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The US central bank has released an update regarding the Federal Reserve’s Fednow project, which is scheduled to begin in July. The Fed has responded to recent criticism of the Fednow service, claiming that the Fednow payment network is “neither a form of currency nor a step towards eliminating any form of payment, including cash.”
When the US Federal Reserve announced the launch of the Fednow service in July, it sparked immediate opposition and led many to believe that it is one of the initial stages of a US central bank digital currency (CBDC). Several prominent economists and politicians have warned that a CBDC would lead to greater surveillance of Americans’ financial transactions.
To allay fears, the Fed issued an update on April 7, 2023, raising the questions: “Is Fednow replacing cash?” and “Is it a central bank digital currency?” The central bank claims that Fednow does not achieve any of these goals and emphasizes that the project is exclusively focused on “instant payments”. The Fed’s update states unequivocally: “Fednow is not related to a digital currency.” The US Federal Reserve’s notice adds:
Fednow is a payment service the Federal Reserve makes available to banks and credit unions to transfer money. It is like other payment services from the Federal Reserve, such as Fedwire and [Fed ACH]. The Fednow service is neither a form of currency nor a step towards eliminating any form of payment, including cash.
In a recent interview, economist Richard Werner expressed concern about the timing of the Fednow project, describing it as “suspicious.” Werner linked the initiative to a central bank digital currency (CBDC), a sentiment shared by Georgia Representative Marjorie Taylor Greene, who criticized Fednow on April 5. More recently, several US lawmakers have proposed legislation that would ban CBDC initiatives.
According to the Fed’s update, the central bank “has not made a decision on whether to issue a central bank digital currency (CBDC),” and it will not do so without permission from the executive branch and members of Congress. The Fed further emphasizes that “a CBDC will not replace cash or other payment options.”
Conversely, the White House’s recent “Economic Report of the President” noted the possibility that Fednow and CBDC initiatives “have the potential to realize many of the benefits that crypto-asset developers have promised.” In terms of a US CBDC, the public is currently aware of two different Federal Reserve projects.
The first project is an experiment called “Project Cedar”, a pilot designed by the Federal Reserve Bank of New York. The Project Cedar protocol uses a wholesale digital dollar to improve financial transactions. The other Fed CBDC initiative is “Project Hamilton,” a joint effort by the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT). While the Fed claims that Fednow is not related to a digital currency, it appears to be a matter of semantics.
The Fed claims that the Fednow service is not a digital currency or a step toward eliminating any form of payment, including cash, but instead a digital payment system designed to facilitate instant payments. However, some critics argue that the system is actually a form of digital currency and that the Fed’s characterization of the project is misleading. Ultimately, the exact nature of the Fednow service and its relationship to a potential CBDC remains a matter of debate.
Will the Fednow project pave the way for a central bank digital currency, or is it simply a digital payment system designed to facilitate instant payments? Share your thoughts in the comments section below.
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