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Takeaways

  • FedNow enables nearly instant money transfers, a significant improvement compared to the conventional hours or even days it used to take in the U.S., finally aligning the world's largest economy with other countries' systems.
  • The central bank firmly refutes any association between FedNow and a digital U.S. dollar initiative.

 

On Thursday, the U.S. Federal Reserve officially launched its innovative instant payments service, FedNow, in the world's largest economy. This groundbreaking system significantly accelerates the process of sending money, revolutionizing the speed and efficiency of transactions.

The central bank has announced the participation of 35 banks and credit unions in its latest initiative. Notable early adopters of this program are JPMorgan Chase and Wells Fargo, alongside 16 other financial institutions that will support the processing of payments. According to the Fed, this initiative aims to provide just-in-time access to paychecks and invoices, ensuring more efficient financial transactions.

This represents a remarkable transformation compared to the previous status quo, where payments sent through the U.S. banking system used to take hours or even days to reach their intended recipients. Many other countries have already transitioned to instantaneous payment systems.

"The Federal Reserve built the FedNow Service to help make everyday payments over the coming years faster and more convenient," Fed Chair Jerome Powell said in a statement.

FedNow provides functionalities that have been advocated by supporters of cryptocurrencies and blockchains for a considerable time: simplifying the process of transferring money. As a result, this service could potentially create more tension between the traditional financial system and the crypto space – particularly now, when U.S. regulators have been adopting stringent measures to regulate digital currencies.

FedNow has encountered criticism regarding the possibility of establishing a pathway to a future digital version of the U.S. dollar. Nevertheless, in a Frequently Asked Questions (FAQ) release on July 10th, the Federal Reserve refuted any connections between FedNow and speculative schemes for such an undertaking.

Not a digital currency

“The FedNow Service is not related to a digital currency,” the Fed said, with officials such as the Treasury's Janet Yellen arguing the U.S. should consider a central bank digital currency (CBDC). “The FedNow Service is neither a form of currency nor a step toward eliminating any form of payment, including cash.”

The Fed's latest initiative involves the introduction of a 24-hour operating service. By maintaining the utilization of commercial banks as intermediaries, central bank officials have asserted that the new system will enable payments to be processed within a matter of seconds-a standard already prevalent in numerous other jurisdictions worldwide. This stands in stark contrast to the current U.S. automated clearinghouse system, which offers same-day service at best, or traditional check cashing methods that may incur delays lasting for days or even weeks.

Officials, including Powell, have emphasized the necessity of establishing a real-time payment network to reduce reliance on private sector alternatives. One such alternative that has been discarded is the stablecoin Diem (formerly known as Libra), developed by Mark Zuckerberg's Meta (formerly Facebook). Concurrently, some view the creation of this payment network as a potential progression towards the introduction of a central bank digital currency.