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System. While the prohibition on ECIs doesn't apply to
Insider’sreport private-sector clearing arrangements, the move was largely
seen as stymieing broad adoption of ECIs, as there is no way
on payments of knowing whether financial institutions in the collection
stream use the Fed or private clearing arrangements.
Bolstering checks with tokens, blockchain

An irony surrounding check payments is that the underlying
technologies that support electronic alternatives to check
Moving toward faster payments (for example, high-speed data networks) also
support faster check clearing, helping to compress the time
payments, slowly required to clear and post check payments to a day or less.
This places the time it takes to process a check payment
on par with that required for ACH payments, an electronic
payment system created in the 1970s as an alternative to
By Patti Murphy checks.

he Federal Reserve wants to build a real-time Faster check clearing, paired with access to real-time
payment network that features round-the-clock information and decision-making capabilities, also has
access and near-instantaneous exchanges of served to substantially reduce check fraud losses. A report
T money. It's not a novel idea. The Fed has been published in 2018 by the Fed, for example, revealed an
promoting real-time payments for about six years. overall rise in the amount and value of fraud involving
nearly all noncash payment methods between 2012 and
However, now that it has decided to build its own network 2015. The lone exception was check fraud, which fell in
– one that can be accessed by 11,000-plus financial terms of number and value of fraud incidents, according
institutions that already clear check, automated clearing to the Fed.
house (ACH) and wire payments through the Fed – it will
probably take another six years before the FedNow network Shoaib Shafquat, founder and CEO of QCheque Corp.,
is fully operational. Meanwhile, the Fed is declining to believes losses to check fraud can be reduced further
support initiatives that could deliver near-instantaneous through tokenization. Tokenization has been used to help
exchanges of funds with an electronified version of the old- secure electronic payments for years, most recently for
fashioned check. card payments. In the credit card world, tokens (randomly
generated numbers) replace actual card numbers, and only
Despite predictions to the contrary, checks are alive and valid credit card processors hold the cryptographic keys
well, with more than 40 million a day clearing between needed to re-associate those tokens with the actual account
U.S. financial institutions. Unlike when the clearing and information.
settlement process for a single check required up to a dozen
physical handoffs across multiple days, checks today clear QCheque has been working with a handful of financial
and settle as electronic image files. Often, thanks to remote institutions testing a scheme to tokenize check magnetic
deposit capture services, even the process of getting checks ink character recognition lines. Shafquat likened the
to banks has been digitized. tokenization process to "putting a chip on a check." Doing
so takes a big chunk out of check fraud, particularly
The next logical step, then, is to digitize the check-writing counterfeit checks, he suggested.
process. It's possible. In fact, it's being done every day. Not
in huge numbers – about 80 million a year, according to An idea put forth in "Tokenization Use Case: Cheques"
one analysis. These so-called electronically created items published May 18, 2018, in Programmable Economics, is
(or ECIs) clear through the banking system as electronic
files, the same as payments that start out as paper checks,
which makes the two indistinguishable. In effect, checks
become fully electronic payments. It wouldn't be a technological stretch

Most ECIs are used for business-to-business payments; they for financial institutions to offer
could just as easily be adopted for consumer payments. It consumers smartphone apps for
wouldn't be a technological stretch for financial institutions
to offer consumers smartphone apps for initiating debit initiating debit payments from their
payments from their checking accounts. checking accounts.
The only obstacle to wide adoption of ECIs is the Fed, which
last year amended its check collection rule set (Regulation
J) to ban the clearing of ECIs through the Reserve Bank
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