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The development of central bank digital currency (CBDC) for the U.S. could drive innovation and generate efficiencies for the financial system, but it poses risks for banks, says Moody’s Investors Service in a new report.

Last week, the U.S. Federal Reserve Board published a paper on the idea of adopting a CBDC in the U.S., which didn’t take an official position of whether a CBDC is a good idea or not.

However, Moody’s said the paper represents “an important first step” in a public dialogue on the prospect of a digital dollar.

“In our view, a well-designed CBDC would be a faster, easily accessible form of public money that is free from credit and liquidity risk, and has the potential to introduce cost efficiencies in payment systems and spur innovation in digital money,” the rating agency said.

The possible advantages of digital money over traditional currency include programmability, and the ease of enabling micropayments.

However, it noted that some of the benefits could also create risks for the traditional banking and payments systems, including the risk of increased disintermediation, and funding risks.

“A CBDC, by providing individuals and businesses a risk-free direct claim on the central bank, could attract funds away from other cash alternatives such as bank deposits, money market funds and stablecoins. The potential effect on deposits would be credit negative for banks and could lead to a rise in their funding costs as deposits become scarcer,” Moody’s noted.

Additionally, it would also be negative for payment providers, “since it would likely cut the fees they earn from processing transactions,” it said.

A digital dollar could also create added cyber-risk for the financial system overall, it warned, and it would introduce uncertainty into the operation of monetary policy.

The actual effects of a U.S. CBDC would “depend critically on the specific design choices in its construction,” Moody’s noted.

“The final design of any CBDC — including whether it is interest-bearing, who is permitted to hold it, for how long and in what amounts — will be a critical determinant of the credit effect on banks and other incumbent financial intermediaries,” Moody’s said.

And it suggested that a well-designed digital dollar could “help preserve the U.S. dollar’s status against increasingly competitive private digital currencies, such as stablecoins.”