Thread by @GeorgeSelgin

There are a many reasons why I also favor a division of labor in which the Fed sticks to being a wholesale dealer in payments media, leaving the retail side of the business to banks and other private-sector payment services providers.

https://twitter.com/MandarKagade/status/1443893675633766403

My reasons _don't_ include a belief that the status quo is dandy, or that the goals proponents of retail CBDC have in mind--such as banking the unbanked, expediting transfer payments, and supplying more efficient alternatives for P2P payments than paper money--aren't worthy.

On the contrary: I favor having the private-sector handle the retail end of the payments media business because I'm absolutely convinced that, provided it's encouraged to do so, it is more capable of achieving these very goals, and doing so efficiently, than the Fed is.

That's partly because the Fed has no retail-end experience, and would be long in tooling-up for it. Even then it seems unlikely to be as responsive to customer's wants as a system of competing private payment service providers.

Of course it's true that ordinary banks have left many of those wants unsatisfied. But one must look beyond them to the many non-bank ("fintech") payment service providers to see just what the private sector is capable of achieving in the realm of payments.

We can see this to a considerable extent just by considering the remarkable achievements of such firms here in the U.S. during the last couple decades: consider, for starters, PayPal, Square, Apple Pay, Venmo, Zelle, and TCH's RTP service for real-time retail payments.

But to really appreciate what's possible one must look beyond the U.S., where fintechs have accomplished far more. Just think of M-Pesa's incredible success at "banking the unbanked" in Africa. vox.com/future-perfect…

Too many U.S. proponents of retail CBDC, while harping on how far the U.S. has fallen behind the rest of the world, fail to note that the rest of the world is ahead, not because other countries have retail CBDC, but because they have superior private sector payments arrangements.

Consequently, they also don't consider, or choose not to talk about, the reasons why the private sector has done less here: reasons mostly traceable to (1) fintechs' limited access to the Fed's wholesale payment services and (2) the inadequacy of those services.

Under current law, only chartered "banks" can have "master" accounts with the Fed, without which its impossible to send payments along the Fed's wholesale payments "rails." That means that non-bank fintechs must have banks serve as their correspondents.

But that option is costly. Moreover, fewer and fewer banks are willing to take part in such arrangements, in part because regulators have discouraged them from doing so. That's especially so w.r.t. fintech payment service providers that issue or otherwise deal in cryptocurrency.

Both some state gov't's and the OCC have attempted to accommodate fintechs with "special purpose" bank charters. But there efforts have (not surprisingly) been strenuously opposed by the banking industry, who claim that those charters don't impose sufficiently stiff regulations.

But it's also true that many would-be fintech "banks" don't engage in the same risky activities banks engage in--like making loans. Firms that are less risky than banks shouldn't be subject to the same regulations.

And provided they're reasonably safe, the Fed should not hesitate to grant such fintech banks master accounts. Elsewhere I've proposed that the Fed should automatically grant a master account to any "narrow" special purpose bank. thehill.com/opinion/financ…

This approach would be similar to that successfully employed by some other central banks, including the bank of England, which oped its doors wide to fintech payment service providers back in 2017, provided they met certain conditions. jdsupra.com/legalnews/bank…

I don't mean to suggest that ordinary banks can't also contribute to payment system improvements, including ones that can substantially reduce the number of unbanked or underbanked persons in this country. On the contrary: they, too, can do a lot more.

Indeed, they have begun. A very important development here is the Cities for Financial Empowerment's BankOn program: joinbankon.org/about/

Already by July, this recent initiative had made remarkable progress. It stands to make a lot more in the coming year. prnewswire.com/news-releases/…

And yet such private-sector accomplishments (some, like BankOn, with encouragement of regulators--in that instance, the FDIC) are not, in my opinion, the most important reason for leaving retail payments to the private sector. (To be continued.)

The most imp't reason is that maximizing the private sectors' role also means maximizing new payments innovations. That is, it isn't just a matter of making the best possible use of existing payments technology, but one of encouraging the development of still better technologies.

We should ask ourselves why we are eve talking about "Central Bank Digital Currency." Is it because central banks have come up with some digital payments technology breakthrough they'd like to introduce? Of course not.

It's largely because central banks have been inspired by the possibilities suggested by private sector developments to launch their own, similar products--and (let's be honest) to try and compete more effectively with innovative private-sector payments media suppliers.

Central banks are in fact not all that innovative. Most of their undertakings have been mere nationalizations of prior private-sector technologies and other arrangements. To the extent that they enjoy monopoly privileges, they have precious little incentive to innovate.

Why else do you suppose that we still rely so heavily on paper currency, if not for the fact that ordinary banks' ability to supply alternative P2P payments media has been hampered by legal restrictions, starting with laws preventing them from issuing their own paper notes?

It took innovations from non-bank fintechs to inspire central banks to consider offering more high-tech alternatives to their horse-and-buggy paper slips! Were central banks to monopolize digital retail payments, who knows how long we'd be stuck using outmoded digital media.

"But no one wants a CBDC monopoly." Actually, China seems to! But even in the good ol' US of A, it's far from clear that the Fed can be expected to compete fairly with private sector rivals. Its very capacity to regulate those rivals, or deny them master accounts, is problematic.

Also, despite the clear intent of the 1980 Depository Institutions deregulation and Monetary Control Act, which requires the Fed to charge fees for its products and services that fully recover their costs, the Fed can compete unfairly by means of predatory pricing.

If you don't believe that, consider FedNow, the Fed's real-time retail payments services that, once it is up and running in 2023 or so, will compete head-on with RTP, a private alternative launched in 2017.

Although the DIDMCA requires that FedNow fees fully recover its cost, the Fed has made a mockery of that requirement by allowing it an indefinite amount of time to do so--with no discount factor applied! Try doing that as a private firm!

Indeed, the Fed's idea of abiding by the cost-recovery requirement is so cavalier that is has as yet _not decided on FedNow's fee structure_! That is, it is sure that FedNow will pay for itself, through user fees, even though it hasn't yet decided what fees it will charge.

Needless to say, RTP isn't happy about this, especially since the Fed encouraged TCH (The Clearing House, its bank-owned parent company) to launch it in 2017, giving no indication that it planned to compete with it. So RTP, having spent millions, has no choice but to soldier on.

How many fintech will invest millions in new retail digital payments arrangements knowing that that the Fed plans to compete with them? The answer, surely, is fewer than would do so if it didn't.

(End of thread.)

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