LONDON (Reuters) - Central banks are looking at creating their own digital currencies - a stark contrast to the ethos of cryptocurrencies that seek to subvert mainstream authority over money.

FILE PHOTO: Representations of virtual currency are displayed in front of the Libra logo in this illustration picture, June 21, 2019. REUTERS/Dado Ruvic/Illustration/File Photo

As Facebook’s efforts to launch its Libra cryptocurrency pour fuel onto debates over who will control money in the future, major economies have started to examine how so-called central bank digital currencies (CBDCs) could become reality.

Here are some key questions on the rise of central bank digital currencies and their progress in entering the mainstream.

ARE CBDCs DIFFERENT TO CRYPTOCURRENCIES?

Yes - and fundamentally so.

CBDCs are traditional money, but in digital form; issued and governed by a country’s central bank. By contrast, cryptocurrencies like bitcoin are produced by solving complex maths puzzles, and governed by disparate online communities instead of a centralised body.

The common denominator is that both cryptocurrencies and CBDCs, to a varying degree, are based on blockchain technology, a digital ledger that allows transactions to be recorded and accessed in real time by multiple parties.

While some retailers accept bitcoin as a form of payment, cryptocurrencies are not recognised as legal tender - which CBDCs, by definition, would be.

And unlike central bank money, both traditional and digital, the value of cryptocurrencies is determined entirely by the market, and not influenced by factors such as monetary policy or trade surpluses.

AND WHAT ABOUT ELECTRONIC CASH?

The rise of technology like contactless debit cards has made it easier for consumers and businesses to use electronic cash, or e-money, to pay for goods and services.

But this also differs to CBDCs.

Electronic cash, defined by the Bank for International Settlements as a store of value for making payments to retailers or between devices, is usually held at banks or on pre-paid cards or digital wallets such as PayPal.

CBDCs would not merely be a representation of physical money, as is the case with electronic cash, but a complete replacement for notes and coins.

SO WHAT ARE THE ADVANTAGES OF CBDCs?

Central banks think CBDCs could make payments systems, which are often time-consuming and costly, more efficient, reducing transfer and settlement times and thus stoking economic growth.

Some central banks think CBDCs could also counter the rise of cryptocurrencies issued by the private sector such as Libra, planned for launch in June 2020.

Bitcoin and other virtual currencies, hampered by wild volatility, have presented few realistic threats to central bank control over money. But central bankers fret that Libra could reach billions and quickly erode sovereignty over monetary policy.

CBDCs, they think, could address problems like inefficient payments that cryptocurrencies seek to solve, while maintaining state control over money.

In an era of negative interest rates, CBDCs are also seen as offering a tool to encourage businesses and people to spend money and invest, the argument goes, as they could be used to charge households and businesses to hold cash.

ARE CBDCs CLOSE TO BECOMING REALITY?

Increasingly so - though most CBDC projects are still in very early or conceptual stages.

A growing number of central banks are likely to issue their own digital currencies in the next few years, the Bank for International Settlements (BIS) has found. Most of those launching pilot schemes are from emerging markets. [L4N29R45W]

Among major economies, China is closest to becoming the first to introduce a CBDC. While details of its project to build a digital renminbi are scarce, it will be powered in part by blockchain technology and will initially be issued to commercial banks and other financial institutions.

The central banks of Britain, the euro zone, Japan, Sweden and Switzerland said on Tuesday they will share experiences in a group assisted by the BIS as they examine the case for issuing CBDCs.

ARE MOST MAJOR CENTRAL BANKS SUPPORTIVE?

Caution and scepticism exists in many quarters.

The U.S. Federal Reserve, for example, was notably absent from collaboration with the initiative by the European and Japanese central banks to look at CBDCs.

Fed Chairman Jerome Powell said in November the bank was monitoring the digital currency debate but not actively considering its own amid a host of legal, regulatory and operational questions.

Others, such as the Bank of Japan, have warned that uncertainties over the impact of CBDCs on commercial banking must be addressed. The BOJ has also scotched the idea that CBDCs could boost the effectiveness of negative interest rate policies.