The Launch of the FedNow Payment System: Impact and Opportunities for Crypto Assets

Supporters of Crypto Assets have long predicted that cryptocurrencies will replace fiat currencies and become the main method of global transactions. However, with the launch of the Federal Instant Payment System (FedNow) in the United States, the market has shown mixed reactions. Some believe this is the first step towards a surveilled currency, while others think it marks the end of most cryptocurrency use cases. But the reality may be more complex.

FedNow is an interbank real-time gross settlement system developed by the Federal Reserve to address issues in the global payment infrastructure. It aims to support faster payments, in part to respond to the challenges posed by tokenized Crypto Assets payments and fintech solutions. FedNow provides round-the-clock service and final settlement, representing a significant upgrade to the U.S. payment system.

Despite the concerns that the launch of the FedNow system may reduce the demand for Crypto Assets, in reality, crypto payments still have their unique role in this new environment. Here are several key reasons:

1. FedNow has not expanded the global dominance of the US dollar.

In recent years, the trend of de-dollarization has become increasingly evident, with the use of the Renminbi and Euro in international transactions significantly increasing. This provides growth opportunities for stablecoins, especially in markets where direct use of the US dollar is prohibited, with stablecoins serving as an alternative to the dollar. The FedNow system operates on the existing framework and does not substantially expand the coverage or potential transaction volume of the US dollar.

2. FedNow overlooks on-chain transaction opportunities

Although FedNow may be seen as an alternative to stablecoins, it overlooks one of the fastest-growing applications of stablecoins: on-chain transactions and applications. Data shows that from 2017 to 2023, the total supply of stablecoins increased by 8,750%, reaching $123.9 billion. This growth is largely attributed to the application of stablecoins in the decentralized finance (DeFi) space. The FedNow protocol does not support the existence of dollars on the blockchain or participation in on-chain transactions, which seems to contradict the market trend of asset tokenization.

3. FedNow failed to improve cross-border payments

The current design of FedNow primarily focuses on domestic payments in the United States, with limited improvements for international payments. In contrast, stablecoin payments provide a ready-made solution to cross-border payment friction. In the first quarter of 2023, stablecoin payment and transfer amounts reached $2 trillion, surpassing the total processing volume of PayPal for the entire year of 2022.

Although the launch of FedNow will undoubtedly have an impact on the payment sector, it does not signify the end of Crypto Assets. On the contrary, the many innovations and improvements that the FedNow system brings to the current payment track reflect some advantages of blockchain-based transactions.

As FedNow transitions from the development phase to mainstream application, some existing issues (such as the $500,000 transaction limit) may be addressed. However, the launch of FedNow may instead open up new opportunities for more stablecoin transactions, rather than ending the development of Crypto Assets.