IOU

An IOU is an informal document or record in which one party acknowledges that it owes money, goods or a service to another. The name is a phonetic shortening of "I owe you". A typical IOU states who owes whom and how much, and is signed or initialled by the person in debt, but it often says nothing about when or how the amount will be repaid.

IOUs are used between friends, family members, colleagues and small businesses, and the word is also used loosely for any claim that represents a promise rather than the thing itself. Economists and crypto users apply it to bank deposits, exchange balances and tokens issued against off-chain assets, all of which are claims on someone else. An IOU is usually weaker and less formal than a promissory note, which contains an explicit promise to pay on set terms.

Picture a friend who pays for lunch because the other person forgot their wallet. On the back of the receipt the forgetful friend writes "I owe you 20" and signs it. That scrap of paper is an IOU. It does not move any money; it simply records that a debt exists and who has to settle it.

The note is only as good as the person who signed it. If they are honest and solvent, the IOU will be paid. If they disappear or refuse, the holder may have a record that helps in a dispute, but no automatic way to collect. The same idea applies to bigger promises: whenever someone holds a claim instead of the actual cash or asset, they are trusting the issuer to honour it.

An IOU records an existing debt. It names the debtor and the creditor and the amount, and may carry a date. By contrast:

• A promissory note contains an unconditional promise to pay a stated sum, usually on a set date or on demand, and may include interest, instalments and default terms.
• A loan agreement is a fuller contract that sets out obligations of both sides, security, covenants and remedies.
• A bill of exchange is an order by one party telling another to pay a third party, and can be transferred by endorsement.

Because an IOU usually lacks an unconditional promise and payment terms, it is generally not a negotiable instrument and cannot be passed on to a new holder in the same way as a cheque or note. Whether it is enforceable depends on local contract law and on what else the parties can show, such as evidence that money actually changed hands.

Records of debt are older than coins. Medieval English officials used notched tally sticks, split in two so that debtor and creditor each held half, and goldsmiths' receipts for deposited metal circulated as early forms of banknotes. Some economists describe all modern money as a system of transferable IOUs, an idea discussed under ledger money.

Governments have also issued IOUs in a crisis. In July 2009, during a budget impasse, the State of California paid some suppliers and taxpayers with registered warrants that the press widely called IOUs; they promised later payment with interest, and some banks accepted them for a short time. In business accounting, amounts that customers owe are recorded as accounts receivable, which are in effect IOUs from those customers.

In crypto, "IOU" usually describes a token or balance that represents a claim on an issuer rather than an asset held directly on a blockchain. Examples include:

• Issued tokens on the XRP Ledger. Early documentation of the XRP Ledger called non-XRP balances IOUs. They depend on a trustline to an issuer who promises to redeem them, and the ledger now generally calls them tokens.
• Fiat-backed stablecoins. A fiat-backed stablecoin is a claim on reserves held by its issuer, so its value depends on the issuer's honesty and solvency.
• Exchange balances. Coins shown in an account on a centralised exchange are, legally, often a claim against the exchange rather than coins in the customer's own wallet. Collapses such as Mt. Gox in 2014 and FTX in 2022 showed how such claims can become worth far less than face value.
• Pre-market tokens. Some exchanges list IOU tokens for coins that do not exist yet, which convert into the real tokens at launch if the project delivers.

The main risk of any IOU is credit risk: the holder depends on the issuer's ability and willingness to pay. Informal IOUs add evidential risk, because a vague note may be hard to enforce, and they can be lost or forged. Anyone lending a meaningful sum is usually better protected by a written agreement or promissory note that states the amount, the repayment date, any interest and what happens on default.