Real-Time Payments in the US: How do web3 rails fill the gaps?
Real-time payment (RTP) systems use payment rails to move money instantly from sender to receiver.
Yes, INSTANT. That is a powerful word to keep in mind, particularly in the context of value transfer/settlement.
Our monetary system and related infrastructure are out of date, by decades..
Despite the current gaps in the US payment infrastructure, there are opportunities to learn from countries like Brazil, India, and China, which have successful RTP systems.
The U.S Federal Reserve (FedNow) instant payment service is scheduled to launch in July, with certification and testing for early adopters started this month.
To take off in the US, RTP needs banks to adopt and connect to the network, regulators to play a leading role in collaboration with financial institutions, and effective consumer protection and fraud management. THESE ARE KEY.
Web3 rails are being leveraged for RTP and FedNow to solve these gaps by creating decentralized payment infrastructure, providing access to a broader range of participants and enabling the building of open-source protocols for processing RTPs.
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As I’ve touched on in past posts, ISO 20022 is a messaging standard that enables the exchange of electronic messages between financial institutions. The standard defines a common language and a standard format for these messages, which makes it easier for different financial institutions to communicate with each other.
With the launch of FedNow, the Fed is using the ISO 20022 messaging standard. This means that all financial institutions that participate in FedNow will use the ISO 20022 standard to exchange messages related to real-time payments.
This will improve the efficiency and interoperability of the payments system by enabling faster, more accurate, and more transparent transactions. It can also reduce the costs and complexities of implementing and maintaining multiple messaging formats across different financial institutions.
Overall, the adoption of the ISO 20022 messaging standard is a significant step forward for the Fed’s efforts to modernize the US payments infrastructure and to facilitate faster and more secure payments.
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Distributed ledger technologies (DLT), such as blockchain, are supporting compliance with ISO 20022 by providing a secure and transparent way to store and share data — ensuring the accuracy, integrity, and privacy of information exchanged between different parties.
Digital assets, such as cryptocurrencies or tokenized assets, are also being used to facilitate ISO 20022 transactions, enabling instant settlement and reducing counterparty risk.
However, there are still regulatory and technical challenges to be addressed before widespread adoption of DLT and digital assets.
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Much needed modernization is coming and web3 rails are behind the scenes making it happen.
Exciting times ahead of us!
