To counter the financial damage from America’s unprecedented national lockdown, the Federal Reserve has taken unprecedented steps, including flooding the economy with dollars and investing directly in the economy. Most of these moves received grudging acceptance even from many Fed skeptics, as they saw this stimulus as needed and something only the Fed could do.
But the Fed’s expanded powers are all the more reason to be skeptical of its entering into activities the private sector clearly could do and is doing, such as payments services and cryptocurrency.
My new CEI report, “Government-Run Payment Systems Are Unsafe at Any Speed: The Case Against Fedcoin and FedNow,” details the dangers of the Fed’s current plans for its FedNow real-time payment system, and proposals for central bank-issued cryptocurrency that have been dubbed Fedcoin or the “digital dollar.”
In my report, I discuss concerns about privacy, data security, currency manipulation, and crowding out private-sector competition and innovation. On the latter point, both FedNow and proposals for Fedcoin likely exceed the Depository Institutions Deregulation and Monetary Control Act of 1980, which restricts the Fed from offering new payment services and technologies if the private sector is already providing these financial products.
Proponents of FedNow and Fedcoin say the government must create a system for payments to deposit instantly, rather than encourage such systems in the private sector by lifting regulatory barriers. But as noted in the paper, the private sector is providing a seemingly endless supply of payment technologies and digital currencies to solve the problem—to the extent it is a problem—of the time gap between when a payment is sent and when it is received in a bank account.
My paper makes the case that government involvement in this area would likely frustrate services already being offered to reduce or even eliminate this problem. And the examples of private-sector innovation in this area are many.
The Clearing House, a bank-held cooperative that has been routing interbank payments in various forms for more than 150 years, has been clearing real-time payments since 2017. By the end of 2018 it was covering 50 percent of the deposit base in the U.S. Its goal was to be able to offer its services to almost 100 percent of depositors by mid-2020, but the Fed delayed this interconnectivity when it announced it was entering the industry last year. Many bank decided to wait to see what the Fed would get off the ground, which by the Fed’s own estimates, could take until 2024.
Then there is the cryptocurrency development of “stablecoins,” such as Tether and the Facebook-developed Libra. Stablecoins, which can be denominated in a single national currency, can lower the costs of payment processing for businesses and consumers. They can also increase financial inclusion for the unbanked and underbanked who are currently locked out of digital transactions.
There are also emerging payment apps that can work around the payment gap and help lower-income consumers. Dave is a subscription-based service that charges $1 per month. It builds customers a budget to help them better predict when they are about to overdraw their bank accounts. And if customers are about to overdraw their accounts, it will advance its subscribers up to $75 interest-free as a small-dollar loan to be paid back from their next paycheck.
Similarly, the earned-wage access provider Earnin’ allows users to access their wages immediately after they’ve earned them, relying only on voluntary tips for compensation. It has been praised by anti-poverty crusaders such as T.D. Jakes.
As I conclude in the paper:
Fedcoin and FedNOW … could create many new problems. The correct policy for the Fed and other government actors is to sit back and leave citizens to experiment and innovate with private options in currency, payments, and other sectors.