In defense of the Bitcoin

September 5, 2014 at 9:58 am 1 comment

 I am exaggerating slightly but I have to do something extra to  get your attention  after getting my post out late this morning. 

Yesterday the Federal Reserve released a report detailing payment trends. When one compares how quickly and dramatically the payment system is evolving with how slowly stake holders and regulators are moving to react, it’s obvious that this is yet another area where technology has outpaced the capacity of regulators, legislators, banks and credit unions to respond to changes in the marketplace.

Why should you care? For the same reason, you should care about the potholes that you have to avoid on the way to work, or the dilapidated train tracks on which you may commute. At some point, these cross the line from being inconveniences to impacting your ability to provide the services members expect. Think of it this way: our payment system is basically a cutting edge version of the Pony Express at a time when virtual currencies, for all their defects, demonstrate that there are cost-effective ways to facilitating instantaneous clearing of payments without the intervention of third parties.

Paper checks are headed for an exhibit in the Smithsonian within a couple of decades at the latest. My five-year old didn’t know what a pay phone was when she saw one A couple of months ago and am positive that her daughter will be equally amused that people used to pay for things by promising to pay for them in writing with paper checks and popping these contracts in the mail. The report confirms that more personalized payment person-to-person payments are beginning to make a mark

One of the trends recognized “in The 2013 Federal Reserve Payments Study is the replacement of check writing as a form of noncash payments to customers’ use of alternative bill payment methods. One alternative to check writing was direct payment to the biller through ACH transactions or via general-purpose cards. Another popular alternative, online or mobile bill payments, was estimated to have 2.5 billion transactions in 2012. Online or mobile person-to-person (P2P) transfers, yet another popular alternative offered by depository institutions, totaled 138.0 million transactions in 2012.”

This is a great example of where our payment system is so out-of-date. Remember that a person paying with a mobile wallet or making a person-to-person transfer has generally not created a “check” sine the item being created was not converted from a paper check. Since 2011 the Fed has considered updating its regulations to provide that a bank receiving and electronically created item has certain warranty claims against a prior bank such as stipulating that a bank that sends an electronically created image “as if” it were a check makes the same promises or warranties that it would if the image was a check. A formal regulation was proposed late last year. To date this hasn’t been finalized. and although it a good first step is only a first step in hashing out the obligations of financial institutions that are going to play an increasingly passive role in the payments process.

Another example is Remote Deposit which is being advertised heavily these days. Do you have remote deposit or are thinking about offering it? Another issue that this regulation is seeking to address for the first time is the liability of parties where a member cashes the paper version of a check that he has also electronically deposited. There are a multitude of issues involved with this technology, and if you want an excellent overview of just how complex and far-reaching they can be get a hold of the December 13 issue of Clocks’ Bank Deposits And Payments Monthly which includes an excellent analysis by the Senior counsel for Wells Fargo. We need an ongoing and quick-moving process where stakeholders look at the most basic premises of our payments system and start from scratch. The Fed is moving in this direction but not fast enough.

One more thought when it comes to virtual currencies. It’s important that regulators not throughout the baby with the bath water. What the bitcoin demonstrates is that, if we were all creating a payment system today, it would put nothing like the one we are trying to retrofit for the 21st century. These changes are coming whether banks and credit unions want them to or not, because consumers are going to demand them. I’d rather have a better regulated modern payment system as opposed to seeing credit unions at a competitive disadvantage because they are constrained by the requirements of an antiquated one.

The links to the Reg CC proposal and the Fed Report are available right here.



Entry filed under: Economy. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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