Where now FedNow?

Earlier this month the Federal Reserve introduced its new instant retail payments system, FedNow. This is actually the U.S.'s second real-time retail settlement system. The first, The Clearing House's Real Time Payments Network, or RTP, opened for business back in 2017.

As FedNow and RTP develop over the next few years, a good way to gauge their performance will be to look to the UK, which provides a useful blueprint of a successful rollout of real-time retail payments, one that the U.S. would surely like to emulate. 

The UK introduced its Faster Payments real-time system in 2008, almost ten years ahead of the American roll-out of RTP. Prior to 2008, payments made by U.K. retail bank customers entirely relied on a piece of infrastructure called Bacs, built back in 1968 and originally dubbed the Bankers’ Automated Clearing System. Much like the automated clearing house (ACH) payments, the go-to U.S. option for retail payments, Bacs payments are not immediate, often taking several days to settle.

Below is a chart of the total value of payments processed by Faster Payments and Bacs over time:

As you can see, the value of Bacs payments was advancing at a brisk 10% pace until Faster Payments landed in 2008, at which point they immediately slowed to a lethargic 2-3%, in some years not growing at all. The Faster Payments scheme, which is currently expanding at a healthy clip of 15-20% each year, is set to surpass Bacs by 2025 or 2026.

A steady eclipsing of the slower network is what should ideally happen in the U.S. as consumers switch from ACH over to useful (and often crucial) real-time FedNow or RTP payments. Mind you, we shouldn't expect ACH to be entirely replaced. It's still more efficient to use slower systems to settle non-time sensitive payments.

Unfortunately, the U.S. is already far behind the timetable set by the UK, and is unlikely to catch up.

Let's take a look at RTP, which is now in its seventh year of operations. When the UK's Faster Payments system was in its seventh year, it was already processing around £225 billion worth of payments per quarter, a hefty 20% of the value then flowing through Bacs. Alas, as the chart below illustrates, the blazing-fast RTP network processed $25 billion worth of payments in the first quarter of 2023, just 0.1% of the $19.7 trillion load processed by U.S.'s ACH network. That's next to nothing.

Source: The Clearing House

I don't see why FedNow will prove anymore successful than RTP in driving real-time payments, since it offers no real advantages over its competitor. (In fact, the second network may even slow down the overall growth rate of real-time payments, as I'll show further down.)

I count two reasons why the uptake of real-time payments in the U.S. has lagged U.K., and why this under-performance will only continue, even with FedNow's introduction.

1. The U.S. has over 9,000 banks, thrifts, and credit unions. By contrast, the UK has only 357 banks and building societies. Not only are there fewer UK banks, the UK's top-5 banks are more concentrated, controlling around 60% of all banking assets compared to the U.S. top-5, which control just 50%.

The advantage of having fewer, more concentrated banks is that it makes it easier for the banking system to coordinate a shift onto a new network. When Faster Payments started, for instance, it enjoyed a huge vanguard group with all of the UK's biggest banks participating, including NatWest, Barclays, Lloyds, and HSBC. Not so with FedNow, which has only signed up 41 of America's 9,000 financial institutions, and is missing top-10 banks like Bank of America, PNC, Truist and TD.

(Those with long memories will recall that this vanguard group problem is also why Canada's e-Transfer service has grown so much faster than U.S.'s Zelle.)

2. Further complicating adoption is that fact that while the UK had just one instant network, Faster Payments, the U.S. has two real-time networks, FedNow and RTP. These two networks are not interoperable with each other. A bank that wants to offer real-time payments to its customers may choose to delay incurring the set-up costs of joining either of the two networks, until a definite favorite has emerged. But this collective hesitation will prevent real-time payments from ever being adopted in the first place.

To sum up, the road to real-time settlement systems in the U.S. has been a long one. Whereas the UK introduced Faster Payments in 2008, it took another decade for RTP to be built, and five years on top of that for FedNow. Alas, the path to actual usage of these new real-time systems will be even slower, given the diffuse nature of the U.S. banking system and the hesitation effect that comes with having two competing networks.

Embargoed by MasterCard/Visa, kratom vendors turn to crypto and eChecks

I spend a fair amount of time tracking real-world use cases for cryptocurrencies. I'm not talking about silly speculation, or millionaire crypto hobbyists using their bitcoins to buy Teslas, or illegal dark web markets that use Monero for payments. I'm talking about actual licit businesses that have turned to cryptocurrency payments -- not because they particularly care about crypto -- but because they need to.

To date, the retail kratom industry is one of the best examples I've been able to find of broad non-speculative licit cryptocurrency adoption. Kratom is a plant that grows in southeast Asia. The kratom leaf can be ground into a green powder that, when ingested, acts as a stimulant. In the U.S., online kratom stores are ubiquitous.

I'm not going to get into whether kratom is dangerous or has medicinal value, or whether it should be legal or not. (For that sort of discussion, I'd suggest visiting the FDA, WebMD, or the Mayo Clinic.) The main point I want to make in this post is that kratom is legal in the US (although several states have banned it).

Although kratom is legal, MasterCard and Visa have decided to prohibit kratom sales from their networks. This poses big problems for online kratom shops. Because the card networks dominate online payments, exile by these oligopolies causes serious financial damage to the unfortunate targets. To survive, the kratom industry has been forced to turn to backup payments systems.

MasterCard's Business Risk Assessment and Monitoring (BRAM) policy, for instance, lists a number of impermissible activities:

Source: Netpay

Most of the prohibited transactions listed by MasterCard are illegal, such as the sale of child pornography. But some are legal, including the sale of "certain types of drugs or chemicals." MasterCard specifically mentions salvia divinorum, a legal drug that has hallucinogenic properties. Although it isn't listed as an example, kratom is usually considered to fall into the same category as salvia.

Acquirers, the financial institutions that connect businesses to the card networks, face large penalties if Visa or MasterCard catch them facilitating prohibited card transactions. To reduce this risk, acquirers will often hire what are called Merchant Monitoring Service Providers, or MMSPs, to scan through retailer data and spot anything that looks dangerous. MMSPs such as LegitScripts are very aggressive about rooting out kratom sales.

Despite the card networks disallowing kratom sales, many of the 20 or so sites that I scanned through still offer card payments. According to my research, kratom sites have a number of ways of securing card availability, one of which is called transactions laundering. That is, a kratom site camouflages its prohibited product sales by routing them through a front store that sells legitimate goods. Eventually these prohibited transactions get caught by the card network or the acquirer, and the site's card network access is revoked. It then has to scramble to build another front.

One commenter on Reddit describes kratom transaction laundering thusly:

"...we can do manual credit cards (as I can) over the phone because we use standard processors that don’t know it’s kratom. We do this by creating Dba’s that have fake web presences selling other products and they don’t find out it’s kratom for a while. Usually we can get a processor to work for 3-12 months before it gets shut down."

(Note: Dba refers to "Doing Business As". A DBA is a business pseudonym or a “fictitious name filing.”)

Another route that kratom sites take to get access to the card networks is to use an overseas aggregator. Kratom Crazy, a website that has since closed for business, describes how and why:

"International is the only way to go because card schemes are less aggressive on banks in international communities. This doesn’t mean they can’t be fined or shut down – oh because they can and still do. No aggregate account we have ever seen has lasted over 6 months before being shut down. The major downside is these accounts are usually 9% fees and up plus 10% rolling reserve over 6 months. So the merchant takes 19%+ off the top immediately plus they have to wait for 2-3 weeks before seeing the first days processing payout. Its a bad deal all around and a massive risk for losing money. In addition, when these accounts get shut down, there is usually no payout to the merchants."

So the upshot is that the sort of card network access that many kratom sites have managed to secure is unreliable and spotty. Indeed, many sites don't accept cards at all, including (at the time of writing) OG Botanicals, Canada Kratom Express, Krypto Kratum, and Rhizohm. Rhizohm's payments page goes to some pains to explain how it would rather be honest than lie to get card access:

Source: rhizOhm

Which gets us to cryptocurrency. Almost all of the kratom sites, including those that haven't been able to sneak themselves into the card networks, accept cryptocurrencies including Bitcoin, Ethereum, Litecoin, XRP, Stellar Lumens, or some other one. Third-party crypto processors like CoinPayments or Coinbase Commerce are typically used for payments processing.

When they accept cards, kratom sites often offer discounts for cryptocurrency payments. For instance, Happy Hippo's checkout page offers a 20% discount:

It's easy to understand why kratom sites would offer such discounts. It's expensive to use overseas aggregators for card payments. By steering a customer to Bitcoin or Ethereum, a kratom vendor saves itself the pain of a 10-15% card processing fee.

But cryptocurrency isn't the only payments option that kratom sites fall back on. Even more popular than crypto is eChecks, a traditional "fiat" form of payment that gets processed via an automated clearing house, or ACH. A kratom buyer inputs their bank routing and account numbers into the payments page, the payment then gets routed to the ACH network and, once cleared & settled, the funds arrive in the kratom merchant's bank account.

In the same way that a business must work with a card acquirer to get access to Visa or MasterCard payments, they must work with an eCheck acquirer in order to accept eCheck payments. But onboarding standards seems to be much looser with eCheck acquirers than card acquirers. For instance, in the screen shot below an eCheck acquirer is actively soliciting all sorts of high-risk industries, including not only kratom but also CBD oil and MLM-based businesses.  

If there's an online retail payments option that's as badass as bitcoin, it's got to be eChecks.https://t.co/HJfEIeQER3 pic.twitter.com/sb4DnHW2X1

— John Paul Koning (@jp_koning) October 7, 2021

Many kratom sites also accept a bespoke payments method called GreenBean Pay. Users open an account with GreanBean Pay and submit their banking account information. The service then uses Plaid -- a piece of financial plumbing that allows apps to hook into banks -- to link to the buyer's bank account and process the kratom payment.

Lastly, a bunch of kratom sites accept person-to-person payments options such as Cash App, Venmo, Zelle, and Interac eTransfer. (This probably goes against these services' terms of service, which generally limit usage to person-to-person payments).

While these backup options have become vital for connecting kratom retailers to the public, they are not really a great substitute for a card network connection. Cryptocurrency is clunky, awkward, and risky. eCheck is slow. By not offering the convenience of card payments, kratom sites lose out on a steady stream of would-be buyers. And this is evident by how desperate they are to find hacks that get them back into the Visa and MasterCard walled gardens.

In closing, I want to touch on something I mentioned in my previous post on MasterCard and porn. A big reason that card networks refuse to process legal transactions for things like kratom (or, similarly, for salvia divinorum, which I wrote about here) is they don't want to damage their brand. These substances may be permitted by law but they are controversial, and so the networks refuse to touch them.

All businesses have the right to protect their brands. But the card networks are oligopolies, and thus necessary for online survival. And so in my view the card networks should be required to forfeit their right to protect their brands. That is, Visa and MasterCard (insofar as they retain their oligopolistic powers) should not be be allowed to police vendors for what they deem to be controversial but legal products.

Which is not to say that I'm a champion of kratom. I'm only suggesting that the appropriate way to control such a product is not by card network bans, but by the Drug Enforcement Agency declaring it to be a scheduled drug.

The good news is that these sorts of situations are very rare. The card companies allow almost every legal transaction under the sun on to their networks, save a few outliers like kratum. This means that the population of licit businesses that need to use a back-up system like cryptocurrency payments (or echecks) is not very big. But examples like this still warrant our attention. Even if we don't particularly care about kratom, one day a product that we regularly consume could get censored by Visa or MasterCard.

Those 70s ACH payments

Here is Facebook's David Marcus, who has been involved in rolling out Facebook's much-touted Libra/Novi/Diem payments system:

I often make the parallel between money and communication networks. Unfortunately money still moves at the pace of the early 70s (ACH), and for the most part at the same price. Unacceptable. https://t.co/beNCtCD3To

— David Marcus (@davidmarcus) July 9, 2021

By ACH, Marcus is referring to automated clearinghouse payments. If you want to pay your phone bill, the payment gets sent to a clearing house, which batches your payment together with many other payments and then settles it the next day. These systems were built in the 60s and 70s.

I don't want to pick on Marcus, since he isn't the only one with this view. But modern money no longer moves at the pace of early 70s ACH. His critique would have made sense maybe 6 or 7 years ago, and only in the US. But that's not the case in 2021.

The speeding up of modern payments is a great success story. Let me tell you a bit about it.

To begin with, central banks and other public clearinghouses have spent the last 15-or-so years blanketing the globe with real-time retail payments systems. Europe has TIPS, UK has Faster Payments, India has IMPS, Sweden has BiR, Singapore FAST. There must be at least thirty or forty of these real-time retail payments system by now. 

The speed of these new platforms get passed on to the public by banks and fintechs, which are themselves connected to these core systems. In the UK's case, for example, consumers can bypass the slower ACH system, BACS, which takes three days to settle, by choosing to make their bank payment proceed via the Faster Payments system.

The U.S. is lagging. The Federal Reserve's FedNow retail payment system, which will facilitate real-time retail payments, won't be in place till 2024, more than 15 years after UK's Faster Payments was introduced. So Marcus's tweet could just be a function of having a U.S.-centric viewpoint.

However, the Fed's private competitor, The Clearing House, has had a real-time settlement system in place since 2017, the Real-Time Payments (RTP) network. Roll-out has been slow, but as of July 2021 The Clearing House claims that RTP reaches 56% of U.S. checking accounts. 

The US is inching towards ubiquitous instant P2P payments. Here is the coverage map for the US's only real-time retail payments settlement system, The Clearing House's RTP network, introduced in 2017.

RTP now reaches ~56% of US demand deposit accounts. https://t.co/xvAKknwaE2 pic.twitter.com/GojH6oR885

— John Paul Koning (@jp_koning) July 9, 2021

RTP illustrates that it's not just central banks that are facilitating real-time payments. Private players are too. Visa and MasterCard, for instance, built their own proprietary real-time person-to-person payments platforms, Visa Direct and MasterCard Send, on the back of their debit card networks.

As Arturo Portilla points out, Visa Direct and MasterCard Send don't actually settle payments in real-time. They only clear them. From the perspective of the consumer, however, it makes little difference. Ned can send Jenny $100 using a Visa Direct enabled account, and Jenny can then spend that $100 within moments of receiving it. (Ned and Jenny's banks settle up the next day.)

In 2017 U.S. banks debuted Zelle, a now ubiquitous instant person-to-person bank payments option. Zelle was built using the Visa Direct and MasterCard Send networks. And now Zelle is being connected to The Clearing House's RTP network, too. Which means that settlement can be done in real-time.

Perhaps Marcus's ACH critique is limited to non-domestic transactions. But even cross-border payments are also going quicker.

Remittance companies like Western Union and MoneyGram are leveraging Visa Direct and MasterCard Send to do instant cross-border transfers. As of late 2020, Western Union was facilitating real-time payouts to 80 countries. MoneyGram recently announced that 575 corridors from 25 countries in Europe would go instant thanks to an integration with Visa Direct, complementing its existing instant payments options from the US.

Remember when everyone was poking fun at Western Union for its slow remittances? It now does real-time payouts in 80 countries, up from 50 earlier this spring, and is targeting 100 countries by the end of 2020: https://t.co/oSiihGCwvs pic.twitter.com/ovRKZMMH8y

— John Paul Koning (@jp_koning) October 28, 2020

Transferwise, another global remittance company, is dispatching up to 38% of its remittances instantly. Whereas Western Union and MoneyGram are building on top of Visa Direct and MasterCard Send, my understanding is that most of Transferwise's success in speeding up remittances comes from integrating with the new retail real-time payments systems I listed above, like Singapore's FAST and UK's Faster Payments.

Let's not forget SWIFT gpi, which is bringing a new speed standard to corporate cross-border payments.

Even the ACH network that Marcus criticizes is upping its game. ACH payments have typically not settled till a day or two after origination, which meant consumers have had to wait for salaries and bill payments to settle. But in 2017, same-day ACH was introduced. It's taken some time for this option to gain adoption. As of the first quarter of 2021, only 2% of all ACH transactions are done on a same-day basis.

But same-day ACH is getting better. In 2020, the limit for same-day payments was raised from $25,000 to $100,000. Just this year a third window for clearing and settling same-day ACH payments was introduced, 6:30 PM EST, making same-day ACH even more convenient for Californians and others in later time zones. Next year, limits will be raised from $100,000 to $1 million.

Lastly, Marcus maligns slow in his tweet. But remember, slow can be a good thing, too. Slowing down transactions allows us to batch them together and cancel out reciprocating payments, thus reducing the amount of work our payments systems must do. And this makes our payments systems cheaper. (I've written two articles on this topic, here and here.)

The ideal payments ecosystem isn't slow or fast. It provides a combination of slow, medium, and fast options. The Libra/Diem/Novi project project that David Marcus is working on will fit in somewhere on this spectrum. The more options, the better off are consumers. But 70s ACH is no longer a very realistic way to describe modern money.

Programmable money isn't new, we've had it for ages

I often hear that modern money just isn't up to snuff because it isn't programmable. That's why we need Ethereum, stablecoins, and other exotica like central bank digital currencies. These platforms will provide the world with much needed programmability.

Stablecoin issuer Circle is one of the bigger marketers of this idea, but it's far from being the only one: 

"While value exchange may be the initial killer app, it’s the programmability of digital money that will ultimately usher in business model breakthroughs." [link]

I disagree. We've had programmable money for ages. Let me offer a quick guide.

Microsoft doesn't have a bunch of employees who sit at desks and manually sign paper checks all day. No, it uses software that automates payments to its tens of thousands of suppliers, employees, contractors, investors, and the tax authorities. Every day this software relays payment instructions to the Federal Reserve's clearing house for processing. The Fed doesn't rely on physical labour either. FedACH, as it is known, is an automated clearing house. It uses software to automatically clear all incoming payments.

Fred Wilson thinks programmable digital money is a big deal https://t.co/4DJRAVBDEH

I mean, we've had programmable digital money for decades. The A in ACH payment stands for automated. Just program in the date & amount, recurring or not, and voila. pic.twitter.com/W5ouXlZDqT

— John Paul Koning (@jp_koning) February 11, 2020

By the way, ACH go back to the 1970s. If Microsoft's software-based payments and FedACH aren't programmability, I don't know what is.

Another example of programmable money is the recent Korean COVID-19 stimulus payments. Koreans had the choice to receive either a prepaid debit card, credit card points, or gift cards. Since the idea was to help local businesses, the prepaid cards and card points were programmed with certain limitations. To begin with, the funds expired by August 2020 in order to discourage hoarding. Secondly, money could only be spent at qualifying shops. That meant no online shopping, no purchases at large-scale supermarkets or entertainment places, and the money had to be spent in the district where the recipient lived.

I like how Korea paid out its COVID relief.

Koreans received either a prepaid card, card points(!), or gift cards. The advantage: programmability. Funds expire by August and can only be be spent at a qualifying shops. No Robinhood/bitcoin speculation! https://t.co/pseJaaIIvy pic.twitter.com/wxcLggV6Sj

— John Paul Koning (@jp_koning) July 23, 2020

Programming COVID relief didn't require anything fancy like Ethereum or stablecoins. The card networks make it easy to do this sort of thing.

We scan see another example of card programmability in Australia with its controversial cashless welfare card (or "Indue" card), currently in pilot mode. Once government benefits are deposited onto the Indue Visa debit card, the money is "quarantined" such that it can't be withdrawn as cash from automatic teller machines or used to shop at merchants that sell restricted items like alcohol, tobacco or gambling products. The idea, presumably, is that low-income people can’t control their spending, and thus their money has to be programmed to overcome their shortcomings.

Source: The Gaurdian

Again, this didn’t require Ethereum or stablecoins or a Australian digital currency.

Automated escrow is another example of programmable money. Using Ethereum’s programming language, Solidity, one can create an escrow contract that locks up some Ether until certain conditions are met and a payout is made. But Ethereum isn't the only platform that can do automated escrow. Escrow.com, for instance, lets users code up escrow arrangements using its application programming interfaces, or APIs. Escrow.com stores the dollars and then automatically pays out once an event has been triggered, say a used car inspection has been passed. 

No fancy blockchains here.

Speaking of APIs, the Europeans are probably the leaders in bank account programmability. Thanks to the Second Payment Services Directive, or PSD2, European banks are now obligated to grant fintechs access to customer accounts via APIs. (Some people refer to this as “Open Banking.”)  This provides fintechs not only with the ability to peer into what those bank accounts hold, but also the ability to program those accounts to make transfers and such. And thus they can provide the public with new financial tools, built on top of banks.

Monzo, a UK-based digital bank, provides a taste of what this sort of programmability might offer. In 2018, it introduced functionality that allowed its customers to connect their bank account to a range of other web services and create automated rules or ‘recipes’. Such recipes could allow customers to use data from, say, a weather application to trigger a change in their Monzo account, say to move money to a savings pot.

Programmable money, the non-bitcoin/blockchain version.

This paper analyzes the automated rules created by the users of Monzo, a mobile-only bank. i.e. "If I spend money at Domino’s Pizza, McDonalds, KFC or the local pub, then move £5 to my penalty pot." https://t.co/nXrIlqiAvP pic.twitter.com/7kCVIXs62T

— John Paul Koning (@jp_koning) April 21, 2019

Even my plain vanilla Canadian bank account grants me some basic programmability. I can set up my Tangerine bank account to pull money from my Royal Bank account, and choose how often this will happen (daily, weekly, monthly), and select how long these periodic transfers are to last. Sure, it's limited. There are no if-than statements. But most regular folks probably don't require much programmability. And banks may not be too keen to provide it to us anyways. We'd probably mess it up, and then they'd have to spend time and money cleaning up our mistakes.

So to repeat, programmability is already here. Has been for a while.

If anything, public blockchains like Ethereum offer a different sort of programmability. Rather than the code being hosted by a commercial or government entity, it is hosted on a neutral, decentralized platform. 

There is a niche for this sort of programmability. Jack may not trust the automation provided by a payments company or a central bank utility. He could be cut off, say because they deem him to be a risky customer, or maybe because he is doing illegal things. But Ethereum isn’t controlled by anyone, so Jack can be sure that the automation provided by Ethereum won’t suddenly stop.

---

P.S.: Antony Lewis has also been thinking on this topic. Head on over.

No, Ohio isn't accepting bitcoin tax payments

Anthony Pompliano, or Pomp, is at it again. Some of you may recall his odd claims about bitcoin adoption in Argentina, which I took apart here. Well, the following tweet wandered onto my twitter stream a couple of days ago.

For more, here is the Wall Street Journal.

So let's get this straight. The Ohio state government is not accepting bitcoin as payment for taxes. Rather, it is sponsoring a gateway that allows business owners to offload their bitcoins on the market in the moments prior to tax settlement. Now that actual dollars having been obtained, the tax obligation can now be settled. Take a look at the FAQ at ohiocrypto.com.

"At no point will the Treasurer’s office hold cryptocurrency. Payments made on OhioCrypto.com, through our third party cryptocurrency payment processor partner BitPay, are immediately converted to USD before being deposited into a state account."

Here's an example of how this might work. Let's say an Ohio business owner has to pay $10,000 in taxes. By logging into ohiocrypto.com, she can sell $10,000 worth of bitcoins to a payments processor called BitPay. BitPay in turn quickly sells those bitcoins for the requisite amount of dollars on a bitcoin exchange like Coinbase, and then forwards the $10,000 (in fiat) to the State of Ohio. Dollars, not bitcoins, are being accepted for taxes.

Ohio's announcement is not a big deal, certainly not one deserving of a WHOA. In addition to bitcoin, there are all sorts of assets that we taxpayers can offload in the moments before settling our tax bill. Once we know how much we owe, we can sell an appropriate amount of Tesla shares, then forward the dollar proceeds to the state. This sort of at-the-last-second sale is exactly what is happening with ohiocrypto.com, except an intermediary—BitPay—has been introduced to expedite the final step. We can do the same with gold, or silver, or property. Heck, using Pomp's definition we can even pay our taxes with an old IKEA sofa. Quickly sell the sofa at a low price on kijiji, deposit the cash, then settle the tax bill with an ACH payment to the government. The whole process won't take longer than 45 minutes.We don't even need to pay an intermediary like BitPay to process it.

The sad thing is that ohiocrypto.com is a big waste of taxpayer funds. Only a handful of businesses are ever going to use it. Say that our Ohio business owner has some dollars in her bank account as well as some bitcoin. She owes the state $10,000. According to the FAQ, the fee for going the Bitcoin route is 1%, which means she'll pay a fee of $100. Meanwhile, an ACH payment is free. Unless she has some sort of soft spot for paying with bitcoin, a quick and simple calculation means the she will never opt to use ohiocrypto.com, preferring to use old-fashioned but free ACH.

I'm being generous with my example. I've assumed that our business owner already happens to have enough bitcoin on hand to send her payment to ohiocrypto.com. But if she doesn't (which is likely to be the case), then that only multiplies the unlikelihood of her ever going via Ohio's new bitcoin route. To fund her $10,000 payment to ohiocrypto.com, she'll first have to endure the hassle and expense of acquiring enough bitcoins ahead of time. Given that she must still incur BitPay's 1% fee to settle her taxes, its hard to imagine her ever bothering to embark on such a costly chain of transactions.

Don't blame BitPay for the high fee. It charges 1% because dealing in bitcoin is a nuisance. Not only must BitPay recoup the trading costs that it incurs by selling our business women's $10,000 worth of bitcoins (both commission and slippage), but in the time between accepting her submission and making the trade it must cope with bitcoin's volatility. BitPay is just trying to get by.

Why is Ohio going through with this project? Ohio Treasurer Josh Mandel, who is behind the effort, has this to say: "Around 2014, I developed an interest in crypto and now I consider myself a crypto enthusiast." Right. This project seems more to me like a fanboy's devotion to the cause than a genuine attempt to help the Ohioan taxpayer.

Back to Pomp. To end his tweet, he proclaims that the "virus is spreading." Not at all. A well-designed payment option will literally drag people in because it is so incredibly useful. This ain't it, Pomp. Not only is Ohio not accepting bitcoins (no doubt they are too volatile), but it is unlikely that Ohio businesses will adopt ohiocrypto.com. Ten years into Satoshi Nakamoto's payments experiment, it still hasn't succeeded in pulling in mainstream payees and payors. Let's face it. Bitcoin is just not that great of a payments system.

---

...which isn't to say that bitcoin hasn't been successful. What Nakamoto didn't realize at the time is that he wasn't creating decentralized cash. Rather, he was creating what would eventually become one of the world's most popular decentralized financial games. Bitcoin is in the same category as the lottery or poker, not Visa or cash. If you think about bitcoin this way, you'll see why it is silly to set up payments gateways like ohiocrypto.com. If you were to offer someone the opportunity to buy $1 worth of goods with a $1 lottery ticket, they'd laugh at you. To a lottery player, their lottery ticket is their potential salvation, their route to becoming a millionaire. To use it to buy stuff would be sacrilegious. The same goes for bitcoin. People don't want to waste their prized bitcoins on buying stuff or making tax payments. No, their bitcoins are their ticket to riches.

The siren call of T+0, or real-time settlement

The NYSE's clearinghouse in 1898, six years after its founding

Traditional financial systems often get mocked for being slow. In North America, for instance, securities markets have recently switched from T+3 to T+2 settlement. Before, if you sold a stock the cash would only appear in your account three days after the trade—now settlement has been moved to a blazing fast two days. In an age where mail is transmitted in milliseconds, this delay seems terribly old fashioned. Or take automatic clearing house (ACH) payments in the U.S. Earlier this month the ability to make same-day ACH debit payments was rolled out, an improvement over the three or four days they used to take, but still no where near immediate.

The snail-like pace of securities and ACH settlement is often contrasted to real-time settlement, say like how payments using banknotes, coins, or bitcoins are finalized the moment the token leaves ones wallet and enters the destination wallet. Or take real-time gross settlement systems operated by central banks, over which a transfer of balances from one account to the other occurs instantaneously and is irrevocable. In the case of securities settlement, why only go from T+3 to T+2? Why not go straight to T+0?

Don't be beguiled by settlement speed. Slow isn't necessarily a bug—it's often a feature. Imagine the following scenario. You and your friends play poker every day at a cafe. To buy into the game, cash or bitcoins are required. And at the end of each game, cash or bitcoin is paid out to the winners. The problem with this system is that each day all players have to lug a transactions medium to the cafe and back from it—and this involves a sacrifice. Banknotes and coins take up lots of space and can be easily stolen. Like bitcoin, they don't yield interest—so a stream of interest income is being foregone to play poker. Once the game is done, the laborious process of counting out cash and banknotes occurs. In the case of bitcoin, the payouts are costly since each one involves incurring a fee to send bitcoins from one wallet to another.

Participants in financial markets have adopted a time-tested strategy to avoid much of the work involved in repetitive use of transactions media like cash: substitute them with IOUs that are only settled from time-to-time. Returning to the poker example, rather than stumping up cash each game players can buy-in using IOUs denominated in cash or bitcoin. These IOUs are recorded in a ledger. Rather than cashing out at the end of the game each player's balance is held over to the next day, only to be updated subject to that day's results. These ledger balances continue to be updated at the close of each game until after (say) the tenth game, everyone finally decides to settle their accounts, upon which all debtors, or losers, bring cash and/or bitcoin to the cafe to pay off winners, or creditors. The system has settled—not in real-time—but T+10.

The advantage of delayed settlement is that quid pro quo is achieved with one set of transactions conducted at the end of the 10-game cycle rather than a set of transaction for each game. No more tedious counting out coins each day or daily bitcoin fees. Because the obligation to carry around cash is kept to a minimum, interest income needn't be sacrificed by players. Nor are there any nuisances of storing cash.

While slowing down the system reduces the amount of work that must be done, it comes at the expense of flexibility and safety. One of the benefits of a cash payment is that transactions media are immediately available for use in subsequent transactions. If a player can only get cash out of the game after ten games, they will have to be sure that they don't need that cash for other payments in the interim. Slowing down the system also introduces credit risk into the system. Players may be unable or unwilling to honor their IOUs at the end of the cycle. Lengthening the cycle only increases the odds of settlement failure due to insolvency or bankruptcy.

If the benefits that your friends expect to harvest from delaying poker settlement—the reduction in work and fees—outweigh the aforementioned costs, then a T+10 system makes a lot of sense. Keep this in mind whenever you encounter a real-life financial transaction like an ACH payment that takes a long time to settle. The system's sluggishness may be designed that way because the conservation of work and transactions costs outweighs the inconveniences of not having immediate availability of transactions media and exposure to credit risk.

Even the bitcoin ecosystem has adopted various forms of delayed settlement. Thanks to high fees and long wait times, Bitcoin companies have been avoiding direct exchanges of bitcoins among each other in favor of netting out bitcoin-denominated IOUs, says Izabella Kaminska, only settling net amounts after some time has passed. And Bitcoin developers are working towards introducing something called the Lightning Network, which will allow users to make payments using fully-backed bitcoin depository receipts rather than having to settle trades directly on the blockchain using regular (and peskily-slow) bitcoins. 

Let's finish off by revisiting the recent shift from T+3 to T+2 securities settlement in the US and Canada. Interestingly, if you zoom out you'll see that over time the New York Stock Exchange shows a predominant tendency to lengthen the settlement cycle, not shorten it. The recent move to T+2 only brings the exchange back to the same settlement speed at which it operated at from 1933 to 1952. Prior to 1933, next-day settlement, or T+1, had been standard.

The lengthening of the cycle to T+2 in 1933, which corresponded with an increase in stock trading volumes, was implemented to "ease the work" of brokerage clerks. Back then all securities were recorded in physical form, so settlement required the transportation by hand of certificates from one office to another by an army of runners. In the face of growing trade volumes, the only way to maintain T+1 settlement would have been to do much more work, which meant hiring more clerks and runners—costs that would be offloaded onto clients. Slowing down the system to T+2 from T+1 presumably would have kept things cheap.

The 1968 switch to T+5 settlement was an effort to cope with the famous "back office crisis." Investors who were too young to remember the Great Depression had begun to arrive in droves to equity markets in the early-60s. Back office clerks could not keep up with amount of work required to settle trades. At one point the NYSE even closed on Wednesdays to help deal with the backlog.

The recent move back to T+2 means that cash will appear in investors' accounts 24 hours earlier, making it easier for them to meet subsequent payments deadlines. Credit risk is reduced too. Brokers conduct trades with other brokers on behalf of their clients, building up credit and debits over the settlement cycle. The shorter the cycle, the quicker these debts will be unwound by transfers of stock and cash, the resulting savings hopefully flowing through to customers.

Why not go straight to real-time, or T+0? The move from T+3 to T+2 means one less day over which brokers can 'net out' their respective debits and credits so as to conserve on transactions costs. T+0 means no netting-out window whatsoever—and that would impose a terrific amount of work on the system. Like I say, it's a trade-off. Real-time settlement is no panacea.

---

P.S. Here's a great article on the history of securities clearing and settlement: Was Trade Settlement Always on T+3? A History of Clearing and Settlement Changes, by Kenneth Levine (1996)