Why gift cards fall right into a loophole within the two-tier banking regulatory system – and a transient history of why that loophole exists

Protection against banking fraud within the United States has never been capable of keep pace with the event of criminals.

The reason for this lies at first the national banking system proposed by Abraham Lincoln and passed by Congress in 1863.

Until the center of the Civil War, the United States didn’t have its own federal currency. Banks could create their very own paper money, but they were subject only to the laws of the person states, which varied considerably. One third of all of the paper money in circulation before the Civil War was probably fakewhich results in currency chaos.

Lincoln’s goal was to create the country’s first federal paper currency – National banknotes that only newly licensed national banks are supervised by the primary US financial regulator, the Office of the Comptroller of the Currency.

To secure the brand new federal currency, these national banks were obliged to buy interest-bearing US government bonds from the US Treasury.

This financed the Union Army, but unintentionally created a Dual banking system. At this time, throughout the war, Congress felt that it was time to abolish state-chartered banks and decided to make them national banks that would issue a federal currency.

Congress is flawed.

The resulting dual banking system with no single regulatory authority responsible the supervision of all banks still exists today.

The state banks couldn’t issue the brand new federal currency. Soon afterward, Congress passed a federal tax on the paper money of state banks. in an try to force state-owned banks out of business.

To stay in business, state banks needed to launch recent financial products. The first, throughout the civil warwas what finally became often known as the check.

Since then, state and federal regulators have have participated to seek out ways to generate different revenue streams.

Time and time again, as criminals found ways to defraud banks, Congress and regulators addressed the complaints, but only in a piecemeal fashion. And on this regulatory “whack-a-mole” game, banks tried to remain one step ahead.

A “race to the bottom”

In 2009, then-Chairman of the Senate Banking Committee, Christopher Dodd, described banking regulation as “Race to the bottom.”

When bank card fraud got here to light, Congress modified the Truth in Credit Actwhich prompted the Federal Reserve to Regulation Zwhich protects consumers from unfair credit practices. The adjustment required banks to offer refunds for transactions that bank card holders had not authorized. This led to losses within the banks' financial results.

Banks then created debit cards. When consumers began to lose money through debit card fraud, adopted changes to Law on Electronic Payment Transferswhich prompted the Fed to Regulation Ethat protects consumers from unauthorized or erroneous electronic transfers. This amendment added similar consumer protections for fraudulent debit card transactions.

But by that point, the industry was already moving to a brand new payment innovation: gift cards, which were offered without the buyer fraud protections that debit and bank cards offer, despite the fact that a lot of these gift cards have the word “debit” printed on them.

Even today, regulators and Congress are attempting to catch the fraudsters.

Read The Conversation's investigation into gift card fraud here: Gift card fraud is making fraudsters and the industry billions, while regulators are failing to guard consumers – and the way an 83-year-old got caught within the 'fear bubble'