The Federal Reserve Launches FedNow, Denies the System is a CBDC, but There’s a Catch

The Federal Reserve unveiled the FedNow service, which it claims would revolutionalize the payment industry by offering real-time gross settlement (RTGS). 

At its soft launch in July 2023, the service incorporates the US Department of Treasury, 41 financial institutions, and 15 service providers. 

However, the Federal Reserve plans to include all 10,000 US financial institutions which would voluntarily join the system by creating mobile apps and websites operating on the FedNow network. 

Meanwhile, the Federal Reserve has denied that FedNow is not a central bank digital currency (CBDC), adding that they would require Congressional approval to introduce one.

Comparing it to  Fedwire and FedACH, the Federal Reserve describes FedNow as a payment service that allows “banks and credit unions to transfer money to their customers.” 

They claim the system would solve latency issues in the traditional financial infrastructure such as the Automated Clearing House (ACH), check, and debit card processing, and create an efficient financial system by allowing round-the-clock money transfers.

However, privacy and rights groups have raised concerns that the payment system could introduce a centralized chock point the government could exploit to shut down undesirable entities.

Although US financial systems join the FedNow system voluntarily, the Federal Reserve could leverage its position to arm-twist them once they get hooked to the system. Similarly, it expands the Fed’s footprint allowing the government to entrench itself further into the financial system.

Additionally, FedNow’s existence lays the groundwork for introducing a central bank digital currency, a possibility the Federal Reserve is currently exploring.  

The Federal Reserve has consistently denied that the FedNow system is a central bank digital currency or it would allow the government to spy on people and control their finances.

While this might be true at the moment, the Feds could expand its scope or use other tactics to achieve those objectives through the system. Finally, it lays the foundation for introducing a more invasive central bank digital currency.

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