The U.S. Central Bank has provided an update on the Federal Reserve’s Fednow project, which is set to begin in July. The Fed has tackled some of the recent criticism of the Fednow service and insists that the Fednow payment network is “not a form of currency nor a step toward eradicating any form of payment, including cash.”
Fednow Won’t Get Rid of Cash, the US Central Bank Reassures
When the US Federal Reserve unveiled the launch of the Fednow service in July, it sparked immediate backlash and caused many to think it was part of the early phases of an American central bank digital currency (CBDC). Several prominent economists and politicians have warned that a CBDC would bring about increased surveillance of Americans’ financial dealings.
In order to allay these fears, the Fed published an update on April 7, 2023, including the questions, “Is Fednow replacing cash?” and “Is it a central bank digital currency?” The central bank maintains that Fednow accomplishes neither of these objectives and emphasizes that the project is solely intended for “instant payments.” The Fed’s update clearly states: “Fednow is not associated with a digital currency.” The US central bank’s notice adds:
Fednow is a payments service the Federal Reserve is offering to banks and credit unions to transfer funds. It is like other Federal Reserve payment services, such as Fedwire and [Fed ACH]. The Fednow Service is neither a form of currency nor a step toward eliminating any form of payment, including cash.
In a recent interview, economist Richard Werner voiced his apprehension about the timing of the Fednow project, describing it as “suspicious.” Werner linked the initiative to a central bank digital currency (CBDC), an opinion shared by Georgia Representative Marjorie Taylor Greene, who criticized Fednow on April 5. In recent times, several US lawmakers have put forward legislation that would prohibit CBDC initiatives.
According to the Fed’s update, the central bank “has not made a decision on whether to issue a central bank digital currency (CBDC),” and it will not do so without the authorization of the executive branch and congressional members. The Fed further emphasizes that “a CBDC would not replace cash or other payment options.”
Contrastingly, the White House’s recent “Economic Report of the President” noted the possibility that Fednow and CBDC initiatives “have the potential to realize many of the benefits that crypto asset developers have promised.” Regarding a US CBDC, the public is currently aware of two distinct Federal Reserve projects.
The first project is an experiment called “Project Cedar,” a trial designed by the Federal Reserve Bank of New York. The Project Cedar protocol employs a wholesale digital dollar to improve financial transactions. The second CBDC initiative by the Fed is “Project Hamilton,” a joint effort of the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT). While the Fed maintains that Fednow is not related to a digital currency, it appears to be a matter of semantics.
The Fed insists that the Fednow service is not a digital currency or a step toward eliminating any form of payment, including cash, but instead, a digital payment system designed to facilitate prompt payments. Nonetheless, some critics argue that the system is, in fact, a form of digital currency, and that the Fed’s portrayal of the project is misleading. Ultimately, the real nature of the Fednow service and its relation to a potential CBDC remains a topic of debate.
Will the Fednow project pave the way for a central bank digital currency, or is it merely a digital payment system developed to facilitate prompt payments? Share your thoughts in the comments section below.
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