Dan Awrey: Legacy banking faces disruption from digital payment demand

Key Takeaways

• Historical banking practices have created a path dependency that affects modern payment systems.
• Good money is defined by law and institutions, while good payments are defined by technology and governance frameworks.
• Central bankers should not act as central planners in response to technological advances and consumer demand.
• The legacy banking system is being challenged by consumer demand for new payment technologies.
• Money’s salient features differ in the short term and long term, focusing on payment qualities and stable nominal value, respectively.
• Equity-based money proposals may not work for individuals living paycheck to paycheck due to financial volatility.
• Current payment system innovations often fail to maintain stable nominal value due to exposure to bankruptcy processes.
• The threat of bankruptcy in digital currencies is influenced by the volatility of assets held by issuers.
• The riskiness of assets and exposure to bankruptcy processes challenge the notion that money should have a fixed nominal value.
• The concept of a ‘skinny master account’ is limited by the terms of section thirteen one of the Federal Reserve Act.
• Understanding the historical context of banking and payments is crucial for adapting to technological advancements.
• Consumer preferences are evolving towards digital payments, impacting traditional banking models.
• Asset management is key for maintaining stability in the digital currency market.

Guest intro

Dan Awrey is the Beth and Marc Goldberg Professor of Law at Cornell Law School. He is the author of the book Beyond Banks: Technology, Regulation, and the Future of Money, published by Princeton University Press in 2024. Before entering academia, he served as director of law and corporate affairs for a global investment management firm.

The historical impact on modern payment systems

• We introduced this enormous path dependency into the development of the payment system… putting all of our eggs in one basket ended up being something that created a lot of pressures once technological disruption sort of entered the scene.

  — Dan Awrey

• Historical banking practices have created a path dependency that affects modern payment systems.
• Understanding the historical context of banking and payments is crucial for adapting to technological advancements.
• The evolution of payment systems is heavily influenced by past banking frameworks.
• Technological advancements challenge traditional banking models.
• Historical dependencies in banking create pressures 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 advancements.

Defining good money and payments

• The key takeaway is then that what makes good money is not what makes good payments… what makes good payments is technology and the governance frameworks around the development and adoption of that technology.

  — Dan Awrey

• Good money is defined by law and institutions, while good payments are defined by technology and governance frameworks.
• The criteria for evaluating money and payment systems differ significantly.
• Legal frameworks play a crucial role in defining good money.
• Technological advancements and governance frameworks are essential for good payments.
• Policymakers and economists must understand the differing criteria for money and payments.
• The distinction between money and payments is foundational for financial systems.
• Governance frameworks influence the development and adoption of payment technologies.

Central banks and technological advances

• If central bankers want to be central planners then that’s something that’s up for societal debate but it’s not something that we currently give them the ability to do outside of the payment system.

  — Dan Awrey

• Central bankers should not act as central planners in response to technological advances and consumer demand.
• The role of central banks is limited in the context of technological advancements.
• Regulatory authority must adapt to market demands and technological changes.
• Societal debate is needed on the role of central banks as central planners.
• Central banks face challenges in adapting to consumer behavior shifts.
• Technological advancements impact the traditional role of central banks.
• The financial system requires adaptability in policy to address technological changes.

Challenges to the legacy banking system

• The longer policymakers spend thinking well why upset the apple cart the more they’re gonna find that there’s no apples left in the cart and they’re left to clean up a mess instead of building a new and better cart.

  — Dan Awrey

• The legacy banking system is being challenged by consumer demand for new payment technologies.
• Consumer preferences are evolving towards digital payments, impacting traditional banking models.
• Policymakers must address the dynamic nature of consumer behavior.
• The financial system must adapt to new payment technologies.
• Traditional banking models face disruption from evolving consumer demands.
• The legacy banking system must innovate to meet consumer expectations.
• Policymakers must focus on building new systems rather than preserving outdated ones.

Short-term vs. long-term features of money

• The salient features of money in the short term are almost always its payment qualities but the salient features of money over the long term are whether it maintains a stable nominal value in times of stress.

  — Dan Awrey

• Money’s salient features differ in the short term and long term, focusing on payment qualities and stable nominal value, respectively.
• Short-term features of money emphasize payment qualities.
• Long-term features of money focus on maintaining stable nominal value.
• Monetary policy must consider both short-term and long-term features of money.
• Different forms of money have varying viability in economic contexts.
• Evaluating money requires understanding its short-term and long-term implications.
• Stability in nominal value is crucial for long-term monetary viability.

Equity-based money 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 namely the population living from paycheck to paycheck.

  — Dan Awrey

• Equity-based money proposals may not work for individuals living paycheck to paycheck due to financial volatility.
• Lower-income individuals face challenges with equity-based money proposals.
• Financial volatility impacts the usability of equity-based money for certain populations.
• Innovative monetary proposals have practical limitations for different socioeconomic groups.
• Equity-based money may not be suitable for those unable to absorb financial volatility.
• The financial system must consider the needs of lower-income individuals.
• Monetary proposals must address the challenges faced by diverse populations.

Bankruptcy processes and payment system stability

• Almost all of them do for the same reason which is that they’re subject to conventional bankruptcy processes… bankruptcy as the kryptonite for credit based money you can’t use the money when you wanna use it and when you get some of that money back it’s very likely gonna be the case that it is not the same nominal value as it was when you put it in.

  — Dan Awrey

• Current payment system innovations often fail to maintain stable nominal value due to exposure to bankruptcy processes.
• Bankruptcy risks undermine the nominal value of digital currencies.
• Payment systems are vulnerable to conventional bankruptcy processes.
• Stability in payment systems is challenged by exposure to bankruptcy.
• Digital currency viability is affected by bankruptcy risks.
• Maintaining stable nominal value is crucial for payment system innovations.
• Bankruptcy processes impact 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 monies.

  — Dan Awrey

• The threat of bankruptcy in digital currencies is influenced by the volatility of assets held by issuers.
• Asset volatility impacts the financial stability of digital currency issuers.
• Effective asset management is essential for maintaining digital currency stability.
• Volatile assets increase the risk of bankruptcy for digital currency issuers.
• Digital currency market stability relies on asset management practices.
• Understanding asset volatility is crucial for evaluating digital currency risks.
• Financial stability in digital currencies is linked to asset volatility.

The riskiness of assets and fixed nominal value

• We start to see how the riskiness of the assets combined with the exposure of firms to conventional bankruptcy process really do raise the stakes and present challenges to that idea that money should have a fixed nominal value.

  — Dan Awrey

• The riskiness of assets and exposure to bankruptcy processes challenge the notion that money should have a fixed nominal value.
• Stablecoin valuation is impacted by asset riskiness and bankruptcy exposure.
• Financial crises highlight the challenges of maintaining fixed nominal value.
• Asset riskiness raises stakes for maintaining stable nominal value.
• Stablecoin reserves and market dynamics influence financial stability.
• Fixed nominal value is challenged by asset riskiness and bankruptcy processes.
• Recent financial events underscore the risks in stablecoin valuation.

Regulatory limitations on master accounts

• The idea of a skinny master account is one that while I think is constructive to think about it’s limited in reality right now by the terms of section thirteen one of the federal reserve act.

  — Dan Awrey

• The concept of a ‘skinny master account’ is limited by the terms of section thirteen one of the Federal Reserve Act.
• Master account eligibility is constrained by current regulatory frameworks.
• Federal Reserve regulations impact access to master accounts.
• Regulatory limitations affect the implementation of master account concepts.
• The financial system must navigate regulatory constraints on master accounts.
• Understanding Federal Reserve regulations is crucial for master account access.
• Current frameworks limit the potential of ‘skinny master accounts’.