The invention of (synthetic) central bank digital currency
September 16, 2019 2:34 AM   Subscribe

The Fed is going to revamp how Americans pay for things. Big banks aren't happy. "America's central bank plans to build its own real-time payment system, much to the chagrin of big commercial banks. The news: The Federal Reserve has announced that it will create 'FedNow', a system that will allow real-time bank-to-bank payments, all day every day."[1,2,3,4]

The Fed's plan to speed up payments despite banks' resistance - "Most countries today settle and clear retail bank transfers within minutes if not seconds. In the US it takes days -- and the banks want it that way." (via)
Due to the outcry following NACHA’s decision to vote down same-day ACH, banks revisited the proposal in 2016, but this second-time around they included an interchange fee. Before, it used to be that ACH, checks, and wire transfers were all cleared at par, which means the banks don’t get any fees for receiving or sending payments, but on cards banks can charge an interchange fee. Hence the constant barrage of advertisements from banks trying to sell you cards. The banks’ fear was that if ACH became faster, and eventually real-time, consumers would use ACH instead of cards or wires, and retail banks would lose very profitable revenue streams.

Traditionally, the payment systems run by the Fed always cleared at par, and this is going to be one of the critical issues in the coming years. The banks are going to adopt faster payments, and due to innovations in fintech, this time they can’t stop it. But they will do their best to build in interchange fees if left to their own devices. I hope the Fed holds the line here and declares that FedNow will clear at par, just like every other backend payment system used to.
Supervision - "We have talked before about related theories, for instance Morgan Ricks's argument that also 'sees money creation as an intrinsically public activity that is then outsourced' and calls for utility-like regulation of the issuance of money claims. This sort of regulation might ban non-banks from issuing very-short-term debt that is treated by its holders as the equivalent of money, because that sort of debt is money and should only be issued by regulated (and supervised) banks under a public franchise. On this theory, issuing overnight IOUs is not a regular commercial activity that anyone is free to get into; it is a form of minting money, and if you do it without a license you are effectively counterfeiting."[5] is a fascinating new paper by Lev Menand on “The Monetary Basis of Bank Supervision.” Menand traces the history of safety-and-soundness supervision and argues that it derives from banks’ role as issuers of money. Historically banks, unlike other businesses (but like the government), are in the business of creating money, originally by issuing bank notes but in recent centuries mostly by issuing deposits and letting people pay for stuff with them. Most people pay for a lot of their stuff without ever touching government-issued currency; they use checks and debit cards and electronic bank transfers to move bank deposits from one place to another. Those deposits are money issued by banks, and at least at the origins of this system, it was pretty clear to everyone that the banks were doing that with a sort of franchise from the government. And because this was a state power that was delegated to the banks, the state kept the ability to supervise the banks’ use of it, and to make sure that the money they issued was “safe and sound.”


There is a lot of fun history in the paper, including some Modern Monetary Theory from Alexander Hamilton (“Every loan which a bank makes is in its first shape a credit given to the borrower on its books”)...

There were good historical reasons for governments to charter banks to provide the money supply, but it is not totally obvious that those reasons still apply. The Federal Reserve has computers now, and will offer real-time payment processing by, um, 2024. One could at least imagine a world in which the Fed just let everyone keep a bank account at the Fed, rather than effectively franchising banks to provide deposit money. And people have imagined that world. We have talked a few times, for instance, about TNB USA Inc., a “narrow bank” that would just take customers’ money and deposit it directly at the Fed. (Ironically it can’t seem to get a government franchise to do this.) In fact Menand has imagined it; we talked last year about a proposal by Ricks, John Crawford and Menand to give “the general public—individuals, businesses, and institutions—the option to have a bank account at the Federal Reserve.” If the essential concern of bank supervision is the soundness of the currency, then offering an unlimited amount of perfectly sound Federal Reserve money to anyone who wants it would seem to solve most of the problem.
  • Full Faith & Credit - "Ten autumns ago came two watershed moments in the history of money. In September 2008, the bankruptcy of Lehman Brothers triggered a financial meltdown from which the world has yet to fully recover. The following month, someone using the name Satoshi Nakamoto introduced BitCoin, the first cryptocurrency. Before our eyes, the very architecture of money was evolving — potentially changing the world in the process. In this hour, On the Media looks at the story of money, from its uncertain origins to its digital reinvention in the form of cryptocurrency."[6]
  • Stigmatized money - "How to evade the awkwardness-stigma spiral? What is needed is a frictionless, non-awkward payments system. With little to learn, everyone—not just nerds and those with an ax to grind—can quickly start using it. Think M-Pesa or Visa or Octopus."
  • Starbucks, monetary superpower - "But the only way to cash out of Starbucks balances is to buy a coffee--a promise that Starbucks can always keep!"
  • How Your Digital Purchases Could Serve the Perfect Surveillance Network - "You may be surprised how many different companies know whenever you use your credit card."
Who Should Provide Central Bank Digital Currency? - "I can think of just one reason why a central bank might want to get into the business of issuing digital currency: to provide privacy. Regulations prevent that."
A related concept has recently emerged: synthetic central bank digital currency, or sCBDC. In a new International Monetary Fund report, Tobias Adrian and Tommaso Mancini-Griffoli point out that it is possible to synthesize a version of CBDC by allowing fintech companies and other e-money providers to keep accounts at the central bank. Customers would in turn hold accounts at these fintechs. As long as fintechs always back each customer dollar (or yen or pound) with a dollar at the central bank, then it is as if customers are holding dollars at the central bank...

I can think of just one reason why a central bank might want to get into the business of issuing CBDC: to provide privacy. Anonymous payments are a controversial topic. Anonymity allows good people to guard their personal information. But it allows bad people to do the same. Nevertheless, I think there are decent arguments to be made for a widely available anonymous payments option.

Anti–money laundering regulations largely prevent the private sector from offering anonymous sCBDC. Even if they could supply it, bankers might be too worried about the risks involved in banking the anonymous to bother. Since central banks already issue the world's most popular anonymous payments medium — paper money — they may have a natural role to play in directly providing a digital version of anonymous cash.

Banknotes are an old technology originally introduced in the 1600s, long before concerns about money laundering, income tax evasion, and drug smuggling emerged. Anonymity was incidental to the role that banknotes played as a payments medium. In some sense, the production of banknotes has been grandfathered into the system — it would be hard to imagine their being introduced from scratch today. But, if banknotes have been granted an exemption from money laundering rules, surely a new digital version of banknotes qualifies under this exemption. And, thus, central banks may be natural anonymity providers.
Wake up, US Federal Reserve! China just showed how digital currency is done - "China's plan to launch a central bank-backed digital currency will have far-reaching consequences far outside the world of cryptocurrencies."
I believe China is creating a new public infrastructure for payments that is completely open — like cash payment. And this new open payment infrastructure will cultivate many further innovations. An open payment infrastructure is a public service, and the US Federal Reserve, as the US central bank, shouldn’t just watch to see how the Chinese central bank’s big experiment goes. It should be leading similar efforts in the US...

I believe China’s DC/EP product is designed to replace the mobile payment systems in China... Alipay and WeChat Pay are closed mobile payment systems. Payment is a critical component for commerce, and these dominant but closed payment systems absolutely represent a long-term threat to the growth of commerce, especially Commerce 3.0. Closed systems discourage innovations, and monopoly positions will eventually dictate terms for the commerce ecosystem. China’s DC/EP product will disrupt these closed systems by creating a new payment infrastructure that is completely open like physical cash, enabling true peer-to-peer mobile/digital payment.
France, Germany blast Facebook's Libra, back public cryptocurrency - "Euro zone governments and central banks are working on a long-term plan to launch a public digital currency that they hope would make redundant projects like Facebook’s Libra, which is seen as a risk to financial stability, officials said on Friday."
An ECB official said the project could allow consumers to use electronic cash, which would be directly deposited at the ECB, without need for bank accounts, financial intermediaries or clearing counterparties.

These actors are all needed now to process digital payments, but may no longer be necessary if the ECB took over their functions, slashing transaction costs. Libra’s plan also would do without financial intermediaries.

Work on the ECB project started before the launch of Libra and could last months or even years, Coeure said. The technical feasibility remains to be seen and opposition from banks is likely. He will present a report on virtual currencies to G7 finance ministers next month, officials said.

Le Maire said one of the purposes of this initiative was to make sure that banks reduce fees on international payments.
Bank of England intends to open its vaults to tech companies - "The move will be seen as a threat to banks, which have exclusive access to BoE payments operations and can make money from acting as intermediaries to other payment providers."
At present only commercial banks can store money — usually overnight — at the BoE, which is guaranteed to be safe as it is backed by the central bank’s ability to create money. Mr Carney said that offering the BoE’s services to others, which would come only after a period of consultation, would help increase competition in payments systems and reassure the public of their safety.

By giving access to ultra-safe and cheap banking services to new payment providers, the BoE hopes it can support financial stability, allowing payment systems to continue to operate even if big banks go bust and at a lower cost for potential users such as Facebook.

“Users should benefit from the reduced costs and increased certainty that comes with banking at the central bank,” the governor said. “From the perspectives of UK households and businesses, wider access can improve inclusion and services.”
The Invention of Money - "In three centuries, the heresies of two bankers became the basis of our modern economy."[9]
How do you know what the cash in your pocket is worth? ... The modern system for dealing with this problem arose in England during the reign of King William, the Protestant Dutch royal who had been imported to the throne of England in 1689, to replace the unacceptably Catholic King James II. William was a competent ruler, but he had serious baggage—a long-running dispute with King Louis XIV of France. Before long, England and France were involved in a new phase of this dispute, which now seems part of a centuries-long conflict between the two countries, but at the time was variously called the Nine-Years’ War or King William’s War. This war presented the usual problem: how could the nations afford it?

King William’s administration came up with a novel answer: borrow a huge sum of money, and use taxes to pay back the interest over time. In 1694, the English government borrowed 1.2 million pounds at a rate of eight per cent, paid for by taxes on ships’ cargoes, beer, and spirits. In return, the lenders were allowed to incorporate themselves as a new company, the Bank of England. The bank had the right to take in deposits of gold from the public and—a second big innovation—to print “Bank notes” as receipts for the deposits. These new deposits were then lent to the King. The banknotes, being guaranteed by the deposits, were as good as gold money, and rapidly became a generally accepted new currency.

This system is still with us, and not just in England. The more general adoption of the scheme, however, was not a story of uninterrupted success. Some of the difficulties are recounted in James Buchan’s fascinating “John Law: A Scottish Adventurer of the Eighteenth Century.” Law was the Edinburgh-born son of a goldsmith turned banker. He moved to London in 1692, where he observed the wondrous new scheme of government paid for by long-term debt and paper money. One of the most significant effects of the paper money was the way it stimulated borrowing and lending—and trading... Law thought that the important thing about money wasn’t its inherent value; he didn’t believe it had any. “Money is not the value for which goods are exchanged, but the value by which they are exchanged,” he wrote. That is, money is the means by which you swap one set of stuff for another set of stuff. The crucial thing, Law thought, was to get money moving around the economy and to use it to stimulate trade and business. As Buchan writes, “Money must be turned to the service of trade, and lie at the discretion of the prince or parliament to vary according to the needs of trade. Such an idea, orthodox and even tedious for the past fifty years, was thought in the seventeenth century to be diabolical.”
  • The Economist Who Believes the Government Should Just Print More Money - "The Bernie Sanders adviser Stephanie Kelton argues that 'How will we pay for it?' shouldn't be a central question in American politics."[10]
  • Is It True That the Government Can Spend Before Taxing? - "Whether the renegade claim is true depends on how you choose to define the word 'government.'"
  • Should governments finance themselves through their central bank? - "But there's an easy way to fix this shortage. Introduce central bank accounts for all. In short, allow non-banks like insurers and individuals to keep accounts at the Bank of Canada. A similar fix would be to provide a means for commercial banks to establish 100%-reserve pass-through accounts. Life insurers and individuals who open a pass-through accounts at a bank would be assured that these accounts are 100% backed by Bank of Canada deposits, the interest flowing straight from the Bank of Canada to the account holder. These accounts would function just like treasury bills."
Why we should measure national wealth in assets - "There are problems in using gross domestic product as the metric of economic success. GDP was a metric for its time: a measure of economic possibilities when the needs of the Depression and war were urgent. The pressing challenge for today's economies is the sustainability of our present standard of living. Unless we measure our assets, we will not know how far we are living on borrowed time — until it is too late."
This is just starting to change. The World Bank is building a database on “comprehensive wealth”, defined as consisting of natural, human and produced capital, and net foreign assets. The UN has been developing a statistical standard for measuring natural assets.

The UK government’s natural capital committee and the Office for National Statistics are pioneering the development of natural capital accounts. They show that the value of natural capital, including mineral resources, urban green space, biodiversity and air quality, has been in decline. But much more data are needed to be able to say when any component will reach the tipping point of collapse, unable to contribute to future living standards. There are statistics on financial capital and conventional productive capital such as factories; there are fewer on infrastructure, and its quality — how many postwar concrete buildings or bridges will soon need replacing? Some countries measure human capital, which the ONS is working on improving.

One key missing piece of the picture is social capital, or trust. Economic theory says this is vital. Anyone buying online puts their trust in someone they do not know, whose product they cannot see. In business, trust comes as goodwill, which makes it easier for a company to raise new capital. Social capital lies behind whether a government can raise tax revenues and provide public goods. But how to define it with sufficient detail for statisticians to measure it? My colleagues and I are working on extending the definition and measurement of comprehensive wealth, in co-operation with organisations such as the ONS and UN. Our recent interim report highlights work such as a methodology for capturing in just two indicators the many dimensions of social capital.
  • Measuring wealth, delivering prosperity - "One of the striking features of politics in many countries now is the way voting outcomes and opinion polls reflect a widespread sense of discontent. Part of that alienation is economic: the fact that growth in Gross Domestic Product (GDP) reflects improving living standards for some, but not for many. Yet politicians still use 'GDP' as a mantra to justify their preferred policies, and the quarterly growth figures still feature prominently in the news."
  • The Puzzle of Economic Progress - "Current academic research – into the impact of new technologies, the economics of innovation, and the quality of management, for example – may be providing ever more pieces of the puzzle. But many crucial questions about economic progress remain unanswered, and others have not yet even been properly posed."
  • Progress studies: a moral imperative - "But progress is not automatic or inevitable. For most of human history, very little of it happened. Almost all our progress has been made in the last 500 years—even though we've had writing for 5,000 years and language for 50,000. Seen this way, we are fantastically wealthy relative to where we were even a hundred years ago—and by implication, we are desperately poor compared to where we can be a hundred years from now, if we keep this going."[11]
  • Photovoltaic Money - "Each citizen of the earth could be issued a photovoltaic (pv) stockholder chip ... that is backed up by the worth of the collective photovoltaic electricity percentage that is actually being produced by the human species."[12]
Izzy and the Central Bankers - "I became the embodiment of a faster payment in a bid to get to my panel on CBDCs at the OECD Blockchain conf after a ticketing clerical error (which would have been irreversible in a blockchain world) delayed me by 2 hrs."[13]

From Territorial to Monetary Sovereignty - "State sovereignty is closely intertwined with, but not limited to, control over territory and people. It has long been recognized that control over monetary affairs is a critical part of genuine sovereignty. In this Article, I go a step further and argue that the relevance and importance of territorial versus monetary sovereignty has shifted in favor of the latter. This shift goes hand in hand with the rise of credit-based financial systems. Such systems depend, in the last instance, on backstopping by an entity with control over its own money supply and no binding survival constraints." (via)
posted by kliuless (47 comments total) 98 users marked this as a favorite
Wow. Well, Who do you trust more? The Fed or Facebook?
posted by eustatic at 3:52 AM on September 16, 2019 [3 favorites]

The archaic nature of American banking is something I always thought was one of America's biggest vulnerabilities. I'm sure the Fed would like to set up a system like most other developed countries - but it sounds like China's probably beaten them to the punch, and America isn't really known for its infrastructure-building capacity these days.
posted by Merus at 3:58 AM on September 16, 2019 [3 favorites]

Most countries today settle and clear retail bank transfers within minutes if not seconds. In the US it takes days

US banking has always puzzled me. Why is it so bad?
Example. I have several accounts, but one of them has day to day spending in that's linked to my debit card.
If I forget to top it up and my card gets declined I can log into the app (with a fingerprint) and shift money from one account to the other quicker than the pay machine can prepare for another transaction.
Then I beep my card on the machine again and it goes through.

In the US (as I understand it) you can barely do a chip and pin payment let along a contactless one. And it takes over a day to move money from one account to another. Also american banks keep sending me cheques.
I don't think I've seen anyone use a cheque in the uk for 20 years. Some banks can't even cash them.

Anyway, great post and I will try and find time to read all of it!
posted by Just this guy, y'know at 4:38 AM on September 16, 2019 [10 favorites]

In the US (as I understand it) you can barely do a chip and pin payment let along a contactless one

Chip-and-pin is fairly common, but if you're really unlucky you'll get a chip-and-sign. Yeah, maximize the inconvenience. Tap (only the UK could use an 11 letter word where 3 letters will do) is surprisingly common: I've been the first person to use it in a couple of rural places in the US, as it hasn't been widely advertised as a thing you can do.

Every time I have to move money through the US (either privately or corporately) it's always slower and more fiddly than I can possibly imagine. And it almost always ends up that — somewhere in the process — someone mails a paper cheque to someone else.
posted by scruss at 6:12 AM on September 16, 2019 [3 favorites]

In the US (as I understand it) you can barely do a chip and pin payment let along a contactless one. And it takes over a day to move money from one account to another. Also american banks keep sending me cheques.

Moving money from one account to another (say savings to checking) is usually instant in the US in my experience. Moving money from one bank to another does usually take a few days.
posted by Fidel Cashflow at 6:20 AM on September 16, 2019 [7 favorites]

Tap ... is surprisingly common: I've been the first person to use it in a couple of rural places in the US, as it hasn't been widely advertised as a thing you can do.

This is my favourite baffle the natives trick, simply tapping to pay. Most US card machines have been upgraded to support contactless payments, but many Americans can't (or won't?) use it because their banks don't advertise or possibly allow that function. So this furriner can walk up to the cash and tap their credit card on the terminal, to the confusion of the cashier. I've had more than a few try to get me to sign the receipt "just in case". This is especially true in rural New England, but it works just about anywhere in the US now.

If you see an Apple Pay brand, tapping will almost certainty work too.
posted by bonehead at 6:42 AM on September 16, 2019 [12 favorites]

Cheques in Canada have almost completely been replaced by "e-Transfers", which is kind of like a Canada-wide Paypal/Venmo, but with all the banks running it and participating. It's tied directly to an account. For values of up to $3k, it works through an email system. Even with e-Transfers being more expensive than paper cheques ($0.50 to $1.50/transaction), electronic payments have almost completely replaced paper ones. And it's clunky and has a moderately terrible interface to use.

However, there's no way to kite an e-Transfer. The money comes out of your account when the payer initiates the transaction, so the recipient can be sure they will get the money. All the trades and small business people looove this system.
posted by bonehead at 6:49 AM on September 16, 2019 [2 favorites]

If you see an Apple Pay brand, tapping will almost certainty work too.

If only. There are big-box stores around here that have ApplePay and Google logos all over their card machines, but have not not activated the tap-to-pay functions.
posted by Thorzdad at 6:52 AM on September 16, 2019 [4 favorites]

Chip and pin credit cards are still hard to come by in the US, which is a PITA when traveling to other countries. I use Google Pay to circumvent this and do tap/paywave/contactless payments, but I resent the extra layer. I'm amazed at how many places in the US, even in major cities, still can't handle tap payments.
posted by rednikki at 6:53 AM on September 16, 2019 [2 favorites]

Ah, yes, AND: my friends overseas have paid their rent online for yoinks, but nearly every landlord I've met in the US is baffled by the idea. It's literally the only thing I've used a check for in the past 8 years.
posted by rednikki at 6:54 AM on September 16, 2019 [4 favorites]

I have never seen chip-and-pin in the US. Never. My bank doesn't even support it. I admittedly live in a semi-rural area, but haven't even seen it when I've spent time in the nearby cities. Chip-and-sign is pretty common these days. Tap-to-pay is getting more common.

Another difference-between-the-US-and-the-world story: I did a review a while back for a scientific journal overseas for which I was paid a stipend. The way they wanted to pay me this stipend was for me to give them my bank info and they would transfer the money right in. This was baffling (and slightly alarming) to me as an American. My French colleague thought it was the most natural thing in the world. I gave them the info and it worked great.
posted by Betelgeuse at 7:00 AM on September 16, 2019 [3 favorites]

This sounds like great news for electronic transfers of money in the US.
posted by medusa at 7:05 AM on September 16, 2019

give them my bank info and they would transfer the money right in. This was baffling

Isn't this just direct deposit? I've lived in the US my whole life, and I don't think I've ever had a job where that was not how I got paid.
posted by Turd Ferguson at 7:30 AM on September 16, 2019 [4 favorites]

Big Brother Is Banking You.
posted by Catblack at 7:31 AM on September 16, 2019 [1 favorite]

The financial system in the US is a great example of "second system syndrome" combined with the "principle of good enough". The US spent a lot of effort in the 20th century optimizing the hell out of paper checks, and basically getting to a point where the paper-check-based workflow suffices—even if just barely—for the majority of needs. (And really, the pre-9/11/pre-Check21 paper check process in the US was a total marvel, when you consider when it was designed and the reliability with which it functioned.) Having a system that moves faster is nice, but not necessary for most commercial transactions. It's only in the last decade or so that there's been seemingly real interest in real-time clearing.

I hope the Fed can weather the significant political headwinds that are going to try and kill FedNow. The banks have several years to lobby against it now, and I am concerned that regardless of which political party ends up dominating between now and 2024, either one could knuckle under to the big banks given enough pressure, appoint the right (wrong) people to the Fed board, and that would be the end of that. The US does not have a good track record of public infrastructure if it competes in any way at all with somebody's rent-seeking scheme. Firing a shot across the bow of a major industry with huge amounts of money at its disposal to induce corruption in the political system is... a bold move. I like it. But I hope they're ready for war with the banks in the interim.
posted by Kadin2048 at 7:32 AM on September 16, 2019 [9 favorites]

This being the US, it's going to take 5 years to roll out something that basically everywhere else already has. So we'll not only get 5 years of screaming from anyone who thinks they could earn a nickel from screwing around with it, but also 3 whole federal elections so that both the legislative and executive branches could easily have a couple of radically different makeups during that time. Obviously setting up something half-baked for something so important would be an incredible disaster, but announcing something that's going to take 5 years 3 years into a presidential election cycle isn't setting it up for success.
posted by Copronymus at 7:53 AM on September 16, 2019 [3 favorites]

MetaFilter: it's clunky and has a moderately terrible interface to use.
posted by kirkaracha at 8:08 AM on September 16, 2019 [2 favorites]

I have never seen chip-and-pin in the US

Chip and pin is available in the US, but most stores are not rushing the roll-out because the amount of fraud it prevents is less than the cost of the upgrade, and the companies are bearing the cost of the fraud, so the upgrade will be done as the existing machines wear out.
posted by The_Vegetables at 8:25 AM on September 16, 2019 [1 favorite]

I hope the Fed can weather the significant political headwinds that are going to try and kill FedNow.

A bunch of friends and family own small businesses that do a lot of retail or small industrial/farm piecework. Getting rid of cheques was a major, major plus for them. If sold the right way, that is "no more bad cheques", they're not just willing to change, but will clamor for it. There's no way to eliminate kiting with a paper credit system.

Despite costing more, despite the bank apps only sort of working, despite the fact that it requires using email, the Canadian system has seen very rapid adoption becasue of this one killer feature, essentially reliability. I'm am sure that it could be done better elsewhere.
posted by bonehead at 8:29 AM on September 16, 2019 [1 favorite]

Isn't this just direct deposit? I've lived in the US my whole life, and I don't think I've ever had a job where that was not how I got paid.

It is but it doesn't require HR & payment processing firm to do it. Your buddies at the pub can just transfer cash from their account directly to yours if the have your bank numbers (assuming they aren't skint).
posted by srboisvert at 8:31 AM on September 16, 2019 [1 favorite]

bonehead - with Simplii , e-transfer payments are free for an unlimited (or at least a number of transactions. Also, as I've been looking into a new account for my youngest, most of the low balance accounts will have something like 5-10 e-transfers free before they hit the $0.50-$2 charge.

When we had e-transfer for $1 per use a few years ago, I wasn't interested. The bank would give us free checks, (but only 50 at a time), or we could use the atm for free (travel/time cost, but if you don't have a side hustle, avoiding stupid charges can be a mini hustle). At no charge, e-transfers are great. Kids get paid via e-transfer instead of cash. People who grind up our raw dog food now get paid in e-transfer. Some races, or activities with my run club get e-transfer. I probably save 30 minutes each month in less trips to grab cash.

The only downside, is that there is anywhere from a 5-60 minute delay between initiating the transfer until the person receives it. So for instance trying to do a kijiji/craigs list purchase via e-transfer wouldn't work well as both parties have low trust in each other, and hanging out with a stranger at someone's residence or a Tim Horton's waiting for a payment to clear isn't what a lot of people are looking for.

In theory MintChip (previously) was supposed to be viable for instant cash-like transactions of low trust, but doesn't seem to have become a thing at least yet. It's now been sold from Canada's Mint to a private company, and I expect to never hear of it again.
posted by nobeagle at 8:35 AM on September 16, 2019 [1 favorite]

I have never seen chip-and-pin in the US

I'm frequently asked to enter my pin when I put my card into the little machine at the grocery store, target, gas station, etc. Or, it just lets the charge go through, no pin, no sign, etc. I don't think I've had to sign on the little electronic pad in a long time.

At the antique mall I work at sometimes, it won't even let you swipe it if the card has a chip, but maybe 5% of the time it asks for a pin, otherwise it prints a paper slip to be signed, but that's a relatively small-scale operation.
posted by AzraelBrown at 8:35 AM on September 16, 2019

>I have never seen chip-and-pin in the US. Never. My bank doesn't even support it. I admittedly live in a semi-rural area, but haven't even seen it when I've spent time in the nearby cities. Chip-and-sign is pretty common these days. Tap-to-pay is getting more common.

Maybe I'm misunderstanding you but the inserting card instead of swiping, and then typing your code has been standard in US for at last a few years? I know because for years I've been instinctively swiping my card and then have to insert it instead. There are a few sketchier gas stations and such where I can still swipe, I take note because the swipe seems superior motion and for speed/ease of transaction. AFAIK the difference between chip, signing, zip, or nothing is about credit/debit use of your card and/or arbitrary to the store.
posted by GoblinHoney at 8:56 AM on September 16, 2019 [1 favorite]

I use several different cards in rotation in the US (big city, plenty of different stores involved) and have never once used chip-and-pin; instead, it's always chip-and-signature or chip-and-nothing. In fact, I didn't even know one of my (non-"travel", just regular mastercard cash-back) credit cards actually supported chip and pin until I was suddenly stuck at a train terminal in Germany where I needed it. My fancy travel cards couldn't do that. AzraelBrown, I'm curious, are you talking debit cards or credit cards?
posted by mosst at 9:02 AM on September 16, 2019 [3 favorites]

Re: Chip-and PIN credit cards (sorry if this is off-topic but I wanted to clear up some confusion regarding the previous comments):

Chip-and-PIN depends on the card supporting it. An EMV (chip) credit card is programmed with a list of verification methods that have an order of priority. In the US, signing receipts is the norm, so in order for PIN to be the method of verification, it needs to be a higher priority (on the card) than signature verification.

On those occasions that you don't need to sign even though your card has signature priority, it's because the amount is under some threshold, like $50.

This site will let you search for credit cards that have PIN priority. Select "PIN" for priority, and uncheck Debit and Prepaid if you only want credit card results. You'll notice a lot of the results are from credit unions, some of which you can join through some sort of associated membership. It's not too difficult, but it is way way harder to get a PIN priority card than it should be. I have one of the First Tech Fed cards for when I go to Canada and Europe, so I don't have to sign a receipt and look like a dumb American (although I'm sure I look like a dumb American anyway).
posted by Quiscale at 9:24 AM on September 16, 2019 [5 favorites]

For those of you who are commenting about the existence of chip+pin in the US, are you sure that you're talking about credit cards and not debit cards? The only times I've ever used a pin in the US has been when I'm using a debit card rather than a credit card.
posted by Betelgeuse at 9:56 AM on September 16, 2019 [3 favorites]

Vendors in Canada really hate having to use any sort of signing system. Under the terms from the banks and the CC companies, the vendor is liable for card fraud if the chit is swiped & signed, but not liable if a PIN or a contactless "tap" is used. To be clear, chips are on all our cards now, either debt or credit.
posted by bonehead at 10:27 AM on September 16, 2019 [4 favorites]

PIN (with or without chip) is as Betelgeuse says, primarily limited to debit cards in the US. The only consistent implementation of PINs for credit cards is for the niche application of ATM cash advances on credit lines. Consumer regulators and public interest groups look seriously askance at that business given the ruinous fees and interest and the propensity to fraud and charge-backs, so card issuing banks don't promote that service.
posted by MattD at 10:51 AM on September 16, 2019 [1 favorite]

For those of you who are commenting about the existence of chip+pin in the US, are you sure that you're talking about credit cards and not debit cards?

I almost always use debit-mastercard as credit, and that bog-standard mastercard transaction almost always requires a pin. It is the same chip and pin method that credit-only cards use, not the older swipe and pin system that debit cards have used for decades. I have noticed that sometimes pressing the credit button transfers it to chip-and-nothing for minor transactions.

The last time I tried to use my credit-only card in meatspace (a USAA visa at one or another big-fucking hotel in DC), I couldn't, because I'd forgotten the required pin, and the card will not swipe if the reader can do the chip thing.

Obviously there must be pretty intense local or state-regulatory variation in chip/pin usage. But I have to admit that the widespread disbelief that we are actually using chip and pin systems is a little annoying; do y'all think we are too stupid to know the difference?
posted by GCU Sweet and Full of Grace at 11:14 AM on September 16, 2019

Imagine if we all had FedBucks cards with $10 loaded on them every day, use-it-or-lose-it.

200 million cards x $10 would be $2B/day of MMT injection, about what the economy enjoyed 2009-2015...
posted by Heywood Mogroot III at 11:36 AM on September 16, 2019 [6 favorites]

For those of you who are commenting about the existence of chip+pin in the US, are you sure that you're talking about credit cards and not debit cards?

Technology across the US is not at all consistent - in that way it's like Walmart stores. In some places, they are legitimately decent looking stores with a decent shopping experience and up-to-date products. In other places, the store looks like a bomb went off with aisles no Fire Marshall would have ever signed off on without huge bribes, and they seem to primarily sell products procured from from big rig accidents. Both are correct.
posted by The_Vegetables at 11:52 AM on September 16, 2019 [6 favorites]

No small part of my life the last 5 years or so has involved rolling out and maintenance of Chip and Pin to a major US retailer, so I feel knowledgeable enough to clear up a few things about EMV (chip and pin, etc). This is coming from a retailer's perspective, so someone with banks might know more of their side.

1)There is literally zero government involvement in the chip and pin/chip and sign tech. It is all dictated by the banks and the retailers. Effectively the way it worked in the states prior to a set date a few years ago was that any fraud reported for a retailer was generally eaten by the bank, not the retailer. If a customer reported fraud on their card, the bank would have to write it off. When Europe went to EMV, a LOT of fraud moved to the states because we weren't/aren't as protected. So Banks started eating a lot more in fraud write offs.

I don't know how the negotiations went down, or who was involved, but basically the banks and retailers worked on a plan to integrate EMV in the states. Basically the banks said "we'll issue chip card cards, and after X date(around 2015 i think?) we won't be covering the money lost on swiped transactions.

After that date, the party responsible for the lost money due to fraud is the least protected party. If the store has EMV but the card isn't chip, the bank eats it. If they card is chipped, but the store doesn't have EMV enabled, the retailer eats the cost.

But through all of that, the government doesn't really get involved to my knowledge. It's all through the banks and retailers.

2)Each retailer has their own "system" in place. It's generally certified through the pinpad provider, but there are variables on how your card is taken. Some require chip and pin, some can do signature, some have minimum purchase amounts before it makes you use pin, etc. Some have a fail over, so if you try to read the chip and it fails 3 times, it will let you swipe. For example, I know Target has a fail over, because i had a card that had a chip that was very fickle and would get "chip Malfunction" all.the.time, but it would fail over to letting me swipe.

3)EMV is in most of the major retailers that I'm aware of. I'm sure there are some larger companies that don't have it, but each one that doesn't have EMV is getting hit HARD with fraud if they're big enough to be a target. Where it is not going to be implemented is in Mom and Pop stores, small locally owned gas stations, and small/local companies. As noted above, the fraud costs may be way less than the costs of implementation of EMV for smaller/locally owned companies.
posted by Twain Device at 12:26 PM on September 16, 2019 [1 favorite]

bonehead: "I've had more than a few try to get me to sign the receipt "just in case"."

To my son's delight, I now sign my credit card transactions -- on the rare occasion that they even ask -- with a simple drawing of a happy fish. The cashiers smile indulgently and I get to try out a new variation each time (bubbles, say, or different fins) -- it's all made up and the points don't matter.
posted by wenestvedt at 12:31 PM on September 16, 2019 [3 favorites]

American capitalism seems to be largely about finding innovative ways to squat on a market inefficiency, siphoning off rent and defending it via lobbying against attempts to make the system better, while claiming that some particularity of America (size, population density, love of freedom) is the real reason that we pay twice as much for shittier results. When they are really good, they use it not only to excuse their poor service, but also to justify large subsidies. See: Broadband, healthcare, banking, cell phones, tax filing, etc.
posted by Nothing at 12:49 PM on September 16, 2019 [19 favorites]

Swish Is the Swedish system, set up by a consortium of banks and secured by the same crypto used for filing taxes. Result: free money transfers between individuals (e.g. ebay purchases or garage sales), and businesses pay $0.30 transactions. Mastercard/Visa are losing out and Venmo etc. are dead here.
posted by anthill at 1:59 PM on September 16, 2019 [6 favorites]

 However, there's no way to kite an e-Transfer.

True, but they're not entirely immune to fraud. Someone had their e-mail compromised and lost their transfer which had a challenge question “Who is my favourite Beatle?
posted by scruss at 2:44 PM on September 16, 2019 [1 favorite]

The trick is clearly not to have a favourite Beatle.
posted by bonehead at 4:22 PM on September 16, 2019 [3 favorites]

On the subject of tapping to pay: it's hell for cashiers if it's not accepted. I work at Starbucks, and there are plenty of cards that must be swiped or inserted to be approved, but are still recognized as tap-able by our machines. So the customer has to swipe or insert ever-so-carefully or they'll trip the tap function and be declined. It's maddening.
posted by es_de_bah at 5:44 PM on September 16, 2019

No, the trick is for your favourite beetle to be Herbie. Yes, yes, I know they are spelt differently, that's part of the security trick

163 claims of fraud over 371 million transfers? Even if the number of fraud claims was a couple orders of magnitude larger (what with the number being self reporting) that would be 1 in every 23K transfers being fraudulently intercepted. People should be smarter about security all around (and IMO banks should be able to reverse this sort of thing in the case of fraud) but those are pretty good odds. So good that banks should just eat the fraud costs, at least to some reasonable amount ($5000?). On 132 billion in transferred money the fraud amount is a rounding error.
posted by Mitheral at 6:33 PM on September 16, 2019 [2 favorites]

I think Fednow is a fine idea, especially if it kills the fucking hot mess that bitcoin became.
posted by aspersioncast at 8:35 PM on September 16, 2019 [3 favorites]

The better security trick is for your favorite Beatle to be 8)FsB#*cf62F&. You can put it in your password manager so you don't have to remember it.

I recently moved to the Netherlands from the US and I'm loving the banking system here. Chip and pin always does actual pin (you can set a tap max for low cost purchases), and to log on to your bank account, transfer money, or do an online purchase you must do a challenge and response two factor involving putting your card into a (free from the bank) card reader or go through the bank's app. Just having the card number won't work. You can give out your account number without fear, and transfer money between friends with no overhead so venmo and paypal aren't necessary and aren't used. My bank has an app to invoice and be invoiced by your friends to reduce the friction of having to type in each others' account numbers, and of course because going Dutch really is a thing there are apps that will keep a running tab between a group of friends so that you know how much to put down when it's time to settle up.

It's all so cashless and seamless that when I end up taking a trip to Germany I'm like "oh right, this is what euros look like"
posted by antinomia at 10:09 PM on September 16, 2019 [2 favorites]

My favourite Beatle is The NY Mets.
posted by mikelieman at 3:46 AM on September 17, 2019 [1 favorite]

Imagine if we all had FedBucks cards with $10 loaded on them every day, use-it-or-lose-it.

I imagine Dominos would sell a shitload of $10 pizzas. And I would quit my job to open an "Everything For $10" store.

But yes, just in general, if individual citizens were allowed to open bank accounts with the Fed and especially if everyone with an SSN just had an associated account at the Fed (or with the IRS, which is another proposal that comes up sometime at tax time—let people use their tax return balance like a checking account by providing access to it via a debit card), there's a ton of neat stuff you can do.

One of the other second-order side effects is that the information and visibility into spending that banks have would shift to the government; official stats could be drawn from actual transaction-level data, rather than surveys and sampling. E.g. stuff like CPI could be calculated very precisely, if there was a political will to do so. There are obviously significant privacy concerns, but those concerns exist (and are largely unaddressed, or poorly addressed) by the current system.

I won't say this is the single key problem in all of US governance, but it's certainly in the top five: we need to kill the idea that it's inherently improper for the government / public sector to compete with the private sector. All of those shitty rent-seeking companies that exploit market inefficiencies—broadband, consumer banking, cellphones, etc.—could be beaten with the public-option stick (or even just the threat of a public option; this has been pretty effective at dropping broadband prices in many places).

There are lots of goods that are basically mandatory to purchase if you want to fully participate in modern society; allowing private companies to supply those goods, in the absence of a very competitive market that drives profits down to near zero over time (which is true in some cases but IMO increasingly not true broadly, due to regulatory capture), is giving those companies a license to collect rents. Or perhaps more saliently to Americans, it's like giving them the power to levy taxes on everyone and use it to line their pockets.

I'm not naive enough to think that the cavalcade of racist greyhairs currently running the country, whose major concern is ensuring that the wrong sort of people don't inadvertently get above their station, are going to have an epiphany about the proper role of government in markets tomorrow. But I do think there is a seismic shift driven by a generational shift: younger people don't have the kneejerk opposition to services being provided by government that Boomers seem to. And I think younger people realize that it's a lie that the government can't provide higher-quality services at lower prices than the private sector. And where that's the case, I think people are going to eventually start demanding it.
posted by Kadin2048 at 12:22 PM on September 17, 2019 [3 favorites]

Should central banks issue digital currency? Suddenly, it's an urgent question. - "In a recent speech, Bank of England governor Mark Carney suggested that a safer alternative to Libra might be a public version. Like Libra, it might be backed by multiple sovereign currencies, but its network would be run by central banks, not companies. 'Even if the initial variants of the idea prove wanting, the concept is intriguing', Carney said."

From Stablecoins to Central Bank Digital Currencies - "One possible regulatory path forward is to give stablecoin providers access to central bank reserves. This also offers a blueprint for how central banks could partner with the private sector to offer the digital cash of tomorrow—called synthetic central bank digital currency (sCBDC)—as discussed in the IMF's first Fintech Note."
Central bank backing

Another approach is to require stablecoin providers to fully back coins with central bank reserves—the safest and most liquid assets available.

The solution is not novel. The People’s Bank of China, for instance, requires giant payment providers AliPay and WeChat Pay to do so, and central banks around the world are considering giving fintech companies access to their reserves—though only after satisfying a number of requirements related to anti-money laundering, connectivity between different coin platforms, security, and data protection among others.

Clearly, doing so would enhance the attractiveness of stablecoins as a store of value. It would essentially transform stablecoin providers into narrow banks—institutions that do not lend, but only hold central bank reserves. Competition with commercial banks for customer deposits would grow stronger, raising questions about the social price tag.

But there are also clearer-cut advantages. Chief among these is stability, as backing is in perfectly safe and liquid assets. Another is regulatory clarity, as narrow banks would fit neatly into existing regulatory frameworks. Moreover, different stablecoins could be seamlessly exchanged thanks to the central bank settling all transactions. This would enhance competition among stablecoin providers. Additional benefits include support for domestic payment solutions in the face of foreign-currency stablecoins offered by monopolies that are hard to regulate; and better monetary policy transmission if pressure on currency substitution were alleviated, and interest rates were paid on reserves held by stablecoin providers—however distant the prospect.

Next step: a central bank digital currency?

If stablecoin providers held client assets at the central bank, clients would indirectly be able to hold, and transact in, central bank liabilities—the essence, after all, of a “central bank digital currency.” In practice, the coins would remain the liability of private issuers, and client assets would have to be protected against the bankruptcy of the stablecoin provider.

This synthetic central bank digital currency—or “sCBDC” for short—offers significant advantages over its full-fledged cousin, which requires getting involved in many of the steps of the payments chain. This can be costly—and risky—for central banks, as it would push them into unfamiliar territory of brand management, app development, technology selection, and customer interaction.
Fed's Harker: Digital central bank currency 'inevitable' - "It is 'inevitable' that central banks including the U.S. Federal Reserve will start issuing digital currency, Philadelphia Federal Reserve bank president Patrick Harker said on Wednesday, while cautioning that the United States should not be the nation to lead such a move... Harker said with the so-called 'FedNow' service in the works, 'I am looking at the next five years after that. What comes next? I do think it is something around digital currency.'"

When Is A Currency A Share? - "What exactly is a currency anyway, and why the regulation?"
Many centuries ago, if you wanted a way to pay your soldiers or your workers, you would look no further than your local salt mine or sea shore.

For all the transactions that were too rapid or small for gold or silver, salt worked well. It had a certain intrinsic value in that people needed it to preserve food through the winter.

Salt also had two other more important properties that made it suitable for paying people.

The first was that there was a potential for it to be an expandable, quasi-limitless source of token. That’s important, because as your economy grows you will need ever increasing amounts of the whatever you’re using. If you run out, you push people into IOUs or micro divisions of the unit. Which isn’t good.

So while the currency needs a certain scarcity value, you also need to be able to expand the currency in volume or you cramp the style of your wealth creators.
Today In: Investing

The other element that makes a currency work is that it is tied to a certain amount of labour to retrieve it. Whether it was a salt mine or the sea, in the absence of any industrial processes, creating salt wasn’t easy. So some labour needed to go into creating it. And therein lay its value.[1,2]
posted by kliuless at 3:21 AM on October 4, 2019 [1 favorite]

Should the Fed's "public option" be only for banks? - "I’m not saying that offering Fed accounts to the public is a good idea. Rather I'm waiting for free market economists to give me a plausible explanation as to why these deposits are not a good idea for the public, but are a good idea for commercial banks."

A fifty-year history of Facebook's Libra - "Out of the millions of crypto projects that have come out over the last decade, it comes close to the Fedcoin vision I originally outlined on my blog back in 2014, and twice now for R3."[1,2]
posted by kliuless at 10:40 PM on October 8, 2019

Aaron Klein on Real-Time Payments and Financial Regulation
I believe that the growing income inequality is number one, deep rooted economic issue that faces our country and our democracy and people of different sides of the political aisle can have radically different perspectives on what government's role should be in terms of addressing the growth and income inequality. We shouldn't… Taxes, spending, investment in education, skills training. These are big picture issues. I have never seen anybody that says the government should run a payment system that exacerbates income inequality by creating a slow and inefficient technology that makes it expensive to be poor. I've never seen anybody defend that system. That's the system we have and if we fixed that, we can have a meaningful impact on income inequality without raising taxes, without spending, without waiting 12 years for teaching skills to come through.


Almost all checks are digitized and emailed. I think that's a great win for society. I'm an environmentalist. We don't need planes damage the environment. We don't need to fly paper checks around the country. But the Fed didn't prioritize passing those savings along to people. They get the float kept in the banking system and that is extremely pernicious to lower income people. I don't think they fully understand that. And to this day, I don't think they fully appreciate that because if they did, I would like to think they'd have the same passion on fixing the issue given the statements from Fed leadership about the problems of income inequality in America. So you had a system that used to be on the vanguard of this 20 years ago. They made an improvement and now they don't. Now, why don't they? I think they have a system that works and they're deathly afraid of having a new system in case there's a problem. It's like modernizing your stereo system.

Well, works well enough. But what the problem is, the payment system works well for the people who have money. It doesn't work well. It is deeply dysfunctional for those who approached the zero lower bound of their bank account. That's the constituency that we ought to be responding to. But it's not the constituency that's before the Federal Reserve. Before the Federal Reserve are the people that operate the system, the banks that profit from the float, the existing employees that manage the existing system that can tell you a thousand reasons why we shouldn't modernize it. Structurally, I blame the Fed for this.
posted by kliuless at 1:11 AM on October 9, 2019

The Big Bank Theory - "How government helps financial giants get richer."
Wall Street bankers are deeply dependent on the government. Far from the rugged, go-it-alone types they wish they were, they are more like well-dressed, coddled adolescents.
Why Shadow Banking Is Bigger Than Ever - "Despite nearly destroying the global economy in 2008, the shadow banking revolution marches on."
Daniela Gabor shows how the shadow banking revolution has been fostered and sustained by the visible hand of the state, which is now angling to extend it to every corner of the developing world. With its vast potential for instability and profiteering, shadow banking is an obstacle to any progressive economic policy, yet it has entrenched itself deeply in the day-to-day workings of the economy — a dilemma that the Left must face up to if it wants to chart a path beyond neoliberalism.
Mapping the Shadow Payment System - "Want to better understand the legal and institutional factors that make the difference between 'good' and 'bad' money?"
Recent years have witnessed the emergence and rapid growth of a large, diverse, and constantly evolving shadow payment system. The shadow payment platforms (SPPs) that populate this system perform many of the same core payment functions as conventional deposit-taking banks: including custody, funds transfer, and liquidity. The crucial difference is that SPPs operate outside the perimeter of bank regulation, thereby depriving customers of the deposit guarantee schemes, lender of last resort facilities, special resolution regimes, and other legal protections typically enjoyed by bank depositors. This paper represents the first attempt to map the global shadow payment system and identify what mechanisms, if any, SPPs use to protect their customers. Examining the business models and customer contracts of over 100 SPPs, we find that it is often difficult to ascertain information essential to evaluating levels of customer protection and, where such information is available, that customers generally enjoy relatively limited structural, contractual, or other private legal protections. This puts enormous pressure on public regulatory frameworks to ensure a sufficient level of consumer protection. Regrettably, we also find that the applicable regulatory frameworks in several key jurisdictions often provide a level of protection that is far below that enjoyed by bank depositors. These findings suggest that, at least from a consumer protection perspective, SPPs are currently not an effective substitute for bank-based payment systems.
Was modern repo created as a form of regulatory arbitrage of the costs of the US RTGS clearing system? - "1. Triparty repo relied on massive intraday credit extensions by JPM; 2. In 1994 the Fed increased the costs of intraday overdrafts and the growth of triparty repo followed."[1,2,3]
This would imply that recent repo market stress is related to (i) extending intraday charges to include repo (Basel III) and (ii) the move to RTGS.
Monetary policy hysteresis and the financial cycle - "New working paper proposes a model where monetary policy can lead to a secular decline in real interest rates through its impact on the financial cycle."
To put it starkly, the issue may not be so much whether monetary policy should lean against the wind, but rather that monetary policy is the wind.
posted by kliuless at 5:55 AM on October 13, 2019

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