MPs have called on Treasury and Bank of England officials to “proceed with caution” when considering whether to introduce the digital pound, widely known as Britcoin.

In a new report issued by the Treasury Select Committee, MPs warned that Britcoin’s introduction could increase the chance of bank runs and put up the cost of borrowing.

Britcoin is a digital form of cash which will be created by the Bank of England, unlike existing digital payments which are created through the private sector. It will not replace cash.

Modelling by the Bank of England suggests that up to 20 per cent of commercial bank deposits could move out of bank accounts into digital pound wallets if the digital pound was adopted because it is risk free.

To mitigate concerns that banks will lose access to lots of deposits, officials at the Treasury and the Bank have proposed a temporary limit on holdings of between £10,000 and £20,000.

Despite this limit, the Committee estimated that a “steady switching” of some bank deposits into Britcoin could put up the cost of borrowing by more than 0.8 percentage points.

To prevent this, the Committee suggested that the proposed holding limit should be lowered.

“To reduce the risk of large-scale outflows from bank deposits into digital pounds, there could be merit in a more cautious approach of a lower initial limit on individual holdings,” the report argued. The equivalent limit on the digital euro is just €3,000.

“While we support the Bank of England’s plan to continue working on the design of a potential retail digital pound, I would urge them to proceed with caution and maintain a genuinely open mind as to whether one is actually needed,” Harriet Baldwin, chair of the Committee said.

More work should also be done to assess whether the digital pound should pay interest, MPs said.

The Bank of England has argued the digital pound should not pay any interest as it is primarily a payment vehicle. But the Committee suggested the transmission of monetary policy could be made more effective by offering interest directly to holders of Britcoin, because it would bypass the banks.

MPs suggested experts should undertake more research on whether the digital pound could pay interest and ensure their work “does not preclude the possibility of paying interest”.

Plans to introduce a digital pound were announced earlier this year with officials suggesting it would “likely to be needed in the future”. The central bank and Treasury said a decision to go ahead would not be taken until around 2025.