Dan Awrey: Why Good Payments Are Creating Bad Money

The fundamental tension in modern finance isn’t between old and new. It’s between two things we’ve conflated for centuries: money and payments. What makes good money (law, institutions, stability) is not what makes good payments (technology, speed, low cost). We bundled them together inside banks, and now technology is pulling them apart. The question is whether we’ll manage the unbundling wisely or clean up a crisis after the fact.

The Episode

Dan Awrey, a Cornell law professor and author of Beyond Banks: Technology, Regulation, and the Future of Money, joins David Beckworth on Macro Musings to lay out a sweeping argument: the US financial system’s centuries-old decision to bundle money and payments inside banks is now breaking down. Technological disruption has made non-bank payment platforms (PayPal, Venmo, stablecoins) irresistibly convenient, but the monetary instruments they issue sit outside the financial safety net. Awrey walks through the history, the risks, and a concrete reform blueprint.

Gresham’s New Law

The original Gresham’s Law said bad money drives out good: people hoard valuable coins and spend debased ones. Awrey inverts this. Today, good payments drive out good money.

Younger generations choose payment instruments based on speed, convenience, and cost. If Venmo is easier than a wire transfer, they’ll keep money in Venmo. In the developing world, network footprint and near-zero transaction costs (India’s UPI, M-Pesa in Sub-Saharan Africa) drive adoption even more powerfully.

The problem: the salient features of money in the short term are almost always its payment qualities. But the salient features over the long term are whether it maintains a stable nominal value in times of stress. PayPal, Venmo, and stablecoins offer attractive payments today. But in a crisis, your dollar in PayPal is an unsecured creditor claim subject to conventional bankruptcy. As PayPal itself discloses in its terms and conditions, you’d be deeply subordinated to PayPal’s other creditors.

“All these good payments over time are going to push good money out of the system, and we’re going to be left with fast, whizzy, cheap payments that at some point down the road we’re going to collectively find out are not worth the digital paper that they’re not really written on.”

Why Equity-Based Money Doesn’t Work

Awrey addresses the proposal (notably from John Cochrane) for equity-backed money, like a debit card backed by an S&P 500 ETF. His response is precise: it works for people with financial slack, but not for anyone living paycheck to paycheck. A 10% swing in the S&P is the difference between making rent and not. Money linked to equities simply isn’t money for broad cross-sections of the population who can’t absorb capital losses.

Bankruptcy: The Kryptonite of Money

The Achilles heel of every non-bank monetary instrument is conventional bankruptcy. The problem is twofold:

1. Frozen access: During bankruptcy proceedings, holders can’t withdraw funds without court approval
2. Subordination: Holders are typically unsecured creditors who may receive far less than par value

The real-world example is vivid. On March 10, 2023, when SVB failed, USDC (Circle’s stablecoin) held about $3 billion of reserves at SVB. USDC traded at 84 cents on the dollar. A “dollar-based nominal fixed instrument” suddenly wasn’t worth a dollar.

MoneyGram nearly failed during the 2008 financial crisis for the same reason: it made risky investments while promising holders that their claims would maintain fixed nominal value. The combination of risky assets plus conventional bankruptcy is, as Awrey puts it, “kryptonite for credit-based money.”

The Shadow Monetary System

Awrey draws a direct parallel to the pre-2008 shadow banking system. Using Zoltan Pozsar’s definition of shadow banking as credit, liquidity, and maturity transformation outside the banking sector, the shadow monetary system is the subset focused on intermediaries that facilitate payments. Not all shadow banking is shadow payments (structured finance isn’t), but instruments like stablecoins and non-bank payment balances clearly are.

The critical gap: these instruments sit outside the financial safety net ex ante, but will almost certainly be bailed out ex post, creating the “mother of all moral hazard problems.”

Awrey and Beckworth make a striking prediction: if Circle came under serious stress, intervention would follow, just as it did for shadow banking in 2008. Awrey goes further. Even Tether (domiciled outside the US, not covered by the Genius Act) might get support, for a specific reason: much of the political motivation behind the Genius Act was creating demand for US Treasury securities. If stablecoins become critical to Treasury market stability, a disorderly Tether collapse would force intervention to protect the Treasury market itself.

“Not because anybody wants to bail out Tether, but because the implications from a disorderly Treasury market are simply too cataclysmic to fathom.”

The Canada Cautionary Tale

Canada offers an instructive contrast. In the 1990s, the finance minister essentially declared: no bank competition, but we’ll stand behind the entire banking system unconditionally. The result:

• What Canada got: Financial stability (no bank failures, even during 2008)
• What Canada gave up: An anemic fintech ecosystem, little competition in core banking, expensive payments, relatively high lending rates for small businesses

Canada’s payment governance body, Payments Canada, is run entirely by representatives of the big banks. Awrey, himself Canadian, is blunt: “They make OPEC look like an engine of transparency and competition.” Canadians think they have decent payments only because their benchmark is the US, “the only jurisdiction in the G20 that has worse payments than Canada.”

The lesson isn’t that Canada’s approach is wrong. It’s that Canada was at least transparent about the trade-offs. The US claims to value competition and innovation but hasn’t built the regulatory infrastructure to make non-bank payments safe.

The Genius Act Gets an F

Awrey’s assessment of the Genius Act (passed July 2025) is damning across both dimensions of his framework:

On money (resolution):

• The Act tinkered with bankruptcy priority but didn’t create a proper resolution framework
• Stablecoin holders get priority over the bankruptcy trustee, which means no qualified trustee will take the case (how do they get paid?)
• No trustee means uncoordinated bankruptcy, more time, more lawyers, and lower payouts for stablecoin holders
• The Act failed to appoint regulators as receivers, which would have enabled coordinated resolution
• Proposals that could have “largely resolved this problem” were dropped before the final draft

On payments:

• One sentence on interoperability (“Hey, we should all get along”), with no binding obligations, no definition of interoperability, and no designated body to enforce it
• Zero provisions for Federal Reserve master account access for non-banks
• A version in the House (fall 2024) included master account access for certain stablecoin issuers; this didn’t survive into the Genius Act
• Payment network governance is now more complicated, with the Fed marginalized, states retaining regulatory roles, and optionality around who your primary regulator is

Awrey’s Blueprint

Awrey’s reform has two pillars, deliberately separated:

For money:

1. Resolution framework outside conventional bankruptcy, designed to return funds to holders as quickly as possible
2. A “no intermediation” principle: non-bank payment issuers cannot engage in credit, liquidity, or maturity transformation
3. Customer funds placed in ring-fenced Federal Reserve master accounts (the ultimate risk-free settlement asset)
4. Activity and financing constraints to ensure monetary commitments are the total credit commitments

For payments:

1. Open access to Federal Reserve master accounts and clearing houses for qualified non-banks, competing with banks on equal terms
2. Interoperability requirements (drawing an analogy to the Biden administration forcing Tesla to make charging stations compatible with other EVs)
3. Payment network governance reform: broadening stakeholder participation beyond the Fed, which has incentives oriented toward financial stability and monetary policy but not toward competition, access, or consumer welfare

On the “skinny” Fed master account concept, Awrey is skeptical. Section 131 of the Federal Reserve Act doesn’t distinguish between skinny and full accounts. Without Congressional amendment, it’s “a superficially different version of access but to the same set of institutions that are currently eligible.” And without codification, the next administration could simply reverse it.

A Few Observations

This episode is a masterclass in a problem most people don’t know they have. The money in your Venmo account is not the same as money in your bank account, legally or practically. The convenience masks a structural vulnerability that will only become visible during stress.

• The insight that payment quality now drives monetary adoption (Gresham’s New Law) reframes the entire fintech revolution as a stability question, not just an innovation story
• The Genius Act analysis is devastating precisely because it’s specific: no trustee economics, no master account access, one sentence on interoperability
• The Tether-Treasury connection is the most provocative prediction: stablecoin bailouts driven not by sympathy for crypto but by Treasury market stability
• The US sits in an awkward middle ground between Canada’s explicit conservatism and the developing world’s embrace of non-bank payments, claiming to want both innovation and safety while building infrastructure for neither