The central bank of the US has scheduled the launch of its 24/7 payment service called FedNow for July 2023.
FedNow is a system that can irreversibly settle international payments, instantly, at any time of day, 365 days a year.
The central bank will operate a pilot program beginning as early as September. More than 120 organizations, including banks and payment processors, will participate in the pilot.
While many expected the Federal Reserve to deploy its own blockchain, or use a CBDC, FedNow does not use any form of blockchain technology to achieve these results.
The value proposition of many cryptocurrencies — cheap, reliable, and irreversible payment settlements within seconds — is all possible with the FedNow system.
How FedNow compares to credit cards or remittance providers
Today, nearly all commercial banks settle with finality on the books of the central bank. Only the Fed can ensure that one bank has debited dollars while another has received them with absolute assurance and irreversible finality.
FedWire, the main payment network for settling interbank transactions on the ledger of the central bank, settles trillions of dollars every day.
In a distant second and third place to FedWire are consumer payment networks Visa and Mastercard, which process hundreds of billions of transactions annually. Visa, for instance, handled over 164.7 billion transactions in 2021 and 140.8 billion in 2020.
However, credit card transactions are not irreversibly settled until over one month after the original payment date; this allows time for chargebacks, funds transfers, and other dispute processes.
Revocable credit card payments are faster but still have to pass several hurdles before reaching the recipient’s bank account, which can take days. Sending money through Western Union typically takes 24 hours for domestic transfers and up to five days for international transfers.
How FedNow compares to blockchains
Blockchains certainly advertise faster settlement times than consumer payment options like bank checks or automated clearing house (ACH) transfers. However, the irreversibility of blockchain payments usually depends on trusted operators of nodes or mining pools.
Consider Bitcoin, the oldest and most decentralized blockchain network, which can trustlessly settle one block of approximately 2,000 payments every 10 minutes, plus good practice of waiting for five additional block confirmations to assure funds have irreversibly settled. In summary, Bitcoin can process about 12,000 payments per hour.
Other blockchains advertise faster settlements by compromising on decentralization of nodes, block production security, or both, and so are not trustless in the sense of a global consensus of irreversible settlement.
FedWire, by comparison, allows banks to trustlessly settle 811,472 transfers per day with other banks.
FedNow will further accelerate payment settlement from days to seconds and give banks and businesses faster access to cleared money. FedNow also includes tools for fraud prevention and other value-added services.
Most blockchains do not yet have sufficient decentralization, security, or scale to handle the settlement assurances of a central bank.
If the Federal Reserve successfully launches its FedNow service in July, it could solve the needs of most consumers, businesses, and banks: cheap, reliable, and irreversible payment settlements within seconds.