Document Type


Publication Date

Summer 2018


Payment systems


Banking and Finance Law


Banking, derivatives, and structured finance may attract the lion's share of accolades and approbation in global finance-but payment systems are where the money is. Historically, payment systems in most jurisdictions have been legally and operationally intertwined with the conventional banking system. The stability of these payment systems has thus parasitically benefited from the unique prudential regulatory strategies imposed on deposit-taking banks. These strategies include emergency liquidity assistance or "lender of last resort" facilities, deposit guarantee schemes, and special bankruptcy or "resolution" regimes for failing banks. Importantly, these strategies have the practical effect of relaxing the strict application of corporate bankruptcy law, thereby enabling banks-and the payment systems embedded within them-to continue to perform their core payment and other functions even under conditions of severe institutional stress.

Recent years have witnessed the emergence of a vibrant, diverse, and rapidly growing shadow payment system. This system includes peer-to-peer payment systems such as PayPal, mobile money platforms such as M-Pesa, and crypto-currency exchanges such as Mt. Gox. The defining feature of this shadow payment system is that the financial institutions that populate it perform the same core payment functions as banks, but without benefiting from the prudential regulatory strategies that ensure bank-based payment systems can continue to function during periods of institutional stress. This Article examines the potential risks to both customers and broader financial and economic stability generated by this functional gap, along with the likely effectiveness of various strategies that institutions within the shadow payment system currently--or might in the future--employ to address these risks.


This article predates the author's affiliation with Cornell Law Library.