By Marc Jones and Tom Wilson

LONDON (Reuters) – A group of central banks sketched out a potential operating manual for digital cash on Thursday as they aim to strike a balance between keeping up with cryptocurrencies and concerns that the new technology could upend commercial lenders.

Beijing and Washington policymakers are working together to develop central bank digital currency (also called CBDCs) in fear of losing control over money due to the rise of bitcoin.

Although a digital euro or digital dollar is still years away from becoming a reality, the work of central banks continues to grow as people ditch cash and note in favor digital payments via debit cards, credit cards, and their mobile phones.

According to the seven major central banks (including those from the United States, Britain, and the ECB within the Euro zone), public-use CBDCs must be available for both commercial and retail purposes. They should also work with existing payment systems.

The central banks along with the Bank for International Settlements said that the tech must work in domestic systems. They also suggested strategies for their adoption tailored to the current economic situation.

They stressed that the existing financial system should be allowed to adapt to CBDC. This is because there are risks for slow-motion bank run if customers of commercial banks suddenly shift their savings to CBDC.

They stressed that the development and operation of a CBDC-system would require a significant effort by a central bank. This is despite the fact that the technology’s design may be flawed.

How a central bank digital currency works: https://fingfx.thomsonreuters.com/gfx/mkt/lbvgngxympq/Pasted%20image%201633001136766.png

STABILITY RISKS

Unlike cryptocurrencies like bitcoin that are usually run by private actors, CBDCs would be equivalent to cash, issued and backed by central banks. These are different from electronic money that’s used daily in millions of transactions and is mostly channelled through commercial banks.

China’s People’s Bank has the highest level of CBDCs implementation and plans to hold its biggest ever digital yuan experiment at the 2022 Beijing Winter Olympics.

Jerome Powell, Fed Chair, said that the U.S. Federal Reserve would soon release research on the benefits and costs of CBDCs.

Commercial banks fearing that CBDC with a focus on retail could lead to a loss of deposit, have tried to control their design.

They sought to reduce the risk of CBDCs that are retail-oriented to lender business models by lowering their threat.

Their analysis suggested that bank disintermediation could be controlled and lending might not have an adverse impact on banks. However, any potential adoption will likely remain low.