FedNow can outperform almost any crypto project in existence
The US Federal Reserve created FedNow to make USD settlements faster and cheaper between financial institutions. The system will offer 24/7 operating hours plus a full-function back-office suite.
Scheduled to launch by July 2023, FedNow significantly improves traditional interbank settlement systems such as FedWire or ACH systems. It offers superior cost, scale, features and end of day.
Simply put, FedNow almost completely eliminates the need for a US central bank digital currency (CBDC).
Here’s how FedNow will achieve almost everything a digital dollar can achieve – and how it will outperform most digital assets, including stablecoins. Moreover, it will achieve all this without blockchain.
Instant peer-to-peer payments with irreversible finality
Once integrated into the vast majority of US financial institutions, FedNow will allow instant settlements in USD between US residents on a peer-to-peer (P2P), business-to-business (B2B) and business-to-consumer (B2C) basis basis — even if bank offices are closed.
For the first time, it will allow almost any financial institution to settle payments with other institutions instantly. This feature will eliminate the usual “three to five business day” time frame for legacy payment settlements. As a result, it will provide payees who rely on cash flows with reliable intraday access to trusted funds.
Admittedly, it will not serve everyone. Features are limited to customers in good standing with qualified US financial institutions. However, FedNow will still connect the majority of US residents, as well as many wealthy USD users abroad. This will soon include hundreds of millions of people.
As the clearing house for the world’s reserve currency and the reference interest rate for the vast majority of global trade, the Federal Reserve is the world’s foremost central bank. Per Pareto’s principle, FedNow may only connect 20% of the world’s population on a peer-to-peer basis, but it can still connect 80% of the world’s peer-to-peer electronic payments.
Since 2017, crypto promoters have mocked bank branches’ inconvenient locations and opening hours. They argued that access to one’s money should not depend on teller windows or the risk of using an ATM at night. They also argued that senders should be able to send irrevocable funds without incurring the risk of chargebacks.
Read more: Central banks play catch-up in attempt to influence stablecoin legislation
Cheaper payments
Another selling point for cryptocurrencies was their promise to reduce transaction costs. However, consider that FedNow also promises lower costs than almost any blockchain in existence.
Specifically, the Federal Reserve will charge most financial institutions a de minimus $25 monthly access fee—a fraction of the cost of running a single node on most public blockchains. For payments up to $100,000, FedNow will charge just 4.5 cents per transaction paid by the sender plus 1 cent per transaction request paid by the requester.
Even better, this fee plan accounts for the complete transfer in fiat, without on/off ramping through any crypto exchange. FedNow eliminates all fiat crypto fees, risks and delays.
With very few exceptions, FedNow offers cheaper payments than almost all public blockchains. It is also secured by the world’s most valuable ledger: the books of the Federal Reserve, which secure transactions worth quadrillion dollars annually.
Scalability
The Federal Reserve already settles trillions of transactions each year and has unlimited data and throughput capacity via government-run data centers. FedNow’s centralized database will allow highly scalable transaction processing. This is of course the advantage of a completely centralized approach to digital payments.
Contrast this centralized database with most public blockchains that limit data to as little as a few megabytes every hour.
- In 2017, decentralization led the Bitcoin community Blocksize War, which ended in a rift.
- On one side were the so-called big blockers who wanted to increase the size of Bitcoin’s ledger to accommodate more transaction data.
- On the other side were the small blocks, which valued a small file size for Bitcoin’s blockchain to decentralize thousands of fully validating nodes with cheap, small hard drives.
- In the end, the small blockages that The Bitcoin community valued decentralization over scalability.
Scalability remains an issue for all digital assets that prioritize decentralization. FedNow, on the other hand, is 100% centralized and therefore scalable with almost unlimited throughput.
Stability
Unlike most stablecoins that regularly struggle to maintain their peg, FedNow will transmit an unchanged, guaranteed dollar value at all times with zero price fluctuations.
Fraud control
FedNow offers tools to fight fraud. Tools include a maximum limit on transaction sizes (originally proposed at $500,000 per account, per day), the ability to flag accounts involved in suspicious activityand reporting tools that include semi-automated as well as manual reviews.
Future capabilities of FedNow
While the initial launch is not planned, the Federal Reserve also has some upcoming FedNow features planned in development.
- Alias-based payments, which may include a “Fed Directory.” Alias-based payments can eliminate the need to remember an account or routing number. The Ethereum Name Service (ENS) does the same for Ethereum by creating domain names, or “aliases” for Ethereum addresses that look like long strings of numbers and letters.
- Support for APIs
- Mass payment applications such as payroll
- Improved remittance services for B2B payments
- Additional security checks
In summary, the Federal Reserve plans to release its long-awaited FedNow system in July 2023. It threatens to outperform most digital assets, especially stablecoins, through its centralized operation with government support.
Although FedNow will only serve customers of financial institutions with access to the US banking network, it could soon connect hundreds of millions of people on a P2P, B2B and B2C basis. FedNow will enable 24/7 instant, irreversible, peer-to-peer payments with low costs and high throughput.
Although purposefully slow, expensive and decentralized cryptocurrencies such as Bitcoin have chosen not to compete on most of these features, many other crypto projects may need to rethink their differentiated value propositions in light of the impending launch of FedNow.
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