White Papers


WIFPR commissions white papers from leading and emerging scholars from a variety of disciplines to create new work accessible to interdisciplinary audiences with relevance to financial policy and regulation.


Aaron Klein – Structural Conflicts in Central Banking: Regulator or Operator of a Payment System?

Central banks can operate national payment systems, either as monopolies or in competition with private systems. Central banks can be the payment system regulator. This paper analyzes the multiple and sometimes conflicting roles facing central banks and payment systems. The paper explores different objectives central banks are tasked with (or task themselves with), looking at whether these objectives are in agreement or in conflict with each other and with other mandates the central bank faces. A primary focus of the paper is to examine the impact of different roles of the central bank in the payment system with corresponding innovation, or lack thereof, in that nation’s payment system. The paper examines why America’s payment system became a global laggard in adopting better payment technology. Structural conflicts between the Federal Reserve’s role as regulator of America’s payment systems and operator of its own system, regulator of bank’s safety and soundness, and prioritization of objectives played various roles in America’s failure to modernize its payment system.

Thomas Ernst and Chester Spatt – Payment for Order Flow and the Retail Trading Experience

U.S. retail brokers have shifted to a business model with zero-commission trades, earning much of their revenue through payment for order flow (PFOF), under which wholesalers pay brokers to route the orders of their retail clients. The presence of PFOF has led to potential concerns about whether it leads to distortions in routing decisions by brokers, a reduction in market quality due to its effect in segmenting retail orders, or changes in the brokers’ incentives to encourage excess trading. While the recent SEC regulatory focus has been on equity markets, two-thirds of all PFOF comes from option markets. PFOF rates in option markets are much larger, creating a system where broker revenue is much higher when retail clients trade options compared to equities, leading to potential incentives to encourage option trading. We consider the current SEC proposal for order-by-order auctions in retail equity trading and its implications for retail investor welfare. We address three alternatives. First, we propose an expansion of equity Retail Liquidity Programs rather than mandated retail auctions. Second, we consider changes to option markets to reduce frictions, which could include fee caps, competitive designated-market-maker assignments, and a more competitive auction process. Finally, we suggest a PFOF-fee cap, which would preserve PFOF, while addressing the large cross-asset PFOF fee differences.


Joshua C. Macey – Market Power and Financial Risk in U.S. Payments Systems

This White Paper argues that there is an unavoidable trade-off between regulations that would reduce risk to the financial system and those that would reduce the market power of the firms that control the interbank payments infrastructure in the United States. Regulatory and economic features of payments systems mean that regulators can (1) entrench bank market power, (2) accept a new source of systemic risk, or (3) expand the financial safety net beyond the bank regulatory perimeter. Recognizing that a private payments system involves a policy trade-off between bank market power and the safety and soundness of the financial system provides support for considering public payments options like the Federal Reserve’s “FedNow” or a well-designed central bank digital currency.

Robert Jackson and John Morley – SPACs as Investment Funds

This essay argues that SPACs bear a striking resemblance to investment funds. SPACs invest in the same assets as investment funds, putting all of their money into securities as they search for deals. And they adopt the same pattern of organization as investment funds, relying entirely on management by external sponsors and advisers, many of whom also manage investment funds. This resemblance creates in SPACs many of the same unique agency conflicts that the regulation of investment funds was designed to address. In fact, we argue that many SPACs have been violating the Investment Company Act of 1940, the main law that governs investment funds. We show that soon after we filed a series of lawsuits alleging that some SPACs were violating the ICA in August 2021, new SPACs significantly changed their practices in ways that reduced their risk under the statute. We offer some suggestions to improve the SEC’s recent proposal to address the status of SPACs under the ICA and show how the proposal can help to protect investors.

Christina Parajon Skinner – Confronting the Challenge of Cross-Border Payments: A US Strategy for Central Clearing KYC

For the past two years, the international community of financial regulators has been intently focused on improving the efficiency of cross-border payments.  To date, this work has taken a wide lens in scoping the problem.  This white paper focuses on what the U.S. could contribute to the cross-border payments initiative.  It argues that the bulk of inefficiency in the current legacy system—corresponding banking—derives from frictions associated with anti-money laundering law and regulation.  To streamline the process of conducting customer due diligence, specifically, the paper proposes moving toward a system of centralized verification.  In particular, the paper sketches an idea for a new kind of payments market infrastructure—a centralized verifying party—that would act as a trusted, third-party intermediary verifying transacting parties within correspondent networks.