In a white paper, the Fed describes central bank digital coins as a ”highly significant innovation.”

<p>The Federal Reserve released its long-awaited paper on the benefits and drawbacks of a central bank digital currency (CBDC) on Thursday, as the debate over cryptocurrency regulation heats up.</p> <p>The Fed outlined the benefits and drawbacks of implementing a CBDC but did not reach a formal decision. The move comes as countries such as China push ahead with their own digital currency plans, as well as in the midst of a wide-ranging debate over how cryptocurrencies are transforming the financial sector — and how they should be regulated.</p> <p>The Fed wrote in the paper, "The introduction of a CBDC would represent a highly significant innovation in American money."</p> <p>The CBDC would be a liability of the Fed rather than a commercial bank. In collaboration with the private sector, the Fed would try to avoid any disruption to the US financial system by leveraging banks' existing privacy and identity-management frameworks and innovation.</p> <p>Among the benefits, the Fed stated that a digital currency could help support faster and cheaper payments, expand consumer access to the financial system, and help preserve the dollar's international status as a reserve currency. According to the central bank, it may also help lower-income consumers gain access to the financial system.</p> <p>Policymakers also believe that a CBDC would provide the general public with broad access to digital money that is free of credit and liquidity risk. The Fed considers it a less risky alternative to other cryptocurrencies and stablecoins, though Fed Chair Jerome Powell has stated that private sector stablecoins could coexist with a CBDC.</p> <p>However, the Fed also outlined several risk scenarios, including how banks that rely on deposits may see those decline if a CBDC is widely adopted. As a result, bank funding costs may rise, as will credit costs for individuals and businesses. According to the Fed, a digital currency could make financial firm runs more likely, if not more severe.</p> <p>It also noted that a digital co