Dan Awrey: Legacy banking is facing the disruption of digital payment demand

Key Takeaways

• Historical banking practices have created path dependencies that affect modern payment systems.
• Good money is defined by law and institutions, while good payments are defined by technology and governance structures.
• Central banks should not act as central planners in responding to technological advances and consumer demand.
• The legacy banking system is being challenged by consumer demand for new payment technologies.
• The main characteristics of money are different in the short term and long term, focusing on the quality of payment and the stable value of money, respectively.
• Equity-based money proposals may not work for people who live paycheck to paycheck due to financial volatility.
• The current payment system establishment often fails to maintain a stable value due to exposure to bankruptcy proceedings.
• The threat of bankruptcy of digital currencies is influenced by the volatility of assets held by issuers.
• The vulnerability of assets and exposure to bankruptcy proceedings challenge the idea that money should have a fixed relative value.
• The concept of a ‘skinny master account’ is defined by the terms of section thirteen of the Federal Reserve Act.
• Understanding the historical context of banking and payments is essential to adapting to technological developments.
• Consumer preferences are shifting to digital payments, impacting traditional banking models.
• Asset management is key to maintaining stability in the digital currency market.

Guest introduction

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

The influence of history on modern payment systems

• We introduced this heavy reliance on payment system development… putting all our eggs in one basket ended up being something that created a lot of pressure when technological disruptions entered the scene.

  — Dan Awrey

• Historical banking practices have created path dependencies that affect modern payment systems.
• Understanding the historical context of banking and payments is essential to adapting to technological developments.
• The evolution of payment systems is heavily influenced by previous banking structures.
• Technological advances are challenging traditional banking models.
• Historical reliance on banking creates pressure in the face of new technology.
• The development of payment systems has been shaped by the historical decisions of banks.
• Traditional forms of banking are being disrupted by technological advances.

Explaining good money and payments

• The key takeaway is that what makes good money isn’t making good payments… what makes good payments is the technology and the governance structures 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 structures.
• The way money is assessed and payment systems vary widely.
• Legal frameworks play an important role in defining good money.
• Technological advances and administrative structures are essential for good payments.
• Policy makers and economists must understand the different determinants of money and payments.
• The distinction between money and payments is fundamental to financial systems.
• Regulatory frameworks influence the development and adoption of payment technologies.

Central banking and technological development

• If the big banks want to be bank regulators then that is something that should be a public debate but it is not something that we currently empower them to do outside of the payment system.

  — Dan Awrey

• Central banks should not act as central planners in responding to technological advances and consumer demand.
• The role of central banks is limited in the context of technological progress.
• Regulatory authorities must adapt to market demands and technological changes.
• A public debate is needed about the role of central banks as central planners.
• Big banks face challenges in adapting to shifts in consumer behavior.
• Technological advances are impacting the traditional role of central banks.
• The financial system needs policy flexibility to cope with technological changes.

Challenges in the legacy banking system

• If policy makers spend a long time thinking about why they are upsetting the apple cart then they will find that there are no apples left in the cart and they are left to clean up the 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 shifting to digital payments, impacting traditional banking models.
• Policy makers must deal with the changing nature of consumer behavior.
• The financial system must adapt to new payment technologies.
• Traditional banking models are facing disruption to the changing needs of consumers.
• The legacy banking system must innovate to meet consumer expectations.
• Policy makers must focus on building new systems rather than maintaining outdated ones.

Short term vs. long-term financial characteristics

• The defining characteristics of a currency in the short term are almost always its paying qualities, but the defining characteristics of a currency in the long term are whether it maintains a stable value in times of stress.

  — Dan Awrey

• The main characteristics of money are different in the short term and long term, focusing on the quality of payment and the stable value of money, respectively.
• The short-term characteristics of money emphasize the paying qualities.
• The long-term characteristics of money focus on maintaining a stable value of money.
• A financial goal should consider both short-term and long-term financial aspects.
• Different types of money have different functions in economic situations.
• Evaluating money requires understanding its short-term and long-term implications.
• Small amount stability is important for long-term financial performance.

Capital proposals based on equity and financial volatility

• It’s not that this proposal doesn’t work, it just doesn’t work for a certain segment of people, ie people who live paycheck to paycheck.

  — Dan Awrey

• Equity-based money proposals may not work for people who live paycheck to paycheck due to financial volatility.
• Low-income people face challenges with equity-based funding proposals.
• Financial volatility affects equity-based spending by individuals.
• Innovative financial proposals have limitations that apply to different social and economic groups.
• Equity-based funds may not be suitable for those who cannot absorb financial volatility.
• The financial system must take into account the needs of low-income people.
• Financial proposals must address the challenges faced by different people.

Bankruptcy procedures and the stability of the payment system

• They probably all do for the same reason which is that they are subject to the normal bankruptcy procedures… bankruptcy is like the kryptonite of debt based money you can’t use the money when you want to use it and when you get some of that money back it may not be the same normal value as it was when you put it in.

  — Dan Awrey

• The current payment system establishment often fails to maintain a stable value due to exposure to bankruptcy proceedings.
• Bankruptcy risks undermine the value of digital currency.
• Payment systems are vulnerable to normal bankruptcy proceedings.
• Stability in payment systems is challenged by exposure to hoarding.
• The performance of a digital currency is affected by the risk of bankruptcy.
• Maintaining a stable amount of money imported is essential to the establishment of a payment system.
• Bankruptcy proceedings affect the financial stability of digital currencies.

Asset volatility and stability of digital currency

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

  — Dan Awrey

• The threat of bankruptcy of digital currencies is influenced by the volatility of assets held by issuers.
• Asset volatility affects the financial stability of digital currency issuers.
• Effective asset management is essential to maintain the stability of digital currency.
• Volatile assets increase the risk of bankruptcy for digital currency issuers.
• The stability of the digital currency market depends on asset management practices.
• Understanding asset volatility is critical to assessing digital currency risk.
• Financial stability in digital currencies is linked to asset volatility.

Asset vulnerability and real estate value

• We are beginning to see that asset risk combined with the exposure of companies to the general bankruptcy process really increases the stakes and brings challenges to the idea that money should have a fixed value.

  — Dan Awrey

• The vulnerability of assets and exposure to bankruptcy proceedings challenge the idea that money should have a fixed relative value.
• Stablecoin valuation is affected by asset risk and bankruptcy exposure.
• Financial constraints highlight the challenges of maintaining a consistent value.
• The vulnerability of the property raises the lizards to maintain a stable value.
• Stablecoin reserves and market volatility influence financial stability.
• The fixed value of the property is challenged by asset vulnerability and bankruptcy proceedings.
• Recent financial events underscore the risk in stablecoin calculations.

Control limits on large accounts

• The concept of a Skinny master account is one that I think is constructive to think about and is limited in reality right now by the terms of section thirteen and eleven of the federal reserve act.

  — Dan Awrey

• The concept of a ‘skinny master account’ is defined by the terms of section thirteen of the Federal Reserve Act.
• Eligibility for a large account is restricted by current regulatory frameworks.
• Federal Reserve regulations affect access to large accounts.
• Regulatory limitations affect the implementation of major account concepts.
• The financial system must navigate the regulatory constraints on major accounts.
• Understanding Federal Reserve rules is essential to accessing a large account.
• Current frameworks limit the power of ‘skinny master accounts’.