Last week, the Federal Reserve launched its highly-anticipated FedNow instant payments system for the U.S. banking sector. The payment settlement platform allows users to send or receive dollars cheaply, and on the go, and is said to be operational 24/7 throughout the year, even during bank holidays.
What is being touted as a revolutionary technology, has existed in other parts of the world for years. FedNow, which has been in the works since 2019, was seen by some as a threat to the future of dollar-backed stablecoins – the cryptocurrencies pegged 1:1 to the value of the U.S. dollar.
Is FedNow A Threat To Stablecoins?
Now that stablecoin issuers and consumers have had time to digest the Fed’s latest offering, they have found several use cases for the dollar-pegged digital currencies that are outside the scope and capabilities of FedNow. Many industry experts have come out to state that they now understand the product and don’t see it as a direct competitor for stablecoins.
Ryan Rasmussen, an analyst for crypto index fund and ETF provider Bitwise Asset Management, said that initially, FedNow caused a “bit of an existential crisis” for stablecoin users.
But the Federal Reserve service caters specifically to U.S. banks, which is a small portion of the stablecoin market. Rasmussen says this leaves out the “unbanked or the underbanked” community who mainly use stablecoins to perform financial transactions.
Stablecoins are deemed far superior to fiat transactions between banks, businesses, and individuals due to their immediate settlement capabilities. Since the advent of digital banking, a large portion of fiat transfers are carried out through Automated Clearing Houses (ACH), which take between one to three days at the least to process and complete transactions. This is atop the already high charges and lengthy delays of traditional bank-to-bank or retail wiring services when performing cross-border transactions.
Whereas, the potential of stablecoins like Tether USD (USDT) and Circle USD (USDC), to conduct cross-border remittances at a fraction of the cost and with none of the delays, makes it a viable and more efficient option over fiat wire transfers.
Rasmussen also added that since FedNow is only suited for U.S. banks and doesn’t do much to reduce remittance charges, the opportunity for stablecoins to become the global standard for sending money remains wide open.
Then there is the issue of the backward nature of the U.S. banking system. Critics of fiat banking have for years called the system archaic. Often they say that the U.S. banking sector is lagging due to operational hiccups, especially during bank holidays. Plus, the Federal Reserve’s unwillingness to set up a system to enable instant and efficient payments, puts it way behind countries in Europe and Asia.
This is another area where stablecoin proponents make their arguments clear, that cryptocurrencies can do what the U.S. banks could not; execute financial transactions within a matter of seconds, to anywhere in the world, all day long for seven days a week.
FedNow Is Only A Way To Accelerate And Improve The Archaic U.S. Banking System
According to Ryan Burke, GM of U.S. wealth management firm M1, FedNow cannot be considered a replacement for stablecoins but rather a tool to enhance the aging and inefficient fiat transfer systems used by individuals and businesses in the country.
Despite FedNow taking up a chunk of the stablecoins’ value proposition and concerns mounting that a possible US central bank digital currency (CBDC) could be a stumbling block to cryptocurrency innovation in the country, there is some sentiment that the instant settlement system could eliminate the need for a CBDC.
It is reported that 57 firms are certified to use the FedNow instant payment system, which includes 42 banks and 15 credit unions. At launch, 35 banks will use the service to make settlements directly in central bank accounts, eliminating the need for intermediaries.
For individuals, the platform will help them get around peer-to-peer payment solutions like Venmo and PayPal and instead conduct transactions directly with the other party’s bank account.
Big U.S. banks such as J.P. Morgan & Chase, BNY Mellon, and U.S. Bancorp, have already signed up to the platform, with more large and small-scale banks expected to become a part of FedNow by the end of the year. The Federal Bureau of Fiscal Services, a division of the U.S. Treasury, and other non-banking service providers have also on-boarded the solution.
FedNow’s direct competition would initially be Real-Time Payment (RTP) platforms, which were developed as an alternative to wire transfers and have started to gain steam since the turn of the year. The Federal Reserve platform can be opted-in by the banks and have no legislation or regulatory oversight forcing them to do so.
Slowly, but surely, the system will be incorporated by major banks in the country. But stablecoins are expected to strengthen their position going into the future as it requires neither a bank account or has any upwards limits on transactions.