What is digital currency banking?
A Central Bank Digital Currency (CBDC) is the digital representation of a country’s fiat currency, which also represents a claim on the central bank. Instead of printing currency, the central bank offers electronic coins or accounts guaranteed by the government’s complete confidence and credit.
Why would the government get involved?
There are several reasons to investigate digital currencies, and various nations’ motivations for releasing CBDCs vary on their economic circumstances. For example, promoting financial inclusion by providing accessible and safer access to money for unbanked and underbanked populations; introducing competition and resilience in the domestic payments market, which may require incentives to provide cheaper and better access to money; increasing efficiency in payments, and lowering transaction costs; creating programmable money and enhancing the transparency of money flows, and ensuring the seamless and easy flow of money.
Some of the challenges
Before launching a CBDC, a nation must carefully analyze the several obstacles that must be overcome. First, by acquiring CBDCs, citizens might simultaneously withdraw too much money from banks, prompting a run on banks and causing a shock to interest rates. This is an issue for nations with shaky financial systems in particular. In addition to operational concerns, CBDCs are susceptible to cyberattacks and must be robust against them. Finally, before using this technology, CBDCs need a complicated regulatory framework encompassing privacy, consumer protection, and anti-money laundering norms, which must be strengthened.
What are the national security implications of a CBDC
New payment systems generate externalities that affect the everyday lives of individuals and may compromise the nation’s national security goals. For instance, they may impede the United States’ capacity to trace cross-border movements and implement penalties. Moreover, long-term geopolitical ramifications may result from the lack of U.S. leadership and standard-setting, particularly if China and other nations retain their first-mover advantage in developing CBDCs. The GeoEconomics Center’s work on digital currencies is at the intersection of the future of money and national security.
What is the Fednow program?
FedNow is an instant payment service developed by the United States Federal Reserve Bank (Fed). The FedNow Service, or FedNow for short, is designed to offer uninterrupted 24/7/365 processing. In addition, it will feature integrated clearing functionality, enabling financial institutions to deliver end-to-end instant payment services to their customers.
What are instant payments?
Instant payments refer to any account-to-account financial transfer that immediately makes funds available to the transaction’s recipient. Payments are often processed in a couple of seconds. However, time may vary depending on the plan. Instant payments are also widely referred to as immediate or real-time payments for similar reasons. Instant payments are advantageous due to their irrevocability, ability to provide extensive data, and 24/7 availability.
How does FedNow differ from Fedwire?
The Fedwire Payments Service is a real-time gross settlement system that facilitates the movement of funds electronically between banks, corporations, and government organizations. Fedwire can deposit and settle payments instantly; however, Fedwire has restricted availability and can only handle payments on specified business days and during business hours. FedNow, on the other hand, is accessible 24/7, 365 days a year, and is not subject to nighttime, weekend, or holiday limitations.
However, it is crucial to remember that FedNow transactions have a maximum value, but FedWire does not, although your bank may impose a restriction.
Who will be eligible to participate in FedNow?
“As with other Federal Reserve Bank services, the FedNow Service will be accessible to depository institutions entitled to have accounts at Reserve Banks under relevant federal legislation and Federal Reserve regulations, policies, and procedures. Participants can designate a service provider or agent to submit or receive payment instructions on their behalf. If they so want, participants will be allowed to settle payments in the account of a correspondent. Merchants, customers, and nonbank payment service providers may access the service via depository institutions, as with other payment systems.
Why is the Federal Reserve Bank developing FedNow?
With a predicted compound annual growth rate of 23.6% between 2020 and 2025, instant payments are one of the fastest-growing types of digital payments. More than 50 national central banks have already built instant payment networks that provide the quick posting and settlement of payments.
Consumers and businesses in the United States currently have access to immediate payments via Zelle and the RTP® Network, privately owned and managed by Early Warning Services, LLC and The Clearing House, respectively. However, in 2013, the Fed started exploring adopting a centrally owned and run quick payments network. As a result, in 2015, it established the Faster Payments Task Force (FPTF) to evaluate possibilities for implementing immediate payments.
In its 2017 final report, the FPTF voted decisively in favor of creating a network and provided implementation suggestions to ensure its success. In 2018, the U.S. Treasury provided its formal support for an immediate payments network, and in 2019, the Federal Reserve Board stated that the FedNow Service would begin development.
In the end, the Fed is building FedNow to enable financial institutions of all sizes throughout the United States to provide secure and efficient rapid payment services to clients.
Will FedNow replace the ACH Network?
FedNow will not replace the Automated Clearing House Network (ACH); instead, it is planned to enhance ACH services.
ACH is an electronic money transfer network for consumers, companies, and federal, state, and municipal governments in the United States. It is often used for direct deposit and direct payment procedures. ACH transfers may generally be completed within one to three business days.
Same-day ACH was launched in 2016 by the National Automated Clearing House Associations, or NACHA, the group responsible for ACH governance. Same Day ACH, as the name indicates, posts and settles payments on the same day they originated – a significant improvement but not instantaneous. Due to this, Same Day ACH is not considered an immediate payment mechanism but a speedier payment system.
FedNow is not intended to replace ACH or Same-Day ACH but rather to offer increased redundancy for payment processes, minimizing payment network bottlenecks. The Fed plans to develop payment interoperability between FedNow and ACH in the long run.
What does the fednow payment flow look like
A FedNow payments flow is comparable to any other immediate payments flow, beginning with the parties: a payer, the payer’s financial institution, the FedNow network, a payee, and the payee’s financial institution.
The basic procedure is as follows:
- A payer begins a payment by sending a payment message to their financial institution outside FedNow.
- The payer’s banking institution gets the payment instruction and approves the transaction if the payer has adequate money in their account.
- The banking institution of the payer transmits a payment message to the FedNow Service.
- FedNow verifies the payment message and transmits its contents to the payee’s banking institution for approval or rejection.
- The payee’s financial institution responds to FedNow by approving or refusing the payment. FedNow will inform the payer’s financial institution of payment failure if the payee’s financial institution rejects the message. In addition, if the payee’s financial institution accepts the message, FedNow automatically deducts monies from the payer’s account and posts them to the payee’s account.
- FedNow notifies all parties of the successful money transfer, at which point the transaction is concluded.
How will financial institutions benefit from FedNow?
The Fed’s announcement of its intentions to create the FedNow Service elicited encouraging responses from the industry, with the general belief that the new service would be a beneficial catalyst for the market’s acceptance of prompt payments.
FedNow will likely:
- Increase fair access for all companies and consumers by making fast payment technology available to a broader audience, including local community banks.
- Reduce banks’ and other nonbank financial firms’ total payment processing expenses.
- Provide fast access to pay stubs and other electronic financial transfers for enhanced cash flow management.
- Optimize a company’s liquidity management and cash flow forecasts, allowing them to control operational expenditures better and retain strong vendor relationships.
- Conform to the new ISO 20022 standard, allowing participants to transmit and receive rich data, including RfP and non-value message types.
- Promote immediate payment security by creating industry-wide standards for contesting fraudulent transfers, ISO 20022 conformance, and payment authentication.