A Debate About The Need, If Any, For a Federal Charter for Non-Banks Engaged in the Payments Business

Our podcast show today features Professor Dan Awrey of Cornell Law School, and Matt Lambert, Deputy General Counsel of the Conference of State Bank Supervisors (“CSBS”) who discuss the pros and cons of Congress enacting a statute which would require federal charter for non-banks engaged in the payments business. At present, such non-banks are generally required to be licensed by state departments of banking under money transmitter laws.

On November 14 of last year, on our podcast show, Professor Awrey discussed his working paper “Money and Federalism” in which he advocates for the enactment of Federal legislation creating a Federal charter for non-banks engaged in the payments business, like PayPal and Venmo. The article may be accessed online at SSRN and will likely be published in a law review at some time in the future. The abstract of Professor Awrey’s article states, in relevant part:

The dual banking system is now under stress. The source of the stress is a new breed of technology-driven financial institutions licensed and regulated almost entirely at the state level that provide money and payments outside the perimeter of both conventional bank regulation and the financial safety net. This article examines the rise of these new monetary institutions, the state-level regulatory frameworks that govern them and the nature of the threats they may one day pose to monetary stability.

It also examines the legal and policy cases for federal supremacy over the regulation of these new institutions and advances two potential models, one based on complete federal preemption, the other more tailored to reflect the narrow yet critical objective of promoting public confidence and trust in our monetary system.

The CSBS on Nov. 12 of last year published an article on its website entitled “The Reality of Money Transmission: Secure, Convenient, and Trusted under State Supervision” in which it purported to dispel several myths about state money transmitter and money services statutes. CSBS stated:

Recent statements about money transmission in the United States have perpetuated myths about consumer protections and the safety and soundness of this vibrant, secure, and trusted part of our country’s payments ecosystem.

It is time that we dispel some of these myths by explaining the realities of the state-developed, nationwide framework for regulation, licensing, and supervision of money transmission.

While targeted reforms made through cooperation between the states and federal government may be appropriate, a complete overhaul of an established, secure, convenient, and stable money transmission ecosystem is an unwarranted federal overreach.

Because of these sharp differences of opinion between Professor Awrey and CSBS, we decided to invite Professor Awrey and Matt Lambert to be our guests on this show and to discuss the following issues:

• The historical background to and rationale for state money transmitter laws
• How the National Multistate Licensing System (“NMLS”) and state supervision work today
• The emergence of new business models: e.g. PayPal, Stripe, Crypto
• A brief history of recent federal proposals: from the OCC fintech charter to the current stablecoin bills
• How state legislatures and regulators have responded to the emergence of new business models (e.g. model act amendments and adoption, new chartering frameworks)
• Where the federal government can meaningfully improve on these state level responses (standardization, bankruptcy protection, payment network access, systemic risk regulation, international coordination)
• Where state regulators have a comparative advantage (novel chartering, supervision)
• Where we think the nonbank payment industry and regulation are heading in 2025 and beyond

Alan Kaplinsky, Senior Counsel and former practice group leader of the Consumer Financial Services Group, hosts the podcast show.