I've been seeing a lot of misunderstanding about FedNow, a new retail payment system built by the Federal Reserve (the FED), but the one I want to deal with right now is the allegation that FedNow has the ability to freeze accounts.
Balaji Srinivasan, for instance, suggests that FedNow could "facilitate Cyprus-style deposit seizure at the speed of light":
Ten years later, physical currency is less viable. It’s all digital now.
— Balaji (@balajis) April 1, 2023
And the Cyprus bail-in makes you look at FedNow’s consumer-to-government payments in a different light.
It could facilitate Cyprus-style deposit seizure at the speed of light. https://t.co/2ZuF7n8qI6 pic.twitter.com/gZE7kwbyvf
That's not quite right, and let me show you why.
Let's set the stage. Say you do something illegal. Maybe some light treason, or better yet, investment fraud. You've got all of your victims' funds in your Wells Fargo account, and law enforcement wants to quickly stop you from making a getaway.
The authorities won't bother sending a court order to the FED to freeze your money. FedNow is a communications system between member bank, allowing them to quickly and accurately update their databases. It has no control over Wells Fargo's database, which is where the stolen funds reside.
To freeze the funds, the authorities have always had a much more powerful tool at their disposal. They will send a court order directly to Wells Fargo. And then Wells Fargo will lock your account. At that point you'll no longer be able to ask your bank to send FedNow transfers (or any other sort of transfer for that matter.) The FedNow network is closed to you, my friend.
But it wasn't the FED that carried out the freeze, it was your bank.
Next, let's broach the allegation that authorities might be able to order the FED to block any FedNow message mentioning your name, in essence marooning your funds at Wells Fargo. In his Twitter exchange with me Balaji seems to think this is possible, although he provides no real proof of his claim.
Even if this was possible (and I doubt it is), that's a fairly ineffective tool. You could get around a FedNow blockade by having Wells Fargo transfer the stolen funds via any non-FedNow network. There are many of them, including one of the ACH networks, Zelle, The Clearinghouse's RTP system, or one of the Visa/MasterCard debit networks. Alternatively, wire it overseas via SWIFT. Or send the funds internally to a confederate's Wells Fargo account and have them evade the blockade. Or, if you're feeling old fashioned, you could withdraw cash, maybe even write out a paper check. How about using your debit card to buy gold or crypto or a yacht if that's your thing?
As you can see, you've got so many ways to exit stolen funds from your Wells Fargo that blocking just one of the holes, FedNow, provides the authorities with no extra ability to freeze funds. FedNow or not, the authorities have the same very powerful tool they've always had: block funds at the bank level by deputizing bankers to do it.
(And that's not a bad thing. Freezing funds before they can get dissipated is one of the best tools for protecting fraud victims.)
As further proof that I'm right about FedNow's alleged freezing ability being a nothing-burger, here's a reality check: When 280 convoy-linked individuals were frozen out of the Canadian payments system by the Federal government last year, did the authorities ask the Bank of Canada to configure its various payments systems to carry out this order?
No, they didn't. They delegated freezing responsibility to Canada's banks and credit unions. And guess what? It worked like a charm.
In summary, let's not get too worked up about FedNow's alleged freezing ability. It's not the tool for the job.
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