By Tom Wilson and Colm Fulton

LONDON/STOCKHOLM (Reuters) – The world’s biggest central banks are revving up work on issuing digital cash, aiming to fend off emerging threats to traditional money and to make payments systems smoother.

In recent weeks, central banks from China to Britain have deepened efforts to test and research such technology, in part as potential rivals like bitcoin move from the fringes of finance towards embrace by major investors and companies.

Here’s what you need to know about central bank digital currencies (CBDCs):

WHAT’S THE IDEA?

CBDCs are the digital equivalent of banknotes and coins.

Like traditional cash, they would give holders a direct claim on the central bank, and allow businesses and individuals to make electronic payments and transfers.

But access to central bank money beyond physical cash has so far been restricted to financial institutions like banks.

Any wide adoption of CBDCs could have major economic and financial repercussions.

BUT DON’T WE HAVE DIGITAL CASH ALREADY?

Yes – whenever you use a debit or credit card, or payment app, to buy groceries or collect dry cleaning, you are using a form of digital money.

But this is created by commercial banks, based on central bank money credited electronically to their accounts.

This form of digital cash is not as “risk-free” as a CBDC. Deposits at commercial banks are usually only insured by governments up to a certain amount. If a bank fails, you could lose your savings.

WHY ARE CENTRAL BANKS INTERESTED?

They fear losing control over the supply of money and payments systems to cryptocurrencies, whether bitcoin or private efforts such as the planned Facebook-backed Diem.

The spread of forms of payment not overseen by any central or public body could weaken central banks’ grip on the supply of money, and economic stability. While distant, that threat has grown more real amid a snowballing mainstream embrace of cryptocurrencies.

As the use of physical cash declines, a CBDC would also ensure that the public has access to central bank money. They could also offer a new tool for central banks to transmit monetary policy and keep economies stable.

WHAT WOULD A CBDC LOOK LIKE?

The scope and shape of CBDCs will vary depending on a central bank’s objectives, as well as political questions.

A CBDC could take the form of a token saved on a mobile phone or a pre-paid card. It could also exist in an account directly managed by the central bank or an intermediary bank.

There is nothing to say it should use a blockchain, the technology that powers cryptocurrencies.

The People’s Bank of China (PBOC), for instance, said its digital yuan would not rely on a blockchain. Sweden’s e-krona, currently being tested, is, like bitcoin, based on a blockchain.

WHO’S LEADING THE WAY?

The PBOC aims to become the first major central bank to issue a CBDC. Its work, part of a push to internationalise the yuan, is advanced. State banks are promoting the digital yuan ahead of a May 5 shopping festival.

Western central banks are taking more time.

The U.S. Federal Reserve has said it will not rush any digital dollar. This year will, however, be important in getting the ball rolling, its head has said.

The European Central Bank is exploring the launch within the next five years of a digital euro. The Bank of England stepped up research last week, without making any commitments.

Smaller central banks are also active. The Bahamas last year become the first nation to introduce a CBDC nationwide, and the Eastern Caribbean this month became the first currency union central bank to issue digital cash.

AND THE RISKS?

Any mass migration to a CBDC could deprive commercial banks of a cheap and stable source of funding like retail deposits.

In a crisis, CBDCs could see customers rushing to withdraw deposits from commercial banks, preferring the safety of cash guaranteed by the central bank. To counter this, most early designs envision a cap on holdings of CBDC.

Central banks could redistribute the money they collect in CBDC deposits to lenders, but commercial bankers in Sweden worry that the availability of mortgages or corporate loans would become dependent on the central bank’s appetite for risk.

In emerging economies dependent on foreign currencies such as the dollar, easy-to-use CBDCs could also hasten the decline of domestic sovereign currencies, eroding the influence of monetary policy and potentially destablising local economies.

(Reporting by Tom Wilson in London and Colm Fulton in Stockholm, editing by Ed Osmond)