Global CBDC Rollouts Continue: FedCoin and FedNow, Explained

A US Central Bank Digital Currency, or Fedcoin, would effectively nationalize the payments industry and maybe even the Bank for International Settlements (BIS), competing with commercial banks, credit card companies, and Web2 payment applications.

Introduction

The United States is inching closer to issuing their own Central Bank Digital Currency (CBDC). The term FedCoin has been used for a shorthand reference to the US version of a CBDC. It would follow on the heels of several other governments around the world which have already launched their own CBDC, perhaps most notably the People’s Bank of China (PBOC). Though a number of pilot programs have been started, only a handful have made the transition to full, official rollouts.

In addition to the White House’s Executive Order 14067 and the resulting Fact Sheet, most recently detailing several plans of action. This comes as several other nations have either piloted or officially released their own Central Bank Digital Currencies by various means. Adoption often takes place quicker in smaller jurisdictions, or those with particular needs which CBDCs are most directly and immediately obvious to affect. Before going into the details and implications of the US rolling out a FedCoin, let’s spend some time examining the results of some of the earlier attempts to do the same in previous years.

CBDC First Movers: Bahamas, Eastern Caribbean, Nigeria, and Jamaica

In October 2020, the Bahamas introduced the first sovereign CBDC, the Sand Dollar. It went beyond the pilot stage and officially launched following a particularly devastating hurricane that destroyed many of the bank branches and ATMs across several islands. Consumers simply need to select which tier of wallet they intend to use, provide the required KYC information, and finally download the Sand Dollar eWallet of their financial institution. However, the Sand Dollar still only represents a tiny fraction of the currency units in circulation at the time of publication. 

Another early adopter of CBDCs, the Eastern Caribbean Central Bank (ECCB) announced the launch of its DXCDCaribe pilot in March of 2019. The letter ‘D’ stands for ‘digital,’ and is attached to the acronym ‘XCD’ – the international currency code for the Eastern Caribbean dollar. The pilot involved the minting and issuance of the EC dollar’s digital version, DCash. It was issued exclusively by the ECCB before being distributed and utilized by authorized financial institutions in the Eastern Caribbean Currency Union. 

After being declared a success, the 2nd phase of its rollout began just two years after its pilot program. The ECCB announced that it used IBM’s Hyperledger Fabric to create an enterprise-grade, private blockchain for its CBDC. DCash makes use of this blockchain to process transfers, payments, and settlement across authorized API’s. Obviously, all DCash users must first be authenticated and authorized in order to participate, making it different from well-known public blockchains like the Bitcoin network, for instance.

Within the Eastern Caribbean Currency Union, users are subjected to all sorts of expensive fees, creating undue economic friction. Incoming and outgoing wire transfers stand out prominently, while point-of-sale merchants have been clearly incentivized to use cash instead of incurring the 3.5% from using credit cards.

Unfortunately, not everything went according to plan. In January 2022, the ECCB announced a system-wide outage, assuring users that a break in service necessitated additional upgrades to its network, resulting in transactions not being processed temporarily. A report was logged to record all of the failed transactions, with the ECCB assuring users that they would be honored once DCash service was restored.

Nigeria was the first African nation, and second country in the world, launching their digital currency called the eNaira in October 2021 in a phased rollout. During the initial phase, only bank account holders could access the eNaira, while the next phase expanded access to unbanked individuals. Though the population of Nigeria is approximately 200 million people, the app is nearing a million downloads, and already has about 270,000 active wallets in its first year of operations.

The Bank of Jamaica recently finished their pilot program of the Jamaican Digital Exchange (JAM-DEX) at the end of 2021. In May 2022, the BOJ announced that legislators voted on a measure to officially implement CBDCs for use by state and commercial banks before users, and even announced plans to airdrop the CBDC to its earliest adopters. Jamaican lawmakers have justified the planned rollout of the country’s CBDC by saying it would promote financial inclusion for the unbanked.

From the outside looking in, it appears that a corollary effect will be that the number of Jamaicans with digital IDs should increase substantially. This undoubtedly will help local governments with raising tax revenues. Many will be curious if this will be a catalyst for a boom in infrastructure developments across the island, and if so, it should be expected that many other nations will follow a similar blueprint.

The White House’s Executive Order on Digital Assets

According to the EO in its own words, “The US has an interest in responsible financial innovation, expanding access to safe and affordable financial services, and reducing the cost of domestic and cross-border funds transfers and payments, including through the continued modernization of public payment systems.” It continued to hone in on its intentions to regulate digital assets in attempts to protect consumers, investors, and businesses. 

It’s hard to argue against protecting people from financial harm. Who could be against such noble ambitions? After all, there have been several high profile incidents in which investors have been swindled or otherwise watched their assets seemingly disappear in the blink of an eye. The recent investigations into Terra Luna’s Do Kwon by officials in South Korea have also helped to bolster arguments in favor of regulation after investors saw $60 billion worth of their crypto wiped out.  

However, despite the US dollar losing at least 63% of its purchasing power since 1983, the EO nevertheless purports to be concerned with financial stability and financial system integrity. Perhaps losing money slowly is preferable to losing it quickly, but protecting the USD’s financial integrity seems to have been a losing battle for regulators and, unfortunately, “consumers, investors, and businesses.” What’s more, the 63% statistic came from the Federal Reserve Bank of St. Louis back in 2021, meaning that the reality of the situation has worsened since the publication of this data. Take a look at the full chart below.

This is not a chart of Terra’s stablecoin collapse, but rather the USD’s purchasing power going back to 1913, the birth of the US Federal Reserve System. Taking the dollar off of a gold standard in the 1970’s all but ensured its managed decline.

Furthermore, the announcement listed combating illicit financial activities, sanctions dodging, and national security issues as precluding the need for regulatory scrutiny. By doing so, the EO states that its actions, and the regulation which will undoubtedly follow it, will increase individuals’ ability to exercise human rights, promote financial inclusion and equity, and address climate change. In order to evaluate whether or not these aims can be achieved through regulation, it is appropriate that we examine the main points of EO 14067 more specifically:

• Protecting consumers, investors, and businesses from unknown risks associated with using digital assets. The EO laments that digital assets suffer from insufficient regulatory oversight standards, meaning that providers fail to protect sensitive financial data, custodial arrangements relating to customer assets, or risk disclosures.
• Protecting the US dollar hegemony, its financial stability, and mitigating global systemic risk. The US derives significant economic and national security benefits from the central role that its currency, regulators, and institutions play in the global financial system.
• The EO also asserted that the use of digital assets can be used illicitly, or else to circumvent US sanctions and other tools of controlling capital flows by financial authorities. This effectively undermines US national interest and security, and therefore has prompted the White House to take actions to mitigate these risks through regulatory oversight and law enforcement action.
• It also states that more regulation will promote greater access of underbanked individuals to safe and affordable financial services, like cross-border transfers and remittances. 
• Finally, the EO aims to support advances in technology that promote what it calls the “responsible development and use of digital assets.” While this section mentions privacy and operational security, the mention of climate impacts stands out. The EO mentions its intention to legislate climate impact goals, particularly with regards to energy use associated with mining crypto.

Specific US Policy Announcement Regarding CBDCs

The EO continued, “Sovereign money is at the core of a well-functioning financial system, macroeconomic stabilization policies, and economic growth.” It therefore promised to prioritize the development and deployment of a FedCoin CBDC with great urgency to ensure that the US protects the unique role that the US dollar plays as the world’s reserve currency. The order called for rapid assessments of potential risks and benefits regarding the US’s efforts to launch its FedCoin CBDC. 

A FedCoin may have the potential to offer more efficient transactions, with supposedly fewer of the risks posed by the current array of non-governmental digital assets. Indeed, a FedCoin that’s interoperable with other CBDCs and officially-sanctioned providers could facilitate cheaper cross-border payments. Though there are no mentions of how this improves upon what is already being offered, it is assumed that the EO means for citizens to have their dollars converted to on-chain assets using their Federal system.

58.88% USD; 20.6% Euro; 2.88% RMB; 4.97% GBP; 5.46% JPY; 1.93% AUD; 2.46% CAD; 3.46% Other (0.23% CHF)

The Chairman of the Federal Reserve, Jerome Powell, was encouraged to report on the extent to which a FedCoin would improve upon the current financial infrastructure, assess the optimal form a US FedCoin might take, and develop a strategic plan of action in terms of appropriately implementing it. Powell was ordered to evaluate the potential downsides which might impede the Fed’s ability to implement monetary policy and whether or not it can be effectively used for macroeconomic stabilization. That is, the White House put Fed Chair Powell to put together a plan of action or else report exactly why it might not be feasible for the time being. 

The EO stressed the importance of enforcing legal standards regarding digital assets and payment infrastructures, which has ended up being announced in the form of FedNow. It is obvious by reading the language of the EO that it not only intends to update its payment rails, but it is concerned about falling behind compared with private companies which have already saturated crypto markets and present difficult competition for Uncle Sam and the Fed. Though late to the game, the US government seems determined to ensure that any new payment systems are overseen by US regulators or those which are consistent with US interests and the legal requirements it decides to impose.

Federal Reserve Bank Announces 2023 FedNow Pilot Test

According to the Federal Reserve Bank’s own website, it has now narrowed the timing of its launch of FedCoin, called FedNow Service, as being launched in the middle of 2023. Currently, over 120 firms have joined the Fed’s launch of its CBDC pilot program. Participants in the pilot will soon provide businesses and consumers with the ability to transact instantly and securely,  giving them more flexibility and providing better liquidity for time-sensitive transactions. Access will be provided through what’s called the FedLine network, already serving over 10,000 financial institutions.

Essentially, FedNow provides the sort settlement speeds of stablecoin payments, but with the backing of the US government, and without the need to convert funds into other digital assets which might not have the same guarantees in terms of support. After all, if something happened to the FedNow network resulting in losses, the government could simply vote to issue new debt to make consumers whole again. This mirrors the current system of US Treasuries which are often viewed as risk-free assets. 

The rollout of the FedNow would fundamentally upgrade the current financial infrastructure to accommodate 24/7 operations, compared with the legacy systems which require business be done during working hours, and requiring workers to manually process transactions with wait times often lasting days. This will provide similar interfacing conveniences to US banking customers as is enjoyed by early adopters of digital assets and open Web3 protocols. 

Analysts suggest that use of FedCoin and the FedNow program could reduce the need for payday loans for individuals as they’ll no longer have to wait for a check to clear. For businesses, payments to suppliers could be settled more quickly and in an expedited manner, not to mention the convenience consumers will enjoy at points of sale. Regulators also profess that faster settlements would help reduce systemic debt risks amongst intraday and overnight credit facilities.

Potential Threats and Final Thoughts

On the surface level, the stated aims of EO 14067 seem noble enough, but important considerations must be taken into account regarding the usefulness or necessity for a FedCoin, or the FedNow program. Who could raise these concerns better than the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari? According to Mr. Kashkari, consumers already enjoy easy access to instant digital payments, but without the privacy concerns associated with a government-imposed FedCoin. 

He elaborated by stating that a CBDC network in the US would make it possible to monitor every transaction, impose negative interest rates on consumers, and directly tax customer accounts under its umbrella. He went on to suggest that he didn’t believe that individuals in liberal democracies would be unwilling to accept these circumstances without a clearly defined benefit for relinquishing so much authority to the Fed and government authorities. He finished with the rather pointed question, “Why would the American people be for that?”

Indeed, the question must be asked whether or not the government should implement such a system when the private sector already offers these services. In addition, the separation of consumers from the Federal Reserve bank provides an extra layer of protection from government overreach in the case that its powers were abused inappropriately. That is not to say it would necessarily happen, but let’s think of the private sector as a sort of ‘insurance’ against such possibilities.

However, a major technical overhaul like the FedNow program is likely needed in terms of upgrading the infrastructure used by institutions who already have accounts with the Federal Reserve. Having digital payment rails to facilitate faster and more efficient transactions is certainly a positive step, with the caveat that the program is not extended and forced upon every consumer that uses US dollars. That is to say that use of a more constrainedwould offer some advantages without encroaching on the privacy of consumers themselves. 

Alas, the FedCoin and FedNow program situation is still unfolding, with the most recent update coming from the White House’s most recent press release on digital assets on September 16, 2022. The FedNow program is anticipated to launch in 2023, according to the press release. The report announced in no uncertain terms that its instant payments infrastructure wouldn’t be limited to interbank settlements, but establish direct access to consumers, for example, in the to disburse funding for “disaster, emergency, or other government-to-consumer payments.”

It seems that neither the Fed nor the White House got Mr. Kashkari’s memo regarding the privacy concerns of such arrangements, or at least they’ve not taken it seriously. When looking back to the chart above, perhaps FedNow is being rolled out in attempts to revive a sharply declining US dollar system and its dominance as a reserve asset for global banking. As it stands, the development of the FedNow program and a digital FedCoin are gaining momentum fast, and it will be interesting to follow their progress as more information becomes available. It seems that history is already in the making, stay tuned for more updates on the matter.

References

1. Antoine, T. N. J. (2021, 1 Mar.). The ECCB’s digital currency (DCash) is a critical step in the buildout of a digital economy in the ECCU. Eastern Caribbean Central Bank. 
2. Biden, J. R. Jr. (2022, 9 Mar.). Executive order on ensuring responsible development of digital assets. The White House. 
3. Bennett, J. N. (2021, Dec.). A dollar’s worth: Inflation is real. Page One Economics.
4. Black, D. B. (2022, 28 Feb.). DCash shows why Fedcoin could be a disaster. Forbes.
5. Campbell, K. (2022, 4 Aug.). Kashkari calls CBDC a threat to privacy, defends regional bank independence. American Banker.
6. Crawley, J. (2022, 19 Aug.). Nigeria’s CBDC eNaira used for nearly $10M worth of transactions since October. CoinDesk. 
7. Kim, H. (2022, 14 Sep.). Terra co-founder Do Kwon faces arrest warrant in South Korea. Bloomberg.
8. Schickler, J. (2022, 9 May). The Bahamas’ ‘Sand Dollar’ needs improved cybersecurity, IMF says. CoinDesk.
9. Schonberger, J. (2022, 29 Aug.). Fed’s instant payment service ‘FedNow’ set to launch by July 2023. Yahoo Finance.
10. Shalal, A., & Johnson, K. (2022, 9 Mar.). Biden orders government to study digital dollar, other cryptocurrency risks. Reuters.
11. Wagner, C. (2022, 8 June). In historic move, Jamaica makes CBDC akin to cash. Blockworks.

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