Officials at the Bank of England said they have made a “material step forward” in addressing one of the major risks preventing central banks issuing their own digital currencies.

Recent analysis from Michael Kumhof, a senior research advisor in the BoE’s research hub, and Claire Noone, who works in the bank note operations division, was followed by an official blog post which was at pains to state that the central bank is not currently planning to create its own digital currency.

The pair did however set out four core design principles for a central bank digital currency (CBDC) which would avoid the possibility of destroying the existing banking sector, which was a concern cited in previous BoE research.

The latest analysis changes the balance between the costs and benefits of a central bank-issued digital currency, according to its authors.

Such a currency should pay an adjustable interest rate to allow it to lower rates if demand surge, while commercial bank reserves should not be convertible to the currency and they should not be obliged to convert deposits into central bank money, explained Kumhof and Noone.

Non-obligatory convertibility would make it a “business decision” to allow depositors to use the central bank currency, allowing banks to manage their risks, rather than leaving them exposed to market volatility.

“While these design principles address some of the major concerns about the financial stability implications of CBDC, risks remain,” the authors noted. “For example, even if bank funding and credit provision do not contract, the presence of CBDC may affect the stability of deposits, the composition and cost of bank funding, and the profitability of banks’ business models.”

They concluded that an understanding that the introduction of CBDC does not necessarily open the door to runs on the banks is a material step forward.

In March, the BoE’s governor Mark Carney told the Scottish Economics Conference that such cryptocurrencies were simply too volatile to operate as a viable system of money, but speaking on a panel in Stockholm last week he said that while the central bank is open-minded about CBDCs, although it is unlikely they will be issued anytime soon.

In March, the BoE started a proof of concept project to understand how the renewed Real Time Gross Settlement service could be capable of interacting with distributed ledger technology (DLT).

This followed the Treasury Select Committee launching an inquiry into digital currencies and DLT in February, with input from UK regulators and the BoE.

Elsewhere in Europe, central banks are moving closer to digital currency issuance. In Switzerland, citizens are due to vote on a referendum on 10 June on a proposed Sovereign Money Initiative, which would permit the Swiss National Bank to create its own digital currency – although the central bank and government have both come out against such a move.

Meanwhile, the central banks of both Norway and Sweden are continuing to consider and consult on the risks and benefits of introducing CBDCs.

“A decline in cash usage has prompted us to think about whether at some future date a number of new attributes that are important for ensuring an efficient and robust payment system and confidence in the monetary system will be needed,” stated Norges Bank governor Oeystein Olsen in a recent working paper.

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