The Write Stuff—America’s Check Addiction and the Cost of Regulatory Indifference

Making good trouble at the intersection of law, tech, and financial services.^[1]

I do not, as a rule, spend much time on TikTok. Indeed, out of what seems like misplaced caution, I have not downloaded the app to my iPhone. But I found myself scrolling through TikTok recently in search of a video about, of all things, check fraud. I was prompted by a thread on a different social media platform. The FinTwit community had erupted over a Fast Company article about a video showing ATMs spewing “free” cash after people deposited checks written to themselves.^[2] The article blamed the virality of the video on financial illiteracy. That claim enraged the FinTwits. They wanted to know why the most technologically advanced country on the planet still relies on the check as an instrument of commerce.

The answer is layered. The check is entrenched in the core commercial plumbing of the United States. Until two years ago, a digital substitute for the check did not exist. And although the new digital object has the potential to reduce the cost of payments for financial institutions and their customers by billions of dollars annually, the agencies charged with regulating those institutions have paid this change no mind. So the U.S. still relies on checks to move more than $25 trillion annually.^[3]

The Check was the Best Payment Instrument “I Ever Saw,”^[4] Until Recently

The check has significant advantages relative to other means of payment, from the standpoint of the person making a payment. With a check, a payer determines the time of payment, discharges the payment obligation by initiating delivery of the check to the recipient, and enjoys protection against diversion of the instrument, all without the need to collect (and confirm) the payment credentials of the recipient. 

Checks do not derive this power from what we generally think of as a technology. Their utility is not tied to the paper on which they are printed or the magnetic ink that encodes the data that ties the paper back to the bank on which the check was drawn or the account of the person, firm, or government entity that drafted it. The power of the check does not lie with code used to program the computers that scan and route them among financial institutions. Rather the power and utility of a check derives from something more enduring and much harder to change than software, the Uniform Commercial Code.

The UCC serves as the plumbing for commerce in the United States. It governs everything from the process used to obtain a security interest in a piece of restaurant equipment to what is necessary to assert a claim to a given amount of money. The history of the UCC dates back to the late 19th Century when the New York legislature called on states to create uniform laws on issues of national importance. Prominent lawyers and academics joined the effort, and they produced the first version of a uniform state law to govern negotiable instruments, the category of commercial instruments that includes checks. The project survives to this day as the UCC.

As one might expect of what is an open source project on legal arcana anchored by the brightest legal minds in the country, the UCC does not change easily or often. Every once in a while, however, change happens. Two years ago, the legal associations charged with maintaining the UCC approved changes to the provisions of the UCC that govern ownership of money, principally Articles 4 and 5 of the UCC. They also added a new Article to the UCC, Article 12. 

That article creates a new digital payment object, the controllable payment intangible. CPIs are, to quote one of the comments, “the functional equivalent of a negotiable instrument.”^[5] In brief, CPIs allow counterparties to pass clear title to money, in digital form, without having to move that money from one account to another. Title to money associated with a CPI passes with control of the associated digital object. These changes are, in my estimation, the most significant changes to U.S. payment law since passage of the Electronic Funds Transfer Act in 1978.

If Only We Could Break the Vicious Circle, We Might Finally Be Rid of Them

The availability of a true substitute for a check is necessary but not sufficient getting rid of the pesky pieces of paper. Adoption of a new technology is often slow, particularly among regulated industries. The core challenge is breaking what Stephen Breyer, prior to his appointment to the Supreme Court, labeled the “vicious circle.”^[6] As Judge Breyer explained, regulators, even those charged with issues of health and safety, rarely intervene in ways that maximize the benefit of the time and effort spent. Rather, regulators end up chasing the most recent crisis.

As the recent industry obsession with a certain technology platform,^[7] the vicious circle is alive and well in the financial services industry. Now, the story of the particular technology platform that shall not be named is irresistible. Andreesen Horowitz, possibly the country’s preeminent venture capital firm, was an early investor and booster. An Andreesen partner once served on the company’s board. And a significant number of people were impacted all at once. According to media reports, some 200,000 people have been waiting for months to get access to $160 million. Interest in the issue reached the point that the FinTwits were providing live updates on the bankruptcy proceeding via media. Members of Congress noticed and, tracing the vicious circle, so did the Federal Reserve, OCC, and FDIC. Rules have followed.^[8]

My heart goes out to the people affected by the situation. People should not have to wait months to get access to their money or worry about the loss of funds. But we should maintain a Breyeresque perspective. From March 2023 through August 2023, banks reported $688 million in fraudulent check transactions.^[9] That’s approximately four times the amount of money in reported losses (not just delayed payouts) in seven months!  And checks impose a tax on the U.S. economy that goes well beyond fraud. Estimates of the cost of processing a check range from $4 to $20 per item. At the low end of the range, the approximately 10 billion issued in the United States impose a “tax” of $315 per U.S. household. 

Yet nearly no one notices. Indeed, notwithstanding the volume of checks used every day, the dominant narrative in the popular media is that checks are on the verge of extinction.^[10] As a result, Congress and our many bank regulators ignore both the persistence of checks and the costs they impose on the American economy. Instead, they focus their attention on much smaller problems that attract attention in part because they seem novel and that seem easily solvable in part because they are novel and small.^[11]

Even A Little Regulatory Nudge Could Make a Big Difference

I do not expect an essay in a nascent online newsletter to change the narrative. But there is a once in a lifetime opportunity to save American households billions of dollars. The Uniform Law Commission and the American Law Institute have done the hard work. They created a legal framework that makes it possible to replace checks with a secure digital object. The legislatures of twenty-four states and the District of Columbia have adopted that framework.^[12] It sits before the legislatures of five more states.

The industry needs a nudge. That nudge could take many forms — a speech, a roundtable, a regulatory bulletin highlighting the cost and risks associated with checks and pointing to the opportunities created by the new UCC to offer an alternative, etc. Of course, an ambitious regulator scandalized by the fact that Americans use checks to exchange more than $25 trillion on an annual basis as we near the quarter pole in the 21st Century could do more than nudge.  Why not call for banks to eliminate checks by 2030 and publish a request for information seeking details on the costs of processing checks, the losses associated with check fraud, and the readiness to negotiate CPIs on behalf of customers?^[13]

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1]  Thomas P. Brown is Partner and General Counsel of Nyca Partners, Special Advisor Paul Hastings. Tom has led an investment in Fin3.Tech, which is commercializing Controllable Payment Intangibles.

^[2]  Sam Becker, The viral Chase Bank ‘glitch’ that spread on TikTok proves it: We need better financial literacy, Fast Company (September 3, 2024)

^[3] Federal Reserve, The Federal Reserve Payments Study: 2022 Triennial Initial Data Release (June 2024).

^[4] A writer’s cut version of this article explores the parallel between the linked scene in the movie, The Right Stuff, and the surprising persistence of checks. For purposes of publication, the link will have to do.

^[5] Uniform Law Commission, Uniform Commercial Code Amendments, Official Comment 10 to Section 12-104 (2022). 

^[6] Stephen Breyer, Breaking the Vicious Circle: Toward Effective Risk Regulation (1993).

^[7] Mary Ann Acevedo, Synapse’s collapse has frozen nearly $160M from fintech users — here’s how it happened, TechCrunch (August 22, 2024).

^[8] See FDIC, Unsafe and Unsound Banking Practices: Brokered Deposit Restrictions, 89 Fed. Reg 68244, 68250 (August 23, 2024) and FDIC, Record Keeping for Custodial Accounts, 89 Fed. Reg. 80135, 80138 (October 2, 2024). 

^[9] FinCEN, Financial Trend Analysis: Mail-Theft Related Check Fraud: Threat Pattern & Trend Information, February to August 2023 (September 2024).

^[10] Department of Data, Paper checks are dead. Cash is dying. Who still uses them? (Sep. 15, 2023).

^[11] Whether those problems are either novel or easily solvable is another matter.

^[12] Uniform Law Commission, 2022 Amendments to UCC (last visited October 11, 2024).

^[13] If some enterprising regulator is up for the challenge, my DMs are open.

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