A Brief History of Payments

Let’s  take a look at the history of payments to see if we can figure out where their future might lead.

Initially, all transactions required in-person, face-to-face exchanges. This posed significant challenges both logistically and in terms of security. Transporting valuables over long distances exposed them to dangers such as piracy, theft, and robbery.

With the advent of banking, money or precious metals/stones were stored in vaults. A payment was made by instructing your bank to send value to the recipient or more likely the recipient’s bank.

It's important to note that ledgers have played a vital role in payment systems from their inception. Even if the barter system was common, an informal, perhaps even mental, system of IOUs likely existed. People kept track of what they owed and what was owed to them

Later, banks formally utilized ledgers of course to account for their clients' money.

This 'instruct my bank to pay your bank' system persisted for centuries and still underlies many of today's payment systems. These instructions evolved into drafts and checks, leading to the establishment of check clearinghouses.

This was the way until the 1970’s when ACH was formed to create an electronic payment system. 50 years ago a system was created to eliminate checks, yet they are still in widespread use today.

ACH still follows the “instruct my bank to pay your bank” or vice versa system. Money still moves from account to account. Nevertheless it was a big improvement over the manual check clearing system that was overwhelming banks in the 1960’s.

Then in the 1990’s the Internet came about, the ease of which we could send an email to an entity across the globe made a lot of curious minds ask “why can we not do that with money?”.

Paypal was the first successful platform to create a concept of digital money that could be sent at the speed of the internet. Paypal maintained a ledger of balances, a payment was simply a new ledger entry decrementing the payor’s balance and incrementing the payee’s balance. Money no longer had to move to accomplish the payment. Of course if you wanted to pay for something where paypal was not accepted you had to withdraw the money to your bank account and instruct your bank to make that payment.

Credit cards also deserve mention; card networks enabled payments without physical money movement.

These developments prompted discussions about the fundamental nature of money. However, a detailed examination of the formal definition and three main characteristics of money (medium of exchange, unit of account, store of value) is beyond the scope of this discussion.

In 2009 a new interesting ledger came online. The idea was that the value stays on the ledger and you pass it from owner to owner on the ledger. Value or money does not need to move anymore. This system of course is called Bitcoin and it is a pretty useful system for moving value, except it was denominated in new units, called bitcoin and as a result it was not accepted widely. In addition the value of bitcoin, the currency, fluctuated widely against fiat currencies.

This led to the idea of using blockchain ledger technology to create a digital representation of the US dollar, thus eliminating volatility while retaining the benefits of online ledger transactions. This was the genesis of stablecoins. In 2014 it was implemented in the form of BitUSD, and later that year as Tether.

As a result you could send dollars instantly to anyone who would accept them in the form of stables.

It would take another decade for stables to become interesting to enterprises, but their future appears promising.

In 2022, the Uniform Commercial Code (UCC) in the United States was amended to include digital value representations, marking another key development.

This amendment enables the creation of instruments representing bank-stored money for payment purposes. Similar to stablecoins, these instruments can be transmitted instantly and spent in real time without physical money movement. In essence, ownership is transferred while the funds remain in place. This is, by the way, how securities are settled, they are no longer moved, only the title is transferred.

The first instrument to be implemented under the UCC amendments is called a Fin3 Digital Draft. It represents a way to accomplish a payment, it can be spent away, or it can be called in to receive dollars in a bank account.

We believe these UCC instruments will significantly influence the future of payments