FedNow: A Foray into the Future or a Forewarning of Financial Doom?

“The road to hell is paved with good intentions”

Following the launch of FedNow, The Federal Reserve’s vague language and avoidance of key issues regarding a possible CBDC have only intensified concerns and suspicion. Is the FedNow just a payment system for fast interbank transactions, or is this the stepping stone toward a CBDC and a state-controlled financial dystopia?

TL;DR:

• FedNow promises 24/7 availability, instant transactions, and affordable fees. However, the true nature of FedNow remains murky, triggering concerns about a potential stepping stone toward a Central Bank Digital Currency (CBDC).
• If developed, a CBDC could potentially allow the government and banks to track all financial transactions, raising serious questions about personal liberty and financial freedom.

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The Launch of FedNow: History, Concerns and Red Flags

Let’s share some quick background history: In March 2023, the Federal Reserve announced the launch of FedNow, a payment system for fast and efficient interbank transactions.

At first glance, FedNow doesn’t seem like anything nefarious. But, it’s the Fed — I don’t think I need to elaborate. It’s infamous for sending clouded messages, avoiding direct and hard-hitting questions, and leaving legal gray areas for themselves.

A major example of this can be seen in a March Senate hearing when Jerome Powell used vague language to respond to questions regarding the Fed’s authorization for the issuance of a CBDC:

Pay attention to Powell’s answer: when asked about the legal parameters for a CBDC, Powell says Congress authorization is needed for the issuance of retail and wholesale CBDC, but doesn’t mention intermediated CBDC, which is the model proposed by the Fed and shares striking similarities to the FedNow system.

Similarly, in September 2022, Lael Brainard was confronted by the House Committee multiple times for her vague language and clouded statements regarding the Fed’s legal stance on a CBDC, rewording statements with little to no substance.

“The Board’s January discussion paper notes only that, “The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.”

Let’s try to ask ourselves what any of this type of vague, inconclusive language means, which, by the way, is called Fed Speak, which Alan Blinder describes as: “a turgid dialect of English’’ used by Fed chair members to make misleading, ambiguous statements. So, this leaves a few questions:

• What exactly is needed from Congress to gain authorization?
• What does ideally mean in this context?
• What are the legal parameters for the issuance of CBDCs, and how does this affect institutions and citizens?
• Can the Fed bypass Congress and impose a CBDC?
• Is FedNow, shockingly similar to an intermediated CBDC, a stepping stone for a future CBDC, and if so, what legal parameters should be covered?

It’s worth mentioning that Lael left the vice chair position after the FedNow was reannounced in March this year.

As you see, words absolutely matter within the legal and financial space, and one thing is what they say and what they do next. And why do they use this language? To manage expectations and market reactions.

If you listen to this FedNow Service Webinar, one of the architects was about FedNow’s fraud prevention, measures, to which the answer was, in short, that the FedNow can adopt centralized monetary policies, impose transaction limits to certain types of users, and use AI to prevent fraud or to blacklist, limit, or eliminate certain individuals automatically if one violates any policy or rules of FedNow.

In other words: they can control, watch, manage, and use AI to exercise these and more control powers.

What Is FedNow and How Does it Work?

FedNow is a payment rail designed for rapid interbank settlements. The service will be exclusive to financial institutions of all sizes and shapes, and it provides a framework for seamless money transactions with 24/7 availability and clearing functionality.

Businesses will have access to FedNow through the FedLine network, the Fed’s electronic messaging system serving over 10,000 banks.

FedNow was made with the help of three main architects, Nick Stanescu, Daniel Anthony, and Kenneth Montgomery, alongside hundreds of financial and tech institutions that contributed to its development.

It provides multiple features and transaction types and limits depending on the service/product, and fees are as low as 4 cents.

For natural people (they will only interact with the service via other banks), transactions are limited to 100k or 500k, although this needs to be better disclosed, and hopefully, it will be during the next phases of the rollout. You can find this information on the FedNow Resource page.

FedNow, ACH and Wire Transfer

When you make a transaction to a party that uses the same bank, the bank in question will only have to update both parties’ accounts to specify from which one the money is going out and to where it is going. The same thing happens with FinTech apps such as PayPal or Venmo.

But interbank transactions, say Bank of America to Wells Fargo, are more complicated and usually happen in two ways: either your bank has an account on the recipient’s bank to transfer the money, or they could use the central bank. I.e., the Fed, which tracks and updates the banks’ accounts.

Two popular models in the US for executing interbank transactions are ACH and wire transfers.

• In the case of ACH, transactions can only be processed during business days and could take hours or days to complete. Basically, an ACH creates a digital file with payment information, such as routing number and amount, and sends it to an ACH network operator, which can be the FedACH service, or the Electronic Payments Network (EPN), which is the only private operator in the ACH Network. But ACH transfers are limited, sent in batches, and can be slow.
• On the other hand, a wire transfer is faster but more expensive; the bank just takes your payment information and sends it to the FED, which transfers the money out of your bank account to the recipient’s respective bank account and vice versa.

Comparing ACH, wire transfers, and FedNow. Source: M6 Labs

Though it’s a bit more complicated than that, and these networks usually complement and compete against each other at the same time, the essence of the current US payment system is there.

All of this is gone with FedNow. While we don’t exactly know the details of the specific underlying distributed system FedNow is built on, it is pretty much an updated version of Fedwire but with immediate transactions, 24/7 availability, and fees as low as four cents for credit transfers. Here’s a look at the fees structure for 2023:

FedNow’s 2023 Fees Structure

So What if The Fed Develops a CBDC?

So what if they develop a CBDC anyway? Wouldn’t that make money transfers easier for everyone? For the uneducated user, a CBDC sounds simple; just digital cash that you can spend to pay your mortgage or at the grocery store. But giving it a little bit of thought, this comes with some implications that undermine your liberty and financial freedom.

• The banks and the government have a database in which they’ll monitor every small transaction you make, 24/7, with absolutely no degree of privacy.
• They could freeze your account, withhold your assets, put expiry dates on your deposits, and what else.
• Well, banks can technically already do that, you might say, but CBDCs provide them with insights into every little transaction you make. In other words, the risk of financial privacy and financial freedom becomes evident as CBDCs potentially turn into a massive surveillance tool.

And I’m not saying this because it’s just me. We already have politicians, financial institutions, and everyday people warning about potential socio-economic risks for CBDCs. While privacy concerns, the risk of massive surveillance, and programmable money are already daunting, two risks are overlooked, in my opinion:

• Cybersecurity threats

If a CBDC is hacked, then it poses a systemic risk. CBDCs can be issued by a distributed ledger (DLT), a centralized database, or a token-based system, all of them proposing multiple challenges in their designs.

For example, Denmark’s central bank was compromised during the SolarWind hack in 2020, which is an IT and SaaS company that hackers managed to exploit after gaining access to its networks through an unknown backdoor. The hackers sent a supply chain attack installing malware in the devices of thousands of SolarWinds users, which included worldwide financial institutions, banks, and the US government, aside from over 30,000 regular users.

If a central bank were to choose a software company or a DLT company, such as a blockchain protocol, they should be aware of the associated risks, such as backdoors and code vulnerabilities.

• The undermining of financial markets

The undermining of financial markets by crowding out private banking. In other words, if CBDCs become more popular than private sector alternatives, people might quit traditional banks.

In this regard, the Fed says CBDCs could provide healthy competition to banks, but how does private banking compete against the government when it doesn’t have to charge anything for the same banking service?

This has led many private banks and credit unions to express their concerns and objections against a US CBDC. The Credit Union National Association (CUNA) said the current financial framework in the US can be addressed and enhanced in multiple ways without a CBDC that could destabilize the system.

Final Thoughts: The Great Reset, CBDCs, and YOU

One of the conspiracies — or let’s better call them concerns — going on around the CBDC dilemma is how CBDCs could be used to “wipe out debt.” While yes, it’s technically possible — by passing a law declaring all debt unenforceable — the consequences could be disastrous since the US essentially has a debt-based economy. What we could talk about is a major financial reset.

Go away from cash, tangible asset, to digital economies with central banks handling CBDCs — in the case of the Fed, intermediate CBDCs, where the Fed handles all interbank transactions on behalf of commercial and regional banks — and basically having a controlled, programmable money supply.

This takes us to one interesting event: the integration of FedNow with Metal Blockchain, a layer zero (for those who don’t know, a layer zero is a foundational layer on which developers can build layer-1s) born as a fork of Avalanche’s code built by Metallicus.

To keep the story short, Metal Blockchain complies with the Bank Secrecy Act, therefore they comply with anti-money laundering laws and KYC, and the reason is to provide DeFi developers with compliance-friendly options. Its ecosystem also hosts the X-Chain, similar to Avalanche, allowing devs to create and manage tokens under their own criteria, e.g., how it can be spent, or with whom can be spent (US citizens only).

According to Metallicus founder, Metal Blockchain can serve as the foundational layer, an ecosystem for “bank chains,” allowing them to create and manage CBDCs

Here’s what the founder said in a conversation with Cointelegraph:

“He stated that it will also allow banks to prepare for an eventual central bank digital currency (CBDC), as well as for “bank-issued stablecoins that can interact within a basket of stablecoin currencies.”

I think this speaks for itself. Like we said at the beginning of this article, the red flags are there, and as we navigate this uncertain future, caution and vigilance remain our best defenses.

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