Unraveling the FedNow Launch: Implications for CBDCs and Crypto | Weekly Digest

July 24, 2023

Welcome to another Crypto Weekly Digest brought to you by VirtualBacon.

A new development in the world of financial technology has made headlines. The Federal Reserve has launched FedNow, a real-time payment system that promises to change the financial landscape. This week, we will delve into what FedNow is, its connection to the emerging world of Central Bank Digital Currencies (CBDCs), and the ripple effects this could cause in the cryptocurrency sector. Join us as we dissect these advancements in our fast-paced, digital-driven economy.

What is FedNow and its History?

With the recent launch of FedNow by the Federal Reserve, we're witnessing the unveiling of a new chapter in the financial landscape. This instant payment service aims to enable instantaneous transfers between participating banks and credit unions, representing a significant leap from current transaction practices.

The journey of FedNow commenced in 2013 when the Fed sought public insights on improving the U.S. payment system.


This consultation led to the establishment of the Faster Payments Task Force, which, in 2017, advocated for a rapid payment system.


The result of these discussions surfaced in August 2019 as the initial plans for FedNow.


In essence, FedNow functions akin to a basic transaction layer - think of it as a 'layer zero' in the blockchain sphere. Key players in this network are U.S. banks with a Master Account at the Fed.


Note that FedNow is not directly available to non-bank entities. Such institutions would need to route transactions through a participating financial institution.

What sets FedNow apart is its round-the-clock operation, facilitating transactions 24/7, every day of the year. The system promises transaction completion times as brief as one second and aims to keep processing times under 20 seconds maximum. It's also worth mentioning that FedNow uses the ISO 20022 standard, which is in alignment with several cryptocurrencies, including XRP.

The FedNow system will initially support basic transactions, such as fund transfers between accounts.

However, its architecture leaves room for future enhancements, including functionalities for generating transaction reports, imposing transaction and account limits, and blacklisting accounts. Such expandability could pave the way for a myriad of applications in the evolving landscape of digital finance.

The FedNow Service officially commenced on July 20th, having garnered significant support from the banking sector. Upon launch, 41 banks and 15 service providers were certified to use the service, including leading institutions like JPMorgan Chase and Bank of New York Mellon.


The Fed also noted that an additional 35 banks and credit unions, as well as the Treasury Department’s Bureau of Fiscal Service, were already utilizing the service. More banks and credit unions are set to be onboarded throughout the year, indicating a significant push for wider adoption.

FedNow and Central Bank Digital Currencies (CBDCs)

As we pivot our focus towards the broader financial landscape, it becomes crucial to discuss the link between FedNow and the world of Central Bank Digital Currencies (CBDCs). The recent advent of FedNow, coupled with the rising discourse around CBDCs, heralds a profound shift in the traditional monetary ecosystem. In this section, we delve into the potential intersections and synergies between FedNow and CBDCs, exploring what this could mean for the future of digital finance.

The FedNow system's launch has triggered concerns, particularly around its perceived similarity to Central Bank Digital Currencies (CBDCs). Resonating with this apprehension, Robert Kennedy Jr posted a tweet, suggesting that the FedNow system could potentially pave the way for CBDCs and a government-controlled financial system.

The underlying fears are not unfounded. Beyond cash transactions, CBDCs could enable extensive surveillance of our private financial affairs. They give central banks the power to enforce transaction limits, regulate expenditure locations, and even determine when money expires. The potential functionalities of the FedNow system, such as imposing transaction and account limits and blacklisting accounts, only add fuel to these concerns.

The launch of the digital Yuan by China in 2022 further exacerbates these apprehensions, with speculations about FedNow serving as a 'Trojan Horse' leading to a US dollar CBDC.



It's hypothesized that FedNow could dominate the instant payment infrastructure by compelling institutions to adopt it, or by outcompeting others with its cost-effective and efficient money transfer methods. The same infrastructure could later be used to foster the adoption of a digital currency.


Despite the circulating conjectures, the Federal Reserve was quick to delineate between FedNow and CBDCs. They affirmed that the FedNow Service operates akin to other existing payment services like Fedwire and FedACH.


As is common in such situations, it's normal for the Fed to dispel any theories casting a negative light on them. Thus, it remains to be seen which assertions hold merit and which do not, as the future trajectory of this system is still unclear.

FedNow Meets Crypto: A Confluence or Conflict?

The rise of digital currencies has undeniably shaken the financial world, making it impossible to overlook their influence in any financial discourse. In this section, we'll examine how FedNow interacts with the crypto landscape, potential repercussions, and whether this new service might spark innovation or incite competition in the crypto space.

FedNow's inception inevitably raises questions about its potential impact on the thriving world of cryptocurrencies. In an arena where speed, trust, and regulation intertwine, the crypto space could face both challenges and opportunities.

Cryptocurrencies, lauded for their quick transaction times, may face competition as FedNow promises near-instant transfers. The new speed equilibrium could potentially alter cryptocurrency's unique selling proposition, with users lured towards FedNow for fast transactions.

Trust has often been a stumbling block for potential crypto investors. The Federal Reserve's endorsement of FedNow, coupled with its positioning within an established regulatory framework, may offer a safe harbor for those cautious of the crypto storm. This increased trust could tilt the scales, especially for institutional investors wary of crypto's volatility and perceived lack of oversight.

While increased competition and trust building pose challenges for cryptocurrencies, opportunities might sprout from this new financial landscape. As real-time payments become normalized, traditional financial entities might consider integrating cryptocurrencies into their systems, bridging the gap between conventional finance and the crypto sphere.

FedNow's launch on July 20, 2023, promises to reshape financial transactions, its ripple effect inevitably touching the shores of the crypto world. As the waves of competition and integration surge, crypto might find its footing altered yet potentially reinforced in the evolving financial sands.

Some interpret FedNow's purpose as an attempt to replace stable coins and other types of private money, but not all cryptocurrencies, which U.S. regulators typically classify as commodities or securities. This viewpoint was reiterated by Fed Chairman Jerome Powell at a recent hearing


However, the Fed's statements in 2020 about FedNow highlighted its intent to coexist with private sector options, though it's unclear if this includes stable coins. The potential impact on the crypto market is uncertain. If FedNow introduces tokenization and creates a stable coin, it might gain significant control over the crypto market, a possibility that could be alarming for crypto enthusiasts.

As we conclude this newsletter, it's evident that the introduction of FedNow marks a significant transformation in the financial landscape. Offering real-time payment services round-the-clock, FedNow is poised to revolutionize the banking sector, creating competition for cryptocurrencies, and potentially laying the groundwork for CBDCs.

From a personal perspective, this is a moment of great anticipation, albeit tinged with uncertainty. The full implications of FedNow, its impact on cryptocurrencies, and potential role in the emergence of CBDCs remain to be fully unraveled. As we navigate this evolving financial landscape, staying informed and adaptable becomes crucial. In this era of rapid technological advancements, change remains the only constant.

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