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We Don’t Need Roads

by: Tom Brown

Tom has been an attorney in the financial services industry for more than two decades. He began his career as an antitrust litigator and was part of the team that defended Visa against antitrust attacks. He then went in-house at Visa where he kicked started the company’s reorganization. After returning to private practice, he won important cases for eBay/PayPal, received the first-ever no-action letter from the CFPB, and made the case for consumer permissioned access to financial information under Section 1033 of Dodd-Frank. In addition to his role at Nyca, he remains an advisor to Paul Hastings and Restive Ventures. He is a member of the American Law Institute and the Editorial Board of the ABA’s Antitrust Law Journal. He graduated from the University of Chicago Law School and has an undergraduate degree from Columbia University.



For people of a certain age, those four words have a Proustian quality. When I read them, I flashback to the summer of 1985. I see Christopher Lloyd as Doc turn to Michael J. Fox as Marty McFly and utter the now-famous line. I can smell the sweet sticky perfume of buttered popcorn, new Coke, and Skittles that hung in the air. I remember, too, my shock the following February when President Reagan, with just the hint of a smirk, quoted the line in his State of the Union speech in an effort to urge young Americans, like me, to be optimistic about our collective future. All of that came rushing back a few nights back as I skimmed the highlights of the Federal Reserve’s 2022 triennial survey of payments in search of a way to explain a significant but seemingly overlooked change to the law of payments rolling out across the United States. 

The lead graph in the release shows the total value exchanged across six methods of payment—checks, ACH debit transfers, ACH credit transfers, credit cards, non-prepaid debit cards, and prepaid debit cards. In 2021, in the midst of a pandemic that eliminated so much physical interaction, American firms, households, and governments wrote $30 trillion worth of checks. I suspect that Robert Zemeckis and Steven Spielberg knew even as they finished their script that cars would still be road-bound come 2015. They might, however, have bet that checks would meet their demise as a commercially viable method of payment. But no, the payment mechanisms that we use today would have been entirely recognizable to Messrs. Spielberg and Zemeckis as well as the fictional Doc and Marty. 

The cost of supporting all of those payments is staggering. The Federal Reserve operates the infrastructure that supports the core payment rails used by Americans, i.e., checks, account transfers, and payment cards. The Federal Reserve makes that infrastructure available to banks, and it charges them roughly $500 million annually. Estimates of the costs borne by households, firms, and governments vary, but at 2.5¢ for every ACH transaction, $4 for every check, and 10 bps (net of interchange) for payment cards, the cumulative direct costs of checks, account transfers, and card payments exceeds $100 billion annually. The collective toll, even on this lowball estimate, works out to $1000 per U.S. household per year.

Fortunately, change is on the horizon. Last summer, a package of amendments to the body of law known as the UCC was introduced. The acronym UCC stands for Uniform Commercial Code. The UCC serves as the country’s core commercial plumbing. It is the product of a collaboration between two legal associations, the Uniform Law Commission and the American Law Institute, and the state legislatures of the 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. It governs everything from how to obtain a security interest in a piece of restaurant equipment to the rights and obligations associated with checks and other negotiable instruments. Under the UCC as it existed prior to the 2022 revisions, it was not possible to pass clear title to funds in electronic form except through an account-to-account transfer. And so it is that Americans engage in lots and lots of account-to-account transfers and send paper checks, which, unlike electronic messages, do transfer title to funds. 

The changes approved last summer open the door to a new way to exchange value in the United States. Rather than having to move funds from account to account or pass bits of paper, households, firms, and governments will be able to pass clear title to funds the same way they do with securities—through electronic updates to the ledgers that track ownership. This means that funds, like securities, will be able to sit at whatever bank or financial institution they happen to reside in while the ledger of ownership is updated. Although these changes have the potential to save billions of dollars for American households, firms, and governments, they are designed to be compatible with the existing financial system. They explicitly contemplate that banks and other regulated financial institutions will stand behind the electronic records that determine ownership of funds. Implicitly, they assume that banks and other licensed institutions will identify their respective customers and protect them, and society as a whole, against the risk of diversion of funds. Those changes have been adopted by five state legislatures and are pending in seventeen more.

All of this may seem as far-fetched as the future sketched by Spielberg and Zemeckis—compact fusion reactors, hoverboards, and flying cars. But the transition from account-to-account money movement to ledger-based money movement isn’t an idea borrowed from an imagined future. As noted above, it is the way that securities change hands today. Moreover, as students of the history of payments know, at least one pre-modern society used a ledger-based system to track its currency. Some of the stone disks used as coinage by the residents of the Pacific Island of Yap were too large to move and, in at least one case, sat on the bottom of the ocean. The residents of Yap kept track of who owned which stone with an oral ledger. As with the third of the BTTF trilogy, let’s hope that history can be the guide to the future of payments in the United States.

All opinions expressed by the writers are solely their current opinions and do not reflect the views of, TET Events.