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2. Money, Ledgers & Bitcoin

Jun 04, 2021
The following content is provided under a Creative Commons license. Your support will help MIT OpenCourseWare continue to offer high-quality educational resources for free. To make a donation or view additional materials from hundreds of MIT courses, visit MIT opencourseware at ocw.mit.edu today. What we're going to do is last week you gave us some feedback about what you want me to do in class. We'll go over that and talk about the readings. I'm going to make a little call to help you. you take the class through the readings and then the six or seven things I'm going to do history of

money

accounting books fiat currency central banks and credit cards the role of

money

some of the first digital money you had the clerk read about a lot of failures tries from a little bit of mobile money to Starbucks and Allie Pay and yet the conundrum remains: we're going to get really deep into Bitcoin and then in the next three classes, but this is to give some fundamentals of money and Ledger's and central banking and technology and then, of course, I always like to end the class by talking a little bit about why we're doing what we're doing from now on, although the readings are required.
2 money ledgers bitcoin
I know you all busy I know you all have a lot of classes and as good business students and business people you optimize, so I'm trying to give you an idea why you might read it instead of it being required at the end of every class and how it fits into the narrative of the course and then we'll draw some conclusions so that the results of the survey what you wanted to learn this is really your class and I'm going to learn a lot from you, but I hope we can cover what you want, so here's a list of those things that were at least written by two of you first, were technical things, eighteen of you said you understood blockchain technology.
2 money ledgers bitcoin

More Interesting Facts About,

2 money ledgers bitcoin...

Hopefully we'll get to that, but they might want to do more after this. classify the ecosystem and be able to have an educated discussion, like a dinner conversation about blockchain. I think it will be a success, but at the end of the semester we will show these slides again and see how we did as a group. group, everyone talked a lot about applications, how you can actually apply them, learn them in the business space and where it really works in the world and I think we're going to spend a lot of time on that in the second half, but throughout.
2 money ledgers bitcoin
We are going to talk about economics and what is the reality versus the exaggerations. They also wanted to understand its impact on people's lives. The regulation. About six of you said something about regulation. I'm glad because we're just going to give a lecture about it. but we're going to spread it because as we talked about in our first class, I'm honored that Larry is here again, but you know we'll always be thinking about the four ways of Larry and I see that's where Larry Lessig shook you. your head yeah anyone wanna say how that relates to blockchain?
2 money ledgers bitcoin
Why are we chatting about that? Oh my gosh, I'm going to have to cold call quick, right. Oh, you're from r3, maybe not. Ilan helps you, your table is made. It's not like I'm having fun, you know, this is what I'm going to do. I'm just going to have fun with all this, so why did I listen to the markets code law? I can't see your name, but that's it. the Doric, yes, why is that related to all this? jihee, you are going to repeat the question because you revised it. Larry's for horses relates to our trade, our horse policing issue again, our markets, so the commercial law code or architecture calls it. technology and social norms, so what I got from the real you today, these Ledger for me already existed, but giving that now makes you think, for example, and more things that are happening help society, a good way to say Look, it's unfair of me, it wasn't.
One of the readings I'm saying in everything in life I find that these things collide with each other. I spent a lot of time in Washington on politics, but markets and how business enterprise and economics deal with technology and something like that. faces the law and then of course social normative behavior, these four forces and almost everything one does in life will find it, so I just ask that you always, whether it's one reading or another, bring that to your thought process of this kind. I'm not signing Larry's homework. I didn't even know he would be here, but I always thought it's a good discipline to think through, what the business realities are, the markets, what the technology is, even if it's older.
Today and it is an automobile technology that replaces the horse and carriage if the US government or the official sector had included it in a set of standards that are required and then how can we be a society, even If not necessary, just have our behaviors? the four forces, that's why and I probably failed Larry's class, but I thought about it, I probably did well, you know, he's shaking his head, but regulation is just one of those four forces and that's why I do a pause there and then I'll have it in every class, but just in a lecture on money and markets, that's one of the other forces.
Five of you said you wanted to make money and I applaud those who said that because if you have it, you're in business school, why not? Investing in trance now there were many other diverse topics. I'm not going to analyze them. I thought the last two were interesting anecdotes from my past. I'm not sure who said that. I'm not sure what you want to know. my three daughters are my broker or this, you know things about Wall Street finance and I would also like to understand hyper

bitcoin

ization, but I don't know who asked that question. I don't know what it is, so I'll try it. to find out what hyper someone wants to recognize that question, they were anonymous, okay, so today's study questions what the role of money is historically and in today's digital economy and this is what I will look for in the discussions for anyone who wants to tell me which It is the role of money.
What would be your response to these three classic roles of money that people talk about? Kelly, do you want to repeat what he just said. You know, in the conquest of various lands, prizes and also funding, and what we will discuss today. and what it is is that money is a social construct, it's something that societies put together, whether it's hard to say if it was five thousand years ago, eight or ten thousand years ago, it's actually a mechanism of social consensus, but let's chat. about the readings in a minute and let's get back to that question: what is fiat currency?
Does anyone want, Tom, want to tell us what fiat currency is correct, so you said it's a central currency and it's managed by the government? Does anyone else want to add some things like? a Kyle that is not backed by any physical product do you want to add anything? It was always like this? The currency could be backed by something physical. There was another? Remind me of your name. Sorry about the taxes and remind me of your name because I can't. See a card, so here's a question for the class: is there inherent value in non-fiat currencies?
Because Shawn sang. There may be one distinguishing feature of fiat currencies: it has no inherent value. Well, actually, the same applies to any product used for purity. You know why. It's just that this car has some specific resource and a common social agreement that will be how many people are more in line with Eric or there's no right answer to this. This is a question that has been debated for decades or centuries. but how many more are there today in Shawn's camp? For example, gold is definitely like a social concept. We decided that as a human society, gold is going to be a valuable thing, but if it's like you know the grain, humans can't do it and you know I've been quietly here in college, so I think there are currencies that aren't from the country, dad, go ahead, inherent values ​​and does not embody them well, no one who is cheeky, yes, Tom Thomas, it is a legal thing, how do you encourage society to use the The food that makes more people use it is to say that the Fiat currency is legal tender, so first we have to discuss what legal tender is.
Anyone wants to kick out of the stadium anyone who has not yet raised their hand to use the money. It can be a store value it can be a means for you to not be able to pay your taxes, right? Is it that correct? So in the 19th century, you could pay your taxes in gold in the US and in Britain in other countries that had gold currency? Is it just a yes? or not, but James does, but the seventies that are not paper money attach the gold standard so inherently that there is in the exchange of value that is linked by the government or the bank or the central bank, so it is almost the same.
At that time, until more recent years, James is saying that gold could be used as legal tender. Legal tender again is something where a society comes together and creates a law that you know back to the lesyk because it is a society that you know, it says that it is not just a social normative behavior it is a law that one must accept this in the US and the UK in many countries says that for all public and private debts, a debt owed to the government or a debt in a store which we will get to later like When is it true that someone has to take your money?
But I'll leave that in a minute and talk about it, but I think he also said it was somewhere between Sean and Eric, both physically in the class and in terms of his articulation, fiat currency might not have anything inherent behind it. , but gold mostly has nothing inherently behind it and then some forms of currency like grain had more, so it might be a continuum, maybe it's not, you know. black and white one hundred percent or zero percent and then we'll talk a little bit about how Bitcoin fits into it and our next three classes will really focus on the technology of Bitcoin, but just a little bit of analysis first.
I go through some lecture slides that want to talk about how Bitcoin could fit into this story of money and then I'll come back to that question in about 45 minutes and ask you again, but does anyone want to say anything about the lectures and you? remind me that your name is about twins, they have the same thing where the value is given by society, except with Bitcoin it's not that I think of a central bank, so people don't believe that there is an inherent value, but I like that the readings pointed out that there is More or less the same story as Isabel said that Bitcoin fits into the story of money because, like fiat currencies and like G, said about gold, it doesn't necessarily have any inherent monetary monetary value, but it is a set of social norms that people are accepting. has value, but the key distinction that Isabel said was that it is not a central, it is not backed by a central bank or a central authority, so my pin is unique because I believe that the value of Bitcoin changes over time, not the fluctuation that we see as 6,000 or 90,000 dollars. but in terms of the energy company it is out of the point itself and today, for example, we could buy pizza or anything popular, so there is an ignorant value in terms of many cycles of exchange and it will change, society adopts it more . and more so, I think it is difficult to define whether there is a rise in Bitcoin if I can put some words in your mouth and tell me if I am right, that Bitcoin could have some distinguishing characteristics even from fiat currency, that its value is changing with time. by adoption is I mean you didn't use that word please let me know your name Ian as a brit but with an O you told me before british the evolution of the tech lady like accounting and the evolution of money together with how we happen. in the great agent and the advent of the tea ladies and then the distributed layer, which is something fundamental, what are the fundamental blocks of another type of natural progression of how money is bought, yes, what is raised, brother Tisch , also fits into Bitcoin. the history of Ledger, whether by double entry, Ledger is recognized through T accounts or other forms of Ledger, which adds to this whole long history of Ledger.
I agree with that and it is a new way to maintain Ledger. Elaine, it sounds like scarcity and Ledger are important. Viva components in terms of scarcity, but the more we adopt, the more it becomes divisible in terms of units and therefore we can increase its use because this ability is another characteristic of the adoption of scarcity of money. Ilan said that Ledger is sorry, you take the

bitcoin

that makes people implement discussed in the decentralized environment, so without any I will take one more and then I will start playing with the story, why don't we go here to revive the username like money in other forms of currency, even if it's not controlled by, like there's a Hooker in Mint or something like there's no fixed exchange rate in the sense of an extremely fast currency, so I mean it's still very different.
Alexis, yes I understand, Alexis' point is that there is no fixed exchange rate on Bitcoin that we are talking about, but couldn't we? really extend that to all forms of currency, I mean what is really the type ofchange between an ounce of gold and a bushel of corn, yes and no, because some governments try to fix it now, back to the markets, how well it worked when governments try to fix it. one type of change, I mean just a sense of class, it works well, so it might work well in short periods of time, it works less well over decades, I'll take one more and then I just want to review a couple of things: what is an accounting book?
Very good question. I'll be chatting about that in a minute, but does anyone want to respond? Sorry, no, we're here because the American ledger of anything recorded in a ledger creates a numerical record. I think it's good that a ledger is basically a way of recording economic activity or social relationships or financial relationships. I would argue that it is both a way of recording economic activity and is a system of recording financial relationships, and while I do not assign these readings, some very good academic research suggests that early writing methods and writing symbols they had to do with numbers and they had to do with Ledger instead of words and communication because it is essential for the society to record various economic transactions or record the financial relationships between them among the members of a community, whether it is a small village or when the society breaks out in villages thousands of years ago so help will come back and you're better off asking that here than in your accounting fundamentals class so the readings we've talked about the readings how many of you actually watched the little video three minutes?
What do you think? I just want to say, sorry, here we have it in the chat, it was just that. It was a nice little Ian Hawaii Matthew. I'm sorry, you would have given him a dollar. Great, if someone else had given him a dollar for it. No, maybe you would. We refer to each of these readings as we go through the next 45 minutes, but yes, he was actually breaking the law by launching his own necklace that was illegitimate, you know, obviously not competing with the US dollar. A very interesting question. I don't know of any federal or state statute that says there is an absolute monopoly or forms. of currency as there is and other things like, you know, that's a slot in the door called where you can put a letter through the door or a mailbox.
There is actually a law that says the US Postal Service has a monopoly and that is why UPS is not allowed to put their boxes or anything there, there is a state Fiat monopoly, but you raise a very good question: what we have found in the last 10 years with bitcoin without oversimplifying is that it is legal to create your own form of money, like bitcoin, possibly this money, but you have to comply with all the other laws and all those other laws of the ones we will talk about in other conferences, in essence, fall into buckets of protection against illicit activities, so the Bank Secrecy Law and all the laws related to money laundering and terrorist financing, etc., by which one still You have to pay your taxes if you win or lose on this investment that the Federal Reserve and other authorities around the world still want to insure for financial purposes. stability the guy on the streets of I don't remember in which city New York he sold his dollars when Mathew bought him for a dollar and I think here Briona what is that yes Brigade bought it, we will probably have society will still be stable, everything will be fine, but if millions of people bought it then people might worry and then there's the third big group that we look at is investor and consumer protection, but I think that's allowed so we'll refer to these and Joe Quinn. and then you have to pay, for example, salaries that you would be in the US, yeah, and why can you legally pay four salaries in Bitcoin in the US?
So anyone you know is out of the readings, but why do you think it's allowed? in this society it's Kyle most of the things you could pay someone with these signs. I really doubt you're worth that much, but you could pay someone in this, you could pay someone in gold, euros, Bitcoin and there are companies that pay normally. They are developing blockchain applications and interestingly they have to calculate the value of salaries to withhold taxes because the US government does not accept taxes in Bitcoin, so they calculate the fair market value and there are companies in the US .U.S. that pay people in Bitcoin. who are doing development work around blockchain applications, but the taxes have to be calculated, analyzed and then paid in US dollars because there was a legislative initiative in Arizona earlier this year where a state legislature wanted Arizona to be the first state in I accepted Bitcoin for taxes, but it failed in committee, not even getting a full vote.
I don't remember if it was the Arizona Senate or the Arizona House of Delegates, but just a little history tour I was going to do. Do some money history and have fun, so in Ethiopia people put together sawn holes, these weren't that long ago, they saw it as, gee, I would have said before that it's really valuable in society and they standardized the shape and size and they said that here it is sawn. Wild boars, we'll get to all the characteristics of money a little later, but what else do you think of a sawn bar in Ethiopia compared to maybe in some other country?
What did it have and why would people use that crude oil? oil, okay, I hadn't thought about that, I'm going to keep thinking that it's not a common characteristic of money, but why, sophomores, what else could I have? In Ethiopia we preserve food, but because it was extracted. There was also some scarcity and a lot of coins, a lot of money over time to have that fundamental problem. Cowie shells from West Africa. Does anyone know the history of when the Cowie shells actually degraded and fell out of use from the readings I can? I don't remember if that was in the readings or not, they had to lament when the Europeans began to realize that they were accepted as a value and as a very sad and terrible story, because it is related to the whole slave trade, but that the Europeans could I realize that societies accepted this as something of value, but they also debased that currency, degraded the land, and captured people as slaves.
I mean, it was a big collection of not particularly good things that are recorded in England, so any of the readings. because there was a bit of debate in the first reading about the history of money. I want to chat and I'll get the rice tones out of yes, how does this fit into that first reading in the debate between whether money comes from a story. from the border or the money came from a Ledger and credit story, which is kind of a setup of that first. I think the first reading you have some idea, what are these four bits of money, initial money or more about maybe the border, such a cool theory, right? dead that corresponds to these a form of metric with which one bit hits six the count says yes correct what is the second here that has to do with debts in reality and credits increase the points, so it is notable that the correct stones They were so heavy that on this island of Yap, they couldn't carry it and use it, you know, in a traditional medium of exchange, but it was also seen.
I have a sixth of this raised stone, you have a sixteenth and then if I make a trade, Remember, a society was small enough to maintain a form of Ledger even to the extent that when a raised stone was lost in a river they said: you know the river of rice stone, each of us has this piece, so on the island of Yap, okay, I can assure you that these stones could not be used for anything else. Does anyone know? Because it was outside of the readings that made these stones so scarce, so the rye stones were quarried on an island about two hundred kilometers from Yap, so we are extremely difficult to get. like gold like gold mining what else has been mined these days that could be money what is that I can listen to everyone what will be very difficult in the future for the electric battery tomorrow what is mine right now that is in the center of This type of Bitcoin true the Yap stone was, in essence, quarried a few hundred kilometers away and what a degradation that currency had when the sailors from England arrived.
There's a specific sailor, I think his name was O'Keefe, in the late 19th century and he realized that these stones were valuable and he went to the other island and started asking questions and came back and in a few years the whole system economic collapsed. At first we went to metallic money. It wasn't actually stamped, it was just heavy. It was difficult to extract bronze in Rome. In Sweden, some Chinese were starting to be stamped by the official sector and then we minted money from about 2,500 years ago and there are debates about whether it started in Greece or China, but we are an official emblem. on a scarce resource that was used, paper money emerged in a certain sense, for what reason, why, why did society first invest in paper money?
Gold is a little heavy, especially if there was no gold and if it was copper, bronze, it was just heavy. or if it was wheat, you have to put it in a storage unit, so the first bills from China were basically warehouse receipts and I spent five years running something called the Commodity Futures Trading Commission and I guess I learned a lot about warehouse receipts. warehouse, commodity receipts. where you put a product in a warehouse and then you get a piece of paper that says yes, you have that product in the air, so the first bills were basically warehouse receipts in China because whatever it was grain or gold and then you had a piece of The paper backing it are five pound notes from England and continental US notes, but between that note from China it is about 700 years old, but before that, between that first paper money and the 18th century, who do you think that we are kind? of the early seven bankers of the late 17th century and early 18th century, which were what Kraft had been before he was in the international banking trade, they actually did something more local like the ones with maids and all the lanes, lands , land, no, they had something. more they were doing Tom Chris I like we haven't gotten to that point yet sure a little later off reading there Goldsmith's the sum of the first dominant bankers in London there were little Goldsmith's and they took the gold they gave you a piece of paper and then they went from there and suddenly figured out how to do credit later in the semester we'll talk about Bitcoin credit, by the way, it's not there yet, I think in the next 18 to 36 months.
We're going to start looking at crypto lending and crypto finance in a similar way to what the Goldsmiths did in the early 1700s in England. A very good question is whether lending against a finite currency is scalable. I think so, but it's not. done still right, this is exactly the core of commercial banking today, it's called fractional banking, we'll talk about that in a moment, but as for yes, you could, you could, you could, you could, lend and then have a multiplier effect which you also had, then the banks appeared. and began to issue private notes, private notes, effectively, a liability of that back and saying that it would be marketed and the history of private notes is usually what you know well until it is really bad and the history of money, many private banks went bankrupt in this country. around the revolutionary period again around the Civil War and in essence that's what we have now with sixteen hundred different cryptocurrencies we have sort of a new period of a bit of private currencies and I just ask you to remember that when we start to look icos initial coin offerings etc.
Ledger's previous question is what was a ledger. You asked it. Can you remember what a ledger is, main records of accounts? And five thousand years ago he read a little about this, just a half. The publication was not intended to be a deep economic academic work, but was to try to get the class thinking about Ledger. This is the personal ledger of George Washington, our first president. He was 15 years old when he kept this ledger and apparently he kept Ledger until his death and let's see 52 years later, but in order for Ledger to be preserved, Justin records the transactions of the day he has one there, mayor of Washington, he must have been a cousin or I don't remember if it was his mother. so if they are the primary records of the accounts and I've already said this, they record economic activity and financial relationships, economic activity and in a sense transactions, financial relationships, what is the key financial relationship that could record a ledger?
I'm sorry. Kelly said it's debt and it goes back to the debate they had at the reading: it's money, frontier history, it came out of the frontier, it came out of a sense of debts and credit and value stored for this purpose today, it's not really It may have come from both, but know thatit has both sides and Ledger also has both sides and when we talk about Bitcoin, Bitcoin you will see that it is a mechanism to store transactions, some other blockchains like etherium store balances, so even in the blockchain world you will see some that are

ledgers

balance sheets and others that are accounting books of transactions so as not to get lost and confused, is an important part of what blockchain is.
Some types of accounting books. I just mentioned a transaction versus George Washington's ledger by the way. I think it was a transaction book. I just kept, you know, a list of sales and movements, but I haven't studied President George Washington's ledger closely enough for anyone to know enough accounting to tell me the difference between a general ledger and a subsidiary ledger. or an auxiliary book. general ledger and a supporting ledger I mean I don't want to do the whole lecture myself how many of you have taken accounting? I once taught accounting to undergraduate students, I'm sorry, so those of you who just raised your hand and who took accounting, did I see you in the back of the room you took accounting and that's Aviva, okay, you passed the CPA oh we have a certified public accountant who will tell us the difference between a general ledger, you can call them as a specialization, so let's say if there is a salary or getting paid in the salary subledger, but it will also go in the general ledger general and the other part of the transaction is some new things that you buy, so all of that goes specifically into the general agent.
Each of them has their own specific conferences. If you want to say how much you spend on salaries during the month, then you go to your salary. agency, but if you want to see in general how much money you spend and how much you move, then look at your general ledger. Aviva clearly said it better than she could have said it. Thank you now that we know we have a CPA in the class, but the importance It's not just a passing note, the importance of a general ledger and a secondary ledger is that there is a hierarchy and the secondary

ledgers

have more details and maybe the net number is kept in the general ledger which is at the heart of our banking system and is at the heart of our financial markets system, where the central bank is like a money ledger in every commercial bank, approximately 9,000 of them in the United States.
In essence, they maintain a subsidiary ledger for the money, but they have no control of what I will call the general ledger or the Federal Reserve ledger. Then a third distinction about the ledger is a single-entry: a little 15-year-old, George Washington, kept a single-entry ledger just a list of things that were happening and I didn't think it was going to bore the public. class with readings on double entry accounting because you studied accounting, but does anyone besides Aviva want to tell me what double entry is? -Entry accounting and she will rescue you. Yes. Double entry accounting basically means that any transaction has two places in the ledger, one on the credit side and one on the debit side.
Every transaction was 1% 90 - one hundred percent, this is getting it. It works for me, anyone who wants a different view, there is a balance between assets and liabilities and then the resulting part of capitalism is whether assets or more than liabilities, the rest is capital, so at the heart of capitalism, in a sense , there is double-entry bookkeeping and in fact, although it probably dates back a little over a thousand years, when it was actually written by the Italians in the year 1300, it started to help you or it emerged from the Middle Ages, I mean the commercial Renaissance of the Middle Ages, some would say. partly not entirely, but partly it was a bet in favor of double-entry accounting, so the Ledger thing is my point: they are not going to be the heart and soul of this class, but Bitcoin, which is a transaction book, aetherium, which is our balance sheet.
The financial system that is all set up on Ledger is a kind of relevant subtext that you don't have to fear, just like you don't have to fear the hash power that we'll talk about on Thursday in crypto, but it would have to make some kind of sense. basic of where Bitcoin fits in terms of Ledger. Someone? If I didn't fill out this slide, you'll find it's blank. Does anyone want to tell me what some of the characteristics of a good ledger are because again, when you start thinking about your blockchain projects later in the semester, that's what makes a good ledger.
I don't have any answers here, the world is immutable, I want to be immutable, maybe Talita, can you do me a favor and keep these? we will put them on the slides when we place them we will keep the list of classes and we will put them on the slides immutable. I like that someone else wants to take something that is a good record time, stand up well so you know when you made your entry Kelly, then there is a transaction, both counterparties of the transaction are correct and if it is a balance, then to Who owns the balance?
I was just adding a little to see if we have a new name or face here at the back table. I haven't talked to you yet, what's wrong? Ross, thank you Ross, it's a pleasure to meet you. Ross says precision and can we take one or two more, just a description of the transaction and lastly all the good attributes of the features? Someone's burning wish that we missed one. or two GE, well, I think that's within immutability, which in essence is valid, you can't, you can't change it, you can't falsify it and the like, and what you will find are the characteristics of a good.
Ledger is also partly similar to good money features, they are not identical but overlap a lot with payment systems. I'm just going to say one line about it, it's a method to basically modify and record changes in a ledger for money. I know it's not what you normally think about a payment system, but if you go to Starbucks, buy a cup of coffee, and use your cell phone, what you're actually modifying is a set of Ledger books. Starbucks' ledger goes up and yes, your ledger goes down. well your monetary ledger increases your utility your fulfillment of that lot I could go up I'm talking about the financial ledger so I just wanted to land when we talk about payment systems to think that it's actually just a way to modify generally two parts The ledger was going up and down now, in an earlier era, you were handing someone a little bit of gold, there's a little bit of silver and it wasn't recorded in the central ledger, but we already live in an age of electronics, so This is really a payment system.
To a large extent, it's not quite, there are still other ways to do it for Nance, so what were some of the first forms of payment systems that did just that, that moved and changed Ledger records? They are called tradable orders. I would venture to say that most of you probably haven't. I used tradable withdrawal orders either in the last week or in the last month. Has anyone here written a personal check in the last week? But in an earlier era it would have been the entire class. Anyone in the class doesn't even have a checkbook. class rooms Larry, how does that make you feel?
But a checkbook is essentially a what do you put on a check? What is it? Where are they? This is all about Bitcoin. Now I'm not doing this just as a walk down memory lane. for Larry and me what is that what are the important pieces of a negotiable order remove or check for a signature what else is there I want only people that I haven't talked to in the back and I don't remember their name, yeah okay, so there's a lot, so, a signature, a beneficiary, how much and what it was for, for what more numbers and meeting account numbers and routing numbers, so think about the counting numbers and the routing numbers meaning, in essence, which ledger it comes from and the beneficiary. it's the ledger, it's who it goes to and I'm sorry, Dan, so there's a timestamp, a signature, a payee, the payer in the form of an account number and an amount.
Those five are really critical and you will find that they will all be right. in the middle of all this Bitcoin and then the reason why you know some other information Sorry, there was something else, they may be, they may be new ways, there are certainly parts of the payment system that might not be tradable orders. withdraw, it may not be a direct authorization for a bank with one ledger to transfer money to another ledger, they could be entering into their own ledger, that's all, but you are asking the right question, some advance money from the that we already talked about. about that was the ledger where the counts in England and the Yap stone were types of ledger and forms of money and it was kind of interesting so Ledger's didn't just come with electricity and computers so now back to the currency fiat, the heart of the previous question and we already talked about that, so let's see how the professor did because you already said that some of the things you said were fiat currency, a social and economic consensus.
No, I'm in this school, it's just part of it. of history is not that different from how it all became even though it was based on that promissory note from China 700 years ago and the private notes you got at Goldsmith's in the 18th century, but eventually governments took control, it represents liabilities of the central bank and that is important, it is a The liability of a central bank is not an asset, it is its passive side, but you can also guess that there is a second form of money and that is when you make a deposit in a bank that is a liabilities of a commercial bank.
The central bank is the main gold. standard in a sense using the word gold but it is the top ledger, commercial banks are like secondary ledgers in a sense please so before answering does anyone want to try to answer what is it because it is a consensus social? The only question is what it means to be a liability of a central bank when it is just the currency in our pocket. This Federal Reserve note says "Federal Reserve Note" and we can pass it on. I'm not afraid it's only a dollar, but you know, join me, hand me about twenty and then I'll give it back, you know, but it's better.
Reserve Note, so it is a liability of the commercial bank. On a previous day it was said that it could be exchanged for gold or silver. in the 1930s for retail deposits in the middle of the Depression, President Roosevelt said, "no more, you can't, you can't redeem gold and silver" and then President Nixon, in the 1970s, said in the official sector that was moving away from what had existed up to that moment in time. other governments could redeem them in gold, but when paper money started it wasn't backed by carbon, we had a period of the gold standard we were on and we got off it, we fell off after WWI, in WWI we went back to he.
It would be a false narrative to say that we were on the gold standard for our first one hundred and forty years. I just wanted to clarify that, I mean, we kind of followed the gold standard, we went out, we went back one and so on. but it's a liability on the books and records, so as a matter of bookkeeping and double-entry bookkeeping, I'll show you the Fed's balance sheet in a minute and come back to this question: Okay, that's right. in essence, a social network is the first point, I'm independent, the central bank is responsible for moving one, it's Ledger, if you want to move it somewhere else so you can take that physical dollar and say: I want to deposit this. in a bank and they have to record it in the ledger in that back, that's what they are, and the US government, which is technically separate from the central bank, or the UK government or the Chinese government , they are all technically separate from their banks, the People's Bank of China or the Bank of England, their governments say they will accept it for tax payments, so there are a set of social constructs that we depend on.
I'm going to go over this to answer your question. It is based on a Ledger system and it is an integration of those Ledger between the banking system and the commercial banks in the US we have about nine thousand commercial banks and what the Federal Reserve says, but it is true about Banco Popular from China, it's true about the European Central Bank, each of these central banks basically says that if you bring your paper money it will record it in the ledger of a commercial bank and you can pay your taxes to our sister, the gentleman here, called the government so I'm sorry to disappoint you, it's nothing more than that, I'm just sorry, I think it's a legal and sustainable way to carry out a pondus even with a proper policy where the value will increase by 1 to 3 percent If you get to the central bank it reaches the inflation target, okay, any other point of view and I saw that, I saw it, I'm not sure of your name, oh no you don't want to say anything no, it's okay, it's a construction that someone would give you something so that your dollar, the central bank, the central bank would owe you those dollars for the value of whatever you wanted and some were happy to take away from Donna. the central bank and gives him the goodopinion you want, so it's an indirect way of it's a way of transacting, something knows it's a liability because it can only issue notes against a certain amount of reserves, that's why that's why.
You refer to this as a liability because you can't just issue new notes every time you need them, you can just make new money out of thin air. I'm going to take one more comment on this and then give a couple more things, I think. maybe the bank's reserves I am very happy with this discussion even even the contribution of the Alliance had the scheme this is the debate if j-pal was here how many of you know who J Pao is who is J pal a lot J how do you know who He's the head of J-pal's Federal Reserve, thanks, sorry, but if J Pat were here, he would laugh at what Alon just said, but he would also say that liabilities are social liabilities and that he is a central banker to the bottom. believe that what they are trying to do is guarantee the stability of this social thing that we call money and to make sure that it does not reach the base and that it has some value and that is why it is accepted for taxes, we talk about notes and coins or currency legal tender for all public and private debts I walk into a Starbucks and say I'd like a cup of coffee here's my five dollars or whatever it costs these days does the person behind the counter have to make the coffee? he says just a yes or no, I can tell who wants to do it, there's a now from Christopher, what Chris, okay, there's an O from Chris who agrees with Chris, okay, get the cup of coffee ready.
I go to the other side of the counter, the coffee is there now. Do they have to accept my five dollars at that time? Yes, before making the coffee, no one has to accept dollars, but once a debt is established, they have produced the good, they provided the service, they have to accept it, just a small thing. That's what legal tender is, so there are a lot of establishments around the world that are basically now putting up little signs: We don't accept Swedish krona, we don't accept this, we don't accept that on paper. They will still take it electronically and there are a kind of new definition of legal tender.
There are also some unique tax treatments, but I'm not going to go into the currency, central banking, and money we talked about. A little bit, this is kind of a short that I borrowed from someone else's paper, but the central banks at the top are in the center and if Alice and Bob and we'll be talking about Alice, Bob and Bitcoin, it's time they can take this out. then you want to make a transaction and they are at the same commercial bank, bank number one, then commercial bank number one has to change the money in motion from their ledger from Alice to Bob, in essence, if they are both two people at Bank of America, they can move. your balance at Bank of America, but if you are a Bank of America going to Citicorp, then something has to happen between two Ledger's, the Bank of America ledger and the Corpse City ledger, and the only way of transacting between two banks, Ledger's, is performing a balancing act. it has to happen in the ledger called the central bank and later when we talk about payment systems and their execution, I will use this slide again later in the semester, so I'm not going to spend as much time on it now.
We are going to talk about Ledger and when you move money between two banks, everything is within a closed system in which countries are the central banking system of that society, but then it becomes a little more doubtful and confusing when you move from one currency to another. because how can you make two closed ledger systems that are operable? Not for today, but we'll see later, when we do payment systems, and they and the like, the Central Bank, the US central bank, this was the only good slide I could find. It was about a year old.
Its liabilities and assets are around four and a quarter billion dollars, four point three billion, one point seven billion. That's in currency. Will you give me back my dollar, by the way? I mean, my L life is a yes, yes, then one. Some $7 trillion of those greenbacks are in circulation, and surprisingly, while half of you probably don't use that much cash - you don't even have checking accounts - the amount of cash and circulation is growing faster than the economy and most of developed nations, why? Do you think that's what's probably a word that's more of a drug word?
Oh trust, I thought you said drugs, trust, well it has to do with trust, but it also has to do with drugs. Paper money is a wonderful method of money laundering. drug trafficking and a store of value, so there are certain segments of our economy and segments of the global economy that do not want to be in the electronic banking system. I'm going to gloss over them quickly, but there's another piece that we need for this entire class and for the semester is credit and credit brokerage, but just one little thing, credit cards started only 60 or 70 years ago, but they go back to a book from just over a hundred years ago, the word credit cards was used eighteen times in this book where a A science fiction writer in 1887 said what the world would be like in the year 2000 and it was the first time we used the word card of credit and he said that society would have a form of money and you would have credit against it and it's fascinating.
The funny thing is that someone could be that visionary, but they started merchant cards, so maybe they weren't that visionary. The oil companies in the 1920s were starting with Georg Cords, but they were cords of individual traders, you could get credit from those traders in 1946 at a bank in Brooklyn. a guy named big uns started that was the first real charge: you could load things up at a few dozen places in Brooklyn, literally, and then all of a sudden it was necessary for Diners Club, which started in the early 1950s , discovered that they could get a lot. of restaurants to say, wouldn't you want to extend credit and we'll back it up?
American Express in the mid-1950s and finally in the mid-1960s Bank America, which is the time when a California bank discovered that they would create a cooperative with a group of other American banks to extend credit and the boom credit took off and the interesting thing about the laws to regulate all of this didn't come until the 1970s, at least in the US the Fair Credit Reporting Act, in all the other laws, there are three big ones in the 1970s , so those that I go to conferences at some point to talk about Bitcoin regulation and they say, well, why can't the government solve this?
Now I remind you that it was fifteen to twenty years since the introduction of credit cards in the early and mid 1950s and the real takeoff in the 1960s was in 1974, 1977, the three big credit laws, so If you are going to be a Bitcoin entrepreneur I know it could be 15 years until there are some crypto laws in the future. That was the processing machine from the 1950s. I know I made it too small. I'm sorry. The visa improved it and then of course that's what we all see today. How cables are processed. so the role of money we've talked about, so I'm going to skip that, but now the characteristics of money, what makes good money, which we talked about before, is durable, which means that that skipped bucket was not the better. because a lot of rain came that would wash away the gold and silver, the metals are durable, they are portable, the heavier it is, the less portable it is and that is why gold was better money than silver, it could be moved or better than copper or bronze was easily divisible, you could cut things that were uniform and fungible and anyone who is down the rabbit hole on these things, if you really want to learn about money, read about Crawford v.
Royal back in 1749, there was a gentleman in the first piece of paper money he mailed £220 notes and he wrote his name on them, they got lost in the mail and he took the banks to court to say they were mine when they found them and there was no law in Scotland or in England at the time like what to do about it, but if you lose or someone steals a piece of art, you get it back and in 1749 the law was made that you don't actually get your money back. Does anyone want to guess why the courts did it? a matter of first interpretation, the court said no, they had no case law on this before 1749, why did the courts decide that a work of art was different than currency and gets to the heart of what money is fiat money?
Yeah, anyone want to grab a coin? Guess why the courts might have taken the other side? In reality, the facts were clear. It was the coin he signed. I'm just helping you, so that's a good point, but he signed it, if I'm you. Know the medium of this game, because if you go back and read, there's some history on this and read the court cases, this was the point where the court basically said we have to make this a medium of exchange, this is the greatest social good it has. be fungible and the Royal Bank of Scotland was of course closer to the courts than this gentleman Crawford but the banks were also saying we can't keep track of this so it was a mix of the two but it did . fungible err yes and in 1749 they all had serial numbers and were signed in a way that they are not today of course they are acceptable and stable and we are going to talk a lot about the last point, they are stable because they are difficult to mine and Bitcoin has that built in, plus the design of the money is really important and you can also turn it into a token, a token is like something physical or a counting based on which of course now you live in a world of accounts. based money and it is digital, not physical, it can be issued by the private sector just like banknotes in the 18th century or a private sector like Bitcoin or it can be central, it can be widely acceptable or simply sold, there are forms of money wholesale, one of the most important ways Bear money is central bank reserves are only available to the commercial banking system.
We will study this money flower later, but I put it on the slides because I did not create this flower. You have a reading later in the semester the Bank for International Settlements has this flower of money, but basically it's about these four things like a private or central or widely accessible token or physical and digital account and then all the money falls into one piece of this flower of money. a Professor Garret who came up with this flower and there is an optional reading by him later in the semester. You had a reading from Clark.
There is not enough time, but all this failed. Does anyone want to give me an idea for one or two reasons? a bunch of digital cache failed Has anyone read the Clark reading the history of some unaligned digit cache? Someone else read it here. I can't, Don, so what did you do, what Zhan Zhan, what did you take from the reading, why did all these do? fail, what are one or two main reasons why they failed, most of them were still dependent on some kind of central authority, any other major reason why the levy was not adopted by merchants, very good, third reason why that failed, one that is fundamental to what Bitcoin solved could not be spent a double spending problem could a coin be spent not just once but twice?
So four things were raised four things that have to do with centralization, double spending, they couldn't get merchants to adopt it and they couldn't There was no kind of consensus on what the ledger was. I'm going to skim through them quickly, but digital and mobile money did happen. We were asked about PayPal before, it was 1998 in Norway. Eriksson and Telenor had the first mobile app and it was to get movies on your mobile phone, $19.99 is a jump that we will talk a lot about when we make payments later and of course we pay, so we talked a little last week in Kenya, where Safaricom was. of money near money it was mobile minutes that were used as money in Kenya and now there are 20 million users of that and of course there are a lot of regulations etc, Starbucks started in 2011 and then of course now He went to the races.
In mobile money, one of the key things about mobile money that we will discuss and learn together is the question of where is the stored value and I have to tell you that sometimes I get quite confused when I'm researching a new app. the value or are they just a processing provider to move, as we said above, payment systems move, change and modify other Ledger in several of these, such as m-pesa, initially stored the value and app store blocks Mobile phones store the value, but many of them are just applications of computer code to move the ledger to another place, but the puzzle remains, remember that puzzle of how to move money peer to peer with that essential Authority and that is what I'll ask the next class on Thursday to actually read.
I don't improvise it and I wouldn't be afraid of it Satoshi Nakamoto wrote an article that everyone in this class, if you are at MIT and some of you are at Harvard, I tell you that you canread it, maybe you will understand it. 1/2 to 2/3 isn't deeply technical, it's, it's, it's, and it's only 8 or 9 pages. I also assigned the National Institute of Science and Technology about 20 pages of NIST reading. The question is whether that is Bitcoin. I'm going to skip the study questions, but the study questions are actually about cryptography and the timestamp of just adding hal.
We are going to get into the nitty-gritty in three lectures. I couldn't commit the entire course clip for the entire semester, but I think three lectures. Thursday and two of next week when you want to come see me Sabrina somewhere around here or who is one of our TAS is a master's student in computer science and knows more about all this medoras who was here last week I don't know if medoras is here, he was part of the digital currency initiative for three conferences, we are going to try to analyze what cryptography is and why it matters, how timestamping happens, how this is seen as money and how transactions are maintained, if you understand.
To close it, I can almost answer that, but the task was to answer it by Thursday, so by Thursday, what's your name? Caroline, I said I was going to respond today, oh, I said today, no, is there a mutable record of? What I said, I'll answer it now if you want, but does anyone in the entire class have the answer? It's good to ask the question. I thought it was due Thursday, but thanks Stuart Haber, a cryptographer and colleague at Bell Labs earlier. The 90s told how we notarize information digitally and we will talk a lot about this Thursday.
They used a cryptographic method called hash functions and they were just trying to notarize information and in 1995 they took the idea. They were entrepreneurs and created a company. It's called bail and once a week they publish it in the New York Times and they still do. You can get it in the New York Times. I think it's Saturday or Sunday and they take it in the classifieds section and they have the hash function that you'll see. Read about how between now and Thursday they have the hash of all the pre-existing information and that's why they timestamp it using the New York Times and they use cryptography and it's currently been working correctly for 23 years because the bitcoin block is about 550,000 blocks and this whatever 23 years multiplied by 52 is the longest time thanks hope to see you

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