Federal Reserve’s ‘FedNow’ Launch Triggers Fresh Speculation Over Digital Dollar

While FedNow is currently not tied to any initiative for a digital U.S. dollar or the crypto space in general, experts warn that the system might end up as a precursor to the infrastructure for a central bank digital currency.

AccessTimeIconJul 21, 2023 at 5:58 p.m. UTC
Updated Jul 25, 2023 at 4:58 p.m. UTC

The U.S. Federal Reserve denies that its new instant payments service, FedNow, is in any way tied to the digital asset space.

But experts say the new system could lay the groundwork for the infrastructure needed for a potential central bank digital currency (CBDC) in the U.S. And so this week’s announcement has led to a fresh airing of warnings about potential privacy and control risks around a digital dollar.

The Fed on Thursday officially launched the service, which makes the process of sending payments in the U.S. almost instant, as opposed to a few hours or days that sending money from account to account currently takes.

Some crypto enthusiasts saw the release as a form of validation, because the FedNow project adopts a key goal of the digital asset industry:moving money around easily and quickly, and at any time of day or the week, even if banks are closed. FedNow will operate 24 hours a day.

“This is a payment system, not a digital token or a CBDC, but it is something that can be used to facilitate the creation of a CBDC,” said Jim Bianco, president of Bianco Research.

But the FedNow might be prone to some of the same concerns shadowing CBDC development.

Some lawmakers and political leaders, especially among Republicans, have expressed concerns that a CBDC might be prone to surveillance by authorities, or that they might be able to censor transactions. Current Florida Governor and GOP presidential hopeful Ron DeSantis, for example, has repeatedly said that he would ban a CBDC if elected president as he sees it as a form of “government-sanctioned surveillance.”

“If FedNow does indeed become a programmable CBDC, then it could theoretically be used to block payments for items the government doesn’t favor or to cut out people from the financial system who are seen as threatening in some way to governing authorities, aka, political opponents,” said Dave Weisberger, CEO and co-founder of CoinRoutes said. “In that situation, things could get dystopian very quickly.”

Officials at the Fed have been studying the potential for a government-issued digital currency, and Fed chair Jerome Powell himself has repeatedly vouched for the exploration. As preparation for the G20 Summit in India earlier this week, The Bank of International Settlement published a report laying out central banks’ efforts to prepare for a CBDC and the benefits of such.

“The problem of course is that the government is going to have to bit ways over the digital token and they’re going to be able to permission them and censor them for certain types of people in certain types of ways, or certain types of transactions,” said Bianco.

Even banks themselves are skeptical about FedNow, criticizing the lack of leadership structure or a clear business plan, all while the system is financed through taxpayer money, the Bank Policy Institute (BPI), wrote in a blog post. Other experts have pointed out that some banks benefit from slow payments and make it part of their business model.

It may be a case of strange bedfellows – with banks and blockchain purists – incumbents and disruptors – united in their skepticism of FedNow.

Jim Iuorio, managing director of TJM Institutional Services and a veteran futures and options trader, noted that bitcoin (BTC) was invented partly as an alternative to the heavily regulated and monitored traditional financial system.

“Cynics see the launch of Fednow to be a move toward an eventual central bank digital currency and a cashless society,” Iuorio said. ”They argue that the government having access to every transaction opens the door to authoritarianism and abuse.”


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Helene Braun

Helene is a New York-based reporter covering Wall Street, the rise of the spot bitcoin ETFs and crypto exchanges. She is also the co-host of CoinDesk's Markets Daily show. Helene is a graduate of New York University's business and economic reporting program and has appeared on CBS News, YahooFinance and Nasdaq TradeTalks. She holds BTC and ETH.