CBDC alternative ‘FedNow’ to launch in July, says Federal Reserve

The Federal Reserve Wednesday announced that its FedNow Service, described as an alternative to a central bank digital currency (CBDC), will launch in July.

FedNow is an instant payments platform in which the Federal Reserve facilitates transactions between financial institutions, companies and individuals. The transaction flow will be the same as it is now, but instead of the transaction going through a clearing house, it will go through the US government.

For example, if John Doe wishes to pay a bill, he would initiate the transaction as he normally would through an end-user platform. John’s bank would then send the request to the Federal Reserve, which would notify the recipient’s bank that funds are about to be transferred and would give the go-ahead to John’s bank to release the funds. The Federal Reserve would then take the funds from John’s bank and deposit them in the recipient’s bank. This would all happen in the span of six seconds.

John would be none the wiser that the US government had not only just seen his transaction but had conducted it from beginning to end. 

The benefit of FedNow, according to the Federal Reserve, is that funds can be transferred and settled in accounts not only instantly, but any point during the day or night. Currently, transaction settlement time — when the funds actually hit the recipient’s account — can take up to three days.

It is unclear what ramifications FedNow might have, given that the federal government would now have records of a private citizen’s transactions. For example, whereas the Biden administration now requires any transaction over $600 using payment apps to be reported to the IRS, the IRS may likely already have a record of the transaction.

FedNow would also allow the federal government to deny a transaction if it wished, something it could not do before. This was the chief concern among opponents to the government’s plan to roll out a CBDC.

A central bank digital currency (CBDC) is a digital currency issued and governed by a central bank. In the case of the United States, a CBDC would be a digital currency issued and controlled directly by the Federal Reserve. 

CBDC is like cash in that it is backed by the Fed and its value is manipulated by the Fed’s monetary policies. However, whereas cash transactions are anonymous, CBDC transactions are not, as confirmed by Federal Reserve Chairman Jerome Powell.  

Though Joe Biden has ordered federal agencies to pursue the creation of a CBDC, Powell has said it is still in the early experimentation stage, and Federal Reserve Vice Chair Lael Brainard estimates it is five years away once Congress issues approval.

“[If] Congress were to decide . . . to issue a central bank digital currency, it could take five years to put in place the requisite security features, the design features,” she told a House Financial Services Committee hearing in May.

Federal Reserve Board of Governors Member Michelle Bowman last year suggested that FedNow is an acceptable alternative to CBDC, because it “addresses the issues that some have raised about the need for a CDBC”.

It is unclear how those issues are addressed by FedNow, given that the government will now ostensibly have even more control over transactions than it would with a CBDC.

"With the FedNow Service, the Federal Reserve is creating a leading-edge payments system that is resilient, adaptive, and accessible," said Federal Reserve Bank of Richmond President and FedNow Program Executive Sponsor Tom Barkin in a statement by the Federal Reserve last week. “The launch reflects an important milestone in the journey to help financial institutions serve customer needs for instant payments to better support nearly every aspect of our economy.”