Fact Check: The FedNowSM Service Versus Central Bank Digital Currencies

Digital transformation has impacted just about every aspect of banking and payments are no exception. As advancements in tech change the way we transact, there are some compelling innovations being discussed, such asCentral Bank Digital Currencies (CBDCs) and not to mention the FedNowSM Service, the Federal Reserve’s new instant payment offering launching later this summer.  

However, with so many developments in payments happening and potential technologies being explored, this can lead to confusion about what these trends mean for the financial industry and how they differ from one other.There has also been plenty of misinformation floating around about these trends recently. In fact, one recent YouTube video titled, “In less than 24 Hours theUS dollar changes FOREVER,” incorrectly touts that FedNow will replace paper currency and was watched more than 5 million times in just three days. It’s time to set the record straight. 

The goal of this blog post will be to clarify these emerging payment technologies and digital transaction trends.

Ready for a fact check?

The Purpose of the FedNow Service versus a CBDC

The biggest difference between the FedNow Service and a CBDC is their purpose. The FedNow Service, which is a real-time payment system developed by the Federal Reserve Banks in conjunction with private industry and the public sector, will facilitate instant payments between different financial institutions, businesses and retail accountholders. The FedNow Service will operate solely in the U.S.

A CBDC, on the other hand, is a digital form of fiat currency issued by a central bank. A CBDC can be used to replace cash or serve as a digital representation of cash. The FedNow Service does not replace cash or serve as a digital representation of cash; instead, it simply facilitates the faster movement of funds.  While central banks around the globe are exploring the potential benefits and risks of issuing a CBDC, the Federal Reserve has made no official decision on issuing a CBDC and would only issue a CBDC with Congressional approval.

Design, Development & Deployment

There are also major differences in how the FedNow Service and CBDCs are designed and deployed. More than 130 public sector and privateU.S. organizations were involved in the development of the FedNow Service, whereas CBDCs are issued independently by the central banks in each country. 

The FedNow Service was designed to complement existing payments infrastructure within the U.S., which includes systems for processing check, wire, credit and debit card payments that are all tied directly to bank accounts. The FedNow Service will be able to process these existing payment types much faster, in real time and at any time of day. Conversely, a CBDC would operate on a blockchain or a similar distributed ledger technology, which would require building new infrastructure into the U.S. banking system.

What Are the Use Cases of Each?

FedNow was created to facilitate faster, more efficient payments between financial institutions and their account holders, while CBDCs have a much broader range of potential use cases, including cross-border payments, which FedNow doesn’t support.

Implications to Monetary Policy

CDBCs would potentially have a significant impact on monetary policy because it would enable central banks monitor to transactions in real time, which would help them implement more effective monetary policies.FedNow, on the other hand, is not expected to have a major impact on monetary policy because it is simply a channel for the real-time movement of money, and does not replace the fiat currency.

The Bottom Line

In summary, the FedNow Service and CBDCs are two distinctly different concepts, but are both related to the continued evolution of payments and the banking ecosystem overall. Unlike a CBDC, FedNow does not replace physical dollars. Instead, it provides a framework for instant payment services to allow individuals and businesses to send and receive payments within seconds at any time of the day, on any day of the year. This framework is set to launch in just a few short months. Meanwhile, the Federal Reserve would need Congressional approval to issue a CBDC and as a first step, the agency is actively exploring the potential benefits and risks of a CBDC.