In This Newsletter
FedNow vs. CBDC
Proxy and Pass-Through Voting
Stats to Watch: Crypto Consumer Confidence
FedNow vs. CBDC
The Federal Reserve announced this March that FedNow, a new instant interbank settlement system from the Federal Reserve, will begin rollout in July after participating institutions are formally certified this April.
While consumers have been feeling instant settlement on mobile and digital financial platforms, the legacy banking infrastructure has been struggling to keep up. The FedNow instant settlement infrastructure will enable institutions to settle transactions between banks as fast as retail customers experience them on their apps. At participating financial institutions, businesses and individuals will be able to send and receive instant payments 24/7. Recipient banks will have full access to funds immediately, giving them greater flexibility to manage their money and make time-sensitive payments.
Real-time, 24/7 interbank settlement could reduce liquidity risks faced by financial institutions—an acute need exposed by March’s Silicon Valley Bank failure. The new infrastructure could also reduce the overdraft fees imposed on retail customers, improve cashflow management for businesses, and speed up government transfer payments to recipients of programs like Social Security.
While the Federal Reserve is actively exploring what a US central bank digital currency (CBDC) would look like, FedNow will use traditional dollars to settle transactions between financial institutions. Importantly, FedNow is not a CBDC but a currency infrastructure service. A CBDC is a digital form of government-issued currency. Digital Dollar Project’s January 2023 White Paper 2.0 differentiates between two basic types of CBDC: wholesale and retail. Wholesale CBDC would be used for interbank settlement, while the general public could use retail CBDC.
Much like FedNow, a wholesale US CBDC would enable instant 24/7 settlement but also with the potential for more efficient international settlement. A retail CBDC would have additional utility like programmability and the ability to bank the unbanked directly. For example, the world’s first retail CBDC, the Bahamian Sand Dollar, allows individuals without bank accounts to hold a limited amount of money in an individual account with the central bank as part of its goal to expand financial inclusion.
Currently, the Federal Reserve cannot house individual consumer accounts; it only operates accounts for other financial institutions. Without amending the Federal Reserve Act, any future US CBDC will be an almost exclusively wholesale tool for financial institutions that will complement the FedNow infrastructure. Learn more about the tech and policy behind FedNow on its website and the Fed’s YouTube channel.
Proxy and Pass-Through Voting
Another piece of financial infrastructure in need of updating is proxy voting in publicly held corporations. Millions of Americans own small stakes in the nation’s largest firms and are occasionally mailed paper ballots by their retirement funds. Some motivated retail investors do show up in person at annual shareholder meetings, as the Wall Street Journal reports. But many delegate their vote to a proxy.
The most consequential votes that drive corporate governance in the board room come from the institutional investors that act on behalf of large numbers of clients casting their votes as proxies. Historically, these institutional investors have been advised by the cottage industry of proxy firms, which research ballot measures and advise their clients on how to vote.
The incentives of institutional investors and the shareholders they represent have historically been closely aligned. Both parties seek to maximize the value of their equity. However, as stakeholder capitalism and interest in environmental, social, and governance (ESG) investing have risen to prominence, individual shareholders and fund participants want their voices heard on emerging governance issues.
Policy initiatives focused on stewardship, transparency, and inclusion are also spurring innovation in proxy voting. Policymakers want investors to understand better how their fund managers intend to vote and actively participate in the process. The UK has led the push for this alignment of fund investor and asset manager preferences in a 2021 report on pension voting.
Some startups are asking if FinTech can help democratize proxy voting by enabling shareholders to cast their votes easily and reliably while being well-informed about the issues facing their portfolio companies. Jeff Cruttenden, co-founder of Treasury, spoke about the need to modernize and democratize proxy voting at the Milken Institute’s 2022 Middle East and Africa Summit session, “The Next FinTech Unicorn: Investment Opportunities in FinTech.”
Innovations like pass-through voting are one way to offer retail fund investors a greater voice in the proxy process. Ordinarily, mutual or exchange-traded fund investors do not have the right to vote on governance issues, as legally, the asset manager is the owner of the securities. Pass-through voting allows fund investors to share their voting preferences with asset managers who will vote on their behalf. Companies like Broadridge and Tumelo are working on offering new options like pass-through voting to update the proxy voting process.
Stats to Watch: Crypto Consumer Confidence
This month, Pew Research released a new report on confidence in and the use of cryptocurrency in the United States. Among the report’s key findings is that 75 percent of Americans who have heard of cryptocurrencies are not confident in their safety and reliability. The report also found that young men, high earners, and Black, Asian, and Hispanic Americans were all overrepresented among crypto users. The survey found that the proportion of first-time cryptocurrency users was lower than in past years, with 16 percent of respondents using cryptocurrencies for the first time in 2022.
Many of these findings echo the results of JPMorgan’s report published this winter, The Dynamics and Demographics of US Household Crypto-Asset Use, which found that usage of crypto is broader and deeper for men, Asian individuals, and younger individuals with higher incomes.