FedNow, CBDC, US Financial Evolution: Insights by Aaron Klein
The unveiling of the Fed’s FedNow payment system has stirred discussions about its influence on banking and its repercussions for the crypto sector. Aaron Klein, Senior Fellow at the Brookings Institution’s Center for Regulation and Markets, addresses questions about this new system, the prospective role of CBDCs, and cryptographic developments.
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Aaron Klein delved into the potential significance of FedNow in the finance sector. He emphasized that the US currently lacks a real-time payment system that's universally adopted by all banks—where funds transfer and settle within minutes, not days. There are some regional fast-payment networks set up by banks, but these often can't scale up and are limited to certain areas.
According to Klein, this has left the US—a financial powerhouse—in the dust when compared to other countries where instant payments are standard.
When people come from Europe, from the U.K., from Asia, they're shocked at how slow things take to settle on the back end in America. FedNow is a tool that could make that happen,
remarks Klein.
He champions the introduction of FedNow, viewing it as more than just a speed boost for transactions. It's an opportunity to close the gap between the US financial system and the real-time transaction practices seen abroad.
However, recent buzz suggests that FedNow's debut is a sign of an imminent CBDC rollout in the US. There's logic to this: many countries are wary of cryptos since they sidestep the banking middlemen. For these countries, CBDCs are seen as the bridge ensuring some security in the crypto space.
Yet, Klein believes that the FedNow-CBDC link doesn't necessarily mean we'll see a US Central Bank digital coin anytime soon. He firmly dispels any talk of the real-time payment system being a catalyst for such a move. In his opinion, a US CBDC is still very much on the horizon, but not our immediate future.
I'm skeptical of the case for central bank digital currency, particularly in the United States,
said the expert.
Aaron Klein further elaborated that there's a divergence of opinions on CBDCs within the corridors of US power. The Federal Reserve seems inclined towards its issuance, but the Department of Justice remains ambiguous. Interestingly, President Joe Biden's directive entrusts the Department of Justice with determining if CBDC issuance contravenes current laws. This mix of positions only muddies the waters.
Klein, a Senior Research Fellow at the Brookings Institution's Center for Regulation and Markets, also shared his reservations about FedNow's potential success. Its triumph hinges on widespread adoption by a large number of banks. If this is realized, then FedNow, designed to speed up transactions, will prove its worth. But a mere handful of banks on board at the outset could stunt its growth.
I think FedNow has a real danger of being a flop, a bust there's only a handful of banks, about 20 more providers,
he stated.
For FedNow's widespread acceptance and success, Klein emphasized the need for regulators to step in. The Federal Reserve should leverage its influence to push banks to facilitate quicker access to individuals' funds. There's a prevailing trend among financial institutions to delay such access, and this needs to change. While customer needs and fiscal responsibility are paramount.
FedNow is an overhyped solution that the Fed fails to follow through with and then draws the wrong inference that there isn't demand for faster payments. The rest of the world moved to faster payments years ago, right? England's had this system since the first iPhone came out,
Klein pointed out.
Wrapping up, Aaron suggested that if FedNow gets off the ground successfully, it won’t be vying for space with cryptocurrencies. Cryptos, in his view, simply aren’t on par when it comes to transaction speeds.
You know, as it relates to crypto, it's a little confusing. Crypto is long hype that they were going to be this real-time payment system. And the reality is blockchain is slow. So FedNow is much faster. And in fact, Visa maintains to be the fastest in the class, far faster than any crypto that I'm aware of beyond technology,
the expert concluded.
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