FedNow Isn’t a CBDC, But Still Contains Many Dangers

Over the past few days, “FedNow” has been trending on Twitter in tweets that contain healthy doses of curiosity and skepticism, well-founded concerns about privacy and government surveillance, and some incorrect information about what exactly “Fednow” is.

Regarding the last item, one widely read tweet incorrectly asserted that FedNow is – by itself – a central bank digital currency (CBDC). This is incorrect, but as I have warned since the Federal Reserve first approved plans for this scheme in 2019, FedNow contains many of the dangers of a CBDC and some unique dangers of its own as far as unprecedented Federal Reserve intrusion into the everyday economy.

FedNow is basically a “real-time” payment system that will be a government-backed competitor to private sector alternatives. It would compete directly with the private sector bank-based payment systems RTP and Zelle, and indirectly compete with FinTech apps such as Chime and Dave that have high rates of customer satisfaction as well as privately issued cryptocurrencies. As I wrote in my 2020 CEI paper Government-Run Payment Systems Are Unsafe at Any Speed, FedNow is a “solution in search of a problem that could create many new problems.”

For instance, as with a CBDC, FedNow would allow the Fed – a government entity – to see intimate details of consumer transactions. This raises huge privacy concerns. As I note in the paper:

This means the Fed, a government entity, would have access to this data without a warrant and be able to hare it with law enforcement agencies. The data would also likely be vulnerable to hacking, as the government’s record on data breaches is certainly no better than that of the private sector.  Drew Johnson, national director of Protect Internet Freedom and Senior Fellow at the Taxpayers Protection Alliance, notes that under these types of schemes, “the federal government could learn how much a mother paid for her son’s piano lesson, how friends chose to split a dinner bill, where an individual traveled using a rideshare app, how much a couple spent on concert tickets for their anniversary, and billions of other nuggets of information the government, frankly, has no right to know.”

I note in the paper that there are also many concerns about FedNow crowding out private-sector competition from FinTech and cryptocurrency providers due to its government subsidization and the Fed’s regulatory power. Stay tuned, as I will have more to say soon on the latest shenanigans with the Fed’s rollout of FedNow.