dollarsThe Federal Reserve Board (Fed) in early August announced that the Federal Reserve Banks will develop a new round-the-clock real-time payment and settlement service (also discussed by Enterprise Times here). It is calling this the FedNow Service. Its objective is to support faster payments in the United States. Perhaps the only remarkable aspect of this is that it has taken so long to come. The US is notoriously behind when compared to, say, individual countries in Europe or across Europe.

Lael Brainard, Federal Reserve Board Governor
Lael Brainard, Federal Reserve Board Governor

Everyone deserves the same ability to make and receive payments immediately and securely, and every bank deserves the same opportunity to offer that service to its community,” said Federal Reserve Board Governor Lael Brainard.

FedNow will permit banks of every size in every community across the country to provide real-time payments to their customers.

The FedNow ‘opportunity’

According to the Fed, the rapid evolution of technology presents a pivotal opportunity for the Federal Reserve and the payment industry to:

  • modernise the US’ payment system
  • establish a safe and efficient foundation for the future.

The Fed believes faster payment services, which enable the near-instantaneous transfer of funds 24×7, have the potential to:

  • attract widespread adoption
  • yield economic benefits for individuals and businesses
  • provide more flexibility to manage money and make time-sensitive payments.

Since its founding more than a century ago, the Federal Reserve has provided payment and settlement services, alongside and in cooperation with the private sector. This is part of its core function – of promoting an accessible, safe, and efficient US payment system. Over time the Fed has become a provider of payment and settlement services to more than 10,000 financial institutions across the US. It is that reach which the Fed now hopes will help the FedNow Service support a nationwide infrastructure on which the US financial services industry can develop innovative faster payment services.

What happens when?

In 2018, the Board requested public comment on potential services that the Fed could offer to support faster payments. Of the more than 350 comments that took a position (on whether the Federal Reserve should develop a new service for faster payments), >90% supported the Fed operating a round-the-clock real-time payment and settlement service alongside services provided by the private sector.

The Board is now requesting comment on how it might design the new service. The snag is that this means US citizens and business will have to wait until 2023 or 2024 for the FedNow Service to become available.

A DLT dimension

In a commentary in the American Banker (a financial industry publication): “As the plan stands now, it seems that the Fed will be adopting a consortium decentralized ledger system. In such a system, banks within the Fed’s network will become permissioned nodes capable of entering transactions into a ledger under some centralized board structure.

“The key aspect of this kind of distributed ledger technology, or DLT — without the obstacle of public access — will be to record instant transaction finality at a high volume, processed through federated architecture. While many projects claim to be able to handle such a high throughput, only a handful of tested technologies will be able to do so, and an even smaller group would fit the aims of the FedNow service.”

The American Banker believes that a differentiator, among the various possible protocols, must focus on the consensus mechanism. This is often the engine which sits behind credible DLT implementations.

Which one should the Fed choose? One of the most advanced (private or consortium) consensus mechanisms is HotStuff. The HotStuff consensus algorithm has obtained greater visibility. FaceBook’s Libra uses a similar approach.

A separate issue for the FedNow architecture will be which VM it chooses. A point made by the American Banker is that “Not every smartphone can run a more advanced Ethereum virtual machine or execute smart contracts, for example“. By implication FedNow must adopt a lightweight and flexible VM technology which:

  • can work with both modern and legacy systems
  • enable all parties to transact with devices on the network and legacy banking systems.

Enterprise Times: What does this mean

The ‘sad’ truth (to misrepresent Mr Trump) is that the FedNow system was long overdue in 2018 (or even 2010). Compared to, say, SEPA in Europe, the FedNow remains a long way off – and that is within the U.S. only. Integrating with international payments and settlement systems will likely take even longer.

That said, delivering instant transaction settlement over (possibly) blockchain/DLT could deliver one of the bridging jumps which then catapults the US into a commanding lead (for a while). As the American Banker opined: “it will be crucial that this new system makes room for communication with like-systems of remittances. The internet has enabled transacting at all distanced, and at all times. Bringing the U.S. banking system into the internet age, as FedNow intends, will entail open and instant institutional interactions, as well as individual interactions.”


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