On Monday August 5th, it was reported that the Federal Reserve was planning on creating a real time payments system to revolutionize the way americans move money on a daily basis. According to PaymentsJournal, the Feds Governor Lael Brainard made this announcement and stated its name would be “FedNow.” Many industry leaders have been waiting years for this announcement, as technology evolution should allow us to have more efficient measures. What “FedNow” will do is allow banks to settle real-time payments with each other across the globe. Instead of having to wait days for money to settle, it would allow people to access their money immediately.
The easiest way to explain this is through an example. Today's financial system follows a protocol called “Deferred Net Settlement.” This would be equivalent to the mail system. Even though you are technically mailing a product to somebody, it typically will take 2-5 business days until that other party receives the product. With the way money settles today, it follows a similar protocol and that's why standard money movement takes so long. Having a “Real-Time Payments System” would be equivalent to text message or email. The second you send a message to somebody, its received by the other party quickly. Imagine a system where you didn't have to pay an extra “wire fee” to access your own money!
Years In The Making
Real-Time Settlement is not a new concept as it's something the Federal Reserve has been working on for years. The financial infrastructure hasn't changed much over the years, so you can only imagine the amount of work that needs to be completed before a big change would occur. If we take a step back, the biggest change the financial sector probably experienced was the introduction of ACH (Automated Clearinghouse) 40 years ago.
Many Are Keeping Their Eye on Ripple Tech
For those unfamiliar, Ripple is a company that provides a real-time gross settlement system. Ripple has been in the news a lot lately referencing the cryptocurrency XRP. It’s important to understand that Ripple and XRP are 2 separate entities. Ripple is the platform that institutions can use for real-time settlement, and XRP is the digital asset that’s sourced for liquidity purposes. Ripple is one of the only companies in the digital asset space that has valued regulators and financial institutions. Brad Garlinghouse, CEO of Ripple has stressed multiple times on how they are working with regulators and banks to enhance the way the world moves money. Bitcoin “Maximalist” tend to talk down on XRP since Bitcoins ultimate goal is to be peer to peer with no third party involvement.
Ripple Has Been Highly Connected To The Federal Reserve
With Ripples goal of working with legacy financial systems and regulators, it's quite interesting to see how close they've been to the Federal Reserve over the years. In Mondays Fed statement, they gave no detail on “FedNow” structure, but there might be potential for Ripple involvement. If we dig into the research, we see this issue looming since 2013 when the Fed 1st started talking about improving the U.S payment system in this document. As discussions proceeded, the Fed eventually rolled out a “Faster Payments Task Force Steering Committee” in 2015. This committee was able to attract 300 different people from various financial segments to address faster payment solutions. The Ripple PR from 2015, talked about their head of research Ryan Zagone being affiliated with this task force.
Ripples affiliation with the Fed did not stop there. As time progressed, we now approached year 2017 when Ripple made another announcement. They had stated in a PR that after 2 years of work, the Fed released their faster payments “action plan” where they were “highlighting Ripple’s ability to underpin the next generation of cross-border payments.”
Time will tell if Ripple has anything to do with the Feds plan on deploying “FedNow.” One thing we do know is that Ripple has been working with the Federal Reserve for years on this issue. It’s not clear yet if XRP will be involved in the framework. A lot of the goals addressed by the Fed on Monday sounded to follow the protocol of Ripples “xCurrent” framework that involved messaging between financial entities. xCurrent does not utilize the digital asset XRP. The Fed also mentioned addressing liquidity issues which could pertain to xRapid which uses XRP. In terms of XRPs potential of being used, it would be a positive sign for Ripple to receive a “No Action Letter” from the SEC regarding XRP. If the SEC eventually deems XRP to be a “non-security” , then you might see a lot more rumors regarding XRP and “FedNow” developments.