FedNow payment system won’t make crypto obsolete

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Crypto advocates and proponents, including the bitcoin maximalist community, have long predicted a future where crypto-assets supplant fiat currencies as the global standard of exchange. Given these beliefs, the launch of the FedNow payment system (scheduled to go live in July and already implemented by early adopters) sent shockwaves through the market. Decried by some as merely a first step towards a surveillance currency following in the footsteps of some authoritarian regimes, and by others as the final nail in the coffin of most crypto use cases, the reality is more nuanced. .

The FedNow system is the Federal Reserve’s response to the litany of issues and problems that exist in the global payments infrastructure. It is a real-time interbank gross settlement that was developed by the Fed to enable faster payments. This project was developed in part to address the challenges posed by tokenized crypto payments as well as the rise of fintech options such as Venmo, Zelle and others. Different from existing options such as those previously listed, FedNow represents a new settlement mechanism that enables real-time payments between US banks. These services will operate 24 hours a day, 7 days a week, 365 days a year, provide final settlement, and represent an upgrade of US payment rails to catch up with similar services offered in the Eurozone and elsewhere.

So if the Fed created an instant, globally interconnected, final (immutable) payment that never ends, does that eliminate the need for crypto? Let’s look at a few reasons why crypto payments certainly have a role to play in a FedNow payment landscape.

FedNow does not extend dollar dominance

One fear that has surfaced in recent years and accelerated in the post-COVID economic landscape is the specter of dedollarization. Specifically, international transactions denominated in yuan and euros are increasingly important. This is due to a number of geopolitical reasons, in addition to the economic arguments behind these changes, but it has also allowed stablecoins to increase in the market. In many markets, since more than 90% of stablecoins are reserved 1:1 with the US dollar, these instruments serve as an effective proxy for USD in markets that are otherwise prohibited.

The FedNow system, operating on existing rails and payment frameworks, does not extend the reach of the US dollar, nor does it increase the potential number of dollar-based transactions that are possible.

FedNow ignores on-chain opportunities

Although the FedNow payment structure may seem like a stablecoin replacement, it ignores one of the fastest growing stablecoin applications; chain transactions and applications. To add some context, the total supply of stablecoins from 2017 to 2023 grew by 8,750% to a total of $123.9 billion according to research from Coin Metrics and The Block. Much of this increase in volume can be attributed to the role stablecoins play in the DeFi sector, both as a medium of exchange and as a hedge against more volatile cryptoassets. The FedNow protocol ignores these opportunities because it does not allow dollars to exist on-chain or participate in on-chain transactions.

With asset tokenization increasingly a topic of conversation at TradFi institutions, including statements by Blackrock CEO Larry Fink that the market opportunity is $10 trillion, ignoring on-chain transactions seems go against the direction and sentiment of the market.

FedNow does not improve cross-border payments

Noted in the President’s Economic Report, the FedNow protocol as it is currently designed and launched focuses almost exclusively on domestic payments, with limited enhancements for international payments. Any government tool seeking to create a borderless international payments system clearly faces a difficult task, but stablecoin payments represent an existing solution to this friction. Regulators and policy makers might reasonably ask how important stablecoin payments and transfers are in the global context; lack of materiality has been invoked to explain why financial accounting standards have taken so long to come.

Stablecoin payments and transfers reached $2 trillion in the first quarter of 2023, more than the total volume processed by PayPalPYPL in 2022.

This is not to say that the FedNow system will have no impact on payments, crypto or fiat; that would be a short-sighted prospect. On the contrary, as the platform moves from development through pre-launch to mainstream acceptance, some of these issues (including the current $500,000 limit) will surely be resolved. Instead, it’s worth pointing out that many of the innovations and enhancements FedNow is bringing to current payment rails mirror some of those available through blockchain-based transactions.

FedNow is not the end of crypto and could actually open the door to more stable transactions in the future.

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I am a professor at City University of New York Lehman College. I sit on the advisory board of the Wall Street Blockchain Alliance, where I chair the accounting working group. I’m also the chair of the NJCPA Emerging Technologies Interest Group (#NJCPATech). I serve on the advisory board of Gilded, a TechStars 19 company and a participant in the AICPA-CPA.com startup accelerator. I was a visiting scholar at the American Institute for Economic Research in 2019.

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