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FedNow: The First Step Toward an American Central Bank Digital Currency

Last Thursday, the Federal Reserve, America’s central bank, announced that FedNow, its new system for instant payments, was up and running. Financial institutions can use this facility to give their customers the ability to transfer funds instantly, anytime, day or night. About 50 financial institutions have signed up for FedNow so far, including banking giants JPMorgan Chase and Wells Fargo. 

Ordinarily, we’d welcome the introduction of another tool which facilitates instant payments. We’ve been frustrated by the generally slow and expensive options to transfer money, although services like Zelle and Venmo have emerged to make the process cheaper and faster.

And that’s just the point. We’re mystified that the Fed is stepping into the payments transfer space when perfectly acceptable and rapid private alternatives are already available. To be frank, it makes us a bit suspicious, especially considering the timing.

One reason is that FedNow’s launch coincides with the Fed’s efforts to choke off inflation by raising interest rate. Just a few months ago, that policy contributed to the collapse of Silicon Valley and Signature Banks – the second and third largest bank failures, respectively, in US history. (We explained why in this article.)

At the same time, depositors are fleeing banks to deposit their money into higher-yielding alternatives. It’s no wonder that the volume of deposits in US commercial banks fell by more than $700 billion in the 12 months ending June 30.

It’s almost as if the Fed is deliberately setting banks up to fail. Indeed, this is a topic we addressed a few months ago, in the wake of the collapse of these three banks.

And that dovetails into another uncomfortable fact. The infrastructure the Fed has set up for FedNow is basically the same as it would need to introduce a central bank digital currency (CBDC). This is due to how funds will flow within the system, with money being sent from a commercial bank through a Fed account to its ultimate recipient. Once consumers become accustomed to moving money via the Fed, the same platform could be used to implement a CBDC.

In May, we warned how a banking crisis might pave the way for the Fed to launch a CBDC. But Fed Chair Jerome Powell says that a CBDC launch would be “something we would certainly need Congressional approval for.”

In a large enough financial crisis, though, it’s conceivable that such approval could come very quickly. Remember, it only took a few weeks for Congress to authorize a $700 billion bailout of Wall Street after the collapse of Lehman Brothers in 2008.

We don’t want to be overly sensationalistic in this matter. And indeed, some people are saying that the launch of FedNow will reduce the need for an American CBDC. But at the same time, it could also render other payment systems obsolete.

The nightmare scenario is a financial collapse worse than the one we experienced in 2007-2009, in which depositors pull their money out of over-leveraged banks and place it into “safe” CBDC accounts at the Fed.

The digital dollars deposited into our Fed accounts could be programmed to expire or decrease in value unless they were used by a deadline. Along with negative interest rates on the CBDC, that would offer the Fed a way to instantly prop up consumer spending during an economic downturn. The effort would be sold as a legitimate exercise of governmental authority in a crisis. In that way, people would begin to get accustomed to using a programmable CBDC. Citizens would be less inclined to be concerned that a CBDC is programmable if they were offered financial incentives to use them.

Meanwhile, alternatives to a CBDC could be quietly choked off as an “anti-money laundering” measure. The final death knell for cash could be a transition period in which individuals would be given the ability to convert their cash holdings to the CBDC with no questions asked, and at full value (or perhaps, even at a premium). From that point forward, the US government would stop manufacturing coins and paper currency.

While cash wouldn’t necessarily be banned (although some CBDC proponents say it should be, as it is not “fit” for the digital age), the volume of cash transactions would plummet. (Even without a CBDC or an outright ban, fewer and fewer people are using cash.)

And that’s where the slippery slope turns into a cliff. Big Brother would have the ability not only to track every penny you earn or spend, but also to restrict how you spend it. A law enforcement agency could conceivably turn off your money at the click of a mouse.

Nor is it difficult to imagine CBDCs being used to enforce social goals our minders deem desirable. For instance, the World Economic Forum (WEF) recently suggested that setting “acceptable levels of personal carbon emissions” could help speed a transition to “sustainable cities.” Along those lines, a CBDC could be programmed not to allow you to buy a gas-guzzling truck with it. But an electric bicycle might be OK. And without cash as a meaningful alternative, you’d have utterly no recourse to these measures.

With these threats in mind, it’s understandable why Florida governor (and now presidential candidate) Ron DeSantis has declared that if he’s elected president, he would kill FedCoin “on day one” of his presidency.

And whether DeSantis, Donald Trump, or Joe Biden is elected in 2024, we think that shutting down FedCoin would be a wise precaution. It would suspend the momentum toward a CBDC. And it would reduce financial pressure on America’s spectacularly over-leveraged banking system and allow the market for instant payments to continue evolving on its own.

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