First News on 570 listeners are a wonderful bunch. They soak up our witty and informative antics on technology and continuously keep us on our toes.
Last week, Listener Sara made a request. She asked us to look into FedNow and bring our insights on The Show.
FedNow Isn’t Digital Cash
FedNow isn’t a digital currency.
After hearing the request for FedNow I can understand Sara’s alarm. Digital currencies began receiving more notice in the mainstream during the rise of cryptocurrencies. Just as governments worldwide began cracking down on cryptocurrencies, these governments began looking into programs create their own central bank issued digital currencies, or digital cash.
FedNow is an instant payments service used by banks and credit unions, not people, to transfer funds to other banks and credit unions.
According to the Federal Reserve, the FedNow service will enable people and businesses to send and receive instant payments to and from their deposit accounts.
That seems confusing.
Old Fashioned ACH
The old ACH (automated clearinghouse) service is (was?) the primary way for banks to move money around. It’s the reason it would some times take days for checks to clear between banks. Legend has it the ACH system works on PCs running MS-DOS 5.0.
Normally, if you want to send someone money from your bank account to someone else’s bank account, you would initiate a wire transfer. Wire transfers normally take a day, or a couple of days to clear between banks. This transfer system happens over an older computer network and it takes time for your account to be debited, and the other bank account to be credited.
Banks like Bank of America, PNC, and others would work with FinTech companies like Zelle, to make instant transfers work. Those companies play a man in the middle role and assume a degree of risk by instantly moving money around.
The FedNow service makes it easier for banks to send these instant payments between banks without the need for Zelle.
The Future of Money Is Digital
Most of us don’t think of money as cold hard cash, but numbers in an account somewhere. But, that money can be converted into paper or coins and easily given or received.
Countries are pushing hard to issue digital currency, or digital cash to their citizens. The ideal is that digital cash would be just as easy as handing Mark Starling a $20 bill, except it would be some form of electronic thing.
The Fed is considering a digital dollar and hasn’t made a decision on it. The United State isn’t pressed to consider a digital dollar because the US payment system is already very robust, speedy, and trustworthy compared to other country’s systems.
In order for a digital dollar to work, it would have to be easily exchange, and easily issued for the general public. People and businesses would also need to have faith that the digital dollar is as good legal tender as the real thing.
This means the Fed would have to maintain some form of wallet, holder, or account for each citizen so their digital dollars could be instantaneously exchanged. It also means these accounts would have to guarantee a degree of privacy from people, businesses, and government agencies. The cash you carry and hide in your mattress is different than the cash in your account. It would need to be regulated at a level beyond current money holding accounts.
We’re Behind in This
China has been running trials of its digital currency, the digital yuan or e-CNY, in cities since 2020. Public sector employees in small cities are set to be paid in only digital yuan this year to test how easily exchangeable it is.
China has struggled to get its people to adopt the digital yuan. The government has pressured Western companies like McDonald’s to accept the money. Some cities have given away millions of dollars of yuan to their citizens to jump start adoption.
The country has yet to announce when they’ll do a nationwide launch or switch over.
In the end, nothing beats having a bill on you. It can get you out of a jam, but you a sandwich at a hole in the wall, or be used in an impromptu bet. Anonymously.
FedNow is scheduled to go into service July 2023.