WASHINGTON — The Federal Reserve is developing a payments platform set to launch in a couple of years to help consumers complete transactions in real time. At the same time, the central bank is studying the potential creation of a digital currency, which would serve a similar purpose and maybe even more.
A growing number of observers are asking: Could one of those payment innovations ultimately make the other obsolete?
FedNow, planned to be up and running
"If the digital dollar proves to be wildly successful, then I see FedNow going the way of the check a few years later,” said Stephen Aschettino, a partner at Reed Smith. “It'll still exist, and people will still use it, but it'll have much lower volume than I think it will initially.”
When FedNow comes online, any financial institution with an account at one of the Fed’s regional banks will be able to use the service to process real-time payments around the clock. That will enable customers to send and receive money instantly instead of waiting multiple business days for funds to clear.
Yet lately, the idea of a digital dollar has grabbed more attention. On Tuesday, a House Financial Services Committee task force held a hearing on the subject days after a
Private-sector cryptocurrency firms have already issued stablecoins that are tied to the value of national currencies. But the Fed and other central banks around the world are exploring the feasibility of issuing a digitized version of actual currency that they would back.
Whereas FedNow will likely require consumers to open an account at a bank that will help facilitate the real-time transaction, a central bank digital currency could cut out intermediaries like banks. A Fed-issued digital dollar could also potentially enable users to take advantage of certain innovations now available with private cryptocurrencies, such as programming payments related to smart contracts.
To be sure, the Fed has not yet decided whether to move forward in developing a digital dollar. It has been studying the issue in depth for a number of years and is set to
Fed Gov. Lael Brainard noted in a speech last month that one of the primary goals of FedNow is to “provide ubiquitous access to an instant payments system,” while a digital dollar could help expand access to financial services more broadly.
“Depending on the design, CBDC may have the ability to lower transaction costs and increase access to digital payments,” she said.
Several observers say FedNow and a potential digital dollar would not be mutually exclusive.
Adam Gilbert, the regulatory head of PwC's financial services advisory service, called FedNow more of a “here and now” project as compared to a digital dollar.
“I think the digital currency will be on a longer fuse, because I think it's more sensitive,” he said, noting that many of the considerations around how a CBDC would work in the U.S. — such as whether it would be used for wholesale or retail purposes — have yet to be determined.
The extent to which a digital dollar would be able to replace FedNow ultimately depends on how that digital dollar is designed, added Diogo Mónica, president and co-founder of Anchorage Digital Bank, a financial institution that provides cryptocurrency-related services.
“It could eliminate the need for FedNow," he said. "They can also design it in a way that it doesn't, and they could also design it in a way that" it goes beyond FedNow.
Gilbert pointed out that even with a digital dollar, FedNow could still be useful for transferring cash between banks.
“You're still going to need to move ... dollar value from point A to point B,” he said. “That is still going to have to occur whether it's in digital form or otherwise, and how you assure finality in that transaction is still going to be key.”
But FedNow wouldn't eliminate the need for a digital dollar either, said Mónica. He pointed out that central bank digital currencies would optimally include some type of digital wallet component that removes the requirement of a bank intermediary being involved.
“I think you could go a little further, which is FedNow allows you to move money from A and B, but doesn't allow you to hold that money,” he said. “A true CBDC would obviate the need for a bank account.”
Yet the prospect of such a scenario has banking industry representatives increasingly concerned. They say potentially moving real-time payments out of the banking system would have drawbacks.
"The push for CBDCs is oddly timed given the revolution in real-time payments that is already underway, and its proponents ignore or minimize the reduction in lending and economic growth that would come if consumers and businesses could instantly move their money from bank deposits into a digital mattress," Greg Baer, the president and CEO of the Bank Policy Institute, said in a statement.
Others say there could be room in the future for FedNow, central bank digital currencies and private-sector cryptocurrencies to all coexist.
"There'll be opportunities for there to be a complementary ecosystem where you'll have private stablecoins, and you'll have digital currencies and you'll also have much faster payment systems,” said Stephen Gannon, an attorney at Murphy & McGonigle.
Unlike the immediate functional need met by FedNow, a CBDC is a bigger-picture effort to reimagine the global economy through a digital lens, Gannon said.
“The CBDC is a bigger project that is much more strategic and much more plugged into how we think about the U.S. dollar, both globally and as an instrument of strategy, and also as an instrument that impacts global markets,” he said.
The discussion about a digital dollar in the U.S. has followed more advanced efforts in other countries. They include China, which is currently piloting a digital yuan. Several lawmakers
“This is an opportunity we have to further export the influence of the U.S. dollar, which would be beneficial for the U.S.,” said Mónica.
A digital dollar would likely be programmable so that it could be spent for specific purposes. That could revolutionize, for example, supply chain management or payroll, and give further rise to smart contracts where money could be delivered immediately upon the completion of certain tasks.
“FedNow is very much a true payments system. FedNow allows you to move instantly money from point A to point B. That's it,” said Mónica. “CBDCs actually have some higher-order primitives in terms of programmability that allow you to do many other things that are not just moving value from point A to point B.”
Aschettino agreed that a digital dollar could offer “a lot of other potential benefits” besides just the power to deliver payments instantly. But that doesn't preclude the need for FedNow, he added, which would provide a much-needed service.
“I don't think that these initiatives are in any way mutually exclusive,” said Aschettino. “I think that FedNow, with or without a digital currency component, is an idea [that] ... should have happened years ago.”
