Is FedNow a CBDC?
Comment of the Day

April 17 2023

Commentary by Eoin Treacy

Is FedNow a CBDC?

This article from the CATO Institute may be of interest to subscribers. Here is a section: 

What is FedNow?
FedNow is an instant payments system—a sort of update to Fedwire and the Automated Clearinghouse (ACH). Individuals will not have direct access to FedNow, but they will have access to faster payments so long as their bank or credit union opts into the FedNow network. Although creating FedNow was not necessary to achieve faster payments, one big difference with FedNow will be that payments will no longer be held up on weekends, holidays, or after traditional business hours.
FedNow is Not a CBDC
Astute eyes will likely recognize that FedNow does vaguely resemble a wholesale CBDC. Where a wholesale CBDC would be restricted to financial institutions for use during interbank settlement, FedNow would also be restricted to financial institutions. The difference, however, lies in their design. Where a CBDC is a currency, FedNow is a payment rail. If we think of dollars and cents as water, then FedNow is the plumbing that gets those dollars and cents where they need to go. In contrast, a CBDC would involve replacing the water itself in this analogy.

Under the current system, interbank settlement is performed on the Federal Reserve’s payment rails, thus ultimately affecting retail banking customers’ settlement times. It’s for this reason that Federal Reserve Governor Michelle Bowman said, “My expectation is that FedNow addresses the issues that some have raised about the need for a CBDC.” This statement should not be misunderstood to say that FedNow will take CBDCs off the table, but it does show that the Federal Reserve itself sees FedNow and CBDCs as distinctly different.

Eoin Treacy's view

There are many ways the Fed could speed up payments and transactions across the economy. Afterall, the USA is still somewhere cheques are commonplace. However, I think the reason they chose to use the FedNow protocol is to blunt the thrust of the digital currency movement.

The primary utility of bitcoin and other tokens is to provide instant transfers of value across their network regardless of counterparty or international borders. FedNow will do much of that for domestic transfers while also preserving know your customer oversight.

The big reason other countries are looking at central bank digital currencies is to avoid using the Dollar system. The burden on the replacement system is to show that it works and is resilient enough to withstand stress, particularly during crises. The incumbent system based on the Dollar has resilience and scale, so beyond tinkering at the margin there is no incentive to change the fabric of the infrastructure.  

That explains why the USA is not leading the world in developing a central bank digital currency. Its strength is in its reliability and stability. Meanwhile, China has everything to prove so they are pioneering the new system. The Eurozone is in the middle both economically and financially.

The roles for which crypto is useful have been as limited supply assets and as a liquidity barometer. The promise of more is looking to be further out in the future. Meanwhile, the SEC continues to crack down on cryptos that trade like securities. 

Back to top

You need to be logged in to comment.

New members registration