Poised to kill the outdated clearinghouse model, FedNow is the Federal Reserve's first new banking platform in over 40 years. Money will flow faster and without any transactional delays while an estimated $73 trillion in funds including over $1 trillion in Social Security payouts and $8.3 billion in payroll deposits.
What is FedNow?
FedNow is the infrastructure for the Digital Dollar Project. It, in effect, removes the "bank float", the three-day period typically required for cash deposits to settle or clear. Typically, even when a bank account shows a deposit the funds aren't available to withdraw until they clear, which could take anywhere between two to five days. The same goes for credit card transactions even though the perception is that it happen instantly. This slow velocity of money can have a crippling effect on GDP growth and is " is antithetical to the concept of a digital economy. FedNow facilitates an instantaneous exchange of funds between parties without any transactional delays and antiquated clearinghouses and any need for funds to "settle"..
FedNow marks the official beginning of a digital world where governments around the world will shift out of paper currencies and into digital dollars. The infrastructure for the Digital Dollar Project is already underway around the world. Although FedNow isn't a central bank digital currency ("CBDC"), per se, it provides the real-time "rails" upon which a CBDC must function. i.e., you can't have a U.S.-backed CBDC or "FedCoin" without first having FedNow, as the two are inextricably linked.
A U.S.-backed CBDC (FedCoin) must run on a real-time network – one that can process upward of 1.7 million transactions per second, with 99% of all transactions "settling" in under a second. Therefore, FedNow must precede FedCoin. As America moves toward FedNow's real-time settlement network and moves toward a fully digital U.S. dollar (FedCoin), we are on the cusp of a paradigm-smashing, era-defining act of creative destruction in modern economic history. In tandem with its handpicked banking partners – i.e. financial juggernauts like American Express (AXP), Bank of New York Mellon (BK), Capital One (COF), Goldman Sachs (GS), JPMorgan Chase (JPM), and Wells Fargo (WFC) – the Federal Reserve is rolling out FedNow in three phases.
PHASE No. 1: Preparation and Readiness. Launched in January 2021, this phase ensures that financial institutions are prepared to "go live" with FedNow in mid-2023.
PHASE No. 2: Testing. Underway now, the testing phase is designed to identify and resolve every "friction point" contained within FedNow's real-time settlement platform before its widescale national rollout.
PHASE No. 3: National Rollout. As of Jully-2023, Americans will be able to send and receive funds from their bank accounts – 24/7/365 – without any transactional delays. "That's completely revolutionary in payments," says FedNow's chief executive and will likely unleash an additional $2.7 trillion through the U.S. economy every year.
FedNow seeks to reroute roughly $73 trillion in transactions away from the 40-year-old clearinghouse system (run by the banks) toward the Federal Reserve's brand-new settlement network. FedNow, therefore, jeopardizes the banking industry's rulership over the economy. The fear among banks is that consumers will dump their traditional checking and savings accounts for digital wallets. Since banks rely on such deposits to fund their loans, a move toward digital wallets would have a catastrophic impact. Or as Politico warns, "a retail model where the Fed issues digital dollars directly to customers, bypassing banks entirely, could be even more dangerous."
Ethereum: Ready for Launch?
To implement their worldwide plans for digital dollar it is unlikely that world governments will "start from scratch." Instead, they are likely to use the infrastructure of an existing blockchain network, most likely, Ethereum. So far Norway and Israel have started their CBDC development using Ethereum. In 2021 a Chinese banking official made the case for deploying a CBDC on Ethereum, and in at the World Economic Forum (WEF) in 2020, one of the Ethereum co-founders and Consensys CEO Joseph Lubin presented a white paper making the case for Ethereum to be the rails for CBDCs. As the WEF meets in Davos for the 50th time, it does so against the backdrop of a sea change in the mechanics of money. Many governments are using Ethereum (ETH) to build their digital dollars, or central bank digital currencies ("CBDCs"), as they're called. Norway has already begun its project with Ethereum as has Israel. More governments are exploring Ethereum as a tool too.
As is well known, Ethereum is a decentralized blockchain platform that establishes a peer-to-peer network that securely executes and verifies application code, or smart contracts. And smart contracts allow participants to transact with each other without a trusted central authority. Transaction records are immutable, verifiable, and securely distributed across the network, giving participants full ownership and visibility into transaction data. Ethereum has a long history of supporting large networks with tens of thousands of "nodes" and hundreds of thousands of users. With more than 350,000 developers, Ethereum has the largest blockchain ecosystem in the world. The network processes more than 1 million transactions a day for things like sending, lending, and borrowing money, and even sophisticated options and hedging strategies. It makes sense that governments would want to use this proven network to support their digital dollars. Ethereum is the best-suited blockchain network for the kind of maximally secure, global-scale, interoperable settlement platforms that CBDCs require. It is well suited for the use case of global CBDCs: different ERC-20 tokens can be issued for multiple uses: stablecoins, UBI, food stamps, carbon quotas, social credit, all underpinned by Ethereum on the base layer.
Why Ethereum?
Ethereum also has a proven track record of being willing to switch monetary policy on the fly, and isn't afraid to hard-fork itself out of a jam. The Ethereum ecosystem is already telegraphing a willingness to comply with central state dictums: embracing OFAC compliance with a ham-fisted stab at protocol level transaction censorship, rather than arguing about it too much. Outwardly it could be branded as decentralized, inclusive digital money while in reality being highly concentrated and censored at the transaction level. Similar to how the WEF brags they've "penetrated the cabinets" of many world governments, the Venn diagram of WEF and upper echelons of the Ethereum Foundation already intersect in a few places. The Ethereum Foundation's executive director is "an agenda contributor" to the WEF. Then there's the Enterprise Ethereum Alliance which is a who's who of big tech, Wall Street, and corporate big wigs, including JPMorgan, Microsoft, Accenture, Bank of New York Mellon, Ernst & Young and even FedEx Corporate Services Inc.
Last September, the Ethereum Merge significantly changed the nature of how Ethereum works. It migrated from a "proof of work" cryptocurrency like Bitcoin to a "proof of stake" network. This has made Ethereum more appealing as an ecosystem for institutional investors who've grown concerned about the heavy electricity usage of mining needed for “proof of work” cryptos. The Merge slashed Ethereum's energy usage by more than 99%. It also bolstered Ethereum's reputation as the crypto upon which many future decentralized applications will be built. Crypto analysts at JPMorgan published a bullish note on Ethereum in December. They noted that after the Ethereum Merge catalyst, there is potential for a significant rebound in 2023. The Surge, another anticipated upgrade, is expected to reduce the Ethereum network's costs even further by improving safety and processing transactions faster.
Conclusion
If Ethereum becomes the base layer for many CBDCs, demand for it would increase. And if demand increases, Ethereum'susage, validator stakes and token price could rise significantly.
References
1. Anrew Zaitlin, Moneyball Economics