FedNow is set to launch this summer and it hasn’t been without much controversy and concern about what a centralized government-controlled system will look like.
What Even Is FedNow?
FedNow is a new system built by the “Federal Reserve” to allow depository institutions – such as banks – to provide their customers access to instant payments. According to a release from the Fed, FedNow is not a CBDC but merely a payments service such as FedACH and Fedwire.
When Testifying before the House Financial Services Committee in March, Fed Chair Powell said a central bank digital currency is, “Something we would certainly need Congressional approval for.”
These words are encouraging although it’s not out of the realm of possibility that the Fed and the US government will be peaking at people’s financial activity through the FedNow system.
In a resource published on the FedNow website, it touts that “Instant payments are well-suited to support the delivery of rich details about the underlying transaction with the payment itself.”
When Will It Be Available?
The development of FedNow started in 2019 and is currently running a pilot with select institutions. The service is set to launch to the public in July, giving institutions, individuals, and businesses the choice to use it for various instant payment utilities of which they will be able to opt in and out.
How it works
The FedNow system is essentially an infrastructure that connects all of the participating financial institutions in an effort to facilitate instant payments and cash transfers 24/7 as opposed to payment processors which can take hours to settle and ACH transfers which can take days to settle and are only available 5 days a week.
The FedNow payments flow
Payment message initiated to senders’ financial institution.
Request from institution submitted to the FedNow service.
FedNow service validates the payment message.
FedNow sends the details of the payment to the receiver’s financial institution for confirmation.
The receiver’s financial institution submits a confirmation message to FedNow.
FedNow debits and credits the master accounts for the sender and receiver’s respective financial institutions.
FedNow sends a payment message to the receiver’s financial institution with advice of credit and sends an acknowledgement to the sender’s financial institution that settlement is complete.
Outside of the FedNow system the sender’s financial institution debits the sender’s account, and the receivers institution debits the receiver’s account.
How does FedNow compare to transactions on the blockchain such as Bitcoin main net or the lightning network.
Compared to FedNow, crypto is still a more efficient and secure system, not to mention crypto allows individuals to have personal custody over their funds just like with physical cash, unlike in financial institutions.
What Are The Alternatives to FedNow?
There is a spectrum of financial privacy from fully private, encrypted, and decentralized to fully monitored and centralized. So if we do not want to use a system that is not controlled by a government agency, what are the alternatives outside of normal debit and credit?
Centralized and Government controlled (worst)
FedNow
Centralized under private institution (ok)
Zelle
Swift
Centralized issuance on a decentralized blockchain (better)
USDT
USDC
Fully Decentralized (best)
Bitcoin
Bitcoin lightning network
Pros of FedNow
Admittedly we are skeptical about the privacy implications of a payments service controlled by and run through a federal agency, although it may seem relatively safe now but who knows about what it could turn into in the longer term.
On the other hand, there may also be some significant benefits to a USD instant payments and cash transfer service, from a global standpoint.
The way we see it is that the ability globally to transfer USD fast and effectively in the same way that a theoretical CBDC would, is a huge step toward maintaining the dominance of the US dollar, as both the global reserve currency and the primary currency for the oil markets.
Furthermore, this is an important status quo for the United States to maintain especially after reports of India, China, Brazil and other nations looking into alternatives to the USD.
What’s Our outlook for the development of FedNow and CBDCs?
The short-term outlook
If you want instant payment functionality and do not want the federal government to be able to invade your financial privacy more than they already do then use alternatives.
make sure your bank isn’t using FedNow to process your transactions w/o your knowledge.
The medium-term outlook
The Fed will slowly push for moving away from cash touting the benefits and efficiencies of a fully digital system.
They might get banks to start using this service w/o customer knowledge.
They may slowly restrict or disincentivize banks from using the alternatives.
The long-term cynical outlook
Eventual abolishment of cash and physical money and FedNow becoming the system for a US CBDC
Possibly Restriction or outright ban of privatized or decentralized alternatives, such as swift Zelle, PayPal, and crypto.
These outlooks may seem overly cynical, however, if you look at history, governments tend to expand their power and control over time and there is no reason to believe that isn’t the case in the United States today.
As Andrew Grove’s book is titled “Only the paranoid survive,” the smart way to think about giving government control over more systems is through the lens of cynicism.