Listen to the Article: Discussions on FedNow Heat Up as It Schedules Debut in Late July

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The Federal Reserve's long-awaited instant payment system FedNow is set to launch in late July, according to recent news. Even though the system is not yet live, it has already sparked a heated debate among the payment, the crypto industries, and politicians as well.

Some people argue that FedNow will pose a serious challenge to the fintech market players who are instant payment service providers; some people fear that this payment system is a precursor for the US government to ban cryptocurrencies and express their concerns about tighter monetary control; some think that FedNow implies that the US is planning to launch a central bank digital currency (CBDC), which threatens the privacy and security of citizens' private financial transactions.

View 1: The Fed's launch of its instant payment system will only intensify the already fierce competition in the crowded payment market

First of all, let's take a look at what FedNow is. According to the Fed's official statement, FedNow service aims to provide a convenient and fast payment experience for American households and businesses. After it goes live, "customers of banks and credit unions who sign up for the FedNow Service will be able to use their financial institution's app, website, and other interfaces to send instant payments directly from their bank accounts quickly and securely." 

Basically, FedNow is an interbank instant payment infrastructure that helps merchants and consumers complete payments faster. Therefore, some analysts believe that the introduction of FedNow will inevitably pose a serious challenge to fintech market players who provide instant payment service. In recent years, the demand for faster and safer individual and institutional payment has driven the rapid expansion of the payment market. For example, in the US, there is Visa Direct launched by payment giant Visa, which has partnered with Paysafe, Remitly, and Thunes; there is Zelle, a P2P payment platform jointly built by more than 30 banks; and there is MasterCardSend launched by another giant MasterCard and more.

Compared with other payment platforms, the Fed's system has an edge in its extensive network of institutional partners across the United States (more than 10,000 in its network). Fazzaco reported in April this year that Salem Five​, a US bank, will use NOW® Gateway, a payment solution provided by fintech solutionist Fiserv, to become one of the first financial institutions to use FedNow service.

View 2: A precursor for the US government to ban cryptocurrencies, heralding a bleak future with more stringent monetary control

It has been a long-time view held in the crypto community that fiat currencies will eventually be replaced by cryptocurrencies in the future and when crypto becomes the global standard for transactions. With the announcement that FedNow will officially go live in late July, many crypto supporters have expressed condemnation, believing that this is the US government's first step towards banning crypto, which is an act of authoritarianism and will ultimately infringe on citizens' right to dispose of their own funds through tight monetary control.

Robert F. Kennedy Jr., a 2024 US presidential candidate, also the nephew of former US President JFK, has publicly stated that banning and confiscating bitcoin will be the next move. FedNow is essentially a central bank digital currency (CBDC), and ultimately the US central bank will control Americans' funds through a digital version of dollar. In response, the Fed issued a statement clarifying that "FedNow is not related to any digital currency. FedNow is a payments service that the Federal Reserve is making available for banks and credit unions to transfer funds." 

To clarify, Binance, the world's largest crypto exchange, also posted a message on its website to reassure investors, saying that "The Fed has not yet decided to issue a CBDC. Nor would it issue a CBDC without explicit support from Congress and the executive branch, preferably in the form of specific enabling laws. CBDC will not replace cash or other payment methods." 

View 3: FedNow is nowhere near posing a fatal threat to crypto

FedNow's design almost completely focuses on domestic payments in the United States only. Therefore it is pretty much not going to improve cross-border payment, a need of the international financial markets. Of course it is an extremely difficult task for any country to create a smooth cross-border payment system, and it is not to say that FedNow will not have an impact on payment, crypto and fiat currency. As the system goes live and is gradually accepted by the mainstream, many payment problems will be solved. On the other hand, the innovative design of the FedNow system itself also reflects the progress made in the field of blockchain-based transactions in recent years.

Conclusion

In short, we will not see FedNow pose a fatal threat to other competitors in the payment market in the short term. There is already a RTP payment platform in the US, and the FedNow system is more of another option. Moreover, it takes a lot of time and money to incorporate a new system, let alone access thousands of local small and medium-sized banks scattered across the country that do not have the same expertise as large banking institutions.