Dan Awrey on the Future of the U.S. Payments System in a Digital World

Dan Awrey is a professor of Law at Cornell University and the author of the new book Beyond Banks: Technology, Regulation, and the Future of Money. Dan returns to the show to discuss his new book, the shadow monetary system, the case for markets to correct this problem, Gresham’s new law, his proposals for fixing the payments system, and much more. 

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This episode was recorded on January 13th, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us. 

Our guest today is Dan Awrey. Dan is a professor of law at Cornell University, and is the author of a new book titled Beyond Banks: Technology, Regulation, and the Future of Money. In it, Dan argues that our financial system is built around a deep and increasingly strained bundling of banking, money, and payments. He introduces what he calls Gresham’s new law, the idea that technology advances and payments outpaces the legal and institutional frameworks needed to ensure sound money. 

We’ll talk about how banks came to dominate money and payments, why so much innovation is happening outside the banking system, why bankruptcy is the Achilles heel of many new monetary instruments, and how recent policy proposals like the GENIUS Act tie into a broader blueprint for reform. Dan, welcome to the show.

Dan Awrey: Thank you so much, David. It’s great to be back.

Beyond Banks

Beckworth: It’s great to have you on. It’s been a few years, and you have an amazing new book, as I mentioned, Beyond Banks. We’ll provide a link to it for our listeners, encourage them to get it. Tell us about the story behind this. I believe last time you came on, we talked about some of the ideas in this book. Tell us the history and how it got to be a book that you published last year.

Awrey: Sure. As you say, I’ve been working on various issues at the intersection of technology and payments probably for about 10 years, really going back to some issues around the popularity of PayPal and other nonbank payment platforms, and the regulatory frameworks in the United States that govern them at the state level and their bankruptcy treatment. Over time, I ended up writing several papers on various dimensions of this, the bankruptcy angle, the federalism angle, some of the issues that ultimately became very salient around access to things like Federal Reserve master accounts.

As you do with these things, at a certain point, you realize, gosh, I’ve done a lot of interesting work, or at least work that I find interesting, but my initial takes were maybe underdeveloped. There were connections between different topics that I didn’t fully appreciate. Part of the fun of being an academic is you have the luxury to be able to go back and revisit it and try to draw out those connections, those bigger picture themes. That ultimately is what became the book.

Beckworth: Let’s jump right into your book. You start out by saying, “we need to talk about money, not just payments.” What’s the central confusion that runs through this book that you address that policymakers and economists make when they treat these two as the same thing?

Awrey: Sure. The starting point for the book, and a question that I always get asked is, why is there so much history at the start of this book? The answer is to drive home the reality that we went through centuries of experimentation to come up with the business model for banking, money, and payments that we have today. It ultimately yields what I think is pretty good credit-based money backed by things like lender-of-last-resort frameworks, deposit insurance, and bank resolution regimes. In that process of really putting all of our eggs in one basket, that is the basket of banks, we introduced this enormous path dependency into the development of the payment system.

What that means today, and what the book is trying to demonstrate, is that putting all of our eggs in one basket ended up being something that created a lot of pressures once technological disruption entered the scene, especially with the advent of the internet. Because now, all of a sudden, the domain of payments, which historically had been built around banks, can be built around technology. Ultimately, what the book then reveals, or hopes to illuminate, is that all of those experiments around good money led to some pretty poor payments. All the new experiments that are taking place, whether it be PayPal or stablecoins or tokenized deposits, we have to learn the lessons of how to create good money over again. The reason we should do so is actually because now we have technological tools that open up the door to better, more cost-effective, more convenient payments. 

Ultimately, to answer your question, the key takeaway is then that what makes good money is not what makes good payments. What makes good money is law and institutions. What makes good payments is technology and the governance frameworks around the development and adoption of that technology. We have to unbundle them in our minds in order to then understand what we need to do to ensure that the next generation of money and payments both learn from the experiments of history, but also take advantage of all the opportunities that new technology has given us.

Beckworth: You mentioned it took hundreds of years to come to the place where we are, where payments and money are together in the banking system. That’s what we’ve come to expect. It seems normal. I was giving a presentation to some banking regulators, and they had a really hard time with the notion of separating those two ideas. One even said to me, “Why would we want to disrupt this optimal outcome where we’ve paired them together in banking?” I actually mentioned your book. I was like, “You need to read Dan Awrey, because how do we know this is optimal?” The horse is out of the barn. We need to deal with this reality. Is that something you find often too?

Awrey: Yes. I think I’ve been a party to that conversation with policymakers a few dozen times over the last several years. Look, the reality is if central bankers want to be central planners, then that’s something that’s up for societal debate. It’s not something that we currently give them the ability to do outside of the payment system. The question about why we would want to upset the apple cart is actually the apple cart is being upset. It’s being upset because people demand things, and capitalist societies are generally very good at providing them with those things.

Central bankers don’t get to determine those technological advances or consumer demand for them. They can only respond to them. The longer policymakers spend thinking, “Well, why upset the apple cart,” the more they’re going to 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.

Beckworth: You do a great job developing the history, as you alluded to earlier, how we got to this place. We have a system now that does function as money, as payments, the legacy system, let’s call it that. One of the key points you make in the book is we’re now facing this tension between the money of the past versus the money of the future, the money of our children. What kind of money do our children use versus what people above us or what we use?

I find this just in my life. At my local church, I’ll give an example. The older people still want to pass offering plates around and collect physical cash. I’m like, “Most young people here don’t even carry physical cash. They want to Venmo you the money. Why don’t we have a QR code on the screen or something?” It just blows their mind that you wouldn’t carry physical cash on your body. It’s just this different mindset, perspective. Banks is a normal thing for them. For the young people, it’s instant payments.

Awrey: The Atlanta Fed has done some great research on this. Some colleagues of mine, Raúl Carrillo at Boston College, has written about this. The generational shift in payments is truly profound. It’s built on a comfort level with technology, but also the benefits of that technology. Importantly, as I go into in the book, it’s also built on the idea, though, that the salient features of money in the short term are almost always its payment qualities.

The salient features of money over the long term are whether it maintains a stable nominal value in times of stress. A lot of these new monies that provide attractive payments features, at present aren’t providing the type of long-term stability that we would want, that policymakers want, that society ultimately wants out of its system of money and payments.

Beckworth: I want to come back to that point about this short-run versus long-run tension, the money today versus tomorrow, and will that money eventually come into the regulatory perimeter so that it is stable over the long run? Let’s go to that point you made about money needs to have a stable or fixed nominal value: $1 is $1. 

I found that interesting where you discuss this in the book, where you brought up some people’s proposal for equity-based money. Our dear friend, John Cochrane, has argued for this. He gives the example of having a debit card or some kind of card where you go, you purchase something at your retail store. Behind it is an ETF for the S&P 500. Maybe it will be $500. Maybe it will be $400. Hey, you can check. It’s all good. Why doesn’t that work in practice?

Awrey: First thing I’ll say is I’m a huge fan and I’ve learned a ton from John Cochrane’s work. 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, because for those people who have to budget, a downward swing in the S&P 500 of 10% is the difference between making your rent or buying groceries that month. For you and me and John, yes, maybe we like the potential of money with capital gains attached to it, but capital gains comes with capital losses that you and I on a liquidity basis can probably reasonably bear up to a point, but broad cross-sections of the world just can’t.

If you don’t have the financial slack to live with the downtimes, money linked to the S&P 500 is just not money for you. It doesn’t allow you to plan your future incoming and outgoing payments in a way that enables you to provide for your family.

Beckworth: Let’s talk about this point about the short run versus long run. In the short run, we prefer payment convenience, speed, low cost, but ultimately it needs to have a stable fixed nominal value. Where do some of the current innovations fall short on that fixed nominal value point?

Awrey: Sure, and almost all of them do, and almost all of them do for the same reason, which is that they’re subject to conventional bankruptcy processes. Doubling down on that, of course, the threat of bankruptcy depends on the volatility of the assets of the issuers of these monies. There, a lot of regulatory frameworks give firms a lot of leeway in terms of the types of assets they can invest in.

A lot of the work I was doing the last time I was on the show was based on those regulatory frameworks, so looking at the state money transmitter laws in the United States, where we have really a huge heterogeneity in terms of the types of assets that firms like PayPal can invest in, ranging from bank deposits, Treasury securities, other relatively safe assets, to things like publicly traded equity securities. To link back to the last question, mortgage-backed securities, we had the near failure of MoneyGram during the Global Financial Crisis because it made risky investments while promising the people that used it that their claims would maintain a nominal fixed value.

When you combine the two, when you combine risky assets with bankruptcy, and specifically the features of the bankruptcy process that, one, prevent the holders of claims, the creditors, from withdrawing money during the bankruptcy process without court approval, and, two, that in many cases they’re ultimately unsecured creditors, all of a sudden now you have bankruptcy as the kryptonite for credit-based money. You can’t use the money when you want to use it, and when you get some of that money back, it’s very likely going to be the case that it is not the same nominal value as it was when you put it in.

Beckworth: $1 of Tether may not be $1 in purchasing power if something happens, such as those assets lose value or there’s some issue at Tether.

Awrey: Yes, and Tether adds an additional dimension to this because depending on how you hold Tether and what type of Tether holder you are, you may have one or two options about how to liquidate your holdings. One of them is to put it back to the issuer for a dollar, which as long as that’s your contractual entitlement, which isn’t always with Tether, and as long as Tether isn’t bankrupt, that works perfectly fine. The other option, the primary option for most of us with Tether is to sell it into the marketplace, and there, it’s the market price that dictates what you get back.

If we go to coinmarketcap.com right now, you can see that Tether is trading at a slight discount to the dollar. If you look at Tether’s competitor, USDC, on or about March 10, 2023, the day that SVB failed, where USDC held about $3 billion of its reserves, now all of a sudden you have a dollar-based nominal fixed instrument that was trading at 84 cents on the dollar. Now all of a sudden 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.

Beckworth: I should mention to the listeners that Tether is the world’s largest dollar-based stablecoin. It’s located outside the US, so it’s not a part of the new GENIUS Act. We’ll come back to the GENIUS Act and later discuss it in comparison to your proposal. You mentioned Circle, which is US-based. It’s the second largest stablecoin. You mentioned the SVB crisis and how it was a part of that story. Do you think that, going forward, something like that is possible for Circle now that it’s under the umbrella of the GENIUS Act?

Awrey: Yes, I do. I think it’s because of the failure of the GENIUS Act, which we can come back to later, to understand the policy framework that you need to have good money in a world where not just banks issue money. And not to foreshadow this too much, the GENIUS Act failed to create an explicit pathway for nonbank issuers to get access to Federal Reserve master accounts and the payment rails. Why was SVB the parking spot for USDC’s money? Because SVB gave them indirect access to the payment system. If you don’t need to create that interconnectedness between banks and stablecoin issuers because stablecoin issuers can directly connect to the Fed infrastructure, then and only then do these issues disappear.

Beckworth: Okay. I promise we’ll come back to this later in more detail—

Awrey: Yes, absolutely.

Beckworth: —because you think the skinny Fed master account closes that gap?

Awrey: I have to chuckle a little bit at the skinny Fed master account thing, both because I’ve spent the last six or seven years of my life trying to convince the Fed that it needs to think about master account eligibility and access. Then also because it’s a great exercise in branding over substance. Section 13.1 of the Federal Reserve Act says what it says. There’s no such thing as a skinny master account or a fat master account. There’s just master accounts.

The list of institutions that are listed in that provision of the Federal Reserve Act has always been the list of institutions that are eligible. 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 13.1 of the Federal Reserve Act. I’ve long been an advocate that we need to go beyond that. We need to ask Congress to amend that section. Otherwise, all we’re really doing is creating a superficially different version of access, but to the same set of institutions that are currently eligible. That, to me, is not the right way to go about this.

Shadow Monetary System

Beckworth: Okay. Returning to the history of money and payments, I want to bring out this comparison that you highlight in your book that’s really fascinating for those of us who lived through the Great Financial Crisis. We talked back then about shadow banking system, this scary word. It was the shadow banking system that collapsed, that caused problems, that caused this prolonged morass in the economy. It was the financial crisis at heart. Now we’re talking about shadow monetary system or stablecoins. What do they share in common, and how are they different?

Awrey: Yes, I think that, in many ways, if you adopt the Zoltan Pozsar definition of shadow banking as credit, liquidity, and maturity transformation outside the banking sector, then really the shadow monetary system is just a subset of that. It’s the subset that focuses on intermediaries that are engaging in these types of transformation, but are doing so in ways that provide liquidity to people who need it and facilitate payments. There are things that are shadow banking that are not shadow payments. Think of structured finance, for example. There are things that are shadow banking that are also shadow payments. Think, in theory, at least, money market funds.

Beckworth: They both share, though, common features that they’re outside the official regulatory space. They’re not going to be backstopped. They’re not going to be immune from bankruptcy like banks are.

Awrey: Yes, they’re going to be outside the perimeter of banking, although not necessarily the perimeter of financial regulation more broadly. You’re absolutely right that the key distinction then is we have this financial safety net for banks, ex ante, that we don’t generally have for nonbanks. Of course, that leads into the moral hazard problem of, well, just because we don’t have the financial safety net, ex ante, doesn’t mean that we don’t functionally bail out these firms during periods of financial distress, but without the benefit of the regulatory frameworks that we have in banking that were designed to minimize that moral hazard problem.

Beckworth: Yes, that is an issue I thought about as I read your book. It’s like, okay, ex post, we did have a backstop to the shadow banking system, right?

Awrey: Yes.

Beckworth: I’ve often made this point, and maybe it’s contentious, but will there ever be a run on money market funds again? I’m not sure there will be because we always know that the Fed will be back there to backstop it. It creates this impression, at least, that there’ll be a fixed nominal value. It also creates moral hazard. Do you think I’m reaching too far there when I say the impression is that the nominal value is more stable now?

Awrey: No, I agree with the factual observation. What I press against is whether we can do anything about that, and whether we should do something about it. I’m of the view that we should do everything that we can to credibly limit the scope of that financial safety net, and to limit the probability that we’re going to have to rely on that safety net in the first place. This is why things like nonbank payments are interesting to me, because a properly regulated system of nonbank payments takes some of the pressure off the banking system as a focal point for systemic risk, moral hazard problems, and bailouts.

The key is then you’ve got to develop regulatory frameworks that work for these new systems, but that then functionally enable the monetary instruments issued by the firms within these systems to look and feel a lot like a conventional bank deposit, the type of money that people know and trust.

Beckworth: Well, Dan, I’m not a prophet, but I’m going to make a prediction here. If Circle does come under a lot of stress, I suspect we’re going to see the same kind of intervention we’ve seen in shadow banking system. That’s unfortunate, and it’d be great if they would follow through on your suggestion of Congress getting ahead of this, ex ante, and creating access to the Fed master accounts in the proper fashion.

Awrey: Yes, I would not bet against you on that particular proposition. I’ll have to go see if we can get some pricing action going on in Kalshi or Polymarket or something like that on this.

Beckworth: I will be even bolder here. I’m going to make a case that it may not be out of the question that if Tether had a serious financial problem, there wouldn’t be some kind of help there, for the same reason we see currency swap lines emerge to banking systems overseas when the global dollar system is under stress. That may take a little bit more pressure to get there, but I don’t know if it’s out of the question.

Awrey: I don’t think it’s out of the question for a very specific reason, which is, I think ultimately getting the GENIUS Act over the line from the Republican side of the aisle was mostly about creating demand for US Treasury securities. If that vision comes to pass, that Tether and other stablecoins are important for the stability of the Treasury market, then, of course, we’re going to intervene at that point.

Almost by definition, our wiring at the Fed and the policy community in general is going to be that we have to intervene to support those institutions to indirectly support the stability of the Treasury market. I actually would agree with you, and I think that if it happens, that’s likely the reason that it is going to happen. Not because anybody wants to bail out Tether, but because the implications from a disorderly Treasury market are simply too cataclysmic to fathom.

Beckworth: This is not a path we want to go down, but let’s just play for a minute in this space.

Awrey: All right.

Beckworth: Let’s say that does happen. You’re at the Fed, you’re a major financial regulator, and you see the writing on the wall, goodness, we’re going to have to step in here. Is there anything you can do or say to Tether, say, “Look, we’ll step in, but we expect that in the future you’ll allow us to look at your books or do XYZ”? What would you tell them as a regulator if push comes to shove and you’re in a situation like that?

Awrey: Well, the first thing I would do is actually once the GENIUS Act was passed in July of 2025, is I would start having quiet conversations with all the major players and saying, “Look, have you ever heard of this thing called an OCC trust charter? We got a guy now over at the OCC who has an interpretation of what an OCC charter trust is that we think might open the door to providing you with certain elements of the financial safety net should you fail. The good part is you’re not going to be subject to all of the onerous elements of bank regulation. The other good news is if you adopt our interpretation, we might be able to finagle things like deposit insurance and lender-of-last-resort functionality, and maybe even this thing that we’ve just invented called a skinny charter.” 

That’s what they’re doing. That’s why this path has been opened and why so many firms are walking through it at the moment. The charitable version of this is the Fed looks at its ability to exercise control over the system ex post in the event of any sort of instability and says, “We want to use the GENIUS Act to maybe change the regulatory direction of these firms up until this point.”

OCC trust charters have existed for a long time. A lot of crypto firms take advantage of them, but now we’re seeing a lot of these firms really roll into this as a light bank charter in effect with lots of the privileges, not so many of the responsibilities. That’s the thing I would do. That’s the thing that’s happening. I don’t like it for all sorts of reasons, but I do think its one benefit is that it gives the Fed and prudential regulators more flexibility in the event of a crisis.

Now let’s say that that doesn’t pan out the way that they want it to. I think what we’re ultimately back to is—you referenced the financial crisis before—we’re back to the use of Section 13.3 again in unusual and exigent circumstances. We’re going to have to have a broad-based program that would likely now apply to all stablecoin issuers, US-domiciled stablecoin issuers, maybe even foreign-domiciled stablecoin issuers under Section 18 of the GENIUS Act that then would give them the ability, in effect, to provide discount window and open market operations support to these institutions.

I think we’ve normalized that to such an extent that maybe a lot of folks wouldn’t necessarily think that that’s controversial at that stage. Again, it comes back to, if you’re not going to regulate ex ante, but you’re going to bail out ex post, shouldn’t we be trying to think of ways to minimize the prospect that that’s an action that the Fed is ultimately going to have to take? I think there are ways, both short-term trust charters, longer-term Section 13.3, that you could intervene.

Eligibility around the repo and reverse repo facilities is also an important consideration there because this is another mechanism for providing liquidity to or removing liquidity from the Treasury market. I don’t worry necessarily about the Fed having a set of tools. I worry more about that we’re not doing enough, policy-wise, to minimize the probability that we’ll have to resort to those tools.

Beckworth: You just mentioned making the repo markets more accessible to maybe some of these firms, some of these stablecoins, or maybe the custodian banks that hold their assets. Would that include the standing repo facility? I know that it’s changed its name recently. The standing repo facility, there’s been talk of bringing central clearing to it so that it could have more counterparties on the other side of that central clearing. Would that be an example of how that would work?

Awrey: It would be. If we wanted to do this in a more fulsome, longer-term, prudentially oriented way, I think there’s things that we could do that would help move us down this path. From your neck of the woods, Yesha Yadav from Vanderbilt has written quite a bit about what we could do to strengthen resilience in the Treasury market. The more and more we get these unconventional issuers as key players within that market, the stronger the case is, I think, to seriously look at the proposals that Yesha and others have put forward.

Can’t Markets Solve Payment Problems?

Beckworth: Dan, as someone who comes from an organization who promotes free markets, classical liberal visions, I’m sure there’s listeners out there who would say, “Just trust the market. Can’t the market solve this problem?” You actually address this question in your book, and we’ve touched on it a little bit already. Why is this an issue that must be solved through these changes you’ve talked about?

Awrey: I love markets too, but as a student and historian and practitioner of financial markets, I also know that we don’t really have anything resembling a free market in banking or financial services more generally. Examples that I give in the book relating to the path dependence built up around bank-based payment systems is that you have to be a bank to get a Federal Reserve master account. You have to have a Federal Reserve master account to participate in a payment network. All of a sudden, your free market doesn’t look all that free when you’ve restricted access to such an extent.

That’s not me saying we should remove those restrictions, but it is me saying that we should at least try to understand how we could expand access to this core infrastructure to other types of firms. This isn’t a process or a policy problem that’s new to us at all. This is a problem that we have come across in other industries, when we build a railway, we have to make decisions about what kind of rails to build. Those decisions create technological path dependencies that then may inhibit competition from new players offering new types of rails. 

Economics can also inhibit market competition when you’re dealing with natural monopoly or other types of infrastructure industries. At the same time, regulation can also be used either to restrict access or, if we work hard enough, to make sure that access is provided on a level playing field and in ways that don’t then skew the competitive landscape as much as something as simple as the restriction on the ability of firms other than banks to access the payment system historically has.

Gresham’s New Law

Beckworth: Let me go back to this idea that I mentioned at the onset, and we’ve touched on it. This idea of Gresham’s new law and good money, bad money, I just want to repeat it because this is a theme that really is coming up through the book, through our conversation, and it’s central to understanding your critique and your proposal that we’ll get to later.

Awrey: Yes, Gresham’s original law, the OG Gresham’s law, was really based on the observation from a time where effectively coin was the currency of the realm, that people would hoard coins that had a high metallic content and use coins that had a low metallic content. The monetary system was full of different types of money, but you would keep the money for yourself that you thought was more valuable and give the money in the form of payments to people that you thought was less valuable. Gresham’s law then has this idea that bad money drives out good. Bad money circulates as payments. Good money sits on the sidelines appreciating in value.

Gresham’s new law effectively inverts that, and this comes to our earlier conversation about short-term versus long-term psychology when it comes to decisions about what you use as money. Today, especially younger people make decisions on what to use as money on the basis of speed, convenience, whether it’s easy to split a restaurant check or share a rent payment via an app. In large parts of the developing world, things like network footprints, the ubiquity of a payment platform, and cost are huge drivers of actual payment decisions in the real world.

That is, good payments now are driving the bus. If, as I think is the case, and as I think of both the book and some of my prior work establish, if all those good payments are coming with bad money because they sit outside the perimeter of the conventional financial safety net, then all these good payments over time are going to push good money out of the system, and we’re going to be left with fast, whizzy, cheap payments that then at some point down the road we’re going to collectively find out are not worth the digital paper that they’re not really written on.

Gresham’s new law is then an inversion. In Gresham’s original law, it’s all about the qualities of money that drive payment patterns, and in Gresham’s new law, it’s all about the qualities of payments that are driving monetary patterns, about what money we hold.

Beckworth: Let’s make this concrete, then. Examples of this new money that’s more payment driven would be like PayPal, Venmo, stablecoins?

Awrey: Correct, yes. All of the above and many hundreds of other examples beyond.

Beckworth: The concern is that these things are great to use, quick payments, they’re cheaper than using a bank, but the problem is if there’s a financial crisis or something happens to one of these firms, suddenly you can’t get your money back, it doesn’t work, that fixed nominal value is not there, and then suddenly you regret maybe not having money in a regular bank account.

Awrey: Yes, absolutely right. PayPal is subject to general corporate bankruptcy. As PayPal laudably discloses to you in your terms and conditions, you’re an unsecured creditor of PayPal, and in the event of its bankruptcy, you are going to not only not be able to get your money back for a period of time, but you’re likely to be deeply subordinated to PayPal’s other creditors. US-denominated stablecoins, subject to the GENIUS Act, same thing. There was some tinkering with bankruptcy in the GENIUS Act.

There were things that were proposed that ultimately did not make it into the final draft that could have largely resolved this problem. But unfortunately, Congress went with a compromised version that likely means that the first time we get a stablecoin issuor bankruptcy, it’s going to be extremely messy, extremely uncertain, and ultimately extremely costly for the holders of stablecoins that are subject to the GENIUS Act. All the good payments that they’re getting today, in the event that ultimately bad equilibriums come to pass, could mean that people are going to get a huge shock about exactly what that money was worth.

To go back to your earlier point, then, the question for policymakers, and this is the bigger meta point here, if these good payments, bad money type platforms become widely used, become ubiquitous, then we’re going to find ourselves in a situation, as we talked about, where policymakers are going to have to intervene, and it’s going to be the mother of all moral hazard problems.

Beckworth: I can imagine some bankers who are listening to this saying, “See, that’s why you’ve got to stick with us, folks. Come back to the safe money form.” Your point is, and mine would be too, the horse is out of the barn, right? Payments are innovating, things change, and we need to embrace it in a safe, ex ante, predictable way.

Awrey: Yes. I think that’s right. It’s at this point that my Canadianness comes to the fore. The defining feature of the Canadian banking system is that a minister of finance in the 1990s said, “Look, we’re not going to do bank competition, but we’re going to stand behind the entire banking system, no questions asked.” What Canada got, as a result, was an anemic fintech ecosystem. It got little to no competition for core banking services, lending, money payments, very expensive payments, relatively high lending rates for small businesses, and the like. What Canada did well is say, “That’s what we’re doing. That’s our decision, how we’re going to do this tradeoff.”

We’ve made a different set of choices outside of Canada. In the United States, we claim to say that we like the benefits of competition for consumers, for the resilience of the financial system. Then if we’re going to go down the path of saying, “No, we’re going to shut all this new stuff down,” it behooves us to be honest with people that that’s a huge change in the way that the United States thinks about the market economy and the role of finance within it.

If financial repression is now how the United States is going to conduct itself, there’s a case to be made there, but somebody should actually make it and acknowledge that it comes with huge tradeoffs for consumers, for the stability of financial system, and ultimately doubles, triples, quadruples down on the moral hazard problem. You can’t kill the nonbank financial ecosystem and then ever say ever again that we’re not bailing out banks the next time that they get into trouble. There is no credible alternative at that point. You put all your eggs in one basket again, and as Pudd’nhead Wilson told us, you’ve got to watch that basket.

Beckworth: Am I being unfair when I say the horse is out of the barn? There might be some people who’d say, “Yes, let’s be like the Canadians. Let’s just completely shut down, regulate out of existence these firms, these forms of money outside the regulated financial sector.” If I look around the world, yes, dollar-based stablecoins is the main and largest stablecoin, but other countries are adopting legislation for stablecoins. Go back to the history of Libra. That was a stablecoin. It didn’t survive, but it seems to me the horse is out of the barn. It’d be very hard to go the direction of Canada. We need to be responsible stewards and do what you’re suggesting.

Awrey: Yes, I think that’s absolutely right. I give the Canadian example not because I think it’s an ideal way for the US to approach policy in this area, but because they were at least transparent about what they were willing to forego in the interest of financial stability: less competition, less choice, higher costs for consumers, higher costs for small businesses, lower access to credit. I have and will always debate folks who think that that’s a good recipe, but I think that technology and business models have moved so far at this point and have proven to have benefits all over the world, not so much in the United States yet. But if you look at India, Hong Kong, Singapore, Brazil, sub-Saharan Africa, the use cases for nonbank payments are just incredible, and for the technological ecosystems that they thrive on. This includes things like speed and convenience, sure, but it also includes things like cost.

One of the big tradeoffs that’s super important to me is you look how much small businesses pay to be able to accept electronic payments from their bank and from the big credit card issuers. Then you look at the unit cost of a payment on UPI, India’s new payment rail—not so new anymore, I suppose—and you realize that there are a lot of rents in the conventional financial market infrastructure that have an appreciable impact on things like small business formation and profitability.

Small businesses are still a big deal in terms of employment, in terms of generating profits and GDP, and the payment system can either help those businesses or it can impede those businesses. To my mind, I would rather be on the side that helps them. If that involves, then, a little bit of intervention in the market to help build infrastructure that is high quality and low cost, then so be it.

Beckworth: Yes, we recently had Aaron Klein on the podcast. This is a big deal for him, the fact that the payment rails are so antiquated for retail everyday people in the US, particularly those who don’t have big bank accounts and do suffer because money gets put in on a Friday, they don’t get access to it until Tuesday or Wednesday next week. It’s a big deal for many people.

Awrey: I make it a point never to disagree with Aaron Klein when he’s right, and he’s definitely right on these points.

Beckworth: I’m just curious about Canada. They’ve had an incredible record of financial stability; during the Great Depression, they didn’t have any banks closed, I believe. Maybe some consolidations. No, okay, maybe I’m exaggerating.

Awrey: I think to the Canadian banking folks, we had no failures. Did we have a lot of shotgun weddings? Yes.

Beckworth: Okay, fair enough. Fair enough. In general, the system there’s been much more stable than in the US, the banking system. I guess my question would be, you’ve said, okay, they’re safe, they’re conservative, but not much on innovation. Does the banking system there provide cheap, real-time payment access for retail?

Awrey: Interestingly, 25 years ago, 30 years ago, I would have said that through firms like Interac, Canada had access to relatively good, if not necessarily cheap, electronic payments. We got stuck 25 years ago, 30 years ago, in effect. We have a quasi-regulatory body called Payments Canada that’s responsible for the governance of the payment system in Canada. Its senior leadership is entirely made up of representatives of the big banks. Those big banks have a monopoly over money and payments in Canada.

Payments Canada, to my mind, has always behaved like the governing body of a monopoly. They make OPEC look like an engine of transparency and competition. Canadians today have bad payments. They’re expensive payments. They are not technologically advanced payments. Canadians, because of their wiring, think they have relatively good payments, but that’s only because their touchstone is US payments. We always compare ourselves to the United States, and unfortunately, that means comparing ourselves to the only jurisdiction in the G20 that has worse payments than Canada.

Beckworth: Okay. I bring them up because Aaron Klein will mention other countries have had real-time payments for some time, have much cheaper payments. Canada, not necessarily the case. All right, let’s go forward to your proposal then. You bring it out near the end of the book. Walk us through the steps that you think need to be done in order to put us on a sure footing going forward.

Dan’s Proposal for Money and Payments

Awrey: Sure. Recall that the big theme of the book is we need to treat the policy problems of money and payments separately. I’ll deal with them both separately because that’s what the blueprint envisions. On the money side of things, not surprisingly, I think the key is creating frameworks that allow for the resolution of nonbank money issuers outside of the conventional bankruptcy process.

The automatic stay in bankruptcy, priority in bankruptcy, all of these things are just the kryptonite of money, and so you need a resolution framework, the sole goal of which is to return money to the people who have entrusted it to these firms as quickly as possible so they can pay their mortgage, so they can pay their bills, so they can put food on the table. That then requires some financial engineering to make sure that then, having provided that sort of safety net for these firms, that we don’t get ourselves back into the same old moral hazard problems that we have with banks.

From my perspective, I would combine then the resolution framework with what I would call the no intermediation principle. These cannot be banks. They cannot engage in meaningful credit liquidity or maturity transformation. Ideally, to me, customer funds should be the only source of debt financing beyond equity, and those funds should be placed in a ring-fenced Federal Reserve master account, the ultimate risk-free settlement asset.

Beyond that, then, that requires, too, that we have activity and financing constraints, restrictions on things like intergroup debt that are designed to make sure that the monetary commitments of these issuers are the total credit commitments of these issuers, thereby engineering good money. The payment side, a little more complicated: First and foremost, from my perspective, is open access requirements to core financial market infrastructure. I want USDC to have access to a Federal Reserve master account and clearinghouses so they can compete with banks on more equal terms and for that competition then to yield benefits for the consumers of those stablecoins and other types of nonbank money.

Two, as the infrastructure becomes more heterogeneous, as we get different types of monetary issuers, we have to start investing in interoperability. Here I would also have interoperability rules that do two things. One that says, if you are an incumbent financial market infrastructure provider, you cannot build your infrastructure in ways that’s designed not to be interoperable.

To give you an example of this outside of the financial world, when Tesla built its charging stations, it specifically engineered its technology so Priuses couldn’t use them. This is something that the Biden administration ultimately took issue with and extracted a concession from Tesla that they would make their charging stations interoperable with other types of EVs.

Similarly, I’d want that type of approach, that type of requirement for payment systems. This is going to be particularly important as we start to wrestle with ideas about how blockchain and distributed ledger technology might play into payments, and how to make it interoperable with conventional financial market infrastructure. We have open access requirements, we have interoperability requirements.

Then the last thing I’ll say is that we need to start thinking seriously about payment network governance, about who makes decisions about the design of payment networks, who makes decisions about access and long-term investments in the evolution of these networks. Historically in the United States, this has been the Federal Reserve. The Federal Reserve, though, has a specific set of incentives and objectives, most of which are linked to financial stability and monetary policy implementation.

This, I think, going back to your conference experience, is why so many of them have such misgivings about going outside of banks, because that implicitly means that you are diluting the power of the central bank over payment system design and effect.

I don’t want to erode the role that the Fed has in monetary policy implementation or financial stability, but there are other pressing considerations here, including things like competition, access for small businesses and consumers to finance, and ultimately, bigger picture policy issues about how to harness technology in the interests of broader society, that I think demand that we get a larger set of stakeholders formally into the discussion about payments and then use that governance to help really deal with the coordination and tradeoff issues that we’re likely to encounter in this brave new world of nonbank money and payments. That’s the blueprint in a nutshell. I don’t think it’ll take us more than three to five days to fully implement. I’m joking.

Beckworth: All right. That’s your blueprint. It’s in the book. Again, we’ll provide a link to the book. Listeners, check out his really amazing book. Let me speak to a few of the points that you raised in this proposal and try to tie them in to what is missing from the GENIUS Act. I think on the first set of requirements under money, you mentioned resolution authority. Is that one of the key things that’s missing from the GENIUS Act, or is it there?

Awrey: Yes. A muddled version of it is there. There are basically two ways, broadly speaking, that you can do resolution outside of bankruptcy. One of them is to go the FDIC route and eliminate bankruptcy as a possibility and replace it with a bespoke resolution framework that just applies to that specific type of institution. The other way to do it is to keep elements of the bankruptcy process, chapter 11 bankruptcy in the United States, but then appoint a regulator as the receiver for the purposes of then being able to drive the bankruptcy process in a way that is in the best interest of the holders of these monetary IOUs that exist outside the banking system.

The GENIUS Act does neither of those things. What it does attempt to do is reengineer fundamental principles of priority in bankruptcy law in ways that I think are ultimately going to fail. The reason they’re going to fail is that conventional bankruptcy, in any other case, tends to be led by a bankruptcy trustee, tends to be led then by the financiers who are willing to give money during the bankruptcy process.

Now, all of that presumes that there are assets that are available to pay the trustee, and that there are good economic reasons for dip financing to be made available, and neither of those are the case under the engineered priority rules under the GENIUS Act. Stablecoin holders are going to have priority over the trustee, meaning that any qualified trustee is going to look at that and say, “How do I get paid?” The answer is you don’t, and so there’s going to be no trustee.

No trustee means that we’re going to have an uncoordinated bankruptcy process. The inability to appoint a regulator as a receiver over this process means doubly we’re going to have a problem with coordinating the bankruptcy process. That means more time, that means more money spent on lawyers. Since all that money is money that would otherwise go to stablecoin holders, it means lower payouts to those stablecoin holders at the conclusion of the bankruptcy process. The design, while, I think, motivated by the observation that conventional bankruptcy processes are the kryptonite of money, actually probably does more harm than good in removing these monetary claims from the shadow of bankruptcy.

Beckworth: There is some work to be done in the space of US dollar-based stablecoins in terms of resolution authority.

Awrey: I think that’s right. Some of it can be done under the rulemaking process, and is being done under the rulemaking process, but some of it, like the automatic appointment of the principal regulator as the receiver of a failed stablecoin issuer, would require Congress revisiting these issues.

Beckworth: Okay. Let’s go to the other side in terms of payments, in terms of your proposal. One of the points you raised is interoperability of the systems. I think that’s probably a big hang-up too, right?

Awrey: Yes. The GENIUS Act just gets an F for the payment side of my blueprint straight up. There’s one sentence in there that says, hey, we should all get along and agree to make things interoperable, which is the weakest statement of intent I think you could possibly make about these issues. It doesn’t even say who’s going to agree on interoperability or what interoperability is or why we want interoperability, what sort of dimensions interoperability might be valuable for. It certainly has no binding obligations.

Two, the GENIUS Act does nothing about access. Federal Reserve master accounts really got struck from the conversation before the Trump administration was sworn in. There was a version of an act on the House side in the fall of 2024 that did include master account access for certain stablecoin issuers. That did not make it into even the early-stage discussions on the GENIUS Act.

Of course, in terms of payment network governance, I think the GENIUS Act probably makes things more complicated than they already were. The Fed is somewhat marginalized in this process. States continue to play a regulatory role in many cases, and there’s a lot of optionality around who your primary regulator is going to be.

Now we have a system that I think is rightfully deserving of an F. Everything that we could have done to bring stablecoins more clearly into the system is something that we failed to achieve. As a result, the next time we get a dislocation, what happened to USDC in the context of SVB could very easily happen all over again because we’re still forcing these nonbank payment platforms to connect to the conventional payment system via their accounts held with conventional deposit-taking banks.

Beckworth: One way to fix this would be to give them unfettered but tailored master account access?

Awrey: To my mind, you’d just give them master account access.

Beckworth: Okay. Full Master account access.

Awrey: I think there are arguments that you can make. It’s not just master account access, but is it intraday or overnight, do I integrate these institutions into the interest on reserves framework, or do I keep them outside of that? I think there’s a healthy debate to be had about all of those subsidiary questions, but do I think that master account access, at least on an intraday basis to nonbanks, institutions currently not eligible under Section 13-1 of the Federal Reserve Act is a good thing? I do, absolutely.

Beckworth: The skinny Fed master account doesn’t cut it. 

Awrey: Yes, exactly. That’s why I say more than Section 13-1 currently contemplates, because at the moment, there are two threshold issues. One is the custodial litigation that you referenced earlier, which is you’re technically eligible, but does the Fed want to give you an account? Which, depending on who you talk to, is a relatively recent threshold issue. Then there’s the longer-term threshold issue, the threshold issue that’s existed since the 1930s, which is who is legally eligible to apply for a master account?

Really, at this stage, unless you are a member bank of the Federal Reserve or a nonmember bank under the Monetary Control Act that equalized access for nonmember banks, you’re not even eligible. PayPal is not eligible to open up a master account. It’s worth pointing out that the United States is increasingly anachronistic in this particular policy choice. The credit risks associated with banks are much higher than a well-regulated nonbank payment issuer, mostly because they wouldn’t be able to engage in the type of credit liquidity and maturity transformation that we associate with bank regulation and the fragility of banks to begin with.

To my mind, the challenge here is more intellectual than it is technical. People have to get their mind around that banks should not be the only game in town—there’s no reason to make them the only game in town—that a well-regulated nonbank payment platform is probably less risky to give reserve account access to than a bank would. To be clear, I think that they’re both incredibly low risk, given the financial safety net for banks in particular, but the idea that we shouldn’t give master account access to nonbanks because they pose a threat to the functioning of the payment system, to me, is a position without much, if any, empirical grounding.

Beckworth: Yes. Part of me has wondered that if the skinny Fed master account does not get written into a rule or made official before the next administration comes along, it could go out the window. If it’s not in law, it could easily be something the regulators say, “We changed our minds. We don’t think FinTech should have access to Fed’s master account.”

Awrey: Yes.

Beckworth: Okay. That speaks to the concern you have. You need to make it a little bit more set-in-stone, codified changes by Congress.

Awrey: Yes. I’ve engaged a lot with Congress on these issues over the last few years. One of the things that I’ve really been struck by is that—David, you and I and the people that we know and that we work with and listen to and are influenced by and hopefully influence, they’ve been dealing with these issues their entire professional lives, and have a level of comfortability with them that enables us to push the boat out beyond what is currently the case, and to make confident predictions about the impact of policy changes.

When I’m engaged with Congress, they have so many things on their plate. They’re not subject matter experts. Then the Overton window for what is possible from a policy perspective is much different in that arena than it is in an academic seminar setting or when I go speak to the Fed or other central banks. What makes me hopeful is that if we spend enough time in education and engagement and answer all the questions, walk through and acknowledge the risks, but also the tradeoffs from not taking policy action, that over time—and maybe I’m being optimistic here—is that our elected officials will understand better that the policy choices we made in the 1910s through the 1930s are maybe not for all time, and that maybe the world has changed in ways that require us to revisit some of those core policy choices.

Beckworth: Well, on that high note, our time is up. Our guest today has been Dan Awrey. Check out his book. We’ll have it linked to in the transcript. Dan, thank you for coming on the program again.

Awrey: Thank you so much, David. I always love listening to the podcast, and it just goes from strength to strength.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth, and follow the show @Macro_Musings.