Search Results
Journal Article
Technological Change and Central Banking
The decentralized autonomous organization (DAO) represents a radically new way to manage databases. Since money and payments are all about managing databases and since banks play a central role in money and payments, DAO-based money and payments systems are potentially a disruptive force in the banking system—which includes central banks. One would normally expect regulatory frameworks to evolve with a changing technological landscape. However, the decentralized governance structure characteristic of DAOs renders it near impossible to regulate these entities directly—a property that makes ...
Discussion Paper
Bitcoin Is Not a New Type of Money
Bitcoin, and more generally, cryptocurrencies, are often described as a new type of money. In this post, we argue that this is a misconception. Bitcoin may be money, but it is not a new type of money. To see what is truly new about Bitcoin, it is useful to make a distinction between “money,” the asset that is being exchanged, and the “exchange mechanism,” that is, the method or process through which the asset is transferred. Doing so reveals that monies with properties similar to Bitcoin have existed for centuries. However, the ability to make electronic exchanges without a trusted ...
Journal Article
Federal Reserve: Bringing Payments into the Fast Lane
In July, the Fed launched its first new payment service in more than 40 years. FedNow enables money to move instantaneously from sender to recipient 24 hours a day, seven days a week — weekends and holidays included. While there are already mobile payment apps, such as Zelle, Venmo, or Cash App, that appear to instantly transfer funds between users, many of these services still rely behind the scenes on older payment technologies like the Automated Clearing House (ACH) network that can result in some delays. Additionally, these apps are focused on person-to-person payments. In contrast, ...
Working Paper
Bank Profitability and Debit Card Interchange Regulation: Bank Responses to the Durbin Amendment
The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 alters the competitive structure of the debit card payment processing industry and caps debit card interchange fees for banks with over $10 billion in assets. Market participants predicted that debit card issuers would offset the reduction in debit interchange revenue by increases in customer account fees. Some participants also predicted that banks would cut costs in response to the law by reducing staff and shutting down branches. Using a difference-in-differences testing strategy, we show that ...
Report
Barriers to network-specific innovation
We examine incentives for network-specific investment and the implications for network governance. We model an environment in which participants that make payments over a network can invest in a technology that reduces the marginal cost of using the network. A network effect results in multiple equilibria; either all agents invest and network usage is high or no agents invest and network usage is low. When commitment is feasible, the high-use equilibrium can be implemented; however, when commitment is infeasible, fixed costs associated with use of the network-specific technology result in a ...
Report
Liquidity-saving mechanisms in collateral-based RTGS payment systems
This paper studies banks? incentives for choosing the timing of their payment submissions in a collateral-based real-time gross settlement payment system and the way in which these incentives change with the introduction of a liquidity-saving mechanism (LSM). We show that an LSM allows banks to economize on collateral while also providing incentives to submit payments earlier. The reason is that, in our model, an LSM allows payments to be matched and offset, helping to settle payment cycles in which each bank must receive a payment that provides sufficient funds to allow the settlement of its ...
Briefing
What Two Billion Retail Transactions Reveal about Consumers’ Choice of Payments
Although cash continues to be a major form of payment in retail transactions, data on the use of cash are challenging to obtain. Research at the Richmond Fed has exploited a large dataset of cash, check, credit card, and debit card transactions at a nationwide retail chain to examine consumer payment choice based on transaction size and location, day-of-week and day-of-month cycles, and longer-term trends.
Discussion Paper
What Quantity of Reserves Is Sufficient?
A concern of the Federal Reserve is how to manage its balance sheet and whether, over the long run, the balance sheet should be small or large. In this post, we highlight results from a recent paper in which we show how, even during a period of “ample” reserves, the Fed’s management of its balance sheet had material impacts on funding markets and especially the repo market. We argue that the Fed’s “balance-sheet normalization” from March 2017 to September 2019—under which aggregate reserves declined by more than $950 billion—combined with post-crisis liquidity regulations, ...
Working Paper
Integrated household surveys: an assessment of U.S. methods and an innovation
We present a vision for improving household financial surveys by integrating responses from questionnaires more completely with financial statements and combining them with payments data from diaries. Integrated household financial accounts?-balance sheet, income statement, and statement of cash flows?-are used to assess the degree of integration in leading U.S. household surveys, focusing on inconsistencies in measures of the change in cash. Diaries of consumer payment choice can improve dynamic integration. Using payments data, we construct a statement of liquidity flows: a detailed ...
Working Paper
The Lightning Network: Turning Bitcoin into Money
The Lightning Network (LN) is a means of netting Bitcoin payments outside the blockchain. We find a significant association between LN adoption and reduced blockchain congestion, suggesting that the LN has helped improve the efficiency of Bitcoin as a means of payment. This improvement cannot be explained by other factors, such as changes in demand or the adoption of SegWit. We find mixed evidence on whether increased centralization in the Lightning Network has improved its efficiency. Our findings have implications for the future of cryptocurrencies as a means of payment and their ...