FedNow and Central Bank Digital Currencies: Setting the Record Straight

Summary

News around the Federal Reserve’s research project on Central Bank Digital Currency (CBDC) and the recently launched FedNow instant payments solution often collide and sometimes cause public confusion between the two. This paper aims to clarify the differences between these distinctly different payment solutions. Both focus on improving the speed and efficiency of the payments infrastructure within the U.S. banking system, but that is where the similarities end.

FedNow is the first U.S. government created real-time payments solution offering 24 X 7 X 365 instant transaction technology for bank customers, which allows for immediate end-to-end payments. The Federal Reserve launched FedNow on July 20^th to a limited number of financial institutions and will expand to a wider user base with additional capabilities in 2024. FedNow is not a digital currency or a Central Bank Digital Currency (CBDC); instead, it is a government sponsored instant payments technology solution.

In the U.S., a CBDC would represent a third form of central bank money but would be offered via a centralized blockchain network. It would supplement, but not replace, the two existing forms of Federal Reserve money: hard physical currency and digital balances held by member banks. It would be a new liability of the Federal Reserve but not its member banks. A CBDC remains in an exploratory phase, with any potential launch being years away if it occurs at all. 

Background on FedNow

FedNow is the first government sponsored real-time payment solution offering participating banks and their customers the ability to instantly send or receive funds. Its development began almost ten years ago with the formation of the Faster Payments Task Force, leading to the announcement of

FedNow in 2019. It is a digital payment solution for member bank participants but is not a digital currency, CBDC or private stablecoin. FedNow enables users to send/receive funds 24 hours a day, 7 days a week, 365 days a year. This is the Fed’s first new payment rail since the introduction of the Automated Clearing House (ACH) in 1972. The Fed’s intent is to enhance, not replace, the decades old ACH and Fedwire services.

FedNow provides similar functionality to current private payment solutions such as The Clearing House (TCH) Real-Time Payments (RTP) launched in 2017 and to a lesser extent more retail oriented apps such as Zelle, Venmo and Cash App. FedNow will not replace existing private payment services but only time will tell if it has a disruptive impact.

Why Now?

The advent of the internet in the 1990’s and the smart phone in the 2000’s, has profoundly impacted customer banking preferences over the last 25 years. The digital age has slowly eroded the dominance of paper checks and ATM activity as the world has shifted away from check/cash transactions toward debit cards, credit cards and instant payment mobile apps. The chart below illustrates this trend and measures the number of transactions (in billions) rather than dollar amounts.