The US instant payment system FedNow is here! But it is not a rival to cryptocurrencies.

The US instant payment system FedNow is not a rival to cryptocurrencies.

FedNow is a real-time gross settlement system developed by the Federal Reserve, representing a new settlement mechanism that enables 7*24 real-time payments among banks in the United States. However, it does not expand the dominant position of the US dollar, overlooks opportunities on the blockchain, and does not significantly improve cross-border payments.

Author: Sean Stein Smith, Forbes

Translation: ShenZhen

Supporters and advocates of cryptocurrency, including the Bitcoin extremist community, have long predicted a future in which digital assets replace fiat currencies and become the global standard for transactions. In light of these beliefs, the launch of the Federal Immediate Payment System (FedNow) (scheduled to be implemented in July and already adopted by early adopters) has had an impact on the market. Some condemn it as merely following in the footsteps of certain authoritarian regimes towards the first step in monitoring currency, while others believe it spells the end for most use cases of cryptocurrencies, but reality is more nuanced.

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FedNow is the Federal Reserve’s response to a series of problems and pain points in the global payment infrastructure. It is a real-time gross settlement system developed by the Federal Reserve, designed to support faster payments. Part of the reason for the development of this project is to address the challenges posed by tokenized cryptocurrency payments and the rise of financial technology solutions such as Venmo and Zelle. Unlike the previously listed existing options, the FedNow system represents a new settlement mechanism that enables real-time payments among banks in the United States. These services will be available 24/7, provide final settlement, and represent an upgrade to the US payment system to catch up with similar services offered in the eurozone and elsewhere.

So, if the Federal Reserve has created an instant, globally interconnected, final (immutable), and never-closing payment system, does this eliminate the need for cryptocurrencies? In reality, under the FedNow payment system, cryptocurrency payments definitely have a role to play, for the following reasons.

FedNow does not expand the dominant position of the US dollar

In recent years, especially in the post-COVID economic environment, there has been a growing concern about the specter of de-dollarization. Specifically, international transactions settled in Chinese yuan and euro have increased significantly. This is due to many geopolitical reasons, as well as economic arguments supporting these changes, but it also provides a path for stablecoins to grow in the market. In many markets, considering that over 90% of stablecoins are pegged to the US dollar at a 1:1 ratio, these stablecoin tools effectively serve as proxies for the US dollar in places where the dollar/local currency exchange rate is unstable.

The FedNow payment system operates based on the existing payment systems and frameworks, without expanding the coverage of the US dollar or increasing the potential number of possible US dollar-based transactions.

FedNow overlooks opportunities on the blockchain

Although the FedNow payment system may appear to be an alternative to stablecoins, it overlooks one of the fastest-growing applications of stablecoins: on-chain transactions and applications. To provide some background information, according to research by Coin Metrics and The Block, from 2017 to 2023, the total supply of stablecoins increased by 8,750%, totaling $123.9 billion. This significant increase in volume can largely be attributed to the role of stablecoins in the DeFi sector, both as a medium of exchange and as a hedge against more volatile crypto assets. The FedNow protocol ignores these opportunities because it does not allow the US dollar to exist on-chain or participate in on-chain transactions.

As asset tokenization becomes an increasingly discussed topic among traditional financial institutions, with BlackRock CEO Larry Fink stating that this market opportunity is worth $100 trillion, overlooking on-chain transactions seems to go against market trends and sentiment.

FedNow does not improve cross-border payments

As stated in the “Economic Report of the President,” the currently designed and launched Federal Real-Time Payments (FedNow) protocol focuses almost entirely on domestic payments in the United States, with limited improvements for international payments. Any government tool wishing to create a borderless international payment system clearly faces a daunting task, but stablecoin payments represent an existing solution to address this friction. Regulators and policymakers may have reason to question the significance of stablecoin payments and transfers on a global scale; some have mentioned the delayed issuance of financial accounting standards due to a lack of substantive significance.

In the first quarter of 2023, stablecoin payments and transfers reached $20 trillion, surpassing the total volume processed by LianGuaiyLianGuail for the entire year of 2022.

This is not to say that the FedNow payment system has no impact on payments, cryptocurrencies, or fiat currencies; that would be a short-sighted view. On the contrary, as the platform transitions from development and pre-launch to mainstream adoption, some of its issues (including the current $500,000 limit) will certainly be addressed. What is worth noting, however, is that many of the innovations and improvements brought by the FedNow payment system to the current payment rails reflect some of the innovations and improvements based on blockchain transactions.

The FedNow payment system is not the end of cryptocurrencies but may instead open the door to more stablecoin transactions.

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