While the Federal Reserve has an interest in the smooth and secure functioning of the overall payments system, our regulatory authorities are specific to only certain operational aspects of the system, such as the interbank collection of checks, and specific consumer rights and protections, such as consumer liability for unauthorized electronic funds transfers.

I expect that the need for further clarification of regulations by the Federal Reserve will only grow as more innovation occurs within the payments system.

The spread of computers, advances in telecommunications, and the dramatic growth in the use of the Internet point to innovations in e-money. These will ultimately reshape the payment system and, along the way, present challenges to the Federal Reserve and monetary policy.

Given the slow pace of progress and the strong likelihood that stored-value cards will substitute only for a portion of currency, there is little danger that the Fed's portfolio will shrink to the point at which the Fed will be unable to cover its costs of operation.

The spread of network money, on the other hand, might not reduce the demand for reserves, if network money is subject to reserve requirements. In the absence of reserve requirements against network money, it is still likely that central bank balances would dominate settlement balances at private banks, given the former's lack of default risk. In this case, a system featuring floors and ceilings appears well designed to allow the Fed to continue to implement monetary policy by controlling the federal funds rate.