Michael Bodley

FedNow does not appear to pose much of a threat to stablecoins, despite the two having more than a few financial characteristics in common, say some observers.



Though it officially launched on Thursday, the Federal Reserve’s FedNow, which enables instantaneous settlements for dollar payments around the clock, has been in the works since 2019. Stablecoin issuers and users have had time to digest the product.&nbsp;



And they’ve found a number of persisting use cases for stablecoins that are outside the scope and capabilities of FedNow.&nbsp;



Ryan Rasmussen, an analyst for Bitwise Asset Management, told Blockworks that news of the Federal Reserve’s service kicked off a “bit of an existential crisis” for stablecoin users. But that crisis, he said, faded fast once industry participants better understood that the product isn’t a direct stablecoin competitor.&nbsp;



“It ultimately only corners off a small portion of the stablecoin market,” Rasmussen said. “It’s great for banks in the US, but it doesn’t really help the US unbanked community or the underbanked community.”



Stablecoin issuers in the US, or those based abroad that pegged their stablecoins to the dollar, have long touted their immediate settlement as superior to transfers of fiat between banks and businesses. Those transfers, as well as exchanges between individuals, have largely been executed via ACH since the advent of digital banking, taking one to three days to settle.



Since their inception, stablecoin issuers have noted their potential for cross-border remittance payments at a fraction of the cost — and with none of the lengthy delays — of traditional bank-to-bank or retail wiring services.&nbsp;



The fact that FedNow does nothing to change that calculus, since it applies only to US banks, represents a significant opening for stablecoins, Rasmussen said.



“[FedNow] doesn’t really help reduce the remittance fees and everything that goes into them,” he said. “Sending money cross-border, stablecoins are obviously great for that..”



<h2 class="wp-block-heading">An archaic US banking system</h2>



US banks often experience additional lags through weekends, when US banks are closed. Critics have for years called the system archaic, pointing to the fact that the US has lagged a number of European countries — including the United Kingdom, Italy and Sweden — in setting up a system enabling instant and efficient payments.&nbsp;



Over the last several years, meanwhile, stablecoin issuers including Circle, as well as their usage and adoption proponents, have pushed the narrative that stablecoin products could do what US banks could not: Immediately execute transfers at any time, seven days a week.



Tether (<a href="https://blockworks.co/price/usdt">USDT</a>) had a $83.8 billion market capitalization on Thursday afternoon in New York, with <a href="https://blockworks.co/price/usdc">USDC</a> clocking in at $26.9 billion. Even combined, both represent a small fraction of the funds that change hands through the banking system each day.&nbsp;



But the outlook for stablecoins doesn’t seem all that dismal, despite the Federal Reserve supposedly catching up to a significant chunk of their value proposition. With crypto concerns mounting that a US CBDC that could stifle digital asset innovation is on the horizon, there’s been some sentiment that <a href="https://blockworks.co/news/fednow-cbdc-save-us">FedNow could eliminate the need for a CBDC</a>.&nbsp;



Ryan Burke, GM of invest at M1, told Blockworks that he does not “view FedNow as a replacement for stablecoins.” A US wealth manager, M1 offers cryptocurrency investment products, in addition to traditional financial instruments.



“I view it as a way to accelerate and improve what amounts to aged and inefficient methods, and methodologies, of transferring fiat between accounts…for both people and companies.”&nbsp;



<h2 class="wp-block-heading">Modernizing the financial system?</h2>



The Federal Reserve has positioned FedNow as modernizing the country’s financial infrastructure. Chair Jerome Powell in a statement on Tuesday said FedNow was designed to&nbsp; “help make everyday payments over the coming years faster and more convenient.”



For consumers, a bank account is required to use FedNow. This is a departure from stablecoins, which enable crypto-to-crypto exchanges, with no bank account required. FedNow also imposes upward limits on transactions, also unlike stablecoins (though the Federal Reserve supports instantaneous wire transfers for larger amounts of cash).&nbsp;&nbsp;



It launched with 35 banks on board, including major players like JPMorgan, as well as a division of the US Treasury, plus an assortment of other non-bank service providers.&nbsp;



But banks have to opt in to use it, and there’s no legislation or regulatory oversight requiring them to do so. Upgrading, or overhauling entirely, the technology behind how banks process transactions is thought to be pricey and complex.&nbsp;



There’s also private market competition, with banks and other financial firms having moved to create Real Time Payments (RTP), which started gaining steam earlier this year. The idea behind the technology, which is opt-in and imposes fees on the financial services firms that use it, is largely the same: to enable instantaneous payment settlements.



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Federal Reserve’s FedNow unlikely to pose a threat to stablecoins

Shalini Nagarajan

Given the <a href="https://blockworks.co/news/fed-payments-fednow-launch-july">upcoming launch</a> of the FedNow service, which aims to provide instantaneous payments and settlement, there is growing curiosity about how <a href="https://blockworks.co/tag/stablecoins" target="_blank" rel="noreferrer noopener">stablecoins</a> will adapt and remain relevant.



After all, stablecoins gained traction by addressing the sluggishness and outdated nature of the traditional US banking system.&nbsp;



FedNow is a centralized payment system provided by the Federal Reserve for instant interbank transactions, while stablecoins are decentralized digital assets that aim to provide stability and fast transactions by pegging their value to specific assets or currencies.



So, will stablecoins still have a place in the digital age? Indeed, according to Bitwise crypto research analyst Ryan Rasmussen, stablecoins are expected to maintain their relevance, for several reasons.



One big common factor between the two is that they are capable of processing transactions at any time, unlike traditional banking systems.



But ultimately, stablecoins come out on top with five clear advantages, according to Rasmussen, enumerated in a <a href="https://bitwiseinvestments.com/crypto-market-insights/five-reasons-why-fednow-fails-to-disrupt-stablecoins" target="_blank" rel="noreferrer noopener">blog post</a> published on May 31.



<ol>
<li>FedNow has limited utility and does not have a global reach</li>
</ol>



The analyst noted that stablecoins make the US dollar more accessible worldwide, helping in countries like Venezuela, Argentina, and Turkey where there are shortages of banknotes and high inflation.&nbsp;



By using platforms like Aave and Compound, stablecoins provide access to financial services and can make a positive difference for millions of people around the globe, he said.



<ol start="2">
<li>Stablecoins offer financial access for all</li>
</ol>



FedNow requires users to hold a US bank account, while stablecoins offer financial access without such limitations.



FedNow doesn&#8217;t help the millions of unbanked households, including marginalized communities, while stablecoins provide instant access to the financial system for anyone with a computer or smartphone, the analyst said.



<ol start="3">
<li>Stablecoins power on-chain transactions</li>
</ol>



Stablecoins have seen a massive surge in demand, with their total supply growing by a more than 8,000% since Jan. 2017, according to the researcher.



They are used in DeFi protocols, trading against cryptocurrencies like bitcoin and ether and for on-chain payments. Unlike FedNow, stablecoins allow dollars to exist on-chain, making them irreplaceable in these applications, he said.



<ol start="4">
<li>Stablecoins offer a way for individuals to send money overseas&nbsp;</li>
</ol>



Stablecoins are borderless and accessible anywhere, making cross-border payments more affordable and accessible. This is reflected in the growing popularity of stablecoin transfers, with over $17 trillion transferred to date, including $2 trillion in Q1 2023 alone, according to the data.



To put that in perspective, $2 trillion exceeds the total transaction volume processed by PayPal throughout 2022, he noted.



<ol start="5">
<li>Stablecoins have no limits on transaction size&nbsp;</li>
</ol>



Unlike FedNow, which imposes transaction limits, stablecoins have no such restrictions. Whether you&#8217;re sending $500 or $5,000,000, stablecoins can handle transactions of any size.



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Will Stablecoins Still Be Relevant After FedNow?

Charlene Fadirepo

Up to this point, the movement of money from and across US bank accounts has been anything but swift.&nbsp;



It can take multiple days for simple bank transactions to settle. Compare this sub-par result to the daily consumer experience with most fintech apps like PayPal, Cash App or Bitcoin payments which makes such transactions nearly instant, and you’ll see why America is in need of better banking payment solutions.



FedNow is a bipartisan solution to modernize government payments — yet reactions have been unfavorable, wrong and weird. Misinformation and fear mongering conversations about central bank digital currency (<a href="https://blockworks.co/tag/cbdc">CBDC)</a> bogeymen muddles the reality that the FedNow system is a viable and favorable option for fast bank-to-bank payments.&nbsp;



The <a href="https://blockworks.co/tag/fednow">FedNow system</a> is not a digital currency and it has nothing to do with a CBDC.&nbsp;



It’s quite the opposite —&nbsp;improving the speed of retail bank payments, through FedNow, will instead significantly reduce the need for a CBDC in the United States.



<h2 class="wp-block-heading">The birth of FedNow</h2>



As a Bitcoin advocate, Bitcoin consultant and former federal regulator, I am well aware of the transformational impact that real-time payments can have on households and businesses.&nbsp;



Consumers, businesses, financial institutions and fintechs all want and expect real-time payments. The payment friction consumers <a href="https://www.federalreserve.gov/newsevents/pressreleases/other20200806a.htm">experienced</a> during the distribution of Covid-19 emergency relief payments again highlighted the need for a significant government technology upgrade.



But despite the last 14 years of incredible global payment innovations across the private sector (the most significant of these being the Bitcoin monetary network) the US federal government still had not launched its own comparable digital payment systems for the banking industry — until now.&nbsp;



In March, the Federal Reserve shared the July 2023 launch date of the FedNow system, the US government’s first and only interbank settlement system.&nbsp;



FedNow is optional for financial institutions offering interoperability with other payment systems, such as Fedwire and the Automated Clearing House (ACH) system. The service is open to more than 10,000 financial institutions that operate within the Federal Reserve’s network.



FedNow will enable real-time payments, which means that transactions will be processed and settled almost instantly, 24/7/365. This feature will provide significant benefits for consumers, businesses, and financial institutions, such as faster access to funds, including paychecks and improved cash flow management.&nbsp;



<h2 class="wp-block-heading">But then conspiracy theories arise</h2>



Shortly after the FedNow announcement, Democratic presidential candidate Robert F. Kennedy Jr. wrongly <a href="https://twitter.com/RobertKennedyJr/status/1643658603885101073">announced</a> on Twitter that the Federal Reserve would introduce its &#8220;&#8216;FedNow’ Central Bank Digital Currency.”&nbsp;



Other under-informed politicians including Florida Governor Ron DeSantis used this moment to share fear mongering conversations about the coming launch of a CBDC by the Federal Reserve, by issuing warnings using strange terms like “woke banking.” Even weirder still have been the related <a href="https://www.nbcnews.com/politics/politics-news/desantis-rfk-jr-misconstrue-fednow-digital-dollar-plans-rcna78591">conspiracy theorist views</a> from none other than InfoWars’ Alex Jones.&nbsp;



But we’ve already mentioned that FedNow is not a CBDC; it operates at a higher level and impacts only bank-to-bank transactions, not consumer transactions. In fact, the creation of FedNow is so favorable for instant payments that it may even render the need for not only a CBDC, but all bank-to-bank cryptocurrency tokens (such as Ripple&#8217;s <a href="https://blockworks.co/price/xrp">XRP</a>) obsolete.&nbsp;



Most payments made in the United States rely on interbank payment services like ACH networks or wire transfer systems. As a result, the addition of the FedNow interbank settlement system will accelerate the vast majority of payments in the United States. As per the Federal Reserve, a <a href="https://www.federalreserve.gov/cbdc-faqs.htm">key benefit</a> of a CBDC is to “support faster and cheaper payments” —&nbsp; which now will already be achieved via the FedNow system.&nbsp;



Plus, having spent nearly six years of my 15 year banking career at the Federal Reserve Board of Governors in a bank supervision audit capacity, it is also clear that many politicians have severely underestimated the legal, compliance, financial, technology and regulatory administrative burden required to launch a central bank digital currency in the United States, not to mention the onslaught of congressional hearings and the passage of a specific CBDC law that would be required for a digital dollar to go live.&nbsp;



The continued success of FedNow will help ensure we don’t ever have to go down that CBDC road.



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Charlene Fadirepo is a financial empowerment speaker, a Bitcoin activist and former US regulator with 15 years of experience in the traditional finance world. As the CEO of her digital assets consulting firm, Mango Digital Strategies, Charlene helps global financial services organizations future-proof their growth through cryptocurrency. Prior to founding Mango Digital Strategies, Charlene held financial analysis roles at Citigroup and Cherokee Investment Partners. She also held a senior consulting bank regulation role at PWC and led bank supervision policy audits at the Federal Reserve Board of Governors.

Charlene is the creator of the Bitcoin education podcast the Bitcoin In Africa Show, a co-author of the Bitcoin policy primer Bitcoin &amp; the American Dream and has been featured in BBC, Time Magazine, Yahoo Finance, CNN, and Coindesk. Charlene was also named one of 5 Women to Watch in Crypto by NextAdvisor in 2022. Charlene studied Electrical Engineering at the University of Virginia and has a Masters In Business Administration from the Fuqua School of Business at Duke University.
</div>

FedNow Will Save the US From a CBDC

Casey Wagner

While a US operated central bank digital currency (CBDC) could dramatically improve settlement times and international payment systems, the digital dollar comes with a lot of risks, Federal Reserve Governor Michelle Bowman said on Tuesday.



A top argument against a <a href="https://blockworks.co/tag/cbdc" target="_blank" rel="noreferrer noopener">CBDC</a>, used by both government officials and constituents, is that such assets may be a potential infringement on privacy. Bowman agreed, noting that privacy concerns have not yet been carefully considered. 



“We must ensure that consumer data privacy protections embedded in today’s payment systems continue and are extended into future systems,” Bowman said during <a href="https://www.youtube.com/watch?v=ZDnMXYa1NcA">prepared remarks</a> at Georgetown University on Tuesday.&nbsp;



The <a href="https://blockworks.co/news/fed-cbdc-robert-kennedy-fednow">FedNow program</a>, which is set to launch its instant payment system this summer, shows that most of the benefits of CBDCs are being achieved through other technologies, Bowman said.&nbsp;



There is an argument that a CBDC could bring the unbanked into the financial system and provide them more access. Bowman countered this point, claiming that it is not plausible.&nbsp;



“I think it’s unlikely [the unbanked population] would find the government somehow more trustworthy than highly regulated banks,” Bowman said.&nbsp;



Some industry members however have said that the anti-privacy argument around CBDCs is unfounded. <a href="https://blockworks.co/news/cbdcs-privacy-not-mutually-exclusive">It’s too early in the game to make that judgment</a>, Mark Young, chief risk officer and data adviser at ConsenSys, said at the Milken Institute Future of Digital Assets Symposium in Washington, DC, last month.&nbsp;



“A [US] CBDC does not exist yet, so how are you saying that,” Young said during a panel discussion at the event. “The onus is on us to design what we want and to design something that demonstrates democracy.”&nbsp;



Consumers and industry members tend to look at other country’s CBDC attempts to form options on the type of asset, namely China, whose <a href="https://blockworks.co/news/china-debuts-digital-yuan-at-winter-olympics-amid-warnings-from-us-senator">digital yuan launched last year</a>. There are 114 central banks around the world currently in some stage of development for a CBDC, Jennifer Lassiter, executive director of the Digital Dollar Project, said.&nbsp;



“In terms of what’s motivating those countries, it varies…each country prioritizes certain principles over the other, but those are competition and innovation, inclusion, cybersecurity, financial stability, and privacy,” Lassiter said.&nbsp;



While the FedNow launch is poised to progress, central bankers have been hesitant to get onboard with a CBDC. There currently are no public plans in the works to deploy a state-sponsored digital dollar within the United States.



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Fed Governor Bowman: US Digital Dollar Poses Some Risks

Sebastian Sinclair

Presidential candidate Robert Kennedy Jr. has rallied against US government plans to modernize the banking system by stoking fears of an overreaching central bank digital currency (CBDC) issued by the Fed.



FedNow, the Federal Reserve’s new settlement system, is pitched to allow instantaneous payments 24 hours a day, seven days a week.&nbsp;



“We should be wary since CBDCs are the ultimate mechanisms for social surveillance and control,” Kennedy Jr. <a href="https://twitter.com/RobertKennedyJr/status/1645499840963518476?s=20" target="_blank" rel="noreferrer noopener">tweeted</a>. 



“The claim that FedNow is not the first step toward a CBDC would be more easily digestible were we not aware of the Biden administration’s steady barrage of hostile broadsides against cryptocurrencies.”



Kennedy Jr. is an environmental attorney, activist and author belonging to one of America’s most famous political families. He’s the nephew of 35th US President, John F. Kennedy.&nbsp;



He announced intentions for his own <a href="https://www.theguardian.com/us-news/2023/apr/06/robert-kennedy-jr-announces-run-for-president-anti-vaccine-activist" target="_blank" rel="noreferrer noopener">presidential bid</a> last week, running as a Democrat. Kennedy Jr.&#8217;s FedNow comments can be viewed as campaigning to voters motivated by distrust in government.



CBDCs are government-issued, fiat-pegged tokens that may or may not run on a blockchain or distributed ledger system. 



While the Fed’s initiative aims to shorten the time it takes for interbank transfers — mirroring potential benefits of a CBDC — there’s so far no concrete plans for a Fed-issued digital currency. 



The Federal Reserve has however sought <a href="https://www.federalreserve.gov/central-bank-digital-currency.htm" target="_blank" rel="noreferrer noopener">public feedback</a> on a “range of topics” related to CBDCs, leading some politicians to curry favor with crypto insiders by claiming one could be used for state-sanctioned surveillance.



In March, DeSantis <a href="https://blockworks.co/news/florida-cbdcs-bitcoin-ban" target="_blank" rel="noreferrer noopener">introduced legislation</a> seeking to ban the use of Fed-issued digital currency in the state and called on others to follow suit. Democrats have voted against the bill citing constitutional precedence which affords the federal government the power to create and circulate national currency.



Despite there being no proposed CBDC — or even an outline of what one might entail — DeSantis alleged a Fed-issued digital currency would gift the government too much control over personal finances, going so far as to claim it would prohibit citizens from buying guns or filling up on “<a href="https://www.nbcnews.com/news/amp/rcna78591" target="_blank" rel="noreferrer noopener">too much gas</a>.” 



DeSantis has <a href="https://www.washingtonpost.com/politics/2023/03/09/ron-desantis-2024-president-iowa-nevada/" target="_blank" rel="noreferrer noopener">hinted</a> at intentions for a presidential bid but no official statement has been made.



It’s worth noting that existing laws surrounding digital payment systems already require financial service providers to collect and report transaction data in a bid to combat money laundering and terrorism financing.



Fed Chair Jerome Powell has stated that the bank would seek prior <a href="https://www.wsj.com/articles/powell-says-congressional-support-likely-needed-to-adopt-fully-digital-dollar-11616424452" target="_blank" rel="noreferrer noopener">approval</a> from Congress and the government before any CBDC comes to fruition.



In any case, FedNow is expected to be rolled out in multiple phases, with its initial launch slated for sometime in July.



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Fed-issued CBDC Is a Hot Topic This Campaign Season

The US central bank has announced its instant payments system is set to go live in less than four months, giving citizens a new prompt settlement and clearing service for their transactions.&nbsp;



The Fed announced Wednesday that the service will kick off the formal certification process for participants in the first week of April, which will be followed by a trial program in order to get ready for sending live transactions through the system. Operations will begin in July.



&#8220;We couldn&#8217;t be more excited about the forthcoming FedNow launch, which will enable every participating financial institution, the smallest to the largest and from all corners of the country, to offer a modern instant payment solution,&#8221; Ken Montgomery, a FedNow program exec and chief operating officer at the Fed Reserve Bank of Boston, said in a <a href="https://www.federalreserve.gov/newsevents/pressreleases/other20230315a.htm" target="_blank" rel="noreferrer noopener">statement</a>. 



A varied mix of small and large financial institutions have shown intent to start using the FedNow service in July, according to the Fed. Montgomery said that access to the service is just the start point, with the major focus being on growing the network of participating institutions in order to broaden the availability of instant payments across the country.



Gabor Gurbacs, director of digital assets strategy at VanEck, said the timing of the service launch was suspicious, considering multiple US bank failures. “This may be the first leg into CBDC rails/reset,” he said.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Federal Reserve announces July launch for the FedNow Service. The first week of April, the Federal Reserve will begin the formal certification of participants for launch of the service. Suspicious timing around bank failures. This may be the first leg into CBDC rails/reset. <a href="https://t.co/2ENBtksZDD">pic.twitter.com/2ENBtksZDD</a>&mdash; Gabor Gurbacs (@gaborgurbacs) <a href="https://twitter.com/gaborgurbacs/status/1636125532155781125?ref_src=twsrc%5Etfw">March 15, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The FedNow service is seen as an alternative to <a href="https://blockworks.co/tag/cbdc">central bank digital currencies</a>, which are virtual currencies backed and issued by a central bank. US Fed governor Michelle Bowman last year said the service addresses the issues that some have raised about the need for a CBDC.&nbsp;



The US Treasury is currently <a href="https://blockworks.co/news/us-treasury-weighs-prospect-for-cbdc-adoption">considering the consequences of issuing</a> a CBDC, while lawmakers are still divided on the matter. But even as policy deliberations drag on, Treasury officials are designing the technology that would be needed for a CBDC in case it is determined that it should be used.



The service will launch with a solid set of clearing and settlement functionality, and other features will be added in future releases as the network expands.



It’s likely there is <a href="https://blockworks.co/news/fed-chair-powell-cbdc-and-stablecoins-can-coexist">a role for cryptographically secured stablecoins</a> even if the US eventually does issue a CBDC, which raises <a href="https://blockworks.co/news/cbdcs-privacy-not-mutually-exclusive">issues of privacy and centralization</a> of power.



Tom Barkin, a FedNow Program executive sponsor, said the Fed is creating a “leading-edge payments system that is resilient, adaptive and accessible.”



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