Our citizens, through their elected representatives, made the considered choice that financial institutions would need to provide extraordinary levels of safety in electronic payments. In reliance upon that regime, the people of the United States transacted many trillions of dollars over payment rails, which was and is very lucrative for all considered.

I had never heard of Regulation E before. It is the part of banking regulation in the US that makes it so that you aren't liable if someone steals your credit card and goes on a spending spree (as long as you report the card as stolen). It does a lot more than that, too. And it was written in 1979.

Patio11's very deep dive into Reg EPatio11's very deep dive into Reg E

You might think that fraud and liability in credit cards is one of the many things we are going to leave behind in the shiny orange world of the future. And maybe that's true. But it's interesting to see how we got to the state where consumers feel very little personal responsibility for the tools to access their wealth (perhaps even for the wealth itself: we keep our stocks with a broker, our money at a bank or in a money market account, and so on, and unless you've encountered a bitcoiner, none of that seems at all strange. Of course I am willing to keep my assets with a stranger. The law protects me).

Therefore the banks were mandated to be able to take reports of mislaid access devices, and there was a strict liability transfer, where any unauthorized use of a device was explicitly and intentionally laid at the foot of the financial institution.

Fraudulent use of an electronic fund transfer mechanism was considered an error as grave as the financial institution simply making up transactions. It had the same remedy: the financial institution corrects their bug at their cost.

Banks have gotten used to this system, tooBanks have gotten used to this system, too

There are on the order of 5 million criminal cases in the formal U.S. legal system every year. There are more than 100 million complaints to banks, some of them alleging a simple disagreement (undercooked eggs) and very many alleging crime (fraud). It costs banks billions of dollars to adjudicate them.

This may not be apparent to you if you don't run a business that accepts customer payments, but chargebacks are brutal, and usually the consumer has most of the power (although it's given to them by the banks and card issuers).

The funds flow in a chargeback mirrors the contractual liability waterfall: the issuing bank gets money back from a financial intermediary, who gets it back from a card processor (like Stripe, which I once worked for, and which doesn’t specifically endorse things I write in my own spaces), who will attempt to get it back from the card accepting business.

That word “attempt” is important. What if the business doesn’t have sufficient money to pay the aggrieved customer, or they can’t be located anymore when the system comes to collect? Reg E has a list of exceptions and those aren’t on it. The card processor then eats the loss.

This high-frequency privately-funded alternative legal system has quietly ground out hundreds of millions of cases for the last half century. It is a foundation upon which commerce rests. It even exerts influence internationally, since the card brand rules essentially embed a variant of the Reg E rights for cardholders globally, and since nowhere in Reg E is there a carveout for transactions that a customer might make electronically with their U.S. financial institution while not physically located in the United States. If you are mugged and forced to withdraw money at an ATM in Caracas, Uncle Sam says your bank knows that some tiny percentage of cardholders will be mugged every year, and mandates they pay.

Enter ZelleEnter Zelle

Where the article really gets interesting is in how patio11 describes the way that Zelle seems to have avoided Reg E responsibilities.

“Neither Chase nor Zelle® offers reimbursement for authorized payments you make using Zelle®, except for a limited reimbursement program that applies for certain imposter scams where you sent money with Zelle®. This reimbursement program is not required by law and may be modified or discontinued at any time.”

Zelle is something that's been on my list to do a deep dive on for some time. And this article pushed it a little higher. One wonders why Zelle didn't beat stablecoins in the US (maybe it has?). What is the need for a stablecoin if you can send "real" dollars from any one to any one? (if you've ever used Zelle, you may in turn wonder why stablecoins aren't more popular in the US -- I've never found it particularly good).

What about stablecoins and bitcoin?What about stablecoins and bitcoin?

patio11 is not a fan of bitcoin, nor of the stablecoins. He's been a prominent critic of tether (featured most recently in Tether Fun Unbelievable Details Part IV #1410689), and he certainly isn't pleased to see bitcoiners saying "Regulation E has no power here."

"Reg E doesn’t have an exception in its text for electronic funds transfers which happen over slow databases."

At the moment, I haven't seen any suggestion that regulators would try to use something like that to enforce bankish responsibilities on app developers or node-runners and even if regulators attempted such a thing, I can't imagine it succeeding. However; it behooves us to learn a little about these things in order that we not be blindsided by them.