Payment regulations and the evolving value stack

It has been surprising how much discussion has been about creating new regulatory frameworks, particularly for fiat-backed stablecoins. Surprising because the current framework works well for fiat-backed stablecoins, something that is pretty boring if done correctly. The regulation is unclear when applying current regulation to other forms of stablecoins, like algo-stables.

The current regulatory structure in the US for fiat-backed stablecoins is complex, time-consuming, and expensive, but it does work and feels like it will keep working for quite some time.

When looking at the technology used in FinTech, where the regulatory landscape is well understood, it is easy to imagine how the layers play together. How everything applies is well understood. FinTech companies build applications that ultimately sit in front of the bank, and those features inform the rules associated with the end user balances specific to each application or provider.

Ben Milne FinTech Stack - Current

There are many popular rules-based balance systems. Paypal and Cash App are consumer-focused examples. Dwolla is an easy business API-focused example where balances sit with financial institutions. Unit, Moov, and Sila are others.

Here is how the stack could lay out in the future state many are currently imaging with Stables and CBDC in the mix. Introducing CBDCs may increase efficiency without cutting out things like application-based balances. This really just increases bandwidth and lowers cost at the settlement layer making everything else more efficient.

Ben Milne FinTech Stack - 2023

CBDC or no CBDC, if there is a custodian, the future regulatory regime could look a lot like it does now, and that is ok. That might be to everyone’s benefit because that means, if done correctly, things like FDIC and NCUA insurance could be mapped to new technologies via their mapping to the existing custodians. It’s nice to see folks like Paxos working so hard to try to make sense of a topic like this.

I have been trying to keep an open mind and consider what advantages a whole new set of laws brings the market and where wholesale change can be an opportunity. In reality, DeFi has not changed the functions of finance, but it has changed how technology enables certain finance functions. The same rules can apply.

Lending, FX, deposits, custody, and many more functions of CeFi are all regulated and defined well in state and federal banking laws, regardless of the technology.

My example of fiat-backed stablecoins rolling up into FinTechs felt far-reaching a few weeks ago. Now it feels like an obvious observation given Binance’s move to shift balances to BUSD by default.


Matt Homer for pushing my thinking on the topic and various members of the V-Sum community who made it relevant with Binance discussion last week. Robert Bench for making me think about throughput differently due to his work with OpenCBDC and how it applies to bank settlement processes.