• Digital central bank currencies employ large central banks
• The US Federal Reserve has not yet positioned itself clearly
• Real-time payment system FedNow coming in 2023 – step towards CBDC adoption?
After the great hype surrounding cryptocurrencies such as Bitcoin, Ether & Co., central banks recognized the opportunity to offer people the advantages of cryptocurrencies in payment transactions with their own digital central bank currencies, so-called Central Bank Digital Currencies (CBDC), while at the same time eliminating some of their risks . For example, China has been working on the e-yuan, which has been issued since April 2020 as part of pilot projects in some regions. The Indian central bank announced earlier this year that its own digital currency, the digital rupee, will come as early as this year or next , the European Central Bank (ECB) is in an investigation phase for the digital euro and the US Federal Reserve is also dealing with a digital dollar. Earlier this year, the Fed released a study on the e-dollar. However, the report lacked a clear positioning of the US Federal Reserve on a digital central bank currency.
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Federal Reserve banks develop real-time payment system – stepping stone for CBDC
However, the US Federal Reserve announced in 2019 that the Federal Reserve banks were developing a new real-time payment system called FedNow to support faster payments in the United States. As CoinDesk reports, this is considered a springboard for a possible central bank digital currency.
“The rapid development of technology represents a critical opportunity for the Federal Reserve and the payments industry to modernize the country’s payments system and lay a secure and efficient foundation for the future,” the Fed said in its statement at the time. The Fed’s broad reach should help the “FedNow service support a nationwide infrastructure upon which the financial services industry can develop innovative, faster payment services to benefit all Americans.”
Time window for FedNow introduction specified
In a press release at the end of August, the US Federal Reserve announced that it was narrowing its time window for introducing the real-time payment system. Previously, the coming year was announced as the time window for the introduction, now it is said that the technical test phase of the FedNow service should begin in mid-September and the “innovative central instant payment infrastructure” should then go live between May and July 2023 and ” available to financial institutions of all sizes across America,” said Fed Vice President Lael Brainard in a speech at the FedNow Early Adopter Workshop, which the Federal Reserve published on its website in late August.
“Today, with the FedNow launch date in sight, we’re excited about the collaboration and commitment of our pilot participants to advance modern payments in America,” quoted the US Federal Reserve Esther George, President and CEO of the Federal Reserve Bank of Kansas City and Executive Sponsor of the FedNow program, in its press release.
Ken Montgomery, first vice president of the Federal Reserve Bank of Boston and head of the FedNow service program, said the benefits of instant payments are becoming increasingly important to consumers and businesses, “and the ability to offer this service will be critical for financial institutions ‘to stay competitive’. In his opinion, over the next year financial institutions can “use the FedNow service as a springboard to offer their customers innovative solutions.”
According to the US Federal Reserve, more than 120 organizations are currently participating in the FedNow pilot program, including, most recently, US Bank, the Exchange Bank and several payment processors and solution providers such as Alacriti Payments, ECS Fin, Form3 and ModusBox.
Brainard: FedNow service will change everyday payments
Fed Vice President Lael Brainard describes the payments system as a critical part of America’s infrastructure that affects everyone, noting that the FedNow service is “changing the way everyday payments are made across the economy, and giving homes and businesses significant… will bring benefits” because “they can send instant payments anytime, any day and the funds are immediately available to recipients for other payments or to efficiently manage cash flow.”
According to Brainard, the Fed has made “a significant commitment” to the new payment platform. FedNow has benefited from the innovative technologies and approaches already proven at global technology companies that are critical to today’s digital economy. “Our cloud-first design, unique among central bank instant payment services, positions us for the future by enabling not only the throughput and scalability required for high-volume retail transactions, but also broad geographic resiliency points to ensure continuous… In addition, the cloud-first design offers other key technology components that contribute to operational resiliency, and the development processes are agile, allowing the Fed to bring new features to financial institutions more quickly, Brainard said.
However, it remains to be seen whether the US Federal Reserve will take the first step towards introducing a digital central bank currency with its planned modernization of payment transactions through the FedNow service.
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