Preliminary notes:

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Blockchain database technology in a global context

Alan Murray - Moderator

Lawrence H. Summers

AM: I would like to show a video.

It's not going to happen. You're wasting your time. When the DOJ calls you up and says it's an illegal currency, it's over. You will be put in jail. There will be no non-controlled currency in the world. There is no government that is going to put up with it in the world. Lots of governors say they don't support silicon valley innovation.

AM: Anyone here want to take an opposite view? So you were Treasury department for a while.

LS: He is a smart guy. Bill Gates is smart. ... Said only 10 uses for computers worldwide. I think Jamie is right that the people who think that somehow that bitcoin is going to bring in some libertarian paradise where KYC is impossible, I think that won't happen. The government will still regulate businesses and enforce basic laws. The people who think all currency is going to be debauched and there will be hyperinflation, I think they are wrong too. I think there's a real struggle to get up to 2% inflation without Fed action. I think bitcoin is going to reduce frictions. Is bitcoin going to be a valuable store of value in the same way that many people use gold as a store of value? I don't know but I don't think the answer is "certainly no", that doesn't seem like the right position.

AM: Jamie Dimon went on to say that JP Morgan was looking at blockchain database technology. As former secretary of the treasury, you have a unique perspective on this. Could you see bitcoin accepted as legal tender?

LS: Legal tender is a complex concept. People buy things with frequent flier miles. Some people buy things with green stamps. People buy all kinds of things with claims on accounts at non-bank financial institutions. Could I imagine that some kind of item on a ledger would be something that would be on occassion exchanged, people buying things with it? People buy things with American express traveler checks, and the Harvard kids use Crimson Cash for their food. There's all kinds of things in a modern capitalist economy that function to facilitate exchange and are exchanged for goods and services. I don't think there's any apriori barrier to something like bitcoin existing and taking that role. I think there's a big question which is whether something whose value is going to fluctuate substantially relative to the basic U.S. currency, how moch traction it will get, what role will it play?

AM: People here have been talking about regulation for the past few days. When do your former members of the Treasury department, you spent a lot of time monitoring large transactions. When do they say it's getting out of hand?

LS: Those rules were something like $10,000-- you can't enter the U.S. with $10,000 in cash or negotiable instruments without reporting it. Those rules will for sure for sure for sure get changed so that you can't avoid them with bitcoin. The idea which some of the early bitcoin advocates had, that there were all these rules about money transmission which were unpleasant and somehow bitcoin woud bend those rules, well Jamie Dimon is completely right and anyone in doubt should consider otherwise. On the other hand, there's all kinds of legitimate exchange where it seems to me that... Jim Robinson is sitting in the front row here. American express had travelers check. If anyone thought that somehow travelers checks were going to become a way for avoiding rules or the various ways that governments limit transactions, then that was a bad idea to happen. They were going to facilitate a certain kind of store and value with respect to the technology at the time, they woud be reguated ike money but not regulated out of existence, to protect the basic kinds of money and basic kinds of regulations we have with money like controlling money laundering and controlling illicit transactions. I think it's very unlikely that bitcoin would ever become a basis for evading those rules or eviscerating those rules. In this sense, I think Jamie was right. The sense he had that if this would become important, then the government would knock it out of existence. This doesn't seem any more right to me than gold existing as a store of value and the government knocking out gold or something.

AM: So the fear isn't that the .... is it going to take business away from the bank? Let me ask another way. You see a role for bitcoin and a role for blockchain database technology.

LS: I don't think you can a priori exclude a role for bitcoin. Whether this thing which depends on there being a large amount of mutual trust, the first person buying it because he thinks the second person will buy it at a high value, whether it will get traction, whether there will be an exchange rate, remains to be seen. A single fax machine is a doorstop. A world where everyone has a fax machine is an immensely valuable thing. Something similar applies with respect to bitcoin. The ultimate valuation of bitcoin will be a market price. I make no confident prediction one way or another. I have no advice to offer whether to buy or sell. At the current price... I only say... I don't think it can be excluded. I am reasonably confident that at some point in the future, the experience with these things is that they take longer than you think they will, then they go faster than you think they will. I think blockchain database technology will change a great deal of financial practice and exchange. I think that what you need to be struck by is that in a world where you have sophisticated information technology it's kind of a remarkable thing that if you walk 3 blocks from here and buy a $400 set of headphones that somehow $8 would be removed from that transaction for transaction payment processing, that's a lot relative to the $400, and if I sell my house then 6% would be removed by a range of middlemen.... but this is only the payment processing perspective for bitcoin, not including the other use cases. I think technology will bring these frictions substantially down. There are going to be a lot of pressures that will make greater transparency and therefore less need for controls. Technology is going to operate in those directions very importantly. I am very sure that something in the general area of blockchain database technology will be important in that. Whether bitcoin will continue to have a market price? I don't know. Another will be blockchain database technology and dollars. Another one is blockchain database technology and digital currencies but not bitcoin. All three strike me as plausible possibilities going forward.

AM: A fundamental difference between blockchain database technology and dollars and digital currencies is whether it happens inside the current banking system or outside the current banking system.

LS: I don't think so. In the same way that Jamie's bank accomodates dollars and accomodates euros and accommodates RMB, I'm pretty confident that if a large number of people want to hold their wealth in the form of bitcoin, JP Morgan will attempt to provide them with that service if there's a very large scale activity in trading into and out of bitcoin. JP Morgan exchange will choose to attempt to enter into that business. Will they succeed? That's a different question. My harvard colleague Clay makes the point with substantial evidence that more often than not, when there's fairly fundamental disruptive change, incumbents in industry are less likely to succeed in carrying it forward than new entrants into industries. I don't have a prediction to make with confidence about current big financial institutions versus the inspiring financial institutions represented in this room, but I don't think it's right, I think it's actually not right, to say that blockchain database technology is potentially the world of existing financial institutions and bitcoin or another currency is the world of new financial institutions... I think you coud imagine existing institutions being very substantially disrupted by blockchain database technology without digital currency and you could imagine existing financial institutions accommodating to a new store of value.

AM: Do you have any sense of the relative magnitude? Some people say that the bitcoin piece of it will be, maybe Jamie Dimon is wrong about it not existing, but perhaps it will be small compared to the disruption provided by blockchain database technology to the economy to all the transactions you talked about.

LS: If I had to bet when the financial history of the second seventh of the 21st century is written in 40 years, the blockchain database technology and everything following from it, will figure more prominently in that story than will bitcoin because I think that the verification... verification and confidence without trust.. and enabling that to be done more pervasively... will be the most fundamental innovation, hwile I'm aware of arguments that you can't get those benefits without bitcoin, my suspicion is that ways will be found to get some of those benefits without the extra uncertainty of trustlessness or the fluctuation of value in market price relative to ways that people currently hold and denominate transactions.

AM: What's the economic effect? If blockchain database technology can get rid of that fee when you buy a house or do forex transactions, then... there's a lot of people employed off of those dollars. What is the overall economic effect of that kind of change ripping through a financia institution?

LS: I think it's hugely possible. The automobile was invented. Jobs were lost doing various things like taking care of horses. But that wasn't a serious argument against the invention of the automobile. The fact that there will be disruption and there will be a variety of jobs engaged in one way or another for example credit card processing...

AM: Not just credit card processing. The whole financial sector is built on those middlemen. Transaction fees.

LS: It's not that it's so remarkably high margin business, if the-- if you take out the costs, and you take out the revenues, there's a balanace that we will stil have a financial sector and if a smaller share of America's most talented people find themselves working in the financial sector, I think the nation will survive. I don't think we should design our policies with the objective of maximizing empoyment in the financial sector. When you reduce friction, the experience is that you make possible previously impossible imaginations and combinations, and you get benefits that you couldn't have seen at first before reducing the frictions. Even 6 years ago, the kind of efficiency about conserving on space and structures that AirBNB has made possibe, or the kind of advantages in transportation efficiency for Uber, I don't think those were imaginable and I think the gains will be of a qualitatively similar sort. This is why I think this is something that is potentially hugely exciting.

AM: How do you expain the fact that if we are on the verge of extremely powerful transformative tech, for finance and others, that we're not seeing that in the government statics? Productivity is way, way down from the average over the last 5-6 decades. Why aren't we seeing this technological change create rising productivity and rising iving standards?

LS: That's a huge question. My best guess is what I would call productivity j curve. The creative occurs before the destruction. Let's take an example. What happened when the first superstore was invented? In the same month, a bunch of capital got used building it. A bunch of people got hired working in it. Total sales didn't change at al. At that moment, productivity went down. You had the same level of sales as before, you had all the old people working in the old stores, and all the people in the superstore. Productivity went down. Took a bunch of time. Ultimately it took a bunch of time to earn that superstores are more efficient. Other smaller stores shrunk. Productivity was higher. But the initial effect was a decrease rather than an increase in productivity. My sense is that this is happening in many parts of the economy. There are many people working on driverless cars, yet no chauffer has been replaced. So right now the net effect is reducing productivity, rather than increasing. But one shoud assume that ultimately the effect should be increased productivity. Historically, productivity growth takes longer to happen than you think it will. You look at productivity from 1895 when electricity started to WW1, it was terribe, then it took off rapidly with electricity. Bob the economist observed in the 70s that computers were everywhere except in the productivity statistics. It could turn out that there's some hype in blockchain database technology and that's a possibility. But I think it's natural to suppose that during the period of implementation of these invents you will get both things going and if you have some of that going on and some actual reduction in productivity and some places where productivity is increasing, and you have a period of a lot of ferment, it wouldn't be surprising that productivity growth would appear low for some significant interval. The other part of it is mismeasurement. We don't hvae a clue. I don't think anyone has a clue. Certainly not the government statisticians have a cue, regarding how to think about extra financial productivity in financia services based on the fact of being able to use a debit card inside a taxi when you didn't get to use to be able to do that.

AM: Your best guess as an observer of these things, do you think digitization of industries like in financial services and happening elsewhere, are they bringing about changes on the economy that are on par with the steam engine or the other industrial revolutions? Best guess.

LS: If you define information technology and digitization as broadly, like artificial intelligence as part of the digitization.... then I think there's a good chance that the answer to that question is yes.

AM: Do you own any bitcoin?

LS: Let me give you some. You now have 1/100th of a bitcoin. ((applause))

AM: There are a number of interesting startups in this room. Are you using Circle? Or Larry Summer signed $20 bills?

LS: To my knowledge, I have not transacted directly in bitcoin or any bitcoin-like activity. I am entirely open to it. Look, I think that this whole sphere is ripe for huge opportunity here... and I guess I can conclude on the thought that we have over the last generation had a lot of financial innovation for the benefit of money. I think it's a good thing to have financial innovation.