it's a real revolution in terms of investment banking and finance in general we'll unfortunately see the consequences of a lack of control of anarchy there will be scams there will be plenty of people who run around and defraud people because they know they can't I think this is going to be one of the great fun challenges to explore if we can accomplish that by 2030 I think that the cryptocurrencies that we'll have become the greatest innovation of the last five hundred to a thousand years [Music] [Applause] [Music] hi I'm Charles Hodgkinson chief executive officer of input-output Hong Kong we're a cryptocurrency company and a research firm that specializes in the science of cryptocurrencies so I first became interested in crypto currencies in 2011 I read a wonderful white paper written by Satoshi Nakamoto and I had known about peer-to-peer technology for quite some time for example I knew about the BitTorrent protocol and Napster and these types of things and I noticed the evolution of the technology so it was really interesting as a as a paper really interesting as an idea but I really didn't think that it was a sustainable market I said oh well we have these imaginary tokens who's going to buy them will they ever achieve liquidity and even if they do that the government will shut it all down so I didn't take it too seriously until about two years later right around 2013 or and I noticed that despite the fact that the system had taken many hits and scandals and other issues that it exhibited a tremendous amount of resiliency and then from there I said boy it would be really interesting for me to do something in this space but I didn't know anybody so I remembered an old adage one of my my professor said which is those who cannot do teach so I created a free class on udemy called Bitcoin how I learned to stop worrying and love crypto because I'm big Peter Sellers fan and so I kind of named it as a spoof on dr. Strangelove and I just created a bunch of free lectures I released him as a Creative Commons license that I expected maybe a few hundred people take the class well it turned out I got over 70 thousand students for the course and I got over five thousand emails in the first year that I hosted it and I answered every single one of them because it was a fun experience so I got to meet everybody and got to learn a huge amount the venture I'm usually most known for is etherium which I started shortly after sitting up Invictus innovations with fatality uterine and several other people so to understand aetherium you have to understand Bitcoin and what problem Bitcoin solve so Bitcoin is all about saying can I create a money system where Alice and Bob can transact with each other and at Restless way and with a decentralized database recording all those transactions so in other words when alice sends that transaction it gets recorded in some magic ledger in the sky like a giant spreadsheet in the sky that once it's in there it can never go out its tamper resistant and it's immutable and it's time stamped and auditable so that's a wonderful concept and that alone with the notion of digital scarcity allowed a currency to form but the minute that you have a currency people immediately start saying well what else can I do with it is it just the ability to move value between Alice or Bob what about the story behind that value the metadata the context of contractual relationship for example what if Alice says I'll mow your lawn if if you pay me a hundred dollars well that's a contract so what if Alice mows the lawn and Bob doesn't pay her that can't be reflected in a system like Bitcoin so what we wanted to do is add a programming language to a blockchain so that these bespoke custom transactions could be coded much the same way someone would write JavaScript in a web browser and that in turn would allow people to have any type of financial relationship that they wanted to have very simple relationships to arbitrarily complex relationships so this was kind of the naive notion that we had in 2013 for for a theorem is can we add a programming language to a blockchain so that we can on that then allow people to facilitate more complex commerce known as smart contracts the best projects are frustration so most of the people who started aetherium they didn't start and say hey we're just gonna go build some magic new blockchain and it's gonna have all these capabilities and they did this in a clean room in a very academic way they all started working on other projects for example Jeff was working on master coin vitalik was working on color coins I'd been working on bitshares and each and every one of us had the same scenario where there was something we wanted to do but the nature of blockchain technology or the nature of law hands had already been deployed but very difficult and time-consuming and expensive to do these very simple things so we had to say there must be a better way so what what occurred was that vitalik started aggregating really good ideas ideas that he learned from Circular learn her ideas that he learned while working on color coins and master coin and kind of stitched them all together into an initial white paper then like all open source projects that attracts attention if it's a good idea and so we started appearing out of the ether and discovering hey this is an interesting thing I'd like to help and collaborate and then somewhere along the way we decided that it was a good idea for everybody to meet each other so really the turning point between this is a discussion about a cool thing we could do to something that we actually wanted to devote time money and effort to was in January of 2014 we most of the etherium founders met up in a beach house in Miami for the North American Bitcoin conference it was a wonderful trip and we had an opportunity really seriously discussed not only the technology and what it would require but also the philosophy what are we actually trying to do now from that we had reach an internal consensus that this is something we'd like to pursue but you can't just build a product in isolation you have to actually go show it off and see if anybody cares so we thought we were all crazy you know we'd show the world this yeah we don't care about this stuff and no there'd be no interest and we just all go home and go do something else maybe start a bakery in Hawaii or something so what we did is we we went to the conference we did some presentations Vitalik presented at the conference and i did a debate with dan Larimer and david johnston david represented master coin dan represented bitshares and i represented aetherium and we we got almost like a makea esque rock star reception to our presentation fatale for example right after he presented was mobbed by people and it took nearly an hour to pull him out of that circle of people who had questions so we realized that we had something very very special the problem is then now we we have momentum we have something special we have a group of people that are willing to do it you very naturally go to the next question which is how do you do it where do we do it you know how do we execute and that was the the hard part the the devil in the details behind aetherium that's a long story but I'll try to make it concise so after Miami we took a vote and we tried to decide whether we were crypto Mozilla or we were going to be crypto Google and these kind of bet two different things so crypto Mozilla is saying let's do a not-for-profit organisation Mozilla is the maintainer of Firefox and projects like that crypto Google is a great patron of open-source software but ultimately it's a for-profit business so these are very different models and they have different notions of how these things ought to operate so we took a vote and initially the vote was eight to zero for all the founders said crypto Google is the way to go so I went to Switzerland and we started examining how one would set up a for-profit venture that would build a protocol and launch the protocol through a not-for-profit foundation so I lived in zhuge for several months we got tax rulings and did very complicated work all in German which was quite fun I ate a lot of pretzels and gained a lot of weight but you know that's how these things always operate and then somewhere along the way around June of 2014 we eventually had to make some hard decisions and the decision was made to reverse that move to crypto Mozilla and some people left the project myself included as a consequence of that and the raining people set up a foundation did a crowd sale and moved on so I never thought at that point I'd ever get back into the etherium space I said well you know my time is over I enjoyed the six months I was there I learned a lot I met a lot of interesting people I enjoyed the beautiful vistas of Switzerland so it's time to go do something else with my life so I suppose the easiest way of thinking about an ICO is it's just basically a mechanism a decentralized mechanism for somebody to raise capital it's a very neutral thing it's not a pro thing or a negative thing it's just a gateway that allows capital of flow and so the very first ICO that was done was master coin and the beautiful thing about this mechanism is just how incredibly simple it is so with master coin the founders of that project just listed a a forum post in Bitcoin talk and they said hey we're doing something interesting if you like it since a Bitcoin to the specially formed address that was that and that's basically what occurred and they raised half a million dollars in a month and everybody was just blown away they said wow I can just create a forum post put an address up some text and then suddenly half a million dollars appears so that's the basic notion of it is this idea of saying hey I'm gonna do something here's how you pay me and then using a cryptocurrency as the value transfer mechanism but more broadly in ICO is is has become formalized because there's now a lot of more tools and functionality and interesting things that one can do the first I cos were all kind of meta to the system you had a Bitcoin as the value carrier but all the terms the conditions the liquidity all these things were kind of outside of the system itself so somebody had to go and build master coin and then find a way to issue a token and master coin it was very bespoke time-consuming process it took months now with aetherium what aetherium is a lot of people to do is to find that once it's called the ERC 20 standard and then they can take that ERC 20 contract issue as many tokens as they want and then go ahead and issue a sale people swap ether for ERC 20 or what-have-you so what this is a lot of people to do is it's kind of democratized access to this new fundraising mechanism it's a lot of thousands of people to raise billions of dollars all throughout the world without actually having to physically meet the people that they're raising money from and in some cases not even knowing who they're raising money from because it's being done over the internet through these types of payment systems so it's an incredibly interesting mechanism it's like crowdfunding on steroids it's not an entirely new concept we've had things like IndieGoGo and Kickstarter for years the Princes that now IndieGoGo and Kickstarter have been disintermediated and also that the payment system itself no longer goes through the standard financial system so banks and financial intermediaries are not involved it's now a direct peer-to-peer payment system between people so this obviously causes a lot of regulatory questions about how this model is going to survive thrive and stay within compliance given that the legacy system never imagined that such a system like this could exist first the magic of AI cos is that they have now made everybody equal in terms of their ability to raise money there's never been a time in human history where we've had this power so you know ordinary days if you wanted to be an entrepreneur get venture capital you have to go where the money lives so that's New York that's Silicon Valley that's London Beijing Tokyo there are certain cities where that kind of value aggregates and the people who dispense it aggregate so you go and come up with your great idea and go on the road and go live somewhere well for a certain group of people that's a perfectly fine proposition the young and the affluent or those who are in a position to take a risk but let's say that you have a brilliant idea maybe you want to run a decentralized grid perhaps you're in Haiti or in Puerto Rico or somewhere and you've just had everything destroyed by a hurricane and you say instead of rebuilding an old stupid grid let's build a really good grid and maybe with solar or something like that have the people on it well that may be a wonderful idea you might have a great business model there might be a lot of passion behind that but the issue is you have no access to capital so your only option is to either fly capital to you which seldom occurs it's luck usually or you have to leave and then find a way to somehow bring that back home and build relationships so people in the developing world are people outside of these zones have historically always been at a disadvantage what the ICO does is say your geography no longer matters many icos have been done from very small countries like Barbados the Cayman Islands Switzerland and so forth and have been able to raise money on par with what you would expect from Silicon Valley and from New York and these other large capital hubs that's a very powerful very prominent very amazing thing but with great power does come potentially great problems some of these offerings could be construed to be securities offerings especially where these offerings require centralization for the end product to work or they have no product that they're selling and they're using it to finance the construction of the project so as a consequence it's very unclear about how legacy laws will fit into this new fundraising model and also unclear about what jurisdictions ought to take precedent normally when one raises money they raise money in a particular place let's say California then you would say as an entrepreneur I have to keep the state of California happy and I have to keep the US government happy those are the two constituencies it's manageable lawyers know how to do this when you do an ICO you could end up raising money from 10,000 people in 200 different jurisdictions in some cases jurisdictions on a Bargo list like North Korea and Iran so in that case how do you actually manage that or do we even know who your customers are if you're not doing know your customer and anti-money laundering compliance so these are some of the great challenges of icos is that while the increased liquidity then they put everybody on equal footing and it's a real revolution in terms of investment banking and finance in general it also introduces the issue that there is a gap of good government is good regulation and good compliance that would allow people to produce a good outcome for these things so anytime there are contracts markets transfer of value and an expectation of return or a potential for fraud and abuse there is universal consensus that there needs to be some notion of governance behind that and recourse in the event that people fail to meet their obligations so the role of the government at least in a Western sense is to be the arbitrator of last resort and creates levels it says ok well for markets that are very efficient work well and are generally not filled with fraud the government does tend to stay out of those markets but for markets where there's just too much temptation there's conflicts of interest agency failures these types of things in those marketplaces the government feels necessary that it has to have some form of a role so this is kind of a contrast between let's say journalism or things involving written content in the financial markets in the first case it's completely unregulated most part can say whatever the heck you want to say in the United States and everybody just finds a way to deal with it whereas in the financial markets they tend to be the most regulated of all markets not because we started that way but because we've had consistent collapses from classes in the 1880s with gold deflation - the Knickerbocker crisis in the turn of the 19th the 20th century - again another crisis and the Great Depression - the crisis of the 1970s the SNL crisis long term capital collapsing you know the dot-com bust the Enron scandal you know you can just keep going down the line and at every single one of these instances usually what occurs is the government says that there was some area that we probably should have been regulating or understand a little bit more about and we now are going to step back for example it and rhonni result in the creation of sarbanes-oxley whereas in 1930s they decided to create glass steagle to separate retail and Investment Banking and both of these were probably pretty good ideas within the context of society so there are two modes of thought on should the government have a role or not one of them says yes the government ought to have a role and that role ought to be very hierarchal meaning the government is the final say of this matter that we should adapt existing regulation to now cover crypto currencies in a way that makes sense whereas there's another group of people who say that due to the nature of this technology and how incredibly transformative it is we're now money can move at the same speed as information at the same speed as an email it's intrinsically global and it's impossible to really know how much people are really making because of this new paradigm that it's going to be very very difficult if not impossible to actually regulate it in a conventional sense as an example if you take a look at how conventional MSB regulation works money service businesses it's not the regulatory agency that acts as the watchdog they actually delegate their eyes and ears to the financial institutions themselves we have a notion of something called suspicious activity report which says if your customer is you the bank or you the exchange are doing business with are doing something that seems a bit suspicious you have a legal obligation to report to the regulatory body on your customer so what does that mean that the regulatory bodies have turned all of the money service businesses into their eyes and ears into their watchdogs and by extension have a pretty good handle on the conduct of everybody using those pipelines but when you move to a cryptocurrency setting there is no longer that third party to file a suspicious activity report and as a consequence the only way that the regulatory body is going to get data on these people is either a finding it themselves or be having people report it self report which which generally doesn't work out so well so when we look at the totality of this problem and the fact that a lot of the tools that regulators traditionally use to maintain control over the markets and a lot of the tools that regulators need to use to maintain order are not present or superseded by cryptocurrencies advancement as well as the very rapid advancement of cryptocurrency technology it does seem to be a Pyrrhic almost Sisyphean effort to to actually regulate the crypto currency markets the way it's done at the legacy system that said if there is no regulation there are no controls it's the Wild West you will unfortunately see the consequences of a lack of control of anarchy there will be scams there will be plenty of people who run around and defraud people because they know they can and they can hide in some jurisdiction so there's kind of a good a bad and an ugly to all of these things my personal opinion is that we need to take a measured hybrid approach there are cases where we probably can institute effective legacy regulation and there are cases where we can use things like self regulatory organizations voluntary standards things like smart contracts to compensate for the fact that these markets are different and also start enforcing best practices and the other point is that if the consumer the market knows that they have to look out for themselves they start making accommodations for that but one final point of caution which is if governments do choose to take too draconian of a measure on crypto currencies this will not stop the market there's never been really a case in human history where there's been a demand for something and the government decides to ban it where all of a sudden people stop using it from prohibition to the war on drugs all of these things we've spent trillions of dollars put many people in jail and yet these black markets continue to grow so if there's utility and demand there will always be away and the problem with crypto currencies is that they're just so darn hard to stop it's as anonymity technology improves as these peer-to-peer protocols become more resilient as they start working their way into mobile devices it's going to become harder and harder to know how much people even make every year unless they self disclose these things so if we look to analogy for example the Hollywoods war on file-sharing and the lack of success that they've had there if regulators do choose to have a very aggressive stance and my belief it's not going to actually protect any consumers it's just going to reduce the overall availability of information and ultimately cause more harm than good I think the biggest risk of icos is not necessarily the specter of government intervention or this idea of is it a scam or not it's more that because of this disintermediation that's occurred by the nature of the technology the people who conduct icos tend not to have a strong of a relationship with the people whom have given them money you know there's an unspoken and sacred bond when you run a business when somebody capitalizes that business gives you money you have a relationship of trust with that person that person had to work really really really hard to get what they have and what they've done is they've taken it voluntarily given it to you and you're gonna go and take that money and hopefully you know build it up make it strong and come back with more of it more value for them if it's a donation that's fine and it but it's the same notion you've taken their money and they want you to go do something maybe build wells in Africa what have you so the issue is when you now no longer know whom you are getting money from there is a tendency to dehumanize these people to say I have no relationship with them I have no obligations to do anything for them I don't have to care about them and if you reads a lot of the terms of sale for the icos that have recently been coming out there using semantics such as this is a donation there is no expectation of return there's no expectation of delivering a product if we take the money and go to the French Riviera and just decide to live an opulent lifestyle for the next five years you can't sue us these types of things now under ordinary circumstances no investor in the world would ever agree to that and ever finance a business that has that kind of prospectus but because of the nature of these markets and the fact that there's going to be liquidity and the initial investor may be able to resell that token to somebody else and recoup their investment regardless of the project ends up being successful it has created a moral hazard and this is something that the community regulators and investors in general need to have a broader discussion about how we're going to overcome this for example there needs to be segregation of capital if capital is raised it needs to be stored somewhere where the people who have raised it don't have immediate access to that capital and there are some sort of controls over that second there needs to be a better relationship between the buyer of the token and the person delivering in the project now it's not completely unfair to to say that this lack of relationship is solely because of the negligence of the person issuing the ICO and some cases because of draconian or very out-of-date securities laws just by giving basic investor protections and basic investor participation you're tacitly admitting that this thing ought to be regulated as a security that's a very unfortunate artifact of old laws that ought to be updated where they're intended to protect somebody but in consequence to avoid them people are actually diminishing consumer protections so basic things like this need to be thought about and done and it goes back to best practices and community standards where do these standards come from they come from failure so if you want to know how to run a secure good cryptocurrency exchange you look at the people who'd ran insecure bad cryptocurrency exchanges and say what did they do wrong just like if you want to build a rocket you look at the Rockets that explode it and you say what did we do wrong and from those failures you learn tremendously quickly on how to change things and we've seen a tremendous evolution already there's a lot more formalism occurring with the ICO markets there are now I see a rating agencies for example if they're very preliminary they are starting to create some things and eventually there will be stronger regulation and hopefully that regulation will be quite intelligent sensible and guide the market in the right direction if it's not intelligent not sensible then unfortunately as I said before it's likely to result in the market becoming actually worse for consumers not better I love the old gas business I've had a lot of friends and family who have been in these industries and if you look at how natural gas or oil or gold or any commodity is treated in the Western world these are you know very competitive reasonable markets and you know people have an expectation that there should be a fair value for what they're extracting and that's somewhat predictable but if you go to the developing world where they don't have the expertise the credibility the infrastructure and other such things to actually develop the resources for example Guinea with its bauxite has nearly 1/3 of the world's supply of bauxite what they end up having to do is go to China or to Rio Tinto or these other firms and make very predatory deals or they get pennies on the dollar for these natural resources and they accept bribes or they accept some infrastructure play but at the end the day they're literally selling something that could be worth $100 for a dollar or less so what if you could actually tokenize the development of natural resources so you say something like okay we're gonna survey this field for oil we're going to survey this field for a bauxite ore for diamonds and then we're gonna tokenize the entire production and each token represents some ownership stake of that now this kind of a way of going about things is not completely new it's been proposed before but now because of all these tools and cool things that we're getting in the cryptocurrency space it gives us many more levers that we can pull to prevent corruption and to prevent theft or other such things from occurring or cut off the flow of capital in the event that a agency failure occurs even on the government side perhaps so this will allow smaller jurisdictions that really do want to compete on the global markets to actually get a fair price for their resources which in turn they can use to reinvest in the community as a corollary to that if you look at infrastructure for example energy water all of these types of things we're moving from a centralized model to a more decentralized model you know it wasn't too long ago that Tesla announced the solar roof and then before that the powerwall but basically what they're doing is proposing a decentralized grid so wouldn't it be a wonderful world to say instead of having to build a 50 million or a hundred million dollar power plant to go provide energy for people in Ghana or people in Nigeria for example why don't we instead build a solar grid or wind grid and have that be community owned and these tokens actually represent ownership of that grid and they can be icy owed so everybody in the world can now make money from a good and energy farm that's providing cheap clean power to people in this jurisdiction or if we talk about for example foreign aid instead of saying we're gonna just give all this foreign aid to some hegemony in the country and hope they do a good job foreign aid can actually be participating on the open markets the UN for example could buy some of these tokens in order to promote the development of water and promote the development of solar and actually get a return on these tokens these are like new opportunities that are incredibly exciting to me and they can do everything from creating a decentralized internet by a mesh net to things like utility services to the tokenization of natural resources and I think this is going to be one of the great fun challenges to explore over the next 10 or 20 years is as technology matures my great hope for cryptocurrency technology is that we stop talking about blockchain and Bitcoin and all of these things we no longer talk about tcp/ip in the general public you know in the early days of the internet the only people who used it were very sophisticated very technical people and they were capable of doing so much and that was because the internet could do so little and they had to carry the load for them so things like tcp/ip and in these ideas they kind of faded into the backdrop they're necessary they're useful technologists iterate and evolve and build things on top of them but at the end of the day the consumer doesn't care consumer looks at things like does my skype work or not you know am I having a good high quality call or is it crackly and there's high latency or something like that if we can achieve the same thing we've achieved with the internet that it just works and it just works well but do that for money then I think we can have some really magical revolutionary things for example I believe we'll have this idea of a universal wallet just recently I was actually on a trip throughout Europe I was in Ukraine I was in Greece I was in Switzerland and I was in London and England and all these countries have one thing in common which is they have different money so Ukraine's money's different than the Euro which is Greece's money is different from the franc which is Switzerland's money which is the pound which is England's money but I never once used a currency exchange and I never once used the local money I had my card and every time I bought something that card would go from u.s. dollars to the local currency so I'd actually didn't care what the local currency was I just had to kind of the back of my mind track what am i spending so could you imagine a future where all of your assets live in a wallet a digital wallet or you have some tokenize gold and tokenize stock but even more exotic things like tokenize airline miles or maybe you tokenize your house and so part of its like a reverse mortgage and you have some tokens in there maybe you pre sell your labor you put it there and when you go in to Starbucks or to McDonald's or any of these places they always will charge let's say in dollars so when you go and cap your cellphone to pay you're gonna pay an airline miles or your labor or your house and they get dollars they didn't know that you paid an airline miles that some decentralized market making network took care of all that process now if we can get to that reality we start caring a lot less about our local money it doesn't really matter if you live in Argentina and the peso is not doing so good because you can just rebalance your portfolio and say you know I'm actually pretty long on the dollar I'm just gonna go for that or I like gold so I'm gonna store all my wealth there so now what we've done is we have taken a person where their financial life is determined by geography and we've now put them in the driver's seat of their financial life they get to make the final say about their portfolio and how they store their assets and by the way every single one of these assets are going to be secured they're gonna be well accounted for they're gonna be free of fraud or a lot more resistant to fraud they're gonna move at the speed of light you're gonna be able to buy and sell them at a fair price and there's no longer a siloing effect that occurs where your equities live here and your bonds live here and your currencies live there and your commodities live there they're all just treated as the same under the same type of protocol and they float just as fast as email if we can accomplish that by 2030 I think that the cryptocurrencies have will have become the greatest innovation of the last five hundred to a thousand years since the invention of banking and the invention of the printing press that just be an amazing future to live in [Music] you
