Dan Orley: Traditional banks face disruption from digital payments demand

Important points

• Historical banking practices have created path dependencies that affect modern payment systems.
• Adequate money is defined by law and institutions, and appropriate payments are defined by technology and governance frameworks.
• Central bankers should not act as central planners, responding to technological advances and consumer demands.
• Traditional banking systems are being challenged by consumer demand for new payment technologies.
• The salient characteristics of money are different in the short and long term, focusing on the quality of payments and stable nominal value, respectively.
• Equity-based funding proposals may not work for individuals living paycheck to paycheck due to financial instability.
• Current payment system innovations are often unable to maintain a stable nominal value as they are exposed to bankruptcy proceedings.
• The threat of bankruptcy in digital currencies is influenced by the volatility of the assets held by the issuer.
• The risk of assets and the risk to the bankruptcy process calls into question the notion that the nominal value of money should be fixed.
• The concept of a “skinny master account” is limited by the provisions of Section 13.1 of the Federal Reserve Act.
• To adapt to technological advances, it is important to understand the historical context of banking and payments.
• Consumer preferences are evolving towards digital payments, impacting traditional banking models.
• Asset management is the key to maintaining stability in the digital currency market.

Guest introduction

Dan Orley is the Beth Goldberg and Mark Goldberg Professor of Law at Cornell University School of Law. He is the author of Beyond Banks: Technology, Regulatory, and the Future of Money, published by Princeton University Press in 2024. Prior to entering academia, he was Director of Legal and Corporate Affairs at a global investment management firm.

Historical influences on modern payment systems

• We introduced this huge path dependence into the development of payment systems. Putting all your eggs in one basket ended up creating a lot of pressure once technological disruption kind of entered the scene.

  — Dan Ollie

• Historical banking practices have created path dependencies that affect modern payment systems.
• To adapt to technological advances, it is important to understand the historical context of banking and payments.
• The evolution of payment systems has been greatly influenced by past banking frameworks.
• Technological advances are challenging traditional banking models.
• Historical dependencies in banking create pressure in the face of new technologies.
• The development of payment systems has been shaped by historical banking decisions.
• Traditional banking models are being disrupted by technological advances.

Defining appropriate money and payments

• The takeaway here is that what makes good money doesn’t make good payouts…it’s the technology and the governance framework around the development and deployment of that technology that makes good payouts.

  — Dan Ollie

• Adequate money is defined by law and institutions, and appropriate payments are defined by technology and governance frameworks.
• The criteria for evaluating money and payment systems vary widely.
• The legal framework plays an important role in defining appropriate money.
• Advances in technology and governance frameworks are essential for adequate payments.
• Policy makers and economists need to understand the different standards of money and payments.
• The distinction between money and payments is the basis of the financial system.
• Governance frameworks influence the development and implementation of payments technologies.

Central banks and technological advances

• If central bankers want to be central planners, that’s a socially debatable thing, but we don’t currently give central bankers the ability to do that outside of the payment system.

  — Dan Ollie

• Central bankers should not act as central planners, responding to technological advances and consumer demands.
• Given the advances in technology, the role of central banks is limited.
• Regulators must adapt to changing market demands and technology.
• There is a need for social discussion about the role of central banks as central planners.
• Central banks face the challenge of adapting to changing consumer behavior.
• Technological advances impact the traditional role of central banks.
• Financial systems require policy adaptability to respond to technological changes.

Challenges to traditional banking systems

• The more time policymakers take to reflect and consider why they upset the apple cart, the more they will realize that there are no apples left in the cart and that they must clean up the mess instead of building a new and better cart.

  — Dan Ollie

• Traditional banking systems are being challenged by consumer demand for new payment technologies.
• Consumer preferences are evolving towards digital payments, impacting traditional banking models.
• Policy makers need to address the dynamic nature of consumer behavior.
• Financial systems need to adapt to new payment technologies.
• Traditional banking models are facing disruption from evolving consumer demands.
• Traditional banking systems need to innovate to meet consumer expectations.
• Policymakers need to focus on building new systems rather than maintaining outdated ones.

Short-term and long-term characteristics of money

• While the hallmark of short-term money is mostly the nature of its payments, the hallmark of long-term money is its ability to maintain a stable nominal value in times of stress.

  — Dan Ollie

• The salient characteristics of money are different in the short and long term, focusing on the quality of payments and stable nominal value, respectively.
• The short-term nature of money emphasizes its payment nature.
• The long-term characteristics of money are focused on maintaining a stable nominal value.
• Monetary policy must consider both short-term and long-term characteristics of money.
• Different forms of money have different viability in economic situations.
• To value money, you need to understand its short-term and long-term effects.
• Stability in nominal value is critical to long-term economic survival.

Equity-based funding proposals and financial volatility

• It’s not that this proposal doesn’t work, it just doesn’t work for a certain subset of the population: those living paycheck to paycheck.

  — Dan Ollie

• Equity-based funding proposals may not work for individuals living paycheck to paycheck due to financial instability.
• Low-income earners face challenges with equity-based financing proposals.
• Financial volatility affects the ease of using stock-based money for certain people.
• Innovative financial proposals have practical limitations for different socio-economic groups.
• Stock-based money may not be suitable for people who cannot absorb financial fluctuations.
• Financial systems must take into account the needs of low-income people.
• Financial proposals must address the challenges faced by diverse populations.

Bankruptcy process and payment system stability

• Almost all of them do so for the same reason. That means you’re subject to traditional bankruptcy proceedings… Like the kryptonite of credit-based money, bankruptcy means you can’t spend your money when you want to, and even if you get some of that money back, it’s very likely not to have the same nominal value as when you deposited it.

  — Dan Ollie

• Current payment system innovations are often unable to maintain a stable nominal value as they are exposed to bankruptcy proceedings.
• Bankruptcy risk undermines the nominal value of digital currencies.
• Payment systems are vulnerable to traditional bankruptcy proceedings.
• The stability of the payment system is at risk of bankruptcy.
• The viability of digital currencies is affected by bankruptcy risk.
• Maintaining a stable nominal value is crucial for payment system innovation.
• The bankruptcy process will affect the financial stability of digital currencies.

Asset volatility and digital currency stability

• The threat of bankruptcy depends on the volatility of the assets of the issuers of these currencies.

  — Dan Ollie

• The threat of bankruptcy in digital currencies is influenced by the volatility of the assets held by the issuer.
• Asset volatility affects the financial stability of digital currency issuers.
• Effective asset management is essential to maintaining the stability of digital currencies.
• Volatile assets increase the risk of bankruptcy for digital currency issuers.
• The stability of the digital currency market depends on asset management practices.
• To assess the risk of digital currencies, it is important to understand the volatility of the asset.
• The financial stability of digital currencies is related to the volatility of the asset.

Asset risk and fixed nominal value

• We are beginning to understand how the combination of asset risk and a company’s exposure to traditional bankruptcy processes actually increases risk and challenges the idea that money should have a fixed nominal value.

  — Dan Ollie

• The risk of assets and the risk to the bankruptcy process calls into question the notion that the nominal value of money should be fixed.
• Stablecoin valuations are affected by asset risk and bankruptcy risk.
• The financial crisis highlights the challenge of maintaining fixed nominal values.
• Asset risk increases the risk of maintaining a stable nominal value.
• Stablecoin reserves and market trends impact financial stability.
• Fixed nominal values ​​are challenged by asset risk and bankruptcy processes.
• Recent financial events have highlighted the risks in stablecoin valuations.

Master Account Regulatory Limits

• I think the idea of ​​a skinny master account is constructive to think about, but it’s actually limited by the provisions of Section 13 of the Federal Reserve Act at this point.

  — Dan Ollie

• The concept of a “skinny master account” is limited by the provisions of Section 13.1 of the Federal Reserve Act.
• Master account eligibility is limited by the current regulatory framework.
• Federal Reserve regulations affect access to master accounts.
• Regulatory restrictions impact the implementation of the master account concept.
• The financial system needs to overcome regulatory constraints on master accounts.
• It is important to understand Federal Reserve regulations to access your master account.
• The current framework limits the possibility of “skinny master accounts”.