everybody else's ledgers.
Sandy and her colleagues at Franklin Templeton thought, hare's got to be a better way.
Our CEO, Jenny Johnson, she was the head of Technology and Operations, so she was very aware of the infrastructure we had, the costs that we were accruing and running that infrastructure. And then she said, Wow, we run so many ledgers. There's this new ledger technology. Let's experiment and see if we can actually maybe save some costs or gain some efficiencies in using this new ledger.
That new ledger was a single public ledger shared by everyone. It was blockchain.
There is only one version of the truth, and everyone sees every transaction that takes place, and every transaction can be linked back to the original or what they call the Genesis transaction, which was the first transaction ever done on the blockchain.
It's possible then to have a complete history and complete transparency. The system is simple, streamlined, and it doesn't run the risk of a tiny connection issue that can cost an institution millions.
You do not have this delay of days or multiple days. You have maybe at most a delay of ten minutes between the transaction getting submitted in it being finalized and recorded. So this takes out so much uncertainty and friction in the system, and it would be able to create a whole new foundation for us to run more efficial payments and more efficient marketplaces.
Sandy and her team were intrigued by the possibilities.
What we found was that the blockchain based transfer agency system was more accurate, fewer errors, and this gave both us and it gave the SEC some confidence that we could keep the transaction records for the funds where we are the transfer agent on the blockchain, which was a big improvement.
Sandy and her team saw a quantum leap forward in the evolution of financial ledgers. They wondered, what could the first decentralized public ledger mean for the entire financial system. The move to the blockchain could represent a shift from one kind of economy to another. The economy we rely on today runs on various apps and platforms offering siloed services.
This is what's called the platform economy. There are a lot of inefficiencies here, but one big one in in particular, is that the apps that we use are each individually their own platform. They actually don't work together. The move to blockchain would be a move to a new economy, the protocol economy, an economy that could provide scaffolding and
interoperability services that could actually speak to each other. That means that transactions could move freely across the blockchain without intermediaries.
Instead of a platform sitting in the middle of multi sided buyers and sellers, in the protocol economy, an open source, easily accessible a completely free set of services sit in the middle that are offering us plug and play capabilities. In these new protocol economies, we're going to have protocols that can do thousands of things. You can call up a protocol that will allow you to hail a ride, just like you could go to the Uber platform, or you could go to Teleport, which is a new protocol
based ride sharing service. It's a free service that people can access and then they can use it to connect with each other to be able to transact, and then they work out the terms of their transaction. But the protocol that sits in the middle is free. They don't have to give you permission to use it, and they don't have the right to shut you out of the system.
The idea of a protocol economy is the first thing you need to understand to know how this new frictionless way of doing business on the blockchain actually works. For instance, to transact on the blockchain, you need a token. Now, the concept of a token may be confusing, so let's get one very basic thing straight. A token is not a currency.
I go back to this idea. You're going to the amusement park. You need to buy something that's going to get you able to ride the rides or purchase things at the concessions. They don't take cash, they take tokens. Think about that concept now, translated into this new blockchain economy. I don't use money, I don't use a government fiat based currency. I use tokens to actually engage and use both the applications that are being offered in the space
and to pay the blockchain to record my transaction. And I'm purchasing the block space on the transaction so that my transaction could be recorded with the token.
But doesn't it mean that you have to buy those tokens with fiat currency.
You can buy them with fiat currency, you can buy them with other tokens, right, You can buy them with a whole variety of different inputs. But the whole point is that it is enabling you to do this in many different ways, not just through one government dictated financial model.
Another distinction you should be aware of. A coin is a cryptocurrency like bitcoin that can operate independently and has its own platform. Tokens, however, don't have their own platforms. Instead, they piggyback on another cryptocurrency's blockchain network, and today the network that most tokens operate on is Ethereum.
When you get beyond Bitcoin and you start to look at different, more advanced blockchains like ethereum. They have developed a concept called smart contracts. If I'm creating a contract with you that you're going to give me a ride that I have requested from point A to point B, that is a contract that you and I are creating
on the fly. That contract can get recorded in the blockchain, and when that ride is completed, and there is proof that this ride is completed, and they can use geolocation, tagging or anything else to prove that the ride has been completed, the money will be automatically withdrawn from my account to you as I pay you for that ride. And that can only happen because that smart contract is sitting on the blockchain, and the blockchain has the business logic to be able to execute that contract.
Of course, smart contracts don't just allow you to get to dinner on time. They're self executing computer programs that essentially play the role of the trusted third party, or put another way, they eliminate the need for that third party. When you talk about this, I mean, it's an incredible it's a very seductive vision of the future. But I am getting a little hung up on the issue of ownership.
In ownership, I own my transactions, right I am looking for a ride, so I own my transactions and you own the car that you're using to provide the transaction, and so the contract between you and I is literally between you and I. Right, the blockchain is simply the passive recorder and enabler of us doing a peer to peer transaction.
Those peer to peer transactions are seamless because the blockchain addresses the siloing problem of the platform economy. With wallets, not the kind of wallet in your back pocket, and not even your Apple wallet that you used to buy lunch.
A cryptocurrency wallet holds your own personal record of all of the tokens and all of the digital assets that you have in your possession, and it allows you to hold all of those assets without revealing your personally identifying information. Because all the transactions on the blockchain are completely transparent to everyone, and if I had my name attached to it, everyone in the world would know exactly where I'm spending all my money, right, I don't want that from a
privacy perspective. So this is a way of me having a financial piece of infrastructure where I can hold my assets and I can try transact, but do so anonymously.
Beyond improving existing financial products and infrastructure. The blockchain is also creating opportunities for entirely new financial products through tokenization, converting assets into digital tokens recorded on the blockchain. The assets can be anything from real estate to bonds, to intellectual property to bottles of wine. I mean, talk about diversification, but there's still that voice in my head that says, there's no intrinsic value to this stuff. Why are people buying it?
If I told you you could now own part of the Visa network, all those merchants that are plugged into that network from all over the world. If I owned part of that Visa network, what could I do as a business entrepreneur with it? What might I be able to save as a consumer by being an owner of the network? Right? That sounds like a very interesting value proposition. So Bitcoin actually did more transact since then Visa in
both twenty twenty two and twenty twenty three. So owning bitcoin actually gives you access to a network that did more transactional volume than Visa did. So I think that it's a new way of thinking. Do you want to own a network? And if you want to own a network, this is a really new and interesting way of being an owner of a network, not a company, but a network.
Why is this so interesting and new? I think that the more people understand, the more they get towards these aha moments of Wow, this could significantly improve the way the economy works. And then all of a sudden, you have now bought into the growth story.
So if this is also great, why are financial institutions so slow to adopt.
A few things are holding people back? Right, So we need to get regulatory certainty. We have to kind of get to a new equilibrium around idea entity. We need to get to a new equilibrium around understanding this new ecosystem because it doesn't operate in the same way that we are used to. So I think there's a big educational hurdle and understanding hurdle that people have to get past. But I think they'll get passed it through things that they do and things that they enjoy.
Right.
I didn't know much about the platform economy, but I know I lived in Manhattan and sometimes it was really hard to get a taxi. So the first time I took an Uber, I was like, I love this service, right, So you know, now if I can get that uber for a fraction of the price that might excite me as a consumer. Right, So, I'm not going to care that it sits on blockchain rails, or that I'm using a cryptographically protected wallet, or that my transaction is pseudo anonymous.
All I care about is that I got a good ride and I felt good about it.
A more seamless efficient and secure future, well, I think that's something we can all get on board with, and an online leisure for all might be the innovation that gets us there. Thanks to Roy Friedman and Sandy Cole, Tune into our next episode when we speak with coinbas As CEO Brian Armstrong and look at how crypto may help to alleviate the most dire financial crises. This is Evolving Money, a podcast from Coinbase and Bloomberg Media Studios.
If you like what you hear, please subscribe and leave us a review. I'm Patty Hirsh. Thanks for listening.