FedNow — US Federal Reserve Payment Tool a Threat to Banks, Not Crypto

At the start of August, the United States Federal Reserve Board announced its plan to release a real-time payments and settlements service in order to boost the payments infrastructure in the country. Called FedNow, the service will reportedly “permit banks of every size in every community across the country to provide real-time payments to their customers" by 2023 or 2024. 

The move seems to coincide with the U.S. Senate’s renewed interest in crypto regulation, although the Federal Reserve has been planning to renovate the payment system for some time now. Further, the new service likely isn’t going to be a substitute for digital currencies, despite playing the same ambitious card, according to a number of experts.

What is the Federal Reserve? 

The Federal Reserve, or Fed, is essentially the central bank of the U.S., being in charge of the country’s monetary policy. It is governed by the presidentially nominated board of governors called the Federal Reserve Board. The board announced the FedNow project on Monday, Aug. 5, via a press release, while a preceding proposal for a new “24/7/365” payment system run by the Fed dates back to October 2018. 

Interestingly, 10 years prior to that, in October 2008, the Federal Reserve attempted to register “FedNow” as a trademark. However, the application was dismissed by the U.S. Patent and Trademark Office later in 2013 on the grounds that the Fed then abandoned it, according to the database.

Moreover, in May 2015, the Fed established the Faster Payments Task Force to “identify and evaluate alternative approaches to implementing safe, ubiquitous, faster payments capabilities in the United States.” The program announced Ryan Zagone from Ripple as one of the participants, and the task force eventually highlighted the company’s progress with cross-border payments. “It has been a long time preparation and Libra has little, if not nothing to do with this decision,” Sky Guo, the CEO and co-founder of smart contracts platform Cypherium, summed up to Cointelegraph. 

Thus, by launching FedNow, the U.S. central banking authority aims to modernize the country's payment system with a real-time service that can transfer funds around the clock, both on weekends and weekdays. The government’s current system is closed on weekends, and it can take up to several business days to settle a transaction.

The new service will reportedly be available to both enterprise and retail customers. FedNow is expected to arrive within five years and will initially support transfers of up to $25,000. The Fed believes that such a system will allow consumers to more flexibly manage their money and make time-sensitive payments. Commenting on the issue in the press release, Federal Reserve Board Governor Lael Brainard wrote:

"Everyone deserves the same ability to make and receive payments immediately and securely, and every bank deserves the same opportunity to offer that service to its community. FedNow will permit banks of every size in every community across the country to provide real-time payments to their customers."

The Fed voted 4-1 to continue the creation of the network. Randal Quarles, the vice chairman for supervision, was the one who opposed. “I do not see a strong justification for the Federal Reserve to move into this area and crowd out innovation when viable private-sector alternatives are available,” he explained.

It is worth mentioning that the Fed has already implemented a real-time gross settlement funds transfer system called Fedwire. However, it only works five days a week, is limited to accredited institutions, is more expensive and is not available on mobile phones, which all make it less convenient in comparison to alternatives like PayPal and Venmo. There is also RippleNet, a blockchain-powered settlement platform that also works exclusively with banks but that offers cross-border payments just as cryptocurrencies do — which is a game-changer in the globalized world, according to Juan Villaverde, a senior crypto analyst at Weiss Ratings. He told Cointelegraph:

“Changing the remittance system within US borders is not as revolutionary as it might sound. It’s in the realm of instant borderless payments that a national currency will have difficulty competing. And it’s in this realm where pure crypto assets could shine, where no individual currency or privately-owned system is able to compete effectively.”

However, Villaverde noted that the new payment system could undermine what Ripple is trying to achieve:

“The reality is the traditional financial system is based on trust and reputation. But for most institutional participants, Ripple — as any other newcomer — lacks in both. If the Federal Reserve upgrades its systems to mimic some of the utility of RippleNet, this would severely undermine Ripple’s future chance of success. Our view with Ripple has long been that they need to pivot away from catering strictly to financial institutions and focus more on providing financial products and services directly to the public.”

Guo of Cypherium disagrees with that assumption, telling Cointelegraph that the two systems are targeting different customers and are therefore not in direct competition: 

“Ripple is for cross-border payments while FedNow is for US domestic. The Fed already has a settlement system Fedwire, working in conjunction with The Clearing House. The competition landscape is unlikely to change.”

Banks, not cryptos?

Notably, the Fed’s announcement starts with an emphasis on “the rapid evolution of technology,'' which enables the Federal Reserve and the payment industry “to modernize the nation's payment system and establish a safe and efficient foundation for the future.” However, neither the press release nor the enclosed