The Digital Dollar and FedNow

The Downsides 

Critics of a digital dollar express concern about the potential concentration of power within the U.S. government. They argue that it might grant the Federal Reserve excessive control over how Americans manage their finances, enabling the government to impose restrictions on fund access, apply negative interest rates to cash, automatically collect taxes, or even eliminate physical currency altogether. Additionally, the government could exercise surveillance over digital transactions, compiling data on individuals’ financial activities.

Adam Jordan, the Director of Investments for Paul R. Ried Financial Group, points out that Central Bank Digital Currencies inherently possess elements that governments historically find attractive, particularly in terms of tracking and control.

While the introduction of FedNow may equip smaller banks with the technological capabilities to compete with larger counterparts, it could potentially impact the revenue streams of all financial institutions. This is because consumers and businesses might prefer using the new payment system over credit and debit cards, leading to a reduction in interchange fees paid to banks and credit unions by merchants.

A report suggests that the implementation of FedNow might diminish the revenues of payments firms and banks relying heavily on debit and credit card interchange fees. Furthermore, banks stand to lose the interest earned on the “float,” which represents the money earned during the period it takes for a bank to process a deposit or withdrawal.