What the PACE Act Gets Wrong — And Why That Makes It More Important

A harder look at the bill everyone is celebrating

In May we published our read on the PACE Act — what it does, what the 40-MTL threshold signals, and why the sequencing logic makes the timeline achievable. That article has been our most-read piece to date.

A few hundred founders, CFOs, and general counsel went through it. Several booked assessments. A number wrote back to say they were forwarding it to their investors.

Almost nobody pushed back on the substance.

That is the problem.

The PACE Act is a genuinely significant piece of legislation. The 40-MTL threshold matters. The policy rationale is sound.

But the conversation happening in fintech right now has tipped from informed optimism into something closer to uncritical enthusiasm — and that gap is where operators get hurt. Not by bad actors. By incomplete models.

This article is the harder version. The one we owed you after the first one.
Read it here.

The Reserve Requirement Is Not a Footnote

Every piece of PACE Act commentary leads with direct Fed access. Very few dwell on what you have to give up to get it.

A Registered Covered Provider under the PACE Act would be required to maintain 1:1 reserves against all outstanding customer obligations at all times. Cash, Federal Reserve balances, or short-duration Treasuries. Nothing else qualifies.

Read that again. Not 90%. Not 95% with a capital buffer. One to one. At all times.

For a payments company whose current model is built on anything other than full reserve backing (float income, overnight sweeps, fractional liquidity management, any yield on customer balances) this is a reconstruction of the business model.

The economics of the sponsor bank relationship are not purely about transaction fees. They are also about the float. The spread between what your customers hold in your platform and what that money earns while it sits in the banking system is, for many operators, a material line in the P&L. Under the PACE Act framework, that line disappears. Completely. Customer funds earn nothing. They sit at the Fed, fully backed, fully segregated, fully inert.

The operators who have run the numbers on this have discovered that direct Fed access under PACE costs more than the intermediary markup it replaces, once you account for the lost float income and the compliance overhead of the OCC supervision regime.

For some operators, the math still works. High-volume, low-margin businesses where transaction fee savings are substantial enough to offset the float income loss — those companies should model PACE seriously. For many others, the calculation is less obvious than it appears.

Before you treat the PACE Act as a strategic destination, model the economics. Not the transaction fee savings in isolation. The full picture, including what disappears from the other side of the ledger.

The State License Question Is Genuinely Unresolved

The published PACE Act commentary has largely skipped past this, so let us be direct: nobody knows whether a PACE-registered company can shed its underlying state MTLs.

The bill, as currently written, does not answer this question cleanly. The statutory language establishes the Registered Covered Provider status and grants direct Fed access. What it does not do is explicitly preempt state money transmission licensing requirements for RCPs.

This matters enormously for the economics of the model. Forty state MTLs cost money to maintain — renewal fees, annual reports, surety bond premiums, net worth requirements, onsite examination costs, and the compliance overhead of managing state-specific regulatory relationships. If you hold PACE registration and still have to maintain forty or more active state MTLs, you have not replaced your regulatory burden. You have layered a new federal regime on top of the existing state one.

Several state regulators have already signaled that they do not intend to recognise federal PACE registration as a substitute for state licensing. This is not a fringe position. States have significant economic and jurisdictional interests in their money transmission regulatory programmes, and the federal preemption of state financial regulation is one of the most consistently contested areas in American regulatory law. The states will fight this, and they will fight it in court.

The most likely outcome, based on how analogous federal-state regulatory conflicts have resolved historically, is a protracted legal and legislative negotiation that produces a patchwork result. Some states recognising PACE registration, others maintaining their existing requirements, and operators caught in the middle managing both.

A company modelling PACE as a path to shedding its state licensing overhead should model the scenario in which that shedding never happens. Because there is a real probability that it doesn't.

The Public Benefit Test Has No Precedent

The PACE Act requires applicants to demonstrate a public benefit as part of the OCC registration process. This is described in the bill text as a requirement to show improved competition, access, or cost reduction in the payments market.

Nobody knows what this means in practice. Because no one has ever applied for it.

OCC registrations under comparable frameworks have public interest requirements, but they are evaluated by OCC examiners with decades of institutional precedent for what acceptable evidence looks like. The PACE Act creates a new registration category with a public benefit test and no precedent for how it will be evaluated.

This is not a reason to dismiss the PACE Act. It is a reason to be realistic about the first-mover experience. The companies that apply in the first wave will be defining the test as much as passing it. Their applications will be negotiated with OCC examiners who are also figuring it out. Some will sail through. Some will face repeated information requests, extended review timelines, and conditions attached to their registrations that nobody anticipated.

The 180-day OCC review window written into the bill is optimistic. Federal financial regulators routinely take longer than statutory windows when reviewing novel applications. The first PACE registrations will take longer, not shorter, than the statutory maximum. Plan for twelve to eighteen months from application to approval on the first wave. Build that into your model.

There Is No Senate Bill

This is the most important thing we are going to say in this article, and it is the thing most commentary has buried in a single sentence or omitted entirely.

The PACE Act is a House bill. It was introduced in April 2026 by Representatives Young Kim and Sam Liccardo. As of today, there is no companion bill in the Senate.

A House bill without a Senate companion does not become law. It becomes a data point.

The legislative path from a House introduction to a signed bill requires: passage in the House (including committee markup, floor debate, and a floor vote), introduction and passage of companion legislation in the Senate (through its own committee process and floor vote), resolution of any differences between the House and Senate versions in conference, and presidential signature.

That process, for a bill touching federal financial regulation and state licensing preemption, is measured in years not months. It involves lobbying from the state banking commissioner associations, from the incumbent sponsor banks whose revenue model is directly threatened, from community banking advocates who will raise financial stability concerns, and from any senator who represents a state with a robust state-level money transmission regulatory programme and an interest in preserving it.

The PACE Act may pass. We hope it does. We think the policy rationale is sound. But any operator making material business decisions on the assumption that it will pass in its current form, on a specific timeline, is making a category error.

So Why Does This Make It More Important?

Because the PACE Act, even if it never passes, has done something structural and irreversible.

It has named the standard.

Forty MTLs is now a number that appears in a bipartisan federal bill with endorsements from the Financial Technology Association, the Blockchain Association, the Crypto Council for Innovation, and a growing list of institutional investors who understand what it signals. That number is in the vocabulary of every regulatory counsel who will sit in your data room at Series B. It is in the vocabulary of every enterprise procurement team that is evaluating you as a payments infrastructure partner. It is in the vocabulary of every acquirer running diligence on a fintech acquisition.

The PACE Act could die in committee tomorrow, and that number would not go away.

The companies building toward forty MTLs right now are not just building toward PACE eligibility. They are building toward the market's new definition of what a serious, scaled, nationally-operating payments business looks like. That definition was written into the legislative record. It does not require enactment to be real.

There is also a second order effect that the commentary has not explored. If PACE stalls — if the reserve requirement economics are harder than anticipated, or state preemption is litigated into a patchwork, or OCC review timelines extend beyond the statutory window — the companies with forty-plus state MTLs and clean regulatory records are not worse off than they were before the bill was introduced. They are better off than every company that waited to see what happened before building.

The PACE Act is important not primarily as a piece of legislation. It is important as a forcing function. It created a benchmark that now exists independently of whether the law ever passes. And it created urgency around building toward that benchmark that would not have existed without it.

That is the right reason to take it seriously.

The Honest Position

The honest version of the PACE Act story for a fintech operator in 2026 is this:

Direct Federal Reserve access is a strategically valuable destination. The PACE Act is the most credible attempt yet to create a path there for nonbank operators. The forty-MTL threshold is a real and meaningful standard that the market has adopted regardless of the bill's legislative fate.

The reserve requirement will eliminate the float income that funds a meaningful portion of many operators' economics, and that needs to be modelled honestly before this becomes a strategic priority. The state licensing question is genuinely unresolved and may be resolved in ways that disappoint. The OCC review process has no precedent for this registration type and will take longer than the statute suggests. There is no Senate companion.

Build toward forty MTLs. Build a defensible BSA/AML programme. Build the governance infrastructure that a federal regulator expects to find. Do it because it is the right foundation for the business you are building — not because the PACE Act is going to pass next year.

And if PACE does pass, exactly as written, exactly on schedule? You will be in the first wave. Ahead of everyone who waited.

The work is the same either way.

Understand where you stand before the window opens.

The PACE Act Readiness Scorecard assesses your position across all six eligibility categories in under ten minutes — MTL portfolio, BSA/AML programme, reserve structure, governance, operational readiness, and strategic timeline.

Download the PACE Act Readiness Scorecard →

If you want to work through the implications for your specific business — reserve model, state licensing position, OCC readiness — that is the conversation a licensing assessment is built for.

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The PACE Act has not been enacted into law. This article is for informational purposes only and does not constitute legal advice. Legislative status and OCC implementation standards may evolve. Consult qualified legal counsel before making licensing or compliance decisions.