Check Me If You Can
Paper, Blockchain, and the Engineering Mindset of Payments
Welcome to Money In Transit, the newsletter for startup founders who find themselves dragged into payments technology. I’m Alvaro Duran.
Today’s post is an exploration of what kind of problems are payments meant to solve, by looking at its oldest and simplest version. Checks are likely disappearing soon enough, but we’ve been saying that for quite a long time, and they’re still around.
This is your chance to learn why.
Consider sharing this post with a friend in the Web3 space.
Something very funny happened two days ago.
Do you know Luke Willis? He is a blockchain expert and writes on TheKoinPress, a newsletter on dApps, which are applications built on top of the Ethereum network.
The newsletter was initially meant to be sent on a weekday basis, but life often gets in the way, and Luke hasn’t been publishing much recently.
And so, two days ago, he made an announcement. He’s back!
I will bet you 100 $KOIN that you will receive 5 (or more) ✨valuable✨ daily emails from me each week for the rest of 2024.
If a week goes by, and you don't think I've lived up to my end of that bargain, send me an email. I'll split the 100 $KOIN between the first 5 people who email me each week.
Good for him! Sitting down to write consistently is hard, that I can tell you. It takes a lot of guts to bet that he will send an email daily for the remaining 253 weekdays left in 2024, putting money on the line if he doesn’t.
But aren’t these promises of future payments the perfect use case for blockchain?
Here’s what Luke has to say about it:
Blockchain is great for publicly enforcing social contracts like this one. It would not be hard to write a smart contract that automatically handled this bet, accepting votes on posts, and automatically paying the weekly winners.
Perhaps a future iteration worth exploring.
Wait! So a blockchain connoisseur, facing what looks to me as the simplest and most obvious application for blockchain technology, has decided that he won’t use it?
Even after acknowledging that it wouldn’t be too much work to do it?
I’ll tell you what’s going on here. He is making an unconscious, accidental admission of reality. It is easier for everyone involved to trust the words on an email than the mechanics of the network.
“Trust my word, not my blockchain”
The greatest trick that the devil ever pulled, said Kevin Spacey in The Usual Suspects, was convincing the world he didn’t exist.
In payments, the greatest trick the industry ever pulled was convincing the world that a payment is more than a promise.
That there’s math and an infrastructure involved that make payments a robust system to transfer value.
Yes, there is math, and there is a lot of people and machinery involved. But at the end of the day, payments are just the formalization of a promise. They are a message that says “money will change hands”, with some contextual information regarding from which hands to which, and how valid such a claim really is.
But being a message, it’s something independent of the way it gets transmitted. Being a message, it’s something that can be conveyed by whatever means you want. Even on paper.
Nobody really cares if money was first, or if it was debt instead. What matters is that nobody in their right mind would have invented checks nowadays. They are unsafe for all purposes. Your bank account information is literally written there, for everyone to see and steal!
That said, checks are a fantastic way to build a pedestrian mental model of how payments work. They are like the spherical cows of money movement.
A legible record of money exchange
A check is a problem for any bank.
When you show up with a check at a bank branch, that piece of paper tells the bank to provide you with the amount written on that paper, even if the check is written for an account that belongs to another bank.
Prior to checks, all sorts of businesses did an even worse version of that. There wasn’t even a paper: business owners would keep tabs on what their clients owed them, and trusted their clients’ verbal promises, much like readers of TheKoinPress have to trust Luke Willis’s promise.
It was bad, but also functional. And in a world where everyone knew each other, it worked like a charm.
Thing is, in the late 19th century and the beginning of the 20th, Americans were going to rely more and more on the facilitation of credit that businesses were implicitly providing.
Businesses will eventually have none of it. “Bring a check, and we’ll talk”. It was high time that banks, who were in the business of financing, owned that extension of credit, and they did so by relying on checks.
Checks were very convenient, because they conveyed legible information. Having something legible to work with is great, because a bank could now see the implicit agreement between the buyer and the seller, and it could give you actual money backed by that piece of magical paper.
Remember, kids, the only difference between screwing around and science is writing it down.
Clearing Checks
I have turned down three pardons from three sitting presidents of the United States because I do not believe, nor will I ever believe, that a piece of paper will excuse my actions. That only in the end my actions will.
How does a standardized piece of paper become money?
As you can imagine, the process was rife with problems from the very beginning. Unlike small businesses, though, turning paper into a trustworthy means of value exchange is precisely the whole point of having a banking system. Banks deal with checks, but they also deal with stocks, with mortgages and deposit boxes.
Anything where the receiving of goods is decoupled from the actual money exchange is a bank’s business.
The history of checks is the history of fraudsters. If you’ve watched Catch Me If You Can, you know what I’m talking about. The ploys that Frank Abagnale employed in the movie showcase the game of whack-a-mole that was hardening the structure. His ploys made possible that checks could function as if they were money.
Moving paper around as if it was money was so convenient, we collectively made an effort to make sure that nobody could exploit that deception.
The only way we could do that is by patching all the vulnerabilities of the system, one by one.
Engineering Payments with Paper
What intrigues me is that there is an implicit engineering mindset behind the scaling of the checking system. A taste of Toyota’s Production System, but for making moving money less cumbersome. Checks engineered modern payments.
As we trust and use payments more and more, the system was forced to build the capabilities to support the load. Sure, the Frank Abagnales of the world exploited any mismatch, but also incentivized those in charge to do something about it.
And so, the payment industry developed quirks. Not because it relied on old technology, but because we built it organically.
It was only natural that, as computers became more prevalent, they would extend, not replace, the checking system. First, ACH came to do what checks were doing, but with computers. Later, Visa and Mastercard built on top of checks a mechanism to make the credit extension more frequent and seamless.
Web3 isn’t going in that direction. Its core idea is the rejection of the traditional financial system. Its replacement with something new, and supposedly better.
What’s funny is that, in practice, most of what’s actually happened in the history of blockchain has been a rediscovery of the history of payments. The recreation of the traditional financial system, from scratch, rhyming in the successes and the scandals.
It would be more effective to look at traditional payment systems in the same light that good technologists look at legacy systems. Not as an opportunity to replace and make over, but to understand and grow upon.
That’s why Luke Willis and everyone subscribed to his newsletter didn’t even notice the contradiction of not using blockchain to make his commitment real. Most people don’t care, and those who care don’t need a blockchain to trust his word.
Payments are still paper-based. You just don’t see it.
Nice one boss