Bad Money

64 Pages Posted: 19 Feb 2020 Last revised: 2 Apr 2020

See all articles by Dan Awrey

Dan Awrey

Cornell Law School; European Corporate Governance Institute

Date Written: February 5, 2020

Abstract

Money is, always and everywhere, a legal phenomenon. In the United States, the vast majority of the money supply consists of monetary liabilities — contractually enforceable promises — issued by commercial banks and money market funds. These private financial institutions are subject to highly sophisticated public regulatory frameworks designed, in part, to enhance the credibility of these promises. These regulatory frameworks thus give banks and money market funds an enormous comparative advantage in the issuance of monetary liabilities, transforming otherwise risky legal claims into so-called “safe assets” — good money. Despite this advantage, recent years have witnessed an explosion in the number and variety of financial institutions seeking to issue monetary liabilities. This new breed of monetary institutions includes peer-to-peer payment platforms such as PayPal and aspiring stablecoin issuers such as Facebook’s Libra Association. The defining feature of these new monetary institutions is that they seek to issue money outside the perimeter of conventional bank and money market fund regulation. This paper represents the first comprehensive examination of the antiquated patchwork of state regulatory frameworks that currently, or might soon, govern these new institutions. It finds that these frameworks are characterized by significant heterogeneity and often fail to meaningfully enhance the credibility of the promises that these institutions make to the holders of their monetary liabilities. Put bluntly: these institutions are issuing bad money. This paper therefore proposes a National Money Act designed to strengthen and harmonize the regulatory frameworks governing these new institutions and promote a more level competitive playing field.

Keywords: Money, banking, bank regulation, money market funds, cryptocurrency, stablecoin, monetary institutions, money transmitter, Libra, safe assets

JEL Classification: G2, K2

Suggested Citation

Awrey, Dan, Bad Money (February 5, 2020). 106 Cornell Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3532681 or http://dx.doi.org/10.2139/ssrn.3532681

Dan Awrey (Contact Author)

Cornell Law School ( email )

Myron Taylor Hall
Cornell University
Ithaca, NY 14853-4901
United States

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
194
Abstract Views
1,300
rank
170,648
PlumX Metrics