One great thing about the Internet is people can make claims, others repeat it, and suddenly, after a period of time, it gets treated as fact. This is especially true when fear is involved.
Within the world of cryptocurrency, nothing instills fear more than central bank digital currencies (CBDCs). This has everyone on edge even before they are aware of how they are being constructed.
Again, we harken back to the basic understanding of money. If you think governments control money, an idea not backed up by history, then we see how this can be very scary.
So now we have FedNow about to go live and the wagons are circling. According to many, this is the stepping stone to a CBDC.
In this article we will dive into FedNow and see what is really taking place.
What Is FedNow?
FedNow is a payment service that is going to be offered by the Federal Reserve that allows real time settlement. This is going to be available around the clock, eliminating the restriction of operating just during business hours.
In other words, we are dealing with a network.
Who Is Eligible?
This is being offered through the Fed meaning only its customers can utilize it. That means one requires a master account with the Fed to be able to interact with the system. It is no different from the present FedWire system in this regard.
Commercial banks can offer the service to their customers, giving them real time settlement.
Account Based
The system is used through one's existing bank account. What likely will happen is one will log onto the bank website or application. There will be an option for instant payment (or something like that) which can be chosen. That will notify the system of a FedNow transaction.
After the system coordinates with the different banks involved, the user will send the money from his or her bank account to the recipient. The first bank removes the dollars from that account while the second adds the amount its customers account.
This is an account based system. There are no digital wallets involved. The Fed is not interacting with the general public.
Settlement
Settlement is always the golden nugget in any monetary system.
With FedNow, the banks will settle with each other in real time. This is in contrast to the present method which is mostly net settlement.
At the end of each day, the transactions are tallied up. The differences with credits and debits are handled by the settlement by those who sent more than received.
What is used for this purpose? Do banks send armored trucks full of cash to each other? This is not the 1920s where banknotes are currency. Instead, we are dealing with a ledger.
So what is used to settle?
Here is where people get lost. US dollars are not the currency that is typically involved. To settle using a Fed system, central bank money is used.
There are only two forms of this:
Since we know cash is not used, the only option is central bank reserves. This is convoluted since reserves are shown commercial bank reserves (vault cash and deposits) plus the central bank reserves put on the bank balance sheets.
When you are dealing with the major banks, the ones who will have access to FedNow, you are looking at the central bank reserves being utilized. Bank of America will settle with Well Fargo on $25,000 using that as opposed to dollars.
Prelude To A CBDC?
Many feel this is a prelude to a CBDC.
The question is why do people feel that way? Why does the Fed need to do this?
To start, if the Fed wanted to bring out a CBDC, it could simply move forward. Do you think these people are worried about upsetting people? Is being sly on their agenda? Look at how they are behaving with interest rates. The belief in their own power is mind blowing. If they believed a CBDC was of benefit, the Fed would create one.
The issue is the Fed already has a CBDC yet people do not realize it.
Central Bank Token
There is already a "Fed Coin".
What is a CBDC? It is a token created by the central bank which can be produced as determined that institution. This is fully in the control of the central bank and transforms the currency to digital form.
A CBDC is not on a public ledger. Instead, it is a currency running completely on a ledger controlled by the central bank. Here is where it differs from blockchain and cryptocurrency.
Central bank reserves fit this description. They are a bank instrument created by the Fed that goes on the balance sheet of commercial banks. To be involved, one needs a master account. Each reserve is pegged to a dollar since it is redeemable for $1. The catch is any conversion means receiving a banknote. The Fed can only pay in cash, something the banks do not want.
In effect, a central bank reserve is a stablecoin. It is an asset backed instrument that used within the banking system.
"FedCoin" already existed for more than 100 years.
Is FedNow A Threat To Cryptocurrency?
FedNow is a good step forward. It is a better network than what was in place previously. Here we see the Federal Reserve improving things from a technological perspective.
There are benefits to the general public. The ability to send instant payments is helpful. What will likely be the deterrent is the transaction fees charged by the banks. We can expect this will rival ETH during bull markets. Bank wires typically run around $40-$50. This will be at least that.
So cost is going to be a consideration.
We do have one other point that is even more important. FedNow is a US only system. This is available to the domestic banking system. The Fed only deals with US banks (or US arms of foreign banks).
Therefore, this system does nothing for international payments which is where the major train wreck resides. Anyone who engaged in cross border payments knows the nightmare that is.
By now, people need to realize cryptocurrency is much bigger than the Federal Reserve, U.S. government, or the existing banking system. The foundation of this new system is global, with the ability to scale to the level of the Eurodollar System.
To fully understand this stuff, it is important to get to the level of the plumbing. Once that is done, we see how FedNow truly operates and what it does for the banks.
Payments are just a small part of the future of cryptocurrency. In fact, that is the easiest part of the creation of a new financial system. It is the other stuff that is the meat and potatoes of what is being created.
logo by @st8z