The Fed’s 2024 digital dollar release was moved up to a premature July 2023. However, US media hasn’t paid much attention to the economic event promoting rumors and speculation about the rushed release.
What is FedNow?
FedNow is a real-time payment system, providing an alternative to traditional payment methods. As a Central Bank Digital Currency (CBDC), it essentially a centralized cryptocurrency backed by an institution.
Officially, FedNow aims to make the payment system more efficient and secure, and to ease access to financial services for people who are unbanked or underbanked. The new system will be available 24/7 and will process digital dollar transactions in real time.
However, instant transactions are not new and are offered from many banks in Europe without the need for centralized blockchain system. Revolut is one such example and has been doing it for years.
The potential of a centralized digital dollar
FedNow offer the potential of making US economy more productive and competitive by providing a modern and efficient way of transferring funds. This potential may lead to increased investment and economic growth, which the US needs right now.
Additionally, the implementation of the new system may reduce the reliance on other payment systems with higher fees and longer processing times, reducing transaction costs.
The crypto dollar also could potentially attract institutional investors from overseas, which could help the country distribute the next wave of US debt that will follow the raising of the debt ceiling.
Conspiracy theories
A digital currency could allow countries to bypass traditional payment systems and engage direct trade with the US and by doing so, reduce the role of intermediaries like banks.
Some have suggested that a digital currency could allow the US to default on its debt without actually defaulting. This could be possible if the US is able to make payments to its creditors without breaking institutional sanctions or restrictions.
Speculators have said that President Biden is delaying “the death of the dollar” until after the coming election and the FedNow digital dollar is the beginning of a cashless society, which they perceive as a threat to American citizens’ individual freedoms and privacy.
There has not been credible evidence to support these speculations.
Conclusion
Considering the speculations, the FedNow digital dollar could be a way to strengthen the dollar in the short term as agile cross-border transactions may be an attractive option for international traders and investors. A digital dollar may also stave off some of the currency catastrophe and keep supply and demand channels open in the case of the US allowing a default.
However, institutional transaction to crypto will be the first of its kind and many big investors may chose to just watch and see what happens for a while. In such a case, a reduction in trading volume is expected and consequently a fall in the price of USD. Shorting USD prior to the release may create issues for traders with high leverage and limited equity, as volatility is expected no matter which way it goes.
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