The world’s largest central banks – and even some of the smaller ones – are toying with the idea of issuing digital currencies. These would allow holders to make payments via the internet and possibly even offline, competing with existing means of electronic payment such as digital wallets, online banks or cryptocurrencies. Unlike these private solutions, an official digital currency would be backed by the central bank, making it “risk-free” like banknotes and coin. While most projects are still at an early stage, they have switched into higher gear in the past year after Facebook announced plans to create its own virtual token and the Covid-19 pandemic boosted digital payments. A group of seven central banks coordinated by the Bank for International Settlements set out on Friday how a digital currency could function. Here is what we know so far: A central bank digital currency (CBDC) is the electronic equivalent of cash. Like a banknote or coin, it gives its holder a direct claim on the central bank, bypassing commercial banks and offering a greater level of security as a central bank can never run out of the currency it issues. Access to central bank money beyond physical cash has so far been restricted to financial institutions. Extending it to the broader public could have major economic and financial repercussions. Authorities say that a CBDC would provide a basic means of payment for all at a time when cash use is dwindling. It would also offer a safer and potentially cheaper alternative to private solutions. Their main fear is losing control of the payment system if private currencies such as Bitcoin or Facebook’s proposed Libra are widely adopted. This could make it harder for authorities to detect money laundering and terrorism financing but also weaken central banks’ grip on the supply of money, which is one of the main avenues through which they steer the economy. For many emerging countries, where a larger part of the population is unbanked, a CBDC could be a way to foster financial inclusion and extend the reach of the central bank’s monetary policy. A CBDC could take the form of a token saved on a physical device, like a mobile phone or a pre-paid card, making it easier to transfer offline and anonymously. Alternatively, it could exist in accounts managed by an intermediary like a bank, which would help authorities police it and potentially remunerate it with an interest rate. While the idea of a CBDC was born in part as a response to cryptocurrencies, there’s nothing to say it should use blockchain, the distributed ledger technology that powers these tokens. The People’s Bank of China aims to become the first to issue a digital currency in its push to internationalise the yuan and reduce its dependence on the global dollar payment system. Major state-run commercial banks are conducting large-scale internal testing of a digital wallet application, according to local media reports. In Sweden, already the world’s least cash dependent economy, the Riksbank has also begun testing an e-krona. The European Central Bank and the Bank of England have both launched consultations on the matter while the Bank of Japan and the Federal Reserve have so far taken a backseat. Central banks fear a massive migration to CBDC would hollow out commercial banks, depriving them of a cheap and stable source of funding like retail deposits. In a crisis, this would make them vulnerable to a run on their coffers as clients would prefer the safety of an account guaranteed by the central bank. For this reason, most designs envision a cap on how much each consumer would be allowed to hold in CBDC and, potentially, even a lower remuneration rate to reduce its attraction. Some central banks have hired major consulting firms to develop pilot schemes. Sweden’s Riksbank, for instance, has partnered with Accenture for tests on its e-krona. But others, mostly in smaller countries, have tapped cryptocurrency and blockchain start-ups.