The Federal Reserve released its long-awaited paper exploring the pros and cons of a central bank digital currency (CBDC) on Thursday as the debate over cryptocurrency regulation heats up.
The Fed has compiled a list of pros and cons associated with adopting a CBDC, but has come to no formal conclusion on this. The move comes as countries like China move forward with their own digital currency plans and amid a huge regulatory debate over how cryptocurrencies are transforming the financial industry.
“The introduction of a CBDC would represent a very significant innovation in U.S. currency,” the Fed wrote in the paper.
Among the benefits, a digital currency could help support faster and cheaper payments, the Fed said, expand consumer access to the financial system and help preserve the dollar’s international status as a reserve currency, among other advantages. It could also help low-income consumers access the financial system, the central bank noted.
Policymakers also believe that a CBDC would provide the general public with broad access to digital currency without credit risk or liquidity risk. The Fed considers it a less risky option compared to other cryptocurrencies and stablecoins, although Fed Chairman Jerome Powell has said that private sector stablecoins could exist alongside a CBDC.
Yet the Fed also laid out several risk scenarios, including how deposit-dependent banks could see deposits decline if a CBDC is adopted en masse. This, in turn, could increase funding costs for banks and increase credit costs for households and businesses. A digital currency could also make panics on financial companies more likely, or even more severe, the Fed said.
And a digital coin could also prompt the Fed to increase the size of its balance sheet to account for the growth of the CBDC, similar to the impact of issuing increasing amounts of physical currency in circulation, he noted. .
If passed, the CBDC is expected to protect consumer privacy, guard against criminal activity like hacking and money laundering, and be a widely accessible means of payment that could be transferred seamlessly between parties. according to the Fed.
The Fed has not committed to how such a currency could be issued, if it would use the same blockchain that underpins other digital tokens like Bitcoin (BTC-USD) and Ether (ETH-USD). It could have a ledger, or would it work like a physical dollar, which doesn’t have a ledger. Additionally, it was unclear how CBDC bank accounts work, given that the Fed does not host personal bank accounts.
The central bank has invited public comments on the document, a period that will last 120 days. If the Fed decides to go ahead with a CBDC, the central bank will need permission from Congress. The central bank insisted it would not move forward without explicit support from Congress and the White House.
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