In this thought-provoking podcast, we delve into the intricacies of the U.S. payments landscape, exploring the perspectives of Professor Dan Awrey of Cornell University Law School. Awrey's working paper, "Money and Federalism," advocates for the enactment of federal legislation that would create a federal charter for non-bank entities engaged in the payments business, such as PayPal and Venmo.

Unlocking the Future of Payments: Bridging the Regulatory Gap

The Dual Banking System: A Fragmented Landscape

The United States' unique dual banking system, where both federal and state governments possess independent yet overlapping authority for bank chartering, regulation, and supervision, has its roots in the Constitution. This system, which emerged long before banks rose to the apex of the financial system and became the dominant source of money, has been a wellspring of jurisdictional conflict. However, over time, this highly contested and fragmented system has also produced strong federal oversight and a financial safety net that protects bank depositors, prevents destabilizing runs, and promotes monetary stability.

The Rise of Technology-Driven Financial Institutions: Challenging the Status Quo

The current system is now under stress, as a new breed of technology-driven financial institutions, licensed and regulated almost entirely at the state level, provide money and payments outside the perimeter of both conventional bank regulation and the financial safety net. These non-bank payments firms, such as PayPal and Venmo, have disrupted the traditional financial landscape, and their rapid growth has raised concerns about the adequacy of existing regulatory frameworks.

Bridging the Regulatory Gap: The Case for Federal Supremacy

Professor Awrey's working paper examines the legal and policy cases for federal supremacy over the regulation of these new monetary institutions. He advances two potential models: one based on complete federal preemption, and the other more tailored to reflect the narrow yet critical objective of promoting public confidence and trust in the U.S. monetary system.

Protecting Consumers in the Digital Age

Awrey explains why existing state money transmitter statutes, under which non-bank payments firms are generally licensed, provide insufficient protection for consumers who use these services. These laws were designed to protect consumers using traditional money transfer services, such as Western Union, and were not intended to safeguard the users of modern Fintech companies that leverage new technologies to facilitate fund transfers. Unlike banks, these non-bank companies do not have access to the Federal Reserve's central payments system, and they are subject to federal bankruptcy law, which increases the likelihood that consumers could lose their deposited funds in the event of the company's failure.

Towards a Federal Charter: Enhancing Stability and Confidence

Awrey's proposed solution is the enactment of federal legislation that would create a federal charter for non-bank companies engaged in the payments business. A company granted such a charter would have access to the Federal Reserve's payment rails and would be exempt from the federal Bankruptcy Code. This would provide greater stability and protection for consumers, as these chartered companies would be subject to strict investment restrictions, ensuring the safety of customer funds.

Diverging Perspectives: The Role of State Regulators

While Awrey advocates for federal oversight, the Conference of State Bank Supervisors has recently published a publication extolling the virtues of state money transmitter laws. This highlights the ongoing debate and the need for a balanced approach that addresses the concerns of both federal and state regulators.

FedNow: A Missed Opportunity?

The podcast also explores the status of FedNow, the instant payments system launched by the Federal Reserve System in July 2023. Professor Awrey, who was previously a guest on the podcast, had predicted that FedNow was "too little, too late and too expensive for small banks." His opinion remains unchanged, as the Fed has so far refused to share any data about FedNow's usage, raising questions about its effectiveness and adoption.In conclusion, the podcast delves into the complex and evolving landscape of the U.S. payments system, highlighting the need for a comprehensive regulatory framework that can keep pace with the rapid technological advancements and the rise of non-bank financial institutions. Professor Awrey's working paper and the insights shared in this podcast offer a thought-provoking perspective on the future of payments and the role of federal oversight in ensuring consumer protection and monetary stability.