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Fed Aims To Launch Instant Payment Service ‘FedNow’ Next Summer

John Galt

Updated: September 7, 2022

fednow payment service
Editor’s Note:

EDITOR'S NOTE: The FedNow system may spell the end of your financial privacy and control. It may come as a surprise to many, but the Federal Reserve just found a way of monitoring and controlling Americans’ financial activities more efficiently than issuing a central bank digital currency (CBDC). The Fed’s solution is a type of digital payment service called FedNow, and it's slated for release between May and July of 2023. Digital payments can be transacted more speedily and efficiently than the current systems relying on banks and third-party providers. And should the government have any need to make payments directly to citizens, similar to the pandemic stimulus in 2021, it has access to using FedNow. Let’s take a pause. That last part sounds like a rehearsal for Universal Basic Income. And although the system has no need to develop Fed-issued “stablecoins,” the Fed still exercises power over the proverbial monetary printing presses. And like any CBDC, this option can also help the government accelerate its war on cash. Fed Vice Chair, Lael Brainard, the official who couldn’t provide a straight answer when asked whether she’s a socialist, is a strong advocate of the FedNow system. In short, the Fed is zeroing in on your cash. And unless you store a good portion of it in safe-haven assets like physical gold and silver, FedNow may spell the end of your financial privacy and, eventually, relinquishment of control over your personal financial assets.

The Federal Reserve is on track to deliver an instant payment service called FedNow between May and July 2023, the central bank's clearest timeline yet for a new system enabling settlement of U.S. payments in seconds.

The FedNow service also potentially negates the need for the creation of a central bank digital currency, or CBDC.

“The FedNow Service will transform the way everyday payments are made throughout the economy, bringing substantial gains to households and businesses through the ability to send instant payments at any time on any day, and the funds being immediately available to recipients to make other payments or manage cash flow efficiently,” Fed Vice Chair, Lael Brainard, said in a speech Monday.

The Fed has been testing the system with a limited number of banks and institutions, but Brainard called on financial institutions, service providers, and software companies to adopt the FedNow Service now to ensure the system will work smoothly come next spring.

"The time is now for all key devote the resources necessary to support instant payments," said Brainard.

Federal Reserve Board Governor Lael Brainard testifies before a Senate Banking Committee hearing on her nomination to be vice-chair of the Federal Reserve, on Capitol Hill in Washington, U.S., January 13, 2022. REUTERS/Elizabeth Frantz
Federal Reserve Board Governor Lael Brainard testifies before a Senate Banking Committee hearing on her nomination to be vice-chair of the Federal Reserve, on Capitol Hill in Washington, U.S., January 13, 2022. Source: REUTERS/Elizabeth Frantz

FedNow, which will enable consumers and businesses to send payments instantly, could offer some of the same benefits as a central bank digital currency.

Fed Governor Michelle Bowman has said that FedNow may deliver many of the same benefits as a Federal Reserve-issued digital dollar, while senior administration officials have also pointed to the FedNow service as an alternative to a CBDC. The Fed has released a study on a CBDC, but has made no decision on whether the U.S. should adopt one.

Officials are thinking through what needs a CBDC would fulfill after the release of the FedNow system.

Cowen analyst Jaret Seiberg said he thinks FedNow eliminates the business case for a stablecoin-based consumer payment system.

“FedNow provides the cost-reduction and settlement speed of stable coin payments without the need to convert into and out of tokens,” said Seiburg. “FedNow could then slow the growth of these tokens, which may help address policy concerns regarding stablecoins.”

Rolling out the FedNow system would involve upgrading back-office processes, evaluating accounting procedures to accommodate a seven-business-day week, arranging liquidity providers, and putting in place new technology to interface with customers.

The Fed maintains making funds immediately available will help Americans living paycheck to paycheck, or small businesses with cash flow constraints, by avoiding late payment fees or freeing up working capital for small businesses to finance growth.

Analysts say FedNow could also cut demand for payday loans as consumers won't have to wait for a check to clear. For businesses, there could also be upside for better paying suppliers on time, and businesses could embrace it as a less costly and more certain way to accept consumer payments.

The FedNow system would help the government transmit emergency relief payments to Americans faster, avoiding making citizens wait for checks as during the pandemic.

Financial regulators also want faster payments because it reduces systemic risk. During the financial crisis, the fear was that the financial system would shut down because banks would not trust that other banks would make good on intraday credit.

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Originally published on Yahoo Finance.

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