The US instant payment system FedNow is here! But it's not a cryptocurrency rival

Original: Sean Stein Smith, Forbes

Compilation: ShenZhen, PANews

Supporters and advocates of cryptocurrencies, including the bitcoin extremist community, have long predicted a future in which crypto assets replace fiat currencies as the standard for global transactions. In light of these beliefs, the launch of the Federal Instant Payments System (FedNow), which is scheduled to go live in July and has already been implemented by early adopters, has sent shockwaves through the market. While some decried this as just the first step towards a surveillance currency following in the footsteps of certain authoritarian regimes, others saw it as the end of most cryptocurrency use cases, but the reality is more nuanced.

FedNow is the Federal Reserve's response to a litany of problems and pain points in the global payments infrastructure. This is an interbank real-time gross settlement system developed by the Federal Reserve to support faster payments. The project was developed in part to address the challenges posed by tokenized crypto payments and the rise of fintech solutions like Venmo and Zelle. Unlike the existing options previously listed, the FedNow system represents a new settlement mechanism that enables real-time payments between U.S. banks. The services, which will provide final settlement 24/7, represent an upgrade of the U.S. payment system to catch up with similar services offered in the euro zone and elsewhere.

So, if the Federal Reserve has created an instant, globally interconnected, final (immutable), never-closed payment system, does this eliminate the need for cryptocurrencies? But in fact, under the FedNow payment system, encrypted payment must have its role to play, for the following reasons.

FedNow does not extend dollar dominance

One concern that has surfaced over the past few years, especially in the post-coronavirus economic environment, is the specter of de-dollarization. Specifically, international transactions settled in renminbi and euros have increased significantly. This is due to many geopolitical reasons, as well as the economic arguments underpinning these changes, but it also provides an avenue for stablecoins to grow in the market. In many markets, given that over 90% of stablecoins are pegged 1:1 to the USD, these stablecoin instruments effectively act as proxies for the USD where USD/local currency instability is prohibited.

The FedNow payment system, which operates on top of existing payment systems and frameworks, does not expand the reach of U.S. dollars or the potential number of possible U.S. dollar-based transactions.

FedNow** ignores on-chain opportunities**

While the FedNow payment structure may seem like an alternative to stablecoins, it ignores one of the fastest-growing applications for stablecoins: on-chain transactions and applications. For a little background information, according to research by Coin Metrics and The Block, the total supply of stablecoins increased by 8,750% from 2017 to 2023, totaling $123.9 billion. Much of this volume growth can be attributed to the role of stablecoins in the DeFi space, both as a medium of exchange and as a hedge against more volatile crypto assets. The FedNow protocol ignores these opportunities because it does not allow dollars to live on-chain or participate in on-chain transactions.

With the tokenization of assets increasingly becoming a topic of discussion among traditional financial institutions, including BlackRock CEO Larry Fink citing this market opportunity as a $10 trillion market opportunity, ignoring on-chain transactions may seem inconsistent with the market Trends and sentiment run counter to each other.

FedNow** does not improve cross-border payments**

As noted in the President's Economic Report, the Federal Instant Payments protocol (FedNow) as currently designed and rolled out focuses almost exclusively on domestic U.S. payments, with limited improvements to international payments. Creating a borderless international payment system clearly faces a daunting task for any government instrument, but stablecoin payments represent an existing solution to this friction. Regulators and policymakers may have reason to ask how much stablecoin payments and transfers make sense on a global scale; a lack of substance has been cited as the reason why financial accounting standards have been delayed.

• In the first quarter of 2023, the amount of stable currency payments and transfers reached 2 trillion US dollars, which is more than the total amount processed by PayPal in all of 2022. *

That's not to say the FedNow payment system has no impact on payments, cryptocurrencies or fiat currencies, that would be myopic. Instead, some of these issues (including the current $500,000 cap) will certainly be resolved as the platform transitions from development, pre-launch, to mainstream acceptance. Instead, it’s worth pointing out that many of the innovations and improvements that the FedNow payment system brings to the current payment rails mirror some of the innovations and improvements that are made in blockchain-based transactions.

The FedNow payment system is not the end of cryptocurrencies, but may open the door to more stablecoin transactions.