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Even Fed Is Not Happy with the Current Payments System

Fredrik Vold
Last updated: | 2 min read

As Bitcoin and other cryptocurrency projects are already forcing banking incumbents to work more efficiently, the Federal Reserve, the central bank in the U.S., is reportedly “seriously considering” to develop a new and faster payments system for domestic use in the U.S., a recent letter from Fed Chairman Jerome Powell to senators revealed.

Fed Chairman Jerome Powell. Source: a video screenshot, Youtube, NBC News

In the letter, which was obtained by Politico, Powell argued that the Fed is “uniquely placed” to develop a new nationwide system, given the central bank’s existing relationship with more than 10,000 commercial banks.

However, a major challenge facing the Fed’s plans is that a number of the nation’s largest banks have already invested more than USD 1 billion in developing their own improved payments system, for now known only as Clearing House Payments Co. If the Fed moves forward with its plans, it would mean that the effort already undertaken by the private banks would be wasted.

Already, several banks are fighting back against the Fed, joined by some lawmakers, including Democratic senators Elizabeth Warren and Chris Van Hollen, Politico reported.

According to Powell, however, public feedback has been “overwhelmingly favorable” to the plans of a new central bank-led nationwide payments system.

“We’ve not made a decision on this, but it’s something we’re looking at carefully, and it’s something I do expect we’ll make a decision on soon,” he said at a press conference about the Fed’s latest interest rate cut.

In July, Powell said that “almost no one uses bitcoin for payments” as this is “a store of value, a speculative store of value, like gold.”

China steps up efforts on own digital currency

Meanwhile, the People’s Bank of China (PBoC) – China’s central bank – has announced plans to step up its efforts to develop a “legal digital currency” of its own, a statement released by the government agency on August 2 revealed.

According to the statement, published in Chinese on the PBoC’s website, the plan to “accelerate the pace of research and development of China’s legal digital currency” is one of seven priorities for the bank for the second half of 2019. Other priorities listed include more traditional central bank tasks like maintaining a “prudent monetary policy” and prevent major financial risks.

The move by the central bank likely comes in response to Facebook’s proposed stablecoin Libra, which the Chinese government fears could pose a challenge to their strict control over cross-border payments, monetary policy, and financial sovereignty. In addition, there is a widely held belief that a mainstream stablecoin like Libra could help cement the U.S. dollar’s position as the world’s leading currency for the foreseeable future.

As previously reported, China’s former central bank governor, Zhou Xiaochuan said in a speech delivered in early July that China could learn from Libra in developing their own digital currency.

Meanwhile, many are attributing the bitcoin rally today to the fact that China on Monday let the yuan tumble beyond the key 7-per-dollar level for the first time in more than a decade.