The Federal Reserve Should Drop FedNow and Any Plans to Launch aCBDC
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pJust before Thanksgiving, a href=https://www.bankingdive.com/news/fednow-federal-reserve-fee-holiday-2023/635933/ rel=nofollow noopener noreferrer target=_blankthe Fed announced/a it still plans to launch its new real‐time payments system in the middle of 2023. More surprisingly, it a href=https://www.federalreserve.gov/newsevents/pressreleases/other20221103a.htm rel=nofollow noopener noreferrer target=_blankalso plans/a to waive the fees to participate in the new system./p
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pa href=https://www.bankingdive.com/news/fednow-federal-reserve-fee-holiday-2023/635933/ rel=nofollow noopener noreferrer target=_blankOne report/a notes that the Fed plans to launch the new system, known as FedNow, after “years of work on the project.” But it doesn’t mention that for most of those years the Fed claimed it had no interest in launching its own instant payments network. Or that the private sector did most of the work./p
pInitially, a href=https://www.forbes.com/sites/norbertmichel/2018/12/16/the-federal-reserve-should-not-compete-with-private-firms/?sh=51e35c677f42 target=_selfthe Fed assured everyone/a that it wanted private firms to build and run the system. It did so publicly in a href=https://www.forbes.com/sites/norbertmichel/2018/12/16/the-federal-reserve-should-not-compete-with-private-firms/?sh=51e35c677f42 target=_self2013, 2015, and again in 2017/a./p
pYet, a href=https://www.americanbar.org/groups/business_law/publications/committee_newsletters/consumer/2019/201911/fednow/ rel=nofollow noopener noreferrer target=_blankin 2019, /aa href=https://www.americanbar.org/groups/business_law/publications/committee_newsletters/consumer/2019/201911/fednow/ rel=nofollow noopener noreferrer target=_blankemafter/em the private sector created one, the Fed announced that it would/a launch its own real‐time settlement system./p
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pIf Congress really wants to provide more access to financial markets and ensure more innovation in financial services, members should support more private innovation and competition./p
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pGiven the a href=https://www.cato.org/publications/policy-analysis/new-yorks-bank-national-monetary-commission-founding-fed rel=nofollow noopener noreferrer target=_blanklong‐running love‐hate relationship/a a href=https://www.icba.org/newsroom/news-and-articles/2022/02/25/icba-insured-deposits-are-safe-at-a-community-bank rel=nofollow noopener noreferrer target=_blankbetween the federal government and the banking sector/a, it’s difficult to feel sympathy for the banks. Small banks, unsurprisingly, are a href=https://www.icba.org/newsroom/blogs/main-street-matters/2019/09/09/value-of-the-fednow-service-for-community-banks rel=nofollow noopener noreferrer target=_blanksupporting FedNow/a. Regardless, the Fed clearly shafted the big banks, and things might not work out as well for the smaller banks as they’re hoping./p
pSome might be tempted to view the Fed’s latest move as good old‐fashioned competition, but nobody can compete with the Fed. It’s the government agency responsible for supplying U.S. dollars. (My colleague a href=https://twitter.com/GeorgeSelgin/status/1600071431349469186 rel=nofollow noopener noreferrer target=_blankGeorge Selgin has/a a href=https://twitter.com/GeorgeSelgin/status/1600071421123756037 rel=nofollow noopener noreferrer target=_blankmultiple Twitter/a a href=https://twitter.com/GeorgeSelgin/status/1599883753425235968 rel=nofollow noopener noreferrer target=_blankthreads/a on the Fed’s statutory requirements for pricing its services and recovering its costs, and how historically difficult it has been to hold the Fed accountable to those requirements.)/p
pThis whole thing is an avoidable mess./p
pSet aside the below‐cost/predatory pricing issue and whether the Fed disingenuously pushed the private sector into creating an instant‐payments network. Also ignore whether the Fed truly recovers its costs, emand/em whether the Fed itself is to blame for anbsp;a href=https://www.forbes.com/sites/norbertmichel/2018/12/16/the-federal-reserve-should-not-compete-with-private-firms/?sh=51e35c677f42 target=_selfhost of anbsp;payments system problems throughout history/a. The basic question remains: Should the government be running payments systems?/p
pIn general, the government should not provide anbsp;good or service unless there is some sort of market failure. And there is clearly no market failure in the payments industry./p
pPayments services are not a href=https://plato.stanford.edu/entries/public-goods/ rel=nofollow noopener noreferrer target=_blankpublic goods/a, and the private sector has regularly provided such services. The Fed does not have to take over the payment system–or even part of it–to implement monetary policy or to regulate financial firms. It has no mandate to provide the technology for people to make commercial transactions, and it a href=https://www.cato.org/testimony/facilitating-faster-payments-us rel=nofollow noopener noreferrer target=_blankcould easily change its policies to speed up settlement times/a on existing systems./p
pAll these reasons have informed Congress’s efforts to limit the Fed’s ability to compete with the private sector, and rightfully so. There is little room for the private sector when anbsp;government entity, least of all the Federal Reserve, a href=https://www.forbes.com/sites/norbertmichel/2018/12/16/the-federal-reserve-should-not-compete-with-private-firms/?sh=51e35c677f42 target=_selfcompetes directly for customers/a. FedNow will surely keep private firms out of the industry./p
pMoreover, the same negative implications–and a href=https://www.forbes.com/sites/norbertmichel/2016/10/18/the-curse-of-the-cash-stewards/#17adaa228de3 target=_selfsome that are worse/a–apply a href=https://www.alt-m.org/2018/12/04/central-bank-digital-currency-threatens-financial-privacy-and-economic-growth/ rel=nofollow noopener noreferrer target=_blankwith central bank digital currencies, or CBDCs/a. Inbsp;received some flak for being anbsp;scare monger when Inbsp;said it, but Inbsp;stand a href=https://www.forbes.com/sites/norbertmichel/2018/12/16/the-federal-reserve-should-not-compete-with-private-firms/?sh=51e35c677f42 target=_selfbehind my original argument/a:/p
pIf the tide continues to move in this direction, with central banks providing retail bank accounts to the general public and controlling every aspect of money, there will be little room left for anbsp;private banking industry./p
pFor anyone who thinks this position is extreme, here’s anbsp;passage from anbsp;a href=https://rooseveltinstitute.org/wp-content/uploads/2021/08/GDI_Central-Banking-For-All_201806.pdf rel=nofollow noopener noreferrer target=_blankRoosevelt Institute paper/a (a href=https://rooseveltinstitute.org/wp-content/uploads/2021/08/GDI_Central-Banking-For-All_201806.pdf rel=nofollow noopener noreferrer target=_blankCentral Banking for All: Anbsp;Public Option for Bank Accounts/a) by Morgan Ricks, John Crawford, and Lev Menand:/p
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pFedAccounts would offer all the functionality of ordinary bank accounts with the exception of overdraft coverage. They would also have all the special features that banks currently enjoy on their central bank accounts—including unlimited secure balances, instant in‐network payments, and anbsp;higher interest rate—as well as some additional, complementary features. The FedAccount program would bring genuinely transformational change to the monetary‐financial system, in ways both obvious and unexpected. Perhaps most obviously, it would foster financial inclusion./p
p…./p
pFedAccounts, properly structured, would be anbsp;money‐and payments safety net for such households, lessening their reliance on expensive and subpar alternatives. But FedAccounts would have benefits across the income and wealth spectrum. For small and large businesses as well as individuals, the boost in interest paid on central bank accounts, the immediate clearing of payments, and (for those exceeding the deposit insurance limit) the nondefaultable status of balances would be transformative. Consumers and retailers would also benefit because the Federal Reserve would not charge interchange fees on debit card transactions./p
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pThey want the government to pay customers anbsp;higher interest rate than private banks and charge little to no fees, resulting in “transformational change to the monetary‐financial system.” Yet, somehow, CBDCs are supposed to complement private banks?/p
pMany supporters, instead, argue that anbsp;CBDC should be considered as anbsp;a href=https://www.congress.gov/event/117th-congress/house-event/LC67455/text?s=1amp;r=61 rel=nofollow noopener noreferrer target=_blanklimited/a a href=https://www.levernews.com/the-big-money-battle-over-cryptos-public-option/ rel=nofollow noopener noreferrer target=_blankpublic/a a href=https://rohangrey.net/files/banking.pdf rel=nofollow noopener noreferrer target=_blankoption/a, perhaps only for the “a href=https://www.piie.com/publications/policy-briefs/securing-macroeconomic-and-monetary-stability-federal-reserve-backed rel=nofollow noopener noreferrer target=_blankunbanked or underbanked/a.” These arguments are weak./p
pFor starters, the supposed benefits of anbsp;CBDC depend on a href=https://www.cato.org/working-paper/central-bank-digital-currency-assessing-risks-dispelling-myths rel=nofollow noopener noreferrer target=_blankwidespread adoption/a. Worse, though, is the basic fact that a href=https://www.forbes.com/sites/norbertmichel/2021/06/18/central-bank-digital-currencies-a-solution-in-search-of-a-problem/?sh=16a7049430d2 target=_selfonly about 5nbsp;percent of U.S. households don’t have anbsp;bank account/a. And nearly half of those folks say that they don’t have an account because they do not have enough money to meet minimum balance requirements. (For other explanations, a href=https://www.forbes.com/sites/norbertmichel/2021/06/18/central-bank-digital-currencies-a-solution-in-search-of-a-problem/?sh=16a7049430d2 target=_selfsee here/a.) Not having enough money is anbsp;broader economic problem, one that creating a “free” public option for banking does almost nothing to solve./p
pFurthermore, people can still participate in the American economy without anbsp;bank account. Check cashing services, prepaid cards, and payment apps such as Venmo are available to anyone who wants them. Of course, CBDC supporters don’t like those check cashing services, so they refer to anyone with anbsp;bank account who uses them as “underbanked,” thus fluffing up the “financial inclusion” problem./p
pThere is also absolutely no doubt where the political pressure will push even anbsp;severely limited public option CBDC. The CBDC’s availability will inevitably expand to more people and businesses, thus crowding out more and more private firms. Just look at the above passage from the Roosevelt Institute and listen to what most of the CBDC supporters already promote./p
pFinally, there is the issue of how CBDCs fit into the existing anti‐money laundering (AML) framework. Anyone who thinks CBDC users will get anbsp;privacy pass compared to bank customers is in for anbsp;rude awakening, and there is clearly further potential for abuse of power with CBDCs relative to existing means of payment. (For more on CBDC issues, check out a href=https://www.cato.org/working-paper/central-bank-digital-currency-assessing-risks-dispelling-myths rel=nofollow noopener noreferrer target=_blankthis working paper coauthored with my Cato colleague, Nick Anthony/a.)/p
pJust like FedNow, CBDCs should be left on the drawing board. Both usurp the private sector. Supporters of both ignore the many harms that the government has already done to financial markets and assume that the government will provide better solutions this time./p
pIf Congress really wants to provide more access to financial markets and ensure more innovation in financial services, members should support more private innovation and competition. At the very least, they should work to lessen government monopoly and regulation while ensuring that the Fed cannot issue anbsp;retail CBDC. Then they can start getting the government out of the payments system business./p
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