Legal Seminar, Denver, CO

071018 Discussion Draft

d. Solving the asymmetry of trust in routine payment transactions enhances the potential for remote commerce. Most electronic systems do this through intermediaries, though some (including cryptocurrencies) do not. When cryptocurrencies are involved, trust moves from people/institutions to software. 4. Speed and convenience. In some businesses, rapid transaction cycles are highly desirable. Delays cost merchants money; consumers have opportunity costs, too. Friction in payments causes some transactions not to occur. Can we improve upon the speed and convenience of a cash- based system through electronic means? And can we improve upon the existing electronic offerings through innovations in this area? III. Electronic Payments: An Overview. Electronic payment systems are designed to improve upon systems rooted in cash (or in close paper substitutes like checks). That innovation process continues, as new entrants seek to improve on deliverables to merchants, consumers or both. A. Rails. Banks, payment cards, and non-bank money transmitters are familiar parts of the payments landscape. Banks and payment cards provide the principal networks over which electronic transactions are processed. B. Regulation Highlights. Banks had a history of government regulation, but private ordering has often led the way toward guiding market practices. While much of the regulatory environment is likely to be familiar, some salient features are described below. 1. ACH System . The ACH system is governed by rules promulgated by the National Automated Clearing House Association (NACHA), a private nonprofit organization that governs the practices and contractual relationships among member institutions that participate in the network. It is one of the most extensive networks and one of the most cost effective. Payment systems like Dwolla and Paypal use the ACH system as a foundation for their networks. See generally Wegner, Rosenberg, & Derrick, Bank Systems 6-16 , in E LECTRONIC P AYMENT S YSTEMS (2018). a. Liability and certain other rules for consumer transactions is governed by Regulation E (12 CFR § 1005.1-.20). b. Regulation E also includes rules that are designed to facilitate error corrections and to limit liability for unauthorized access. o Note how this may shift liability for errors or unauthorized access to the institution, away from the consumer. o Risks of errors are minimized by practices such as “micro deposits” that are used to validate ownership, as is common for Paypal users. c. NACHA rules govern data security requirements. “Commercial reasonableness” remains the standard, though this is an evolving standard.

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