The payments system is an “essential public utility” that “cannot be left solely in the hands of private enterprise,” a former federal banking regulator told the Senate Banking Committee Wednesday in testimony supporting the Federal Reserve’s plans to build an interbank settlement system to support real-time payments.
Sheila Bair, who chaired the board of the Federal Deposit Insurance Corp. (FDIC) from June 2006 to July 2011, said FedNow – on which the Fed is accepting comments until Nov. 7 – “will provide the foundation upon which to build the next generation of instantaneous payment services, in partnership with the private sector.”
Bair added that the Fed’s operational involvement in this effort “will ensure that the payments system of the future is resilient, safe, and broadly accessible on fair and equitable terms.”
The former FDIC chair noted deficiencies in the past efforts of financial technology start-ups and large banks, the latter being spearheaded under the auspices of The Clearing House (TCH), to provide real-time payment services. The fintech efforts, she said, relied too much on legacy systems and result in delays in the transfer of funds between banks. Meanwhile, she said, the big banks’ platform has failed to gain significant traction, “with relatively low volumes and few banks participating beyond mostly the big ones” that own TCH.
“What’s needed – but what the private sector has yet to deliver – is a trusted and universally available infrastructure that would allow banks and credit unions of all sizes to send and receive money in ‘real time,’” she said in her prepared testimony.
Bair added that while she strongly supports the Fed’s decision to build FedNow, she also said she hoped that the Fed “fully explores the use of digital currency, including a cryptocurrency based on distributed ledger technology (DLT), in effectuating real-time settlement between banks.”
“As I have written in the past, the Fed should consider development of a Central Bank Digital Currency (CBDC) that could eventually be used by members of the public to transfer money directly between each other without the need for bank intermediation and its attendant costly fees,” she testified. “If based on DLT, such a system promises to be more secure, efficient and less costly than intermediated systems that rely on centralized ledgers and master accounts. Given the permanence and immutability of DLT, it could also provide important law enforcement benefits.”
Pointing to initiatives such as Facebook’s Libra, Bair said that if the Fed “does not stay ahead of this rapidly maturing technology, I fear private sector efforts to eclipse fiat monetary systems will get ahead of them, with potential disruptions to our banking system and in a worst case scenario, loss of control of our own currency.”