Concerns have been spreading widely that the Federal Reserve’s new payments system, FedNow, was a covert plan to launch a central bank digital currency, or CBDC. While it’s important to remain vigilant, it’s equally important to get the facts right: FedNow is not a CBDC.

Before defending the Federal Reserve (a rare position for myself) and explaining what’s happening, let me take this opportunity to note that much of the concern here is a direct result of how the Federal Reserve has become infamous for clouding its messaging to the public. To make matters worse, the Federal Reserve has consistently preserved a legal gray area with its authority to issue a CBDC. With these considerations in mind, it should be no surprise that the public’s trust in government is at historic lows and many have worried that something more sinister is at work.

With that said, let’s dive into what exactly FedNow is (and isn’t).

What is FedNow?

FedNow is an instant payments system—a sort of update to Fedwire and the Automated Clearinghouse (ACH). Individuals will not have direct access to FedNow, but they will have access to faster payments so long as their bank or credit union opts into the FedNow network. Although creating FedNow was not necessary to achieve faster payments, one big difference with FedNow will be that payments will no longer be held up on weekends, holidays, or after traditional business hours.

FedNow is Not a CBDC

Astute eyes will likely recognize that FedNow does vaguely resemble a wholesale CBDC. Where a wholesale CBDC would be restricted to financial institutions for use during interbank settlement, FedNow would also be restricted to financial institutions. The difference, however, lies in their design. Where a CBDC is a currency, FedNow is a payment rail. If we think of dollars and cents as water, then FedNow is the plumbing that gets those dollars and cents where they need to go. In contrast, a CBDC would involve replacing the water itself in this analogy.

Under the current system, interbank settlement is performed on the Federal Reserve’s payment rails, thus ultimately affecting retail banking customers’ settlement times. It’s for this reason that Federal Reserve Governor Michelle Bowman said, “My expectation is that FedNow addresses the issues that some have raised about the need for a CBDC.” This statement should not be misunderstood to say that FedNow will take CBDCs off the table, but it does show that the Federal Reserve itself sees FedNow and CBDCs as distinctly different.

Not Without Objection

Although FedNow is not a CBDC, that’s not to say there is no reason to object to it. Faster payments are needed in the United States, but FedNow is not the only option. FedNow was announced in 2019, but that was two years after the Clearing House (TCH) introduced the Real-Time Payments (RTP) Network. In fact, while not offering instant payments, even just expanding the operating hours of Fedwire and the National Settlement Service (NSS) to run 24x7x365 would have improved the U.S. financial system. Yet, the Federal Reserve seems to have chosen to ignore the simpler option and walk over the private sector. Both choices are grounds for fair and longstanding objections to FedNow.

Staying Vigilant

While FedNow is not a CBDC, that doesn’t mean those concerned about CBDCs should let their guard down. Rather, staying vigilant means working to identify issues as they come up and working to get the facts right. From ending financial privacy to destabilizing the banking system, the risks of CBDCs are all too real.



Are you interested in learning more about CBDCs? Check out this new report that explains why the benefits of CBDCs are a myth, but the risks are serious. Or, if you want something lighter to get up to speed, check out this introductory webpage.