How is Silicon Valley changing Wall Street?
You. Hello. Welcome to faster, FinTech, I'm delighted, you're all here tonight. Thank. You for coming, faster. FinTech today's discussion, is a discussion jointly, sponsored, by the, School of Engineering and. The Graduate School of Business, before, we get started I would love to remind you all to please turn off your cell phones. And throughout. The evening you will see two people walking up and down the aisles, they, are collecting. Questions for, the Q&A portion so. Please, signal to them when you see them coming through. So. Now it's my pleasure to introduce. Tonight's. Program. And the. Intersection, programs consists, of a series of conversations, in. Which faculty from different Stanford. Schools explore, areas of common, research interest, from, their different. Disciplines. And perspectives to. Talk. About the future of financial technology, we have brought together three, experts, in their fields. Balaji. Prabhakar is, VMware. Founders, professor, of computer science and, faculty, member in the Department, of Electrical Engineering. And computer science his. Research interests, are in computer, networks notably, in data. Center networks and cloud computing platforms. He, has also worked on societal. Networks networks. Vital forces societies. Functioning, such, as transportation, electricity and, recycling, systems. Darrell. Duffie is the dean witter distinguished, professor, of finance at Stanford, University's, Graduate, School of Business he. Is also a senior fellow at the Stanford, Institute for Economic, Policy Institute and. An alum from Stanford, engineering with, a PhD in engineering economic. Systems, Darryl's. Research focuses, on the design and regulation, of capital, markets and our. Moderator moderator. For this evening is John Markoff a research, affiliate, at Stanford, Center for Advanced, Study, in behavioral, sciences, he. Reported, on science and technology for the New York Times for over 18 years and was, nominated for a Pulitzer Prize five times and with his team was, awarded the Pulitzer in. Explanatory. Reporting, he, is currently researching a biography of, Stuart Brant the creator of Whole Earth Catalog, please. Join me tonight in welcoming them. Thanks. Everyone, can. You hear me in the back how does okay. We're good great and Stuart. Brand was a Stanford student so there is a connection. So. It's it's been a half century, since the, advent of packet switching switch, networks it's, been 48 years since. The microprocessor, was invented and so. We're part way through this interesting, transition. From. A commerce, system which is rooted in paper and metal to, one that's rooted in bits, and glass and, the. Question I hope we can pursue, tonight, is. Whether. This is a one-time, transition. Like indoor. Plumbing are we sort of at the end of this transition or, is, it something else are we at the beginning of something that's going to remarkably, trance, transform. The world over, the the. You know next couple, of decades and you. Know to get us going I wanted to ask Darrell, if you could start, by maybe painting, a picture maybe. Not a decade, in the future but you know there's all these forces, based. On technologies, that are merging largely, from this part of the world that are changing, the commerce system what, might it look like in the relatively, near future. We, already have actually a pretty good idea just looking into China they, they're getting a head start on the United States they. Have a mobile payment system that's. Roughly. A factor of a hundred more. Transactions. Than in the US and five. Hundred million users. Swishing. Money around on their mobile, phones to make payments using QR codes. There's. There are even infamous, videos. Of beggars in the street with, rather than a hat they. Actually have their QR code ready. To collect. Payments. By WeChat, WeChat. Pay or Ali pay. Just. So that I can kind of gauge the, level. Of familiarity, how. Many how, many people here tonight, ever. Used, or have on their iPhones, venmo, or, WeChat pay or Ali pay. Wow. Okay, so, so. That's. A sign that the, you know it's not ten years off it's happening right away and the, the, vision, is what. I call faster payments. How. Is when, when you pay today most, of the time that's. Going against your credit card it might be going against your bank account but, the person that's getting paid is actually not getting paid until tomorrow or perhaps the day after, and. A lot can happen in a day or two the money gets held up it. Goes through deposit accounts into banks where it holds very little interest, it gets very little interest, and. Vendors, are getting, delayed. On their payments meanwhile, in the in the. Big. Banks and on Wall Street they. Need to make their payments much, faster, just because there's so much money involved and they, are also developing, new payment methods and.
One. Of the. Visions. Is. That rather than going through the bank payment system where all of these, devices. Are connected to now all the people in the audience are getting, paid one way or the other through. The banks that may, happen through, other methods like crypto. Currencies, and. I. Know, how. Many of you have ever actually. Purchased, a cryptocurrency. Wow. Okay. So we have a pretty sophisticated audience. Okay. So first let. Me let me disabuse you, of the idea that this could ever be done with with. Bitcoin. Because. Bitcoin is just not suitable for making fast payments it's very. Slow and it's, price is very volatile, so you couldn't count on the. Value, that you wanted to send getting to somebody in a proper way but there, are new methods called stable, coins, which. Are crypto currencies, which, if done properly will, always be, worth $1 per coin and, they'll. Be able to be transmitted, very rapidly and there. Are lots, of entrepreneurs in Silicon Valley and, elsewhere that are developing, these right now and they're going to be ready to deploy any time there's. Still I think a fair amount of skepticism about, some of these new kinds of cryptocurrencies teather, in particular, is one that seems, to be in the in the gun sites of skeptics. Or. The are the currencies, that you believe will. All the problems in the first generation of cryptocurrencies do they already exist or do you think they are to come. They're just nascent so a, JPMorgan. The Bank has just come up with an imaginative, Lee named JPMorgan. Coin. Which. Is fully back dollar-for-dollar with, deposits. Of JPMorgan and, that will work okay so. Take. Me through this are we gonna see a proliferation of payment systems and how is I well. I as a consumer make sense out of this or will there quickly be a monopolization, yeah, it's kind of like the. You. Know the subway system or, the, telephone. System there's only a certain number of these that can actually survive that because of the massive. Economies, of scale and scope you know wouldn't work if I wanted to pay you with JPMorgan coins, and you, wanted to pay me with.
Another. Cryptocurrency, like tether though, we're gonna end up most. Likely having. A small number of these that are widely used. If. The, authorities. Allow that bond that's another issue entirely there's, this thing called fiat, currency, yeah maybe how, will they okay. So let, me put my my. Thinking. On as a, potential, regulator, so if I were at the Federal Reserve which, is the, central bank of the United States I. Would, be fine with this as long as it didn't get too big and then. I would start to worry that people. Are using this other currency, than the one that I the, Fed controls then. I won't be able to do. My job of, controlling, inflation, and promoting. Economic growth and, if. Some operational, failure were, to occur. That. Could bring down the financial system so I. Think, the central banks of the world will, allow. These to sit on the fringe maybe be used for consumer payments, or for. Specialty purpose. Big. Bank settlement. Of trades but, they won't be the general payment, currency. Of the economy and then what. Does this do this, kind of the, emergent payment system well you're talking about due to our, existing, banking system do we need banks in in this kind of an. Environment are. They some, risk I just. Gave a talk at the New York Fed a couple months ago and it was it was titled. Disruption, is coming, and. I was speaking about, the impact, on the banks some of the banks are gonna, try to get ahead of the curve but the ones that don't, they're. Gonna see those massive amounts of deposits, sitting in their in their accounts, and for. Which they're paying almost no interest those are just gonna go way down and they're. Going to lose out in the technology, wars JP Morgan alone is spending 16, billion dollars a year on, tech. Of which, a lot is devoted, to these. Kinds of initiatives, and. There are other banks that are doing the same but a lot of other banks are gonna get left behind any bank that's not big enough or not nimble enough is. Going to lose out in this disruption so, there. Have been reports, in the last couple. Weeks that Facebook. Again is working on its own currency I think they're called suck bucks by some. The. The Amazon. Of Facebook Google, these are the the, analogs of what's happening in China those of you in the audience that have Ali, pay and WeChat.
Pay You're, holding the analogs of what in the US would be Amazon. Pay or. Use of a new Facebook coin or, a possible, Google coin and, it doesn't have to be a cryptocurrency, it could be a fast payment system but those tech firms could. Eat the banks for lunch if they really got got going on this because they have all of the network. In place they don't have to develop a network yeah, and so, in that model also what happens to things like ATMs. Okay. So how many in the audience. Actually. Use paper money today raise. Your hands Wow a lot of paper money users - well. I haven't carried paper money in a long time so I but I think ATMs are going to be few and far between pretty, soon okay, and then, so so I mean there's been this this, model in this transition, on ATMs. We're supposed to kill bank tellers but, in fact because, of the falling cost of computation and the and the explosion. Of computer networks banks. Put branches on every street corner and, they began to use tellers as salespeople. In. The new world you're talking about does, this get reset one more time absolutely, it's, gonna it's going to be a. Lot, of. Well. Actually, there was a story in your former newspaper just last, week I believe about small community. Banks in America, not, having not, having any success and, the large banks reducing the number of branches dramatically, to, the point at which you. May have to go searching for an ATM machine and ten years like you now have to search for a telephone booth and, the, number of employees and in banks that are actually doing customer service is also going to go way down I think so I want, to get to speed quickly but before, we get to speed, what. About the, people who can't participate what, about the people who don't have bank accounts, who. Are being pushed through the cracks in, this kind of a world, are they are they are, they pushed farther off the edge yeah, this, is a serious, concern China, has just passed a law requiring. That. Vendors, take paper money because, they're so concerned about the unbanked. People. In particularly, in the countryside that don't have mobile. Phones and bank accounts now China actually has pretty good penetration but, let's take a country like Vietnam only. 30% of people in Vietnam actually, have a bank account which is kind of a prerequisite, for using, any of these things so. If you don't have paper money. And. Vendors, won't take paper money that, could be a serious problem Sweden. Has. A remarkably. Little use of paper money I was there just a couple months ago I couldn't actually use my paper money at my hotel.
And. They are worried. And they're probably going to introduce some form of electronic, money, that. Will be a substitute, but, that's not the case I mean doesn't the United States have kind of a cash, economy an underground economy that that that, you, know trades in cash and yeah, thriving. And the. People who sort of the, the work, on the books and then they'll work off the books for cash I mean that's that's called the underground economy yeah I mean if you think about the amount of paper currency, that's. Circulating, right now it's about a trillion and a half dollars probably, only half of that is, used, legally. The. Rest is $100 the rest is you, know. Smuggling. Money or. Underground. Untaxed. Economy. India. Recently. Tried, to remove cash from its system or, a large partion portion of the cash from its system. In. Order to try to reduce, the amount of this. Kind of black, economy use some paper cash so if you had to predict a decade from now in the u.s. less. Cash no cash the, US will be one of the last to go it's a very conservative, country. Relative, to some, of the other countries that we've just been speaking about so, I think cash, will be here for a long time I don't know how long but we still have the one dollar paper bill which. Is kind of a sign that Americans, don't like giving up their paper money so. To. Make this work you, need these very. Powerful, computer. PAP platforms, backends, markets, that. Allow these transactions. To happen the. Largely how did you come, to get. Interested, in the problem of time, and computing, well. Actually the if you look at how. Computing. Let's say in the 60s. Bifurcated. From. Centralized. Sort. Of things that were single. Machine or, set. Of machines that were the high speed interconnect, to look like a single monolithic system and. I went into this whole supercomputing. High-performance, system sort. Of trajectory and, the, other thing that began was distributed, computing. Lots. Of cheaper. Less. Powerful, machines, connected. Trying to connect that was not. Necessarily, you know super high-performance, and. That evolved into now, essentially. The cloud computing sort of paradigm, at, the, same time on the networking side communications. We. Have circuit switching and packet switching, and. What. Circuit, switching guaranteed, was you, know 100% real time nothing is buffered anyway and so. You know it just everything, is a circuit is dedicated, for, transit, hora for, for. A connection and, packet. Switching changed all that and introduced. Jitters. What. I sent to you may, not get to you the.
Same Speed, every time I send it it could take more or less time depending, who else was there and. So. That jitter, you, know network, which we call best effort service so. It's not to promise, anything at, all right. Went. In, became most global internet Ethernet, all, the data center stuff, I think. We've. Given up we had essentially, you know both conceptually and in fact, given. Up on time and and, in real time in. The sense that if you have to take one of the disputed systems and make them look like a single monolithic system and. Which they do like, databases guarantee, consistencies, or whereas kind, they. Will do, this by exchanging messages, so. We'll stop doing some work for a while and then leave, the nodes of the database will agree that this is the order in which transactions. Shall. Appear commit. To, that and then, proceed this, is like a trade like a financial trade would be a good example as a good example for example foreign exchange trading many people are considering, putting. It on blockchain, especially the settlement and clearance, side, of it, and. It's. Important to have things in a single common timeline if possible, or a, non controvert able I, mean, nobody disagrees, with it everybody's commonly agreed to this. You know succession, of events and. That. Was then you know this, is because we, as a community gave. Up on. We. Start building systems, with a clock less assumption, and, that. Has been liters of distributed systems and, we've. Learned how to cope with this. But. Now imagine that we actually can, revisit, this question of can clocks be synchronize across a large. Network where, the random delays, possibly. Between any, two pair of notes that's. The problem that more, recently, buddy year and a half or two ago we started working on and you solved, for all practical purses, more. Or less at scale good enough that at a market, like Nasdaq, could deploy, it commercially, and yes. Would. You talk about why they chose to deploy. It what was it was it simply about front running this issue of. Yeah. So the two to two things here. Front. Running is you, know I'll come to that separately, front. Running is sort of information about ROG of the I know something, I had of you know somebody else but. But keeping that aside for a second just consider single financial exchange, on, its own there.
Are Market participants. They're. All sitting you know. Accessing. Certain gateways, that where the financial exchange officially begins, so. Gateway one gateway through gateway, 3 like that. And then these transactions. Are in other bids that market, participants. Place across. These gateways maybe different, gateways for different market participants and, make their way through this matching, engine where. If you're looking for something to sell and I'm looking for something to buy we meet over there and the matching engine you know performs. The trade so. Long as the prices are how we would like okay, and. In. This world between, gate with a matching engine, there's. This need. For what's called fairness. Fairness. Is that the. Order in which transactions. Cross the Gateway no. Matter what gate with Araya. That. Is exactly order in which they should be executed, so. If you saw a price, that's. Favorable for, your strategy or trading and. He chose to transact, then and. You cross the Gateway ahead of me then you should be transacted, your, transaction, should go through first. Unfortunately. In the world where these networks of jitters. This. Is not easy to guarantee, okay. And so. Occasionally does, happen then. These networks are very carefully engineered they. Measure of the delays and sometimes, the length and the wires if. One. One path is shorter than the other they will make it longer okay, and so. It's very carefully, manicured networks, what, this financial exchanges look like and. In. Fact we were taking. A tour or one of the exchanges and the, flooring, is transparent, and the. Goal is to show the market participants, look all the wires the same length okay. It. Told us that this is why the floors the, tiles are transparent. Okay in, their world right now what kind of precision do they need I mean so, they're at the you, know nanosecond, level, pretty. Much that's 12 inches that's. How far light goes and no it's. Five nanoseconds. Per. Meter on. On. Fiber okay, and and. You know it's a pretty. So. If you have because transactions, coming thick and fast yeah. The time. Taken from going from tick to. Trade is. Down into a few tens of nanoseconds, now and. And you're able to give them the precision. Just in software now that, was sort of the break, it's called Huygens is that, you. Did, this with Google Google. Was a collaborator, they we worked summer internship, or, the student host thesis work this is Elan gang and I see, Celia was another collaborator, on that work, and. Jian are the three students and Google, researchers in. The past you've actually, created. Companies to create technologies, and then sold them why did you choose not to go that direction, this time we. Are oh. But. But but let, me say why. Well. First of all it is Stanford now, the. The the thing is that sometimes, this software. Has. To be produced for production, readiness, and it's. Not easy to take an advanced academic prototype. Which may be good for a proof of concept or a pilot. And. That. Somebody can install and have you, know it run in, production environments where, the network interface cards and variously. Different, or you know operating conditions are are. Changing, and, so that's one of the things but. I think time itself is a foundational, piece you know this is sort of know you have the opportunity to revisit.
You. Know choices, made a few decades ago. About. Why go this way versus not and then say well if time is sold what can we do yeah, I got, this sense I mean you're, now slicing time so thinly it reminded. Me you know Zeno's paradox, of the turtle. Bumping his nose against the wall you're, kind of pushing up against fundamental limits or. Well. Is there still this little peeko we're. Not know there's you know femto. That people, actually have been talking about such things I mean. The thing is that I heard certain. Physicists, say that we're at the relativistic timescales, is the speed of light you know, in. Speed, of light is you know. Three. Times, ten to the eighth meters per second so we're, not relativistic. Terms but. There are you know phenomenon. That are you know even. Lower timescales, but, for practical purposes, today's technology, I think we're where we should be yeah and. Was. There a significant, I mean Michael, Lewis wrote a book in 2014, which was very pop very controversial, apparently, was. There a real, front-running problem, that, these. People had to solve, well. There is a front-running problem there. Is and you, know they, the. One way you can think of it is that if. So. Is the case that if. You're trading a. Lot. Of people's money you're required, as. A broker acting, on behalf somebody else to look for the national, best bid or offer nbb oh that. Requires this person to go check with multiple exchanges as to what is the best price, but. The very act of checking, 400. Shares or some company's, stocks. You're. Close to one exchange, and then, the other extreme that you're checking out is distant from you, now. In both these places you get into them on wires, so. It's possible for someone else to, hear your bid here and then take an air link or like a microwave link over there and get, that ahead of you and wait for you that's the front-running problem, and. They know exactly what you're looking for because they already heard you say so here right. The. Way of one. Way of solving this problem is to put you know speed. Bumps speed bumps are you. Slow down the speed of trading you don't, have to do it as, frequently as people are doing it that's one way the other, way also is to just for the trader to, you know not, place, orders. Until. A certain time in the future place them simultaneously and, that the. Clocks are synchronized you could do this yeah, I want. To ask you, see now you've controlled, time you, know Google talks about this notion of a planetary scale computer. These, platforms, that are smeared out are there other obvious. Financial. Applications, what capacity would be one obviously, but are there other things you can do. When. You can precisely, control time, the way you can now oh yeah so the lot of lot of the dispute systems, that people have built. Like. You, know databases, Google has this global database called spanner, which. Guarantees, what's called external consistency I've seen by external observer events. Are you know in a sort of linear order as. It happen upon it you know an external observer that. Is done through a, clock, so is that they have called full time. Similarly. In. Our group we've done other work. Using. Accurate, clocks let's, go revisit whether. Dispute. Alleges of the, blockchain type could be sped up whether. Consensus, protocols, like. Famous, ones called taxes and raft could. They be made. To be higher throughput, and lower latency, now the director Clause and. The idea here mostly is that if you can agree on time then, becomes easier iam other things and. That's how time requires, certain primacy, in. These these, wenches. Go, you you brought, up the specter of China in a really quite striking way and we just sort of glossed over it but you basically said China's ahead of us in. The deployment of this financial technology. And I you know if you've if, you've been to China really. Recently. And particularly, urban China I don't know how spread out is across the country it's, really quite striking. There's. WeChat, as as a social, and economic tool is so far ahead of the way we, as Americans, are using Facebook, for example. You. Know I. Guess. I want you to assess, where China is as, a, competitor. Either, financial, or technological. I mean you you take. That take. That where you think it'll go you're, you're, hitting on one of the questions of the last few. Months because as you know the US, administration. Has. Been engaged. With China over, issues. Of this sort technology, transfer, and. Scented. The use of sensitive technology, in. The finance area I don't think, the. Technology, transfer issues, are so critical, so on. There. There was a recent. Attempt. By a Chinese firm to acquire a, stock, exchange in Chicago.
Which. The United States turned down and, each, of those two countries, have. A an, authority, whose purpose is to, accept. Or deny a, transaction. That would involve technology, transfer, and that's how it's currently being controlled but right now because of these trade negotiations. China and the United States this. Is all in play how, much. How. Much will. American. Firms be permitted. To do, in China without transferring. Technology how much trade. Involving, technology will. Go in either direction that's, all being worked out so. It's a it's. A question that's. Extremely, pertinent right now I have, to tell you it's a reporter, if you go to Beijing, and you're in the third ring you. Feel like you're in Silicon Valley except. That the air quality is much worse and they. Don't seem, to worry about this thing called democracy yeah. Culturally. It's so, similar it's it's it's eerie I teach a course on Chinese financial system, for. Our graduate students here at Stanford and. One. Of our. Speakers. Is a venture, capitalist, who works in both the United States and China. This, is Richard Lim and he. Described, Beijing. As. Second. Only to Silicon Valley in, terms of the. Vibrancy, of the. Entrepreneur. Tech entrepreneurship, scene, and they're moving, very rapidly there, and the government is heavily involved their, venture funds, a significant. Amount of that is directly coming. From the government a, general. Question about these, next, generation financial, technologies, do you think as, a rule, they. Are either stabilizing. Or destabilizing in. The sense of the kinds of problems that the our financial, markets face, on occasion, can, you make any generalizations. Do. They give us guardrails, or do they strip away the guardrails I think. So for. My view, I'm, gonna take a view of technologists. Used. To sort of seeing software. Upgrades. Go. From once. In two years to once and you know yeah and now it's all happening, continuously right. I'm. Certainly, hardware and firmware updates, are all reasonably, frequent. Financial. You, know trading, platforms, or financial, institutions, for. Regulated reasons or even just hiring you know because so many participants they all need to get, ready to move to some new thing have. Moved slowly in the past but. Increasingly, I think the. Disruption, is coming is correct. You, know one of the advantages of freeing. These. Networks of the worry, of accurate, clocks is. That you can move them into the cloud for example and. That's one of the big motivations. And goals because, now you don't have to be worrying about a small number of gateways, and the, cost of participating, in these markets goes down dramatically, because, it costs a fair amount of money in few tens of millions of dollars to be present, at all the venues where these exchanges, are and get yourself one of these cages so. Your machines can stood there and participate, and. I think that disruption, will happen and now, you are the pace of you know cloud I mean if cloud. Providers. Make available a, IML. Tools which. To have then. You can revise the trading strategies, more frequently because the market data is available right there and. So this is sort of what's exciting, in a way that. The whole ecosystem could you know change.
Fairly, Quickly I. Think in that sense I can see it disruption, is coming. I think. Balaji is on exactly, the right note which is, that. The demand for speed, and volume is. Growing by leaps and bounds and. The. Technology, just needs to stay ahead of that all of the cases that not all but many of the cases of financial crashes that we've had are, cases in which the technology was not able to keep up with. The. Demand for speed. Today. Every. Day there. Are 17, trillion, dollars, of transactions. On the world's large payment. Systems and we're, not for the very, stable, fast technologies. Enabling. That global. Commerce would just have to slow down and that would that, would not you know people would, not have as many jobs that would have as much to eat you know the whole economy rests. On developing. A financial system that's capable of staying ahead of that demand it's another kind of Green Revolution I guess yeah. So. I don't want to leave China we. Talked before about this. Social. Credit score that the government of China has instituted and. I you know I was thinking about it cuz I use this service called mint which is a free service and it shows me my credit score every time I I, go, there and I thought well there's only one word missing, and you know it's a know a cultural difference but. The. Credit score may already be being, used like a kind. Of quasi. Social credit score in America are, you worried about I mean. What. Will be the impact of that kind of technology. Yeah. Just to make. Sure we're all in the on the same plane here. John's. Talking about the. Development. Of a system in China that basically monitors. Individual. Behavior. And. Keeps, track of who's. Who's, been doing good things that who's not been doing good thing according to the government according to the government it's a very centralized, system it's very controversial. It's. Very effective if you're in charge if you want to be in, charge and, then it has it, has other shortfalls. I don't think it would go, over very easily in the United States on the other hand. A. Friend. Of mine, visited. My office two. Days ago this is a banker, who, just bought a database, for only $250,000. That. Allows him to monitor. Everyone. In the room everybody, in the United States. Through. Their GPS so. They. Can see if you've signed up for any kinds, of, services. On, your iPhone chances. Are you check the box without knowing it that allows, that, service to. Monitor your location, and certain. Types of transactions, that you're doing so, when you walk into Walgreens. Or. You go into the. Perhaps. A drivers, like to get a driver's license or go.
To The bank, many, of those kinds of things are being monitored and, this. This bank analyst, is going to use this database for. He's, not going to use it the way that a social credit score would be used but, another person could. Keep. Very close tabs on you and he said when he bought this database and realized that he, can monitor individuals. Right down to where their their home location is so, he designed her and off all of his would. Uncheck all the all the checks anonymized. Data that's not anonymized, that's not really because it's not it's anonymous however, it it, is able to monitor your location, including the. Residents, of your. Home I mean basically where you are so they can basically get by, merging with other databases, can find out exactly who. You are what you're doing it at most times a day, so. In Europe there's this thing called the GD P R would. That prohibit. This kind of. You. Yes. You can you can request that you get unchecked, from. All of this and. You could do that he did it himself and, added himself by basically, going back through all of his iPhone, connections. And I'm turning them all off but yeah. That. That probably, would keep that in check to some extent I don't know I'm not an expert on this particular, system there's also a school of thought that block. Changed which are supposed to be immutable by, design, would, also run a fell with the GD P R have you looked at the problems that they would face no. Why, would you any ideas. Immutable. But. It's, still a not changeable you're anonymous nevertheless, meaning you could potentially preserve, some aspects, or, an anima T because that's the other aspect of blockchain style. That. Is if that is interesting, and useful right, so. Like. You know Fiat car you know like hard, currency, yeah, you. Can destroy it but, as long as the rom is immutable but, it's anonymous you know the whole roof it can change it it doesn't it. Doesn't stick to you in any way and. I think that feature, exists with blockchain so, it's. A question of. You. Know how how, sticky something, can be made to be as. Far as your personal information, is concerned. But. One. Thing that I, think. The the you know the disruption, you know i when, when I hear Darrell talk about payments, and currency systems the, our, idea that a mobile found in a person's hand or people's, hands and a. Service offer from the cloud, this, is sort of a big from. For me as a, networks. In a cloud type, person, this is a big deal that's. Changed everything like if you look at us, hailing, for taxis in the road and now you Hale on your phone that's. A phone in my hand and, so it's in the cloud. Retail. You. Know Amazon's. Done back to retail we, used to go to the department, stores to buy but. Department, stores are becoming like banks no. Need for them in physical locations. Or not relevant anymore, physical, stores not relevant necessarily. And. So I think this. Something. That is. A service offered to you, for. Which you don't need to have cash payments. Directly or the mobile payments. Adequate. But. Then you get a real service back okay, and I think that, that disruption, has applied that the financial services industry itself, is essentially. What's I'm getting underway now well it raises an interesting question it might be very theoretical, but I'd like to ask your reactions.
You Know there's this, mysterious absence. Of inflation, in the American economy right now and there, is a particular, school of thought that it's because, of Silicon Valley technologies. That, there is no inflation I was wondering if you guys either have a viewpoint. About why. Is there no inflation. Well. Actually there was a there, was a study just completed, about. A month ago that said. That's not the hidden. Reason. It's not like that's not the black matter and the yeah, in the economy, that's keeping inflation down in fact, the. Added. Technology. Is, not. Being contributed. Is not contributing to GDP as much as you might think a lot of it is being used for personal. Leisure, activities, like playing games on your iPhone. But. There is a I, mean it is an interesting question why inflation is so stable despite all the. The. Roller coaster ride that the economy is taking and. There's. It's been a big debate and it's a mystery among, central bankers some people ascribe. It to. A. Broken. Theory known as the Phillips curve which is supposed to show a relationship between, unemployment and, inflation that, has, stopped working and people have completely. Mystified, about why it's not working anymore. I. Have. One small, claim to fame in the FinTech world and that, is that my uncle invented the ETF this, is a very small class uncle. Nate invented, this fighter and American stock exchange some years ago but ETFs, have become to come to be a very, significant. Part of the economy there, is also an argument that, hidden. In the ETF world is the kind of leverage that got, us in trouble in 2008. And I. Was wondering I mean I know this is all speculative, but I was wondering if that's a concern, yeah. I was for. Three years I, was on the board of directors of iShares which is the largest etf complex, and, we. Were getting these queries. About you, know is it really true that. There's. An explosive. Problem. Here where people all try to cash in their ETF's at the same time that. The underlying assets, will have to be sold and the economy. Will will head, into a tailspin. Of, course you might second-guess, my opinion since I was at iShares but. It's. It's, simply not not. The problem that people suggest, ETFs. Don't. Add to the problem they in fact mitigate, the problem because in order to cash. In an ETF unlike. A normal mutual fund. Nobody. Has to sell the the underlying. Stocks, or bonds you, can just sell, the ETF would, be like taking your mutual fund and selling. It directly. Rather, than forcing, someone to sell all the assets in it so there's not it's, not really the. Problem that it's made out to be now that's not to say that there. Won't be. Hiccups. In the system as if you know if there's a bad. Run of events and people decide they all want to sell their ETF so yeah the prices will go down a lot, and. Then other investors, may step in and and buy them but it's not going to be it's not going to cause a financial crisis I also. Wanted to ask you guys about the, the the you know the the, financial, system and the future of the workforce because, there. Is a kind, of a narrative about 2008. In the Great Recession that. One of the consequences is you, know these these large corporations contracted. And then. When they came back. You. Know through sort of largely through business process reengineering, they, came back and they grew without jobs, and so there was a layer. Of sort of you. Know semi. Skilled white-collar, labor that went away millions, of jobs. Real casualties, of that recession, and you. Know we're in the same day as that we have this mystery around inflation, we have a mystery, about employment, we we have the lowest despite. All of the forecasts, in Silicon, Valley that the robots are going to get us there, more people working in this country than ever in history right now and for. You know there are lots of caveats but, still we have pretty low. We have reasonably low unemployment I was wondering if you guys went, out if we could look forward and see this wave of financial. Technology, that's sort of spreading, out to the economy do, you have a view one way or the other but it's. A. Game I think it's a reallocation. Deliver. What happened transportation. Detroit. As it was losing jobs and layoffs were taking place San, Luber and lift up picking out you know large. You know workforce so. It's sort of a different, kind of job in, the same industry a redefinition. Of the industry was underway I think. That you know if you look at now. That I'm speaking to a number of Wall street-type firms. I keep. Hearing them say, things that I've been hearing in the valley like we.
Are Our tech company, that happens to be, trading. Or that happens to be you know every said Amazon's, a tech company happens to be in retail so this is there's, a mantra that's now being repeated in Wall Street or vertically that happens to be a bank investment bank etc but, what that means also is that the amount. Of, tech. Uptake. Into. This company is not just consumers. Of technology which. Have been forever, but. Creators of technology, you, know like you know some. New tools that could be more ubiquitous and widely used that's. What they you know they're heading towards if. They acquire the bench strength to, do that but. Some of these tech, companies you, have I think. That's going to be very interesting. Redefinition. It's. That's unemployment, you, know, I'm I'm quite an optimist on this I mean I think you, just look at the progress of human civilization, the extent. To which we've, hit the ceiling in terms of our ability to find new and. Exciting. And productive things, to do. We're. Not even close to that and so as, new technologies, develop. They'll. Be leapfrog by other technology. Many people in the audience especially the younger ones will be. Coming. Into the workforce to, either. Develop or exploit these technologies. There's. No particular reason, at. Least not in economics, to believe that this is a you, know at some point we're all going to be out of work because we've gotten such so productive that there's nothing else left for us to do ourselves that's, I don't think that's coming well. Along those lines do either of you have thoughts about the future of financial advice I was looking today at the. These. Startups, like betterment. And wealthfront, and. I you know you look at assets. Under management you, know they've got several billion dollars and then I went over and checked Vanguard. And the Schwab and, they have several they're many trillions of dollars and so it. You. Know what's the future of the, the. You know the automated, financial, adviser is that something that will be as disruptive is. It's. Getting quite popular and it's a very inexpensive way to get financial advice and I think it can be it. Can be used for. For. Example if you. Want to help the, people in your company to, manage their retirement, savings through your pension plan. You. Know personally, I don't think it's a good, value for money to have each one of them go off to an independent, human. Financial, adviser and get individual, for financial. Advice that and you know much of which will not be that effective I think, having. A. More. You, know machine learning or a more. Algorithmic. Approach. To this that can be cheap, is, is. The, way to go do you imagine it can you imagine a world in which Syrian, Alexa, and what-have-you, will be the Hathaways and conduits for that kind of conversation you'll, have with your financial adviser could. Be but I'm you. Know I think I think the. It. Could be it literally could be done on your iPhone on your Mac smartphone. I mean I'm gonna be more positive because, he's. From the business school down from School of Engineering so, yes. I think I think algorithms. Are gonna start advising, they probably do a good job they'll. Probably pass the Turing test before, you, know that an out was gonna be a financial adviser before.
So In that sense I think it's coming and it'll be faster yeah. Let. Me ask you about inequality. You. Know in, the last two decades there's. Been dramatic increase, in inequality in. The United States, do. You think technology in Silicon Valley is to blame at all. Why. You, know we we've. Why. Why, why, are we seeing this this tremendous. Spread. Of wealth. And poverty. In America I, don't. Know it's to blame but it's definitely it's, happening. Both, are happening and there. I think that related I think. You. Know it's too much to say one is causing the other I, don't, know if Silicon Valley's output. Is big enough. But. I think manufacturing. Is where a lot of it is. Occurring. I think, one thing I'm noticing is. You, know the amount of things. That people don't mind reusing. It. Is going out and it's, a very interesting generational. Thing. That I see a lot of like. You, know ownership, of things is not as important, it seems for younger people which, could. You know see, a sort of tapering off of manufacturing, the car industry, or industry as an example but. Others too I mean people are you know stay, in other people's homes for a lot longer, than. They used to and people. Wanted to own homes early soon. Quickly. As quickly as possible but that's not the case anymore not. Necessarily. And. That's also happening and that's not that's not a similar, inequality, that. But that represents. Certain kind, of demand going down I. Mean. It's a question of I mean you spoke earlier John about a, portion. Of the middle class that the, phrase, that economists use are though is the hollowing out of the middle class and I. Think you have seen a lot of that happening, in the last 50 years in the United States with the extremes, of income. Inequality and wealth inequality in this country. And. It it, to. A certain extent it doesn't need to be. It, could there, there could be a much more progressive tax system that. Redistributes. Some of the income and wealth without. Necessarily, killing, off Silicon, Valley and all of the other sources. Of wealth creation you, can create a lot of wealth and then. Distribute the wealth I think more evenly it doesn't have to be in the form necessarily, of. Direct. Payments it, can be through health care. Minimum. Wages.
Housing. There's. A lot of different views about whether that's an. Effective approach or not and we're seeing a much, fiercer debate now in the political spectrum about. Redistribution, as you've, probably noticed. With. Some of the new, Democratic. Congress. People. Advocating. Much higher tax rates. Personally. I think the the income. Inequality in, the United States is out. Of whack and it should be fixed. So. I, guess we're, gonna have questions from the audience but I wanted to ask you one of the area there's that there's an interesting current, debate in Silicon Valley that plays, on business. Strategy and I, guess it lives. On top of the platforms, that we've created here in Silicon Valley and that was. Started by Reed Hoffman who was advocating. This business strategy which he calls blitzscaling, which. Is I think embodied. By uber and lyft as you you raise a tremendous, amount of capital, and then you've dominated, a market you get a monopoly, as soon as possible as a business strategy in it it's. Probably not new in Silicon Valley I think you. Know Larry Ellison, said what wasn't he who said it's not enough to wind everybody else must fail which is kind of an example, of blitzscaling. I would, imagine but recently. Tim. O'Reilly, who's runs. A publishing company and he's an investor has sort of criticized, that as a strategy because it. Might not be the, best thing for society and. You. Know. Amazon. For example grew, without taking. A lot of capital they borrowed money but they didn't take investment capital that was a different approach O'Reilly. Company, grew organically over, a long period of time and, it. Might. Be argued that having, a non monopolistic. Situation in, a particular market might be good, for an economy if you had many competitors, that might benefit, Zoomers although. I guess Google is the counterexample perhaps. So I have. You looked at that argument, and either, you have thoughts on on. The. Silicon Valley strategy, did you or we come back full circle, to, where, I started which which, is with, WeChat and. An. Aunt or or, Alibaba. In China those that's, a duopoly and. Blitzscaling. Is a fantastic. Word. For, that. For just describing, the. Competition, between those two firms to get to scale as fast. As possible, because of the enormous, economies. Of scale and scope you, just think about, why. Does anyone want to join WeChat, that's because, everybody else is joined reach out and the faster, you can get to scale. The. The. The. Greater, your chance of dominating, the market an uber, versus. Lyft is a similar, example if these these, are all. Social. Economic. Enterprises. That, thrive, on. Scale. And network, economies. And. You, should expect it in the payment system you should expect it in, telecommunications. Social. Networks of all types. And. The. Yeah, I mean it's it's it's you we should expect monopolies, or dois police. To. Dominate. Ever more as the economy becomes more integrated through, faster. Technology. Like fin tech, well. I actually, think that was, one of the things I worked on for what. Eight or nine years and you know Toronto's transportation. And. There. Are many, routes. In, a bus. System, or or, in a metro system that, are not, running at. Full capacity and, are in fact you know profitable, where. Is the requirement of a public. Service. Like public transport, that. It takes some routes, with loss while, continuing, because there's still some people that need to be serviced. On those routes it's, just simply the way cities you, happen to have a house over there there's. Not much traffic going, and then you know but you need to get home and get to walk and so. Your route is running, at a loss but the system, as a whole will subsidize a track this is true for airline industry so for many things. I've. Worried, that, you. Know if systems, become. Monopolies. And. Not even just to do familiarly, that. The. Neglect, that. Some areas, may suffer from. Are. Really going to be difficult to to. Explain or to Felicity. To bear this. Is already happening you know sometimes when you're in like, when you're traveling abroad or when I've been in India and you say you. Hail somebody and they show up and if, it's not an uber or somebody who you ordered on the on your on your phone, already. Knew where you were going often, they listen to where you want to go and then they do so I'm not going there and. You you lose like some 20 of these vehicles that, are just passing you by after.
You Know they're not going where you want to go and, so this is an example of something that's and that's very tough. For. Public systems. And. I think that's not necessarily desirable I. Think. When people burn, money what, they do is this is the thing that this, is a loss they can't take on yeah. Alright the system can't take it on. So. There's some good questions here let's let the audience participate. This, is for Dale for the first one, how. Do you think the digital economy is going to hurt the jobs dependent, on the cash economy. Ok, so it. Used to be that marijuana was a cash economy that's probably not the case anymore, it. Still is they you know they don't let the bank yet. I'm, trying to think about what. I mean. The stuff that makes sense you know as as cash becomes more. And more scarce. It's. Going to be hard to run your business on cash and people, people want with cash won't be able to use it but. I'm trying to think about. What. Significant. Parts of our economy that are legal. Can't. Be done, without. Cash a lot, of them have been dragged into the gig economy haven't. Yeah, I mean I still, pay cash for my haircuts. Seventeen, dollars. But. I suppose if, if. There were no cash they would have to take a credit card I, don't. Know that's a good question but I can't think of any parts of our economy that depends so heavily on cash that, we can't do without it yeah here's. A question, for, Balaji, first. When a blockchain and related, systems require intense, electricity. Like. Server, equipment, in the end and land use who, should pay for this yeah. I mean. That's, the way it is now, but I think this is one of those first generation second, generation sort, of thing what. I will what, I'm sure will read I don't know five years from now is the same thing we read about the Princeton ENIAC machine taking a big room and. Being some, you know less than some kilo ops and something you know not, even I'm not even sure it goes to kill ops whatever, the number was right some amount of memory it had you're. So small I, think it's going to be like that I think the inefficiency, technological. Inefficiency, people. Will find a way to overcome and and get. And, solve. As. To whether the part of the following is required which. Is why you know all this is happening. That's not clear meaning there. Are other ways one can conceive of potentially. Doing things and people will consider them yeah the. Second one is this someone who basically didn't, take your message on stability, I think the heart we have seen you as stock market crashes because of robot computing, if we speed up robot computing, is that better right.
So This isn't about that. It, isn't about speeding. Up the faster FinTech here they're first not to what. The market participant, is doing how fast they come back, you. Know that winner, has come down as, a number, this, is more about if. You have an exchange. Could you get transactions. From one side of the exchange, the other and. About the same time or exactly the same time okay. And, I think this. Is about removing the jitter. Intrinsic. To packet switched networks but, not doing it by, adding an enormous delay to. The whole process, one. Could do that and that that is an exam we'll have one gran a speed bump as it's called this, is trying to do it without having to do a speed bump. The. Question when I buy stocks I usually. Put in a quote market, order unquote, is that good or bad and by, and, by doing so does the the. Booker, Booker, make, most broker, make most, money in the, spread. Anybody. Take. A, okay. So if you're in a hurry you can put in a market order and you'll pay a very small fee because. Somebody. Has been waiting for you and willing to buy or sell based on your market order for, a small profit. But. If you're not in a hurry and you know exactly the price that. You're willing to pay you can also put in a limit order it's, pretty easy to do and I'll. Bet many people in the audience have done it, so. Both, both strategies, work depending on whether you're in a hurry or not. This. One I don't quite understand, how do you feel about payment, from order, flow does it ultimately help or hurt retail investors. More. Oh okay, I think I know what that person has in mind. So. You. Might you might think that, you would need to pay the exchange, a fee. In, order. To execute. Your order but in fact the. Exchanges, are so anxious to get a large number of orders that. They will pay you. To. Put limit orders on their order book, because. That creates, more. Liquidity and makes, it your exchange, more attractive, and, it's. A big controversy, but. To tell you the truth, no. One's been able to show one way or the other whether, this. Is a good, idea or not it's it's it's, not a lot resting on this one okay, here's. Something I talked about glass but I didn't talk about Wireless. How. 5g, the much faster, wireless communications, could, it create opportunities, in fintax so this new. You. Know global. Technology. Standard. Will, it will, it, meaningfully. Change, in. Tech. It's. A way of communicating, and, you know I'm.
Less You. Know yours you're, taking your subway train or your yeah. Metro. And then you want to feel like train you to want to trade from there. It's. Not clear that the. Bat might change it, does change something which is the number of connections. You can get. Into. Let's say the Internet. You don't have to be tethered or wired or you know you don't have to be because. A lot of these things it's. About proximity not in physical sense but actually in you. Know ether sense, how far are you from, someplace. Where you could you should be transacting. That. It could change fairly dramatically. How. Much of the city could very. Quickly get. To whatever. Other part of the city that needs to get to that'll change now. Is that finances the only main beneficiary, of this yeah, it's one of the beneficiaries or I'm, not sure it's. Is. Do, you think that 5g, is a threat to Wi-Fi as a technology. Some. Perhaps but but I think you know Wi-Fi. Will continually exist in. The sort of in. A really small local area sense. 5g. Can carry a lot more data, but. It is intrinsically, going to be more of a circuit switch type thing you know, in the main because gigabits, per second data I can give you. I see. More. As. A, fatter pipe and. Really. High-speed one and that. And. So but, but one thing I can't say is that you know the clocks need. To be synchronized for. You, know to get that kind of benefit of IG the. The, base. Stations clocks aren't as well synchronized as. Being, down to a few nanoseconds, then in. The amount of throughput, that you might get from a 5g network could be somewhat, proportionately, less and, so, that's one things we become aware of the 5 G's looking. For clocks once. Again to China one of the numbers that I saw today was that the rate of deployment, of new cell towers in China is order. Of magnitude, faster, you know it's. Really yeah, it is staggering yeah it's, it's. Just that the popping up so, if there is a advantage, to 5g they're gonna get there first yeah I think infrastructure, is critical. This. Is for, Darryl um what, are your views on the tension between distributed. Ie fragmented. Markets and the quality, price. Discovery. Process, especially. Given, greater number of exchanges, in. Regulated. NMS. Reg. NMS yeah, reg reg NMS in in, the in the US does, that make sense yeah, this, whoever, wrote this question is a deep. Aficionado, of financial markets let, me let me unpack. It a bit, it. Actually goes back to, something that Balaji. Was raising. Just a minute ago. Right. Now if you send an order into, the knee into the let's, say New York Stock Exchange. It's. If. It's gone through your broker it's actually, searched for the best price available on, every, exchange in the country. And. That tends. To. Consolidate. The. Available. Demands and supplies of stocks, in the United States into, yeah. In. A way that gives a more efficient execution but. That's not the case everywhere in the world and particularly in Europe. There's. A lot of concern about fragmentation across, different exchanges because, if. I send a large order to one exchange it may get a very bad price relative, to. What. Would have been the case had all the exchanges merged, into one similar. To but. Not quite like, the u.s. NMS, system, so. I. Actually just was in Basel Switzerland a, month. Ago on this, exact, issue. Debating. With a number of market participants and regulators about, how serious a problem this, is and I think it's a pretty serious problem and. I have a. Doctoral. Student and I are actually working on this one right now how, inefficient. Is it to, have market fragmentation I, think it's relatively, inefficient because, it means you're breaking, up the. Sources of liquidity to. That. Are. Able to absorb your demands, and supplies of trades, into. Bits on you have to go. Put them back together again in order to get a good exit good, trade execution. So. Here's what we talked a little bit about before we got started how, fragile are the fast financial systems, to mass hacking, by state sponsors, or rogue tech groups wow. This. Is something that the three of us were just discussing, before we sat down here tonight that's pretty interesting. Okay, so I'll start and, so. This is a serious problem many. People. Put cyber risk to, the financial system as the biggest source of financial instability, going. Forward in, other words, you. Know before, it was the big bank collapsing, was the biggest threat and now it could be a, cyberattack on the financial system and, I'm. Gonna be in Washington DC in two weeks talking about this problem and what would happen if. A major bank had a cyber attack would. There be a bank run and if so how would you handle it because, large depositors, are not just going to sit there and watch their. Money frozen, into their accounts even if it's not gone if, they can't get it right away they're gonna panic and try, to take it out and that could be very damaging to.
The Economy if, everybody tries to move their money out of the banking system all of a sudden. So. I you, know I think it's a very serious problem to do. We need better, protection, than the circuit breakers we have what would I mean in that kind of situation what would happen if the circuit breakers were tripped and you don't want to do the circuit breaker you want to do the opposite you want to keep everything as open as possible yeah, so the money can flow that. Makes that decision. Unfortunately. The decision may be made by the depositors, and our end users of the financial system that they pull back, then. That's bad news well, actually on, the. Engineering. Side. Many. Financial, companies, that do trading derive time, through. GPS antenna attach the roofs. Of the buildings in. Which you. Know the America, located with the exchange, this. Is a fairly common thing to do. And. So. In other words anybody if you have good, access to GPS, you. Not only know your location accurately, but also you can get fairly accurate time and. Then you're on a wire figure, out how long the wire is precisely and then you know what the time is here if, time over there was blah okay now. This, is very easy to be jammed, the. One big fear is if, I just jam all the GPS system this is going to be a huge problem. So. Already. In anticipation of things like that people, companies. Have. Been taking dark fiber from time, authorities for, example, the National Physical Laboratory. Of. The financial institutions, a druggie, okay that's an example of how in, Canada as well they're doing things like this. That. Does one way the other the other reason that some of the companies are looking to move to the cloud, is. That you know cloud has, had. To look, at me you know security they. Constantly do it they. Probably have very good. Tool circling but, potentially, much better tools and financial institutions have for. Protecting. You know against, attacks. So, that's the other reason I don't even access management being the other big, thing the cloud is good at so, I can see how you, know the the it's it, is definitely fragile. At. The same time you know people. Are aware and the countermeasures. Being adopted. So. Security. Is one of those things that you just you, know the good guys get ahead a little bit of the bad guys get ahead you know just it's. Its business to, be in forever we have a question on the other side of the ecosystem, actually other end of the ecosystem. By. That same token how confident, are you that startup, FinTech companies can, protect client data and assets from hackers and security, intrusions, will, they still protect client privacy, or will our privacy evaporate. Well. Uh yeah so if you host yourself, in the cloud a coin. Base has been operating the cloud for a while now and you, know, startups. Like, Robin. Hood etc, probably operated mostly. In the cloud, then. You're about secure. As cloud is it's pretty secure at the moment but, nothing is 100% secure, in. One sense now, but, there's also the other side of you know how much, money the evaporate, compared to any any other alternative, it's, not about FinTech. Startups it's, about any other way in which a service. Can we offer all your credit cards. Transportation. Companies for example or. Elsewhere. That about a secular or not that. Race is another question just on the side. Would. Workable. Computation. Be a huge threat to. Market. Security, it. Would start a lot of things not. Just multi security. I mean. At the same time again you know for every one of these technologies, that you can come up with something to. Try and break it the same, thing would give you a way to protect yourself against, it but. Then question is how can you move from an existing thing to this quantum wall and, you talk about regulations, and how would that how. Would it operate over there I think the human components. Of this will have to be you, know I'm, graded, yeah other ways of policy setting it off just, just to tag on on. The. Issue of privacy and data. The. Events, of the last year. Particularly. The. Testimony. Of Mark Zuckerberg in Congress, and his, decision, yesterday. To, announce, that Facebook. Is now going to prioritize.
Privacy. These are signs that. The. Mass, collections, of. Personal. Data. Are. Being. Perceived as a, threat and that where. We are. Making. A fairly sharp. Turn, I think and the. Use of technology