One of the strongest arguments for cryptocurrencies since their development has been cheap, near instantaneous payments without the need for a bank or credit card company intermediary. At the end of August, the US Federal Reserve announced that its real-time payment network, FedNow--10 years in the making--would launch in May or June of 2023. Is this Fed’s answer to crypto in a time of increasing scrutiny by the SEC and other global regulators?
Fed now is a replacement for the aging ACH and bank wire systems, which are slow and built on outdated architecture. ACHs are manually processed in batches, only during business hours, and typically have 2-3 day settlements. Bank wires are processed one at a time, settle faster than ACH, but are still only available during business hours, and only then before the cutoff time.
The system will be welcomed by merchants, employees, and anyone who needs to send or receive payments quickly and reliably. It will also help the economy run more efficiently. Less than 1% of US transactions were settled in real time last year, compared to 30% in India.
FedNow is step in the right direction, but still has serious limitations. It will only provide access, or “rails”, to an earlier attempt at instant payments by a big bank consortium launched in 2016, which has had limited adoption. Applications will have to be developed by banks, credit unions, and credit card companies to make the rails useful. FedNow may only be accessible to banks in the Fed System, and consumer fees can be added at the discretion of the banks. With the launch of FedNow still nearly nine months away, the “now” part of FedNow may still be a few years in the future.
In the cryptocurrency space, there are a number of competing payment systems that offer cheap, near instant transfers for the most popular 30 or so cryptocurrencies. Companies like BitPay, CoinsPaid, CoinBase Commerce, and CoinGate are just a few examples. The Federal Reserve’s FedNow system has the advantage of transacting in US dollars, but they will need to need to offer competitive speed, low transaction costs, convenience, and high adoption to compete with the growing crypto payment infrastructure.
One way or another, advancing technology is going to make payments of all types faster, cheaper, and more convenient. The Fed has a rare chance to provide a US fiat based gateway to compete with the crypto payments industry, if the can get the development, feature set, and economics right.