A lot is being made within the cryptocurrency industry about FedNow, which went live on July 21st. This is a payment system that will allow for instant settlement among the banks.
This is revolutionary for the United States banking system. Before this, settlement occurred on a net basis. The transactions were tallied up at the end of the day, with the appropriate credits and debits applied.
FedNow will allow for instant settlement. It is important to remember that the banking system is two-tiered.
The first is the commercial bank customer. This is where most people have accounts. We sign up with a particular bank, which allows us to send, receive, and store money. When we make a payment, say a credit card bill, the money is removed from our account. Eventually, that ends up in the account of the issuer of the card.
This can be an instant transaction. The problem is the settlement layer.
With banks, the ledger is maintained by the central bank. Here is where the transactions between the two financial institutions has to take place. To fully settle means the banks square their books.
The end of day transactions handle this. Since we are dealing with the central bank's ledger, most of the settlement occurs using reserves the Fed issued. This is not legal tender but is bank currency (or tokens) that they pass back and forth to each other.
Obviously we can see how this is not only centralized but a closed system.
Image by JC Reuland
FedNow - Instant Settlement
The key to the payment system is the settlement is done on a gross basis. With this, the money that is pulled out of the individual's account is matched by a transaction on the bank's balance sheet.
This is revolutionary since it allows customers access to their funds immediately. The traditional financial system is know for its delays. Anyone remember how long it took for a check to clear?
One of the keys is what FinTech does with this. This is a base system which different applications can be built upon. For example, this could affect merchant accounts in terms of how they settle. Visa tends to dominate this sector, a company that is not always the quickest to get companies their money.
Still Trailing Blockchain
As revolutionary as this is, it still trails [blockchain])@leoglossary/blockchain), especially one like Hive.
Hive has the fastest settlement in the world. The transactions, due to one block irreversibility (OBI) averages under 2 seconds to completely settle. This is not likely to be matched anytime soon.
Another important piece to this discussion is transaction fees. While we often allude to those on networks such as Bitcoin, now we are comparing to the banking system. Commercial banks are not going to give this service away. Anyone who incorporates this will charge for it.
How much is the question? We will likely get some ideas over the next few weeks as the early participants start to test things out. However, we know it is not going to be feeless.
So while a bit of friction might have been removed, we are not seeing much improvement in the cost. Of course, when using some blockchains, those prices when the network is busy can rival what the banks charge.
Is The Centralized Option Better?
This is where the development is going to enter.
FinTech is adept at building things out. However, we have to keep in mind that many of the participants are traditional banks. These are not epicenters of innovation. Disruption often comes from outside an industry.
Silicon Valley excels in this area. One of the best examples is PayPal. This corporation revolutionized digital payment yet is not a bank or credit union. It is outside the banking system, something that took business away.
FedNow is run by the Federal Reserve for its customers. These are banks and credit unions. The Fed does not deal with the general public. Hence, the only ones who can tap into this are those financial institutions with master accounts. They will then offer it out to businesses and individuals.
This is as centralized as it gets.
Catching Up To Hive
There are many ways that Hive is ahead of FedNow.
As stated, the fees are going to be lower. We also have the speed versus the traditional system, even the new network.
The wallet system that blockchains use are light years ahead of what the financial system offers. We also have the ability for anyone to innovate and build. Applications are not just limited to banks. Anyone with the technical skills can simply build on Hive and utilize whatever is at the base layer.
Finally, FedNow is still using the same ledgers as before. The players are not changing at all.
The debits and credits in your account are maintained by the commercial bank. As stated, the transactions between the banks is done using central bank money.
A blockchain like Hive has the ledger run by the block validators. The ledger is housed on servers all over the world, by unrelated entities.
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