FedNow Expansion and Central Bank Digital Currencies (CBDCs): A Look at the Latest Developments
Fed's Waller counters criticism concerning the pace of implementation for FedNow service
The Federal Reserve's real-time payment settlement service, FedNow, has seen significant growth since its launch in July. The service, initially available to 50 banks and credit unions, has expanded to over 100, with plans for approximately 250 to 350 additional enrollments by the end of the year.
However, the specific names of these participating institutions have not been disclosed. The increased network has also raised the transaction limit to 10 million USD.
According to Fed Governor Christopher Waller, the growth in FedNow sign-ups is continuing, with banks joining at a steady pace. He characterized the expansion as a positive sign of the service's robust uptake.
Despite the growth in FedNow, Waller has expressed uncertainty about the need for the Fed to step out front and be front-facing with retail customers. He questioned the Fed's rationale for becoming consumer-facing and offering retail accounts.
In terms of Central Bank Digital Currencies (CBDCs), Waller has maintained a sceptical stance. He believes that the technology holds little benefit for the Fed, banks, and consumers in today's payments landscape. He emphasized the importance of the Fed's role in ensuring the clarity of CBDC transactions.
Waller also stated that a potential U.S. CBDC would operate through bank accounts, not direct accounts with the Fed. He did not express support for a direct retail CBDC account, as such a setup would necessitate master accounts beyond banks, requiring legal changes.
Waller echoed his stance on CBDCs, stating that he believes a satisfactory answer to the question of what major market failure in the payment system requires a CBDC and only a CBDC to solve has not been provided.
If a CBDC were to be implemented, users would have a CBDC account via their commercial bank app, along with standard accounts. However, Waller noted that the banks have to see a value proposition to make the investment and join such a system.
The Fed has focused on efficient backend payment functionalities for over 100 years while banks engage customers. The Fed wants to explore CBDCs in preparation for a potential congressional mandate, but they are not legally required at this time.
In July, Aaron Klein, a senior fellow at the Brookings Institution, characterized FedNow as "tepid" during a Philadelphia Fed fintech conference. Despite this initial assessment, the service has clearly shown signs of growth and potential in the real-time payment landscape.
As the landscape of digital payments continues to evolve, the Fed's role and potential involvement in CBDCs remains a topic of discussion and debate. Waller's stance on the matter underscores the importance of careful consideration and a clear understanding of the benefits and potential drawbacks before any significant changes are made.
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