FedNow: Digital Dollar By Stealth?
The FedNow Service Is Not A Central Bank Digital Currency. It's Much Worse Than That
In addition to the Federal Reserve making a complete fustercluck of US monetary policy and setting the stage for what could be the mother of all credit crises, we soon will have to deal with another high-profile and hugely impactful display of the Fed’s “competence”—the FedNow real-time payments system.
As was announced last month, the Federal Reserve has now begun the formal certification of the initial participants in the system, which is meant to speed payment resolution to real-time or near real-time.
The Federal Reserve Banks are developing the FedNow Service to facilitate nationwide reach of instant payment services by financial institutions — regardless of size or geographic location — around the clock, every day of the year. Through financial institutions participating in the FedNow Service, businesses and individuals will be able to send and receive instant payments at any time of day, and recipients will have full access to funds immediately, giving them greater flexibility to manage their money and make time-sensitive payments.
More than a few people view the coming of the FedNow service as the first step towards the ultimate in government control over people—a digital (and therefore “programmable”) currency.
For its part, corporate media has been dutifully rolling out “fact checks” (which, of course, are nothing of the kind) blandly reassuring folks that the Fed is not looking to take control of your money and your spending habits with FedNow.
CLAIM: The Federal Reserve is launching a digital currency app, FedNow, that will eliminate physical cash.
AP’S ASSESSMENT: False. The Federal Reserve’s FedNow is a service that allows banks and credit unions to transfer funds more quickly. It’s not a form of currency, nor is it a move towards eliminating cash, the Board of Governors of the Federal Reserve System stated.
Across social media, the chattering class has been dutifully singing FedNow’s praises as a “game changer” in financial payments that will “transform” financial payment systems within the US.
The introduction of the FedNow Service has the potential to transform the U.S. payment landscape, offering real-time settlement capabilities that outpace traditional banking systems and rival popular P2P platforms. While the full impact of FedNow remains to be seen, its promise of increased efficiency, accessibility, and security could make it a game-changer in the world of digital payments.
Even the financial media has swung into action to defend FedNow from “misinformation”.
The problem with having the misinformation Eye of Sauron cast its gaze upon FedNow is that, as I said a moment ago, banks are in the process of deciding whether and when to join that network. There is no real way to know with certainty whether the musings of Twitter personalities are a viable proxy for attitudes of ordinary bank customers. But if that misinformed conflation between FedNow and a CBDC takes root in the minds of bank customers, it could turn a routine business decision about whether to join FedNow into a political decision with no right answer.
This effusion of positive propaganda press suffers from just one basic flaw: it’s horse hockey. Yes, FedNow is likely to be a “game changer”, but for all the wrong reasons, which means that a bank’s decision to use FedNow is intrinsically a political decision, and it always has been. Whenever government seeks to reinvent a wheel, especially a monetary wheel, politics are part and parcel of the process.
Is FedNow a “Central Bank Digital Currency”? Many people will say “Yes”, and can point to substantial reasons why they think this: it is a means of settling payments (which it is), it is digital (which it is) it is run by the central bank (which it is). At the risk of veering into Clintonian microparsing and wordsmithing, we should note, however, that the Automated Clearing House system is also a digital means of settling payments run by the central bank, and yet that is not treated as a CBDC.
Similarly, FedNow is also not a CBDC. Whether it is a precursor or a steppingstone to a CBDC is something the Federal Reserve more or less denies (in that artless mode of communication that seems to be a requirement for government bureaucracies). I leave it to the reader to decide how much faith to put in the Fed’s denials on this point.
Nicholas Anthony, policy analyst for the Cato Institute, provides a good analogy for differentiating FedNow from a CBDC set up by the Federal Reserve:
Astute eyes will likely recognize that FedNow does vaguely resemble a wholesale CBDC. Where a wholesale CBDC would be restricted to financial institutions for use during interbank settlement, FedNow would also be restricted to financial institutions. The difference, however, lies in their design. Where a CBDC is a currency, FedNow is a payment rail. If we think of dollars and cents as water, then FedNow is the plumbing that gets those dollars and cents where they need to go. In contrast, a CBDC would involve replacing the water itself in this analogy.
If we view FedNow as a “payment rail”, we immediately see one of the principal objections to the service: it is directly competing with privately-funded real-time payments initiatives, such as the RTP service offered by The Clearing House, Zelle, Venmo, and even PayPal.
Real time is becoming more and more of a reality. RTP, Zelle and other networks offer instant or near-instant payments today, and FedNow is promising to broaden access to real-time rails next year.
RTP, the real-time payments system run by The Clearing House, launched about five years ago to address some of the shortcomings of the ACH system.
ACH payments are sent in batches only at certain times, which isn’t ideal for certain kinds of transactions. (ACH is still the largest payment method, and has added more batch windows and doubled its same-day transfers in Q2.)
“It's really hard to take a batch system and have it work in a real-time world,” James Colassano, SVP of product development and strategy at The Clearing House, told me. TCH built entirely new rails for RTP.
RTP is designed to address the demands of consumers who are growing used to getting immediate payments. “If you want to be able to have a delightful customer experience, you can't wait for a batch run at the end of the day, or for transactions to settle two days later, right?” Colassano said.
There can be little doubt but that the Federal Reserve is muscling its way to solving a problem that either already has or is at least in the process of being resolved without the need for central bank interference.
There can also be little doubt but that there is no Constitutional authority for Congress to authorize any government agency to participate in private commerce as a peer of private banks. The powers of Congress with respect to commerce are limited to three broad areas, as enumerated in Article 1 Section 8 of the Constitution.
To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;
While one can with some credibility argue that regulating the value of the US dollar is the essence of monetary policy in a modern context, and thus that duty of the Federal Reserve is a legitimate power of Congress which Congress has delegated to the Federal Reserve, there is no argument to be made that “regulating” payment processing by electronic means (“regulating Commerce”) requires or permits Congress to act as a commercial entity. The very existence of services such as RTP, Zelle, Venmo, and Paypal are more than sufficient proof that payment processing is a commercial activity.
The US government is authorized by the Constitution to regulate such activity where it involves foreign nations and the several states, and that is the limit of its authority. The FedNow service greatly exceeds that authority.
Why is it doing this? Primarily because the Treasury Department under Donald Trump more or less told it to create such a system.
In its July, 2018, report to the President, “A Financial System That Creates Economic Opportunities Nonbank Financials, Fintech, and Innovation”, the Treasury Department under Treasury Secretary Steve Mnuchin recommended the Federal Reserve create the FedNow service.
Treasury recommends that the Federal Reserve move quickly to facilitate a faster retail payments system, such as through the development of a real-time settlement service, that would also allow for more efficient and ubiquitous access to innovative payment capabilities. In particular, smaller financial institutions, like community banks and credit unions, should also have the ability to access the most-innovative technologies and payment services.
Why the Federal Reserve needed to create such a service as opposed to working with banks and other services to address any regulatory hurdles inhibiting the development and evolution of services such as Venmo, Zelle and RTP is a question that the report never addresses. Nor does the report address the constitutional barriers to the Federal Reserve creating such a service.
The report does not even mention Venmo or Zelle, and its discussion of RTP is limited to three paragraphs buried deep in the report.
It even manages to give a bit of back-handed praise to RTP’s messaging system.
One of the key components of RTP is the secure messaging system that allows banks to communicate with payment messages. The messages are flexible, compliant with global messaging standards, and allow for immediate confirmation.
With private services such as RTP already in operation (RTP went live in 2017), FedNow is indisputably the recreation of a financial wheel—the unconstitutional recreation of a financial wheel.
Again, the constitutional approach to the challenges of real time payments is for the government to facilitate—i.e., get out of the way of private commerce—the development of robust commercial services to provide real time payments. The United States already has commercial services to deliver real time payments; if they are insufficiently robust the solution is not for 800-pound banking gorilla that is the Federal Reserve to stomp them into oblivion.
This reality alone is reason enough to discourage banks from adopting FedNow. A thriving economy needs more private enterprise and less government ownership. A thriving economy needs private enterprise to stand up and demand that government confine itself to its established Constitutional lane and not stray beyond those boundaries. A thriving economy needs private enterprise and private citizens to be free from government interference in their private commercial choices and endeavors.
Yet there is an even bigger reason for being suspicious of the FedNow service: its messaging standard.
Every means of transaction processing among disparate systems requires the adoption of a uniform messaging standard and protocol in order for communications to occur. RTP has its messaging standard, as the Treasury’s 2018 report acknowledges. So, too, does the FedNow service.
The messaging standard used by FedNow is, according to the Federal Reserve’s own materials, the ISO 20022 standard.
ISO 20022 is an internationally recognized standard for financial services messaging, and was first developed in 2004, with regular updates and revisions since.
The financial services industry’s need for a common “language” is what led the Geneva-based International Organization for Standardization to launch its ISO 20022 (pronounced EYE-SO-TWENTY-OH-TWENTY-TWO) messaging standard in 2004.
The Federal Reserve engages in a bit of semantics sleight of hand in talking up the ISO 20022 standard, as it makes the exaggerated claim that The Clearing House’ RTP network also uses ISO 20022.
Financial services organizations in more than 70 countries currently use the ISO 20022 standard, including The Clearing House’s RTP® 1 network, which has used the standard since the payment platform launched in 2017
However, a quick examination of the RTP messaging standard documentation reveals that, while RTP is indeed broadly compliant with ISO 20022, it also deviates from the standard in many areas, such as using error codes and messages which are not part of the ISO 20022 standard.
RTP supports the ISO 20022 message standard also known as the Universal Financial Industry Message scheme (UNIFI) for the communication between its Participants and the System. In cases where the ISO 20022 message format does not cater to certain communications (e.g. Participant Sign-On to the System), proprietary messages based on the ISO 20022 data dictionary have been defined. The specific schemas relating to the supported RTP message formats are available to all Participants in the RTP Scheme and must be adhered to when constructing and processing messages.
Why is ISO 20022 a point of concern? It was largely designed and is today supported and maintained by SWIFT—the Society for Worldwide Interbank Financial Telecommunication.
Full-scale implementation of ISO 20022 by SWIFT member institutions is that organizations primary project at this time.
The rich and structured data enabled by ISO 20022 is an essential element of the next generation of payments. It’s the foundation for financial institutions to work smarter and faster, leading to greater operational efficiency, improved data analytics and compliance, new opportunities for innovation and enhanced customer experiences that promise to transform the payments landscape.
“The go-live of ISO 20022 for CBPR+ and the start of the coexistence period represents the huge collective effort of the entire Swift community and opens significant possibilities for the future,” said Pat Antonacci, Chief Customer Experience Officer at Swift. “We look forward to continuing to work with the payments industry to unlock new opportunities as institutions move to fully adopt ISO 20022 and benefit from its richer, more structured data.”
What a coincidence that the Federal Reserve is using FedNow to push this standard within the US in the same time frame that SWIFT is pushing the standard globally!
Ordinarily, standards are dry and dull things discussed by faceless bureaucrats in anonymous and largely invisible bureaucracies. However, SWIFT has the curious (mis)fortune to have been given a dramatic dose of visibility recently—when the US government and the EU combined to expel Russian banks from participation in the SWIFT network immediately after Russia’s invasion of Ukraine.
The White House, along with France, Germany, Italy, the United Kingdom and Canada, announced Saturday evening that they would expel certain Russian banks from SWIFT, the high-security network that connects thousands of financial institutions around the world, pledging to "collectively ensure that this war is a strategic failure for (Russian President Vladimir) Putin."
"This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally," they wrote in a joint statement released by the White House, also pledging "restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions," and restricting the sale of "golden passports" that allow Russian oligarchs to avoid the brunt of sanctions already levied.
The degree to which this maneuver was strategically advisable remains very much a subject of some debate, as even corporate media has examined the possible ramifications of such a move to “weaponize the dollar”.
U.S. sanctions against Russia should hasten a move by some countries to reduce their reliance on the U.S. dollar, which could also soften demand for Treasuries just as the Federal Reserve, the largest holder of U.S. debt, looks to cut its bond holdings.
In reality, exclusion from SWIFT is not “weaponizing” the dollar, but rather the network by which banks globally settle transactions and facilitate international commerce. SWIFT is not run on the dollar, but processes several currencies. The euro routinely runs a close second to the dollar and has at times even surpassed the dollar as the most commonly used currency in SWIFT messages and transaction.
What is more than a little disturbing about Russian banks’ expulsion from SWIFT is the “SWIFT-ness” (pun intended) with which it was done. Barely two days after Russian forces crossed the border and invaded Ukraine, the US and the EU—or, rather, the governments thereof—simply told SWIFT that Russian banks were no longer members, and transaction messages from those banks were not to be processed. By simple diktat, Russian private banks were ejected from international commerce.
To say that weaponizing the infrastructure of international commerce is problematic government policy is the epitome of understatement. Weaponizing the infrastructure of international commerce is dangerous government policy. Within the United States, it is illegal and unconstitutional government policy to extend that same weaponized infrastructure to domestic commerce by US citizens—the power to regulate commerce is not the power to decide who may and may not engage in commerce, and must never be seen as such.
FedNow’s adoption of the ISO 20022 messaging standard, coupled with SWIFT’s own advocacy for that same standard, unequivocally connects the FedNow service to the larger SWIFT system. It extends the US government’s power to exclude foreign entities from participation in a global payment processing network into power to prevent the participation by US citizens in private commercial transactions within the United States—it illegally extends the government’s power; it unconstitutionally extends the government’s power.
Advocates for FedNow will probably nod condescendingly at this juncture and say something to the effect of “yes, that’s whole idea.” In an earlier period, before Russia was summarily bounced out of SWIFT, the potential risks of such an integration might not have seemed quite so significant. However, we now live in an era where it is accomplished fact that governments can, at a moment’s notice, ban a bank or even a country from participation in the SWIFT network, thereby isolating that country economically—and what has been done once is always done easier the second time.
It is easy and even trite to argue that expulsion from SWIFT was an appropriate response to Russia’s invasion of Ukraine. That is a policy discussion for another time. Yet, whether it was appropriate or inappropriate, wise or unwise, it was done.
What is to prevent a future US government, or a future EU bureaucrat, from expelling a bank for processing gun purchase transactions? Or for handling donations to an “objectionable” political cause? That is also a scenario we know can happen, because it already happened to the Freedom Convoy in Canada, when GoFundMe cancelled the convoy’s account and refused to give the money back to the donors.
The FedNow service, as a means to facilitate moving money between two parties to a transaction, is also intrinsically a means to bar that transaction. The power to enable real time payments is intrinsically the power to disable real time payments.
The FedNow service is intrinsically a means to exclude the politically undesirable—the “deplorables” who can exhaust a government’s “patience” with their dogged insistence on freedom of thought, freedom of action, and freedom of conscience.
As we have seen just with the COVID-inspired lunatic government excesses in recent years, the government needs no encouragement to stray beyond its Constitutionally appointed domains and illegally impose its bureaucratic will upon the people. It is hardly a paranoid exaggeration to highlight the new opportunities for government mischief and misbehavior when we are still dealing with the fallout from its recent orgy of pandemic-related mischief and misbehavior.
The FedNow service is proof positive that the Federal Reserve—and, by extension, the US government—does not need to “weaponize” the dollar via a CBDC. With FedNow, it is already weaponizing the means by which people spend their dollars in furtherance of their own lives, their own liberty, and in pursuit of their own happiness.
Thanks. Peter, I ’m saving this excellent explanation.
What happens when the grid goes down?