Real-Time Payments Are Coming — But Do We Need Crypto to Deliver It?

Twenty years ago, the payments system in the United States was so stable that it was considered the backwater of banking and finance, Rob Hunter, deputy general counsel of The Clearing House (TCH), a banking association and payments company owned by the largest U.S. commercial banks, told Karen Webster in a PYMNTS TV TechREG conversation.

Now, with the launch of the RTP® network by TCH, the growth of FinTechs and the advent of cryptocurrencies, firms are jockeying to determine the future of payments. And suddenly, the payments space seems more of a major metropolitan area.

“We have seen enormous change, and we anticipate even more enormous change going forward,” Hunter said.

Dating back to 1853 and clearing and settling over $2 trillion in payments every day, The Clearing House likely has the longest pedigree of any of those racing to accelerate how payments are made, cleared and settled in the U.S.

TCH initially started to formulate the ideas that would ultimately become the RTP network, a real-time payment system open to all U.S. financial institutions, back in 2010 — but the banking industry was still reeling from the sub-prime mortgage crisis and addressing the subsequent Dodd-Frank Act regulatory reforms, leaving little technology investment funding to launch a new payments network. A working group was established in October 2014 to explore use cases and design the system that launched in November of 2017. Today, Hunter said, the RTP network provides technical access to 73% of demand deposit accounts in the U.S. and supports a variety of use cases, including gig worker payroll, P2P payments and bill payment.

Hunter said he understands the enthusiasm that many across the payments and FinTech communities have for the technology that underpins crypto and the blockchain. But he disagrees that only stablecoins and cryptocurrencies can make payments seamless. It’s hard to get any faster than instantaneous, he noted, which is how the RTP network operates in the U.S.

Hunter added that technology is not the gating issue to making payments cheaper, faster and more transparent to consumers when it comes to moving money cross-border — the gating factor is regulation.

“[The challenges are] regulatory and legal, and compliance-related,” Hunter explained. “It’s related to the fact that there are different laws in each jurisdiction over how payments are treated. That’s the nut that really needs to be cracked to make cross-border payments more efficient and seamless.”

Scale is another issue that is important for network development. As Hunter noted, the U.S. financial ecosystem is significantly larger and more diverse than other jurisdictions, with 10,000 to 12,000 FIs that all have to be on board with a different system for moving money between people and businesses. It takes time for networks to scale. For any money movement scheme to work, a significant majority of banks – from the biggest to the smallest – must be connected to ensure that the network’s rails have meaningful reach. It took the ACH almost 20 years to scale, and the RTP network has reached a significant scale in much less time.

The New Tech

One of the latest entrants to the crypto payments space is central bank digital currencies, or CBDCs. It’s a huge topic around the world, with scores of countries pondering whether to follow China’s lead with its launch of the digital yuan. Central banks are accelerating their review of CBDC possibilities in the face of the perceived threat of stablecoins to the world’s fiat currencies – particularly the dollar.

Hunter has another perspective: “We’ve seen a lot of debate in Congress on the issue,” he said. “Most of it has focused on the potential benefits of the central bank digital currency. I think the question needs to be posed: What problem does it actually solve?”

Among other things, he pointed to the design challenges that a CBDC would pose to the central banks that would issue them, and the potential disruptions to the existing financial system. Central to that discussion is how having a CDBC would impact bank deposits used for lending and reserves.

“It’s difficult to understand how a central bank digital currency would be additive to what we already have in the payment system and the capabilities that exist today,” he explained.

Regulation on the Horizon

As for stablecoins, Hunter pointed to the widespread belief that they currently exist outside the federal financial regulatory framework, despite the attempts of agencies, including the Securities and Exchange Commission (SEC), to assert authority under existing rules.

That means more than just a lack of appropriate supervision. There’s FDIC insurance, the speed at which stablecoins are scaling as the DeFi industry booms, and the lack of resources comparable to what banks can use “to shore up their deposits when they get into times of stress,” Hunter added. Runs on stablecoins could easily turn into “runs on the wider financial system,” mirroring the biggest concern of many central bankers.

Many of those issues also apply to other FinTechs, Hunter said, arguing that despite their having entered deeper into the payment space over the past 15 years, the regulatory framework has not kept pace.

“That may start to change in 2022,” he said, predicting that “I think you’re going to see the regulatory agencies taking significant action to try to bring stablecoins under some sort of regulatory control.”

That said, he thinks it will take much longer than 2022 to decide their, and crypto’s, future. The agencies have been very cautious and technology-neutral in order to avoid stifling innovation, he noted.

But, Hunter added, “they are waking up to the fact that these are real products. There are a lot of people using them, and as a result, they need to step in and create some parameters. Innovation is great, but there must be a meaningful regulatory framework that protects people at the same time.”