The United States Federal Reserve is set to launch its FedNow program, which is an instant payment system designed to improve settlement times and international payment systems. However, as with any new technology, the system also comes with its fair share of risks. Federal Reserve Governor Michelle Bowman has highlighted several risks that come with a Central Bank Digital Currency (CBDC), which are some of the same risks associated with the FedNow program.
One of the main concerns with a CBDC, according to Bowman, is the potential infringement on privacy. Bowman stated that privacy concerns have not been carefully considered and that consumer data privacy protections embedded in today’s payment systems must continue and be extended into future systems. The FedNow program, which is set to launch this summer, aims to achieve most of the benefits of CBDCs through other technologies.
Furthermore, there is an argument that a CBDC could bring the unbanked into the financial system and provide them more access. However, Bowman countered this point, stating that it is unlikely that the unbanked population would find the government more trustworthy than highly regulated banks. This assertion has been challenged by some industry members who claim that the anti-privacy argument around CBDCs is unfounded.
It is too early in the game to make that judgment, according to Mark Young, chief risk officer and data adviser at ConsenSys. He stated that “a [US] CBDC does not exist yet, so how are you saying that? The onus is on us to design what we want and to design something that demonstrates democracy.”
The launch of the FedNow program has generated some skepticism and concern over privacy issues. FedNow is a real-time payment system that will be a government-backed competitor to private sector alternatives. It would compete directly with private sector bank-based payment systems such as 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 with a CBDC, the FedNow program raises significant privacy concerns. It would allow the government to see intimate details of consumer transactions, and this information could be shared with law enforcement agencies. The data would also be vulnerable to hacking, which raises concerns about data breaches. There are also concerns that the FedNow program could crowd out private sector competition from FinTech and cryptocurrency providers due to its government subsidization and the Fed’s regulatory power.
While the FedNow program aims to improve settlement times and international payment systems, it also comes with several risks, including privacy concerns and potential crowding out of private sector competition. While a CBDC could bring the unbanked into the financial system, it also poses several risks that have not been adequately addressed. The onus is on designers to develop a system that demonstrates democracy and protects consumer data privacy.