The Biggest Upgrade to the US Financial Payment Rails Since SWIFT
The biggest upgrade to the payment rails of the US financial industry - since the SWIFT system was introduced in 1973 - is going to be unveiled in July 2023. The system known as FED NOW will enable instant payments that take seconds to complete and can occur 24/7, 365 days a year, all with integrated clearing functionality allowing financial institutions to deliver end-to-end instant payment services to their customers. This means the recipient of funds will have immediate availability and access to utilize these funds. To put this in perspective ACH transfers typically take anywhere from one to three business days to complete, domestic wire transfers can take 24+ hours to complete and international wire transfers can take up to a week to complete. Fed Now will not replace the Automated Clearing House Network (ACH) - at least not anytime soon - and is expected to complement ACH services. However, the writing is clearly on the wall as Fed Now grows its track-record, adoption, sophistication, and capacity.
Instant payments are digital payments which have the capacity to be "programmable" and generate rich data. What is rich data? Rich data is the process of compiling data to determine when and where a person is most likely to buy something, as opposed to relying on trend forecasts. Rich Data is used to predict consumer behavior. While this may sound like a godsend to businesses of all types as well as the Federal Reserve and other agencies who rely on financial data for forecasting and decision making, this "potential to invade privacy" will simultaneously cause consumers to sound the "alarm". Who wants their every transaction to be trackable?
Instant payments are the fastest-growing forms of digital payments on the planet with a projected compound annual growth rate of 23.6 percent from 2020 to 2025. Central banks in 50+ countries have already implemented instant payment networks that support the immediate posting and settlement of funds.
Consumers have shifted increasingly to using online banking options and applications such as Zelle, Paypal and so forth. In response to 2022 Federal surveys, businesses highlighted the importance of flexible payment options to be responsive in a fast-moving business environment. It is not surprising in the context of businesses having to navigate growing complexity in supply chain, inventory and delivery/distribution management that 62% of businesses reported cash flow management being a significant challenge and they would welcome the need for more flexibility and speed with respect to payment options. Twenty percent of businesses surveyed indicated that speed and timeliness were critical to their businesses’ success. Forty-five percent of businesses believed that faster payments could lower their costs with more efficient processing and data attached to the payment.
Consumers likewise see several benefits from instant payment including person-to-person transfers (57%), account-to-account transactions (32%) and last-minute bill payments (30%).
New Payment Rails, Rich Data, Programmable Money, and The Digital Payments Economy
Many are aware today of the digital or cryptographic payments industry that was birthed after the introduction of Bitcoin in 2008. Bitcoin was born out of the 2008 banking crisis which shook the global financial system to its core. Part of its originating impetus was that that governments, big banks run as centralized entities are fallible and can succumb to poor decision making. Continuous fiat money printing, not operating with a balanced budget, poor risk management and a growing national debt debases the currency and consumer spending power. Since World War 2, the purchasing power of the US dollar has fallen by more than 70%! It was time for a new form of money, a digital money that had a fixed supply that could never be altered, that was deflationary in nature, could be self-custodied without an intermediary (bank or government) and that was not owned by any central entity - decentralized - and 'trustless" meaning that you did not have to have to put your faith in a centrally controlled entity e.g. a central bank, government or big-bank for the safekeeping of your money.
Considering all the recent bank failures and Federal Reserve failures, history keeps proving why Bitcoin is needed, is valuable and happens to be the best performing asset since 2008 despite its significant volatility. Since August of 2020, Bitcoin is up 118%, the S&P is up 30%, the Nasdaq is up 25%, Gold is down 3.5%, Silver is down 16% and bonds are down 19%. The innovation that followed bitcoin ushered in the concept of programmable money and smart contracts which in turn has fueled the concept of the tokenization of all assets on the blockchain, a transparent ledger that cannot be tampered or altered where any asset or fractions of an asset can be exchanged, traded and stored altogether more securely, faster and more cost efficiently.
Fed Now ushers in a new digital payments era in the US financial system and paves the way technologically for the introduction of a central bank digital currency. Consumers are rightly concerned about the implications of a CBDC and how this can infringe on consumers privacy. As Snowden revealed, extraordinarily little remains private. A CBDC would inevitably give rise to concerns about a surveillance state.
It is not far-fetched to see how FED NOW will pave the way for a CBDC a well as intersect with the digital payments, blockchain and crypto economy. There will naturally always be a tension between using privacy ensured payment networks and those that are more vulnerable to potential government over-reach and access. Governments have their own legitimate security concerns with respect to money laundering and who has access to their currency. As most blockchains conduct business over a transparent ledger, it makes it a less favorable place to conduct fraud. Compared to the traditional FIAT currency paradigm, the fraud committed on the blockchain is a minute fraction. There will always be bad centralized actors which is why the essence of cryptographic transactional innovation is for it to be decentralized and what is motivating the development known as Web 3, the building of a decentralized internet and commerce architecture where the individual retains owenrship of their data, assets and privacy. It is important to note that the financial fraud and failures we heard about in the media with respect to crypto were ALL centralized entities with bad or incompetent actors at their core. All the decentralized entities functioned as they were supposed to and did not fail.
FED NOW ushers in another stage in the digital evolution of the US economy, with more far-reaching implications than just instant payments. In this evolving digital era, digital wallet technology will begin to intersect with banking as the world begins to transform into a purely digital global commerce ecosystem. Given the risks and costs associated with paper money, it is not far-fetched to envisage a transition to a cashless society, mandated by governments. As the world transitions to an all-in digital payment’s economy, private custody of assets, privacy and security will become increasingly important. With respect to security, Bitcoin is interesting. It is backed by 440 Exa hashes and 12.5GW of power. One Exa hash is equal to one quintillion hashes. In the current computing paradigm even if AI took over every computer in the world it could still not slow down the bitcoin network by more than 10%.
The battle for oversight and regulation of what will likely become a fully immersed digital global economy is in full swing across the world and more recently in the US. The SEC for example filed a lawsuit against Coinbase (the largest digital/crypto exchange in the US) alleging it was trading "un-registered" securities. The digital blockchain industry on the other hand does not believe that its tokens are securities. The SEC thinks differently with the clear exception of Bitcoin for the moment. The 1930's securities laws did not account for the advent of digital tokens and a digital economy. As a result, it will likely require congress to pass new legislation to newly define how the new blockchain economy is taxed and regulated. This is already happening in other countries. The EU for example recently passed legislation on digital assets and England is in process of doing so. China is back in the fray as are many other countries across the globe. The US will have do the same.
Regulation will provide clearer guidelines for innovators and investors and allow this emerging industry to mature and flourish. As blockcahin security and infrastructure develops in its sophistication, it will become more seamless and natural part of the economy. Web 3, the decentralized web economy will likewise grow as will the emergence of the metaverse. How decentralized entities will be regulated is anybody's guess. The world is transitioning to a pure digital paradigm and the pace is only likely to accelerate along with AI. No country, industry or company wants to be left behind an unstoppable trend.