The recent banking crisis has unleashed a fury of speculation around whether or not this is the inflection point for the adoption of CBDCs by central banks and governments around the world. However, during the last few years, we have seen how the pandemic has sped up technological adoption and developments throughout many countries. From the increase of card payments and a move away from cash, to the growth in ecommerce and fintech transactions through our mobile phones, the concept of money has radically changed and become truly digital in nature.
In the US, the Federal Reserve has been working on their pilot program for real-time payments (RTP) infrastructure, FedNow and recently announced in a press release that this will go live in July 2023. Many people see this as a precursor for the adoption of a US CBDC or for the implementation of a ‘digital dollar’. Let’s look at what FedNow is and why RTP infrastructure matters for the future.
What is FedNow?
The Federal Reserve has been working on its pilot program for FedNow since January 2021. In the US, unlike a number of other countries around the world, there has not been a public RTP infrastructure (for mobile or banking transactions) other than the SWIFT payments system for sending money between banks or real-time settlement. As a legacy system, SWIFT typically takes between three to five business days to clear funds between banks and depending on the amount involved has service fees for both consumers and merchants.
Over the last decade, many countries have upgraded and enhanced their RTP infrastructure which has greatly transformed their economies and the lives of ordinary people. In 2021, the global real-time payments market was valued at around $13.9 billion and is expected to grow at a compound annual growth rate (CAGR) of 30.6% from 2021 to 2028, reaching a market size of $104.6 billion by 2028. Asian countries have pioneered mobile-first digital payment infrastructure with India’s UPI and China’s instant mobile banking payment giants AliPay and WeChat which are the largest mobile payments markets in the world by volume. Both China and India have launched CBDCs with the digital yuan in circulation since 2021 and the e-rupee pilot program nearing completion this year.
In the UK, the faster payments service was introduced in 2008 which enabled institutions to process almost all payments in real-time. Their network includes banks and fintechs alike with transaction limits as high as £1mil. The European Central Bank's TARGET Instant Payment Settlement (TIPS) system was launched in 2018. The US is the only large payments market in the world without this level of digital infrastructure. Many payment service providers such as PayPal, Visa, Mastercard and Zettle, offer real-time payment solutions to their customers; however there is no payment infrastructure available to provide RTP for financial institutions in the US regardless of size.
In our article, The State of CBDCs, we looked at the reasoning behind this technology and the many projects underway globally to research and test different use cases for retail, wholesale and commercial transactions. Without RTP infrastructure, there is no way to use CBDCs on a daily basis regardless of the transaction. Governments and Central Banks need digital payments infrastructure in place as a precursor for public and private sector adoption of a ‘digital dollar’.
This is why many people both within and outside web3 see CBDCs as means of monetary control and an invasion of their privacy. In the US, this stems from the libertarian principle of wanting less government intervention in people’s lives. Freedom for many Americans is also about a right to financial freedom. China’s launch of the e-CNY or digital yuan as a means of government capital controls (keeping money from leaving their country) has also influenced people’s views as to what CBDCs are designed to do or what central banks could potentially use these for.
We live in a time of surveillance capitalism and CBDCs are just another layer of data capture. Currently, Amazon, Google, PayPal and Meta pretty much know everything about us from our data. If it is ‘okay’ for corporations to have your personal data and financial information, why is it ‘not okay’ for central banks or governments? Do any of them have our privacy or financial freedom at the heart of what they do? What needs to be regulated when it comes to these technologies? These are questions we need to start thinking about as a society and how they apply to AI, web3 and digital currencies in the future.