A digital version of the euro could be on the way as the European Central Bank set out its plans for a potential new form of currency.

It would sit alongside cash as a digital equivalent, the bank said, as an alternative to private sector payments systems, and a guarantee of central bank control of a modern currency.

“The euro belongs to Europeans and our mission is to be its guardian,” said ECB chief Christine Lagarde.

“Europeans are increasingly turning to digital in the ways they spend, save and invest. Our role is to secure trust in money. This means making sure the euro is fit for the digital age. We should be prepared to issue a digital euro, should the need arise.”

That need could arise if cash use fell dramatically, for instance, and the ECB wanted to ensure everyone had access to cash, or if a foreign digital currency gained popularity.

“A digital euro may even become essential in a number of possible scenarios,” said the ECB’s report into the idea.

“For example, if the use of cash were to decline significantly, other electronic payment methods were to become unavailable owing to extreme events, or foreign digital money were to largely displace existing means of payment.”

The idea of digital currencies has been raised in the public consciousness by the rapid rise and subsequent fluctuations in Bitcoin, as well as Facebook’s proposed currency, Libra.

The central bank has yet to set out detailed proposals for the way this digital euro would work, but transactions could either be administered centrally by Frankfurt, or through the wider banking and payments system.

Officials said they will continue to issue cash, but the idea of a digital currency could raise new ways of conducting monetary policy.

For instance, without physical cash it is easier to take interest rates into negative territory, because individuals cannot simply take the cash out of their accounts and stash banknotes under their mattresses.

The central bank could also impose other controls, such as limits on holdings of the currency to try to stop the payment system being used as an investment.

“The Eurosystem might consider introducing tools to limit the use of a digital euro … and to prevent excessive shifts of commercial bank money into digital euro. The amount of digital euro that individual users could hold would be kept within a range such that the overall value of the digital euro in circulation would remain below an aggregate threshold deemed reasonable,” the ECB said.

“This would require every digital euro user to be identified at least during onboarding: anonymity would not be possible in order to avoid the circumvention of restrictions by impersonating multiple users.”

It also brings risks, for instance that in an economic downturn or financial crisis, depositors could flee commercial banks in favour of the perceived security of the central bank’s digital currency, destabilising the system.