I was very curious when the Federal Reserve announced their new service that would directly compete with crypto so I dove in and did a lot of research and found some details that are going to surprise you. For one, most of the Ripple influencers out there are lying to us about how this will benefit Ripple. Besides that, I do think this development will forever change the landscape of crypto.
What is going on anyways? The Fed recently announced its FedNow service, it’s a settlement service for banks that enables instant payments. This is a big deal because it’s the first new payment system that the Fed has created since the 1970s, for us end users that mean that the money that we send or receive will be settled instantly and be available in our bank accounts in seconds, as opposed to days.
You know how when you send someone money it could take like three business days to fully clear? With this new service, we don’t have to wait anymore. Unfortunately, we do have to wait a little bit because it’s not going to fully launch until mid-2023, and when it does, it’s going to be for only domestic payments, to begin with.
If we take a step back and look at this whole thing from the Fed’s perspective. I think this new service makes a ton of sense. They see our payment technology in the US as falling way behind other countries. Europe has had this instant payment stuff for a while now, and China is way ahead of us too. Even with cryptocurrencies, you can send money to someone in seconds with pretty low fees. That’s why the Fed was like we gotta innovate, or else we’ll be left behind.
Their announcement was not surprising to me at all, but it did make me wonder, how this would affect crypto. When I looked on Twitter, I saw some bullish takes like “Oh my god, this is amazing for crypto.” and I saw some bearish takes “Wow this is going to destroy crypto.” So let’s analyze both sides to see who’s right.
Starting with the bullish side, some people say that this is good for crypto because the FedNow service will use crypto or blockchain tech. But does it though? they say that because there’s a showcase website for FedNow partners which includes some crypto projects like Cypherium and Ripple, but indirectly. Let’s take Ripple first, they’re not actually on the showcase website themselves but their partner Volante is.
Volante is a fintech software company that helps their clients, mostly banks and other financial institutions to do payment stuff. If we dig deeper we see that they do indeed use Ripple. On their cross-border payments page, they list Ripple as one of the technologies that they support. However, that just means that their customers could use ripple if they want, but it’s not required at all. In fact, they could choose from a bunch of other cross-border rails such as SWIFT gpi, VISA Direct, etc. Even if all of Volante’s customers use Ripple, it would have little to do with FedNow because that’s a separate service under their real-time payments section.
There are two different services under the broader Volante umbrella, and there’s really no direct connection between FedNow and Ripple, which is what the XRP Army was pushing on Twitter. Some influencers specifically said that FedNow benefits Ripple because it will use Ripple’s interledger protocol.
To that, I say yes and no, because Volante does offer Ripple connect service which utilizes interledger, but once again that’s a separate service from FedNow. Even if it is tied to FedNow somehow, let’s just say that it is for the sake of argument, then it still wouldn’t benefit XRP because the interledger protocol is
totally separate from the Ripple network.
Interledger was built for interoperability, to let people send payments across different ledgers. It does not have its own token, nor is it powered by XRP. Interledger can actually connect to a bunch of different payment systems. So yes, it can connect to Ripple, but in no way does it require the use of XRP. In fact, all those different payment systems hold their own native currency when connecting to an interledger.
What about Cypherium? That crypto project shows up directly on the showcase website, that must be bullish for them, right? It looks like a lot of people thought that as they aped into Cypherium’s coin, pumped it 4x since the FedNow announcement.
If we look closer, we see that the showcase isn’t even that big of a deal. It just lists a bunch of different service providers that may utilize the FedNow service in the future. It’s literally a list of companies that will connect to FedNow, and offer instant payments to their clients on the other side. So it’s not like they’re playing some important role, or helping the Fed build out their technology.
In fact, the fine print on the website says that the Fed does not support nor endorse any of those entities, and none of them have a special relationship with the Fed, so Cypherium is just hyping it up. I can’t blame them because it’s great marketing, but just being on that showcase means nothing to them.
They’re one of those enterprise-focused blockchains and you see that they do a bunch of stuff for banks, just like Volante does. So it makes sense that they would integrate FedNow because of who their customers are, but that’s not special nor notable at all. I highly doubt that this will benefit their blockchain in any meaningful manner.
In fact, I want to be very clear here, this FedNow service does not use crypto or blockchain tech whatsoever. They already said that this service will run on their existing FedLine® network which does not use blockchain. so my conclusion here is that the bullish side is clearly wrong, because the FedNow service is not good for crypto, and definitely not for Ripple or Cypherium like their fans are claiming.
Does that mean that the bears are right that the FedNow is going to end crypto? Let’s think about it. It’s definitely going to affect payment cryptos, like Nano. People are always like it’s so fast and cheap, it’s amazing for payments. Well, looks like the value proposition just went out the window. Also, both of the Bitcoin forks: Bitcoin Cash and Bitcoin SV wanted to focus on being peer-to-peer electronic cash. They went with bigger blocks to optimize for the payments use case, but it looks like bye bye to them as well now that the FedNow service is here. Fortunately, the BTC camp is fine because their store of value use case is still intact and stronger than ever.
Now, keep in mind that this service is only domestic to begin with, so cross-border use cases still live on for crypto. That’s actually good for XRP because their remittance use case is still intact. However, it does look like the payment use case that people often touted for crypto is going to be weaker in the future.
I’m not personally worried though, because that just means crypto will have to compete in other areas, like store value, privacy, censorship resistance, etc.
But what about stablecoins? because those are surely going to be affected, right? Well, from a payments point of view. Yes, there’s no need to get stablecoins to send them to other people within the U.S. But was that ever really that big of a use case?
I mean, for those purposes I always use Venmo or the Cash app. Also, you’ll still need stablecoins to trade on certain exchanges, or if you want to operate within the Defi world. Not to mention people in countries like Argentina will still want to hold stablecoins because FedNow doesn’t fix anything for them. It’s just a payments rail, it doesn’t fix the fact that their own currency is rapidly depreciating. Therefore, I don’t think this will end stablecoins by any stretch.
What about the Fed’s own stablecoin? Their central bank digital currency or CBDC, they’ve been talking about that for a while now. Well, that’s not really crypto per se; but I do think that this FedNow service could end any potential CBDC before it happens since one of the biggest reasons to even explore CBDC was for their better payment capabilities. Not to mention CBDC will most likely need congressional approval to happen. That’s why I think that FedNow could actually turn out to be the CBDC killer instead of a crypto killer.
My conclusion is that the bearish takes are also wrong and that this news isn’t as bad for crypto as the critics say it is. so there you have it, nuance wins the day. Things are rarely as extreme as they seem.
