The Bank of England and HM Treasury will conduct a consultation next year into the possible implementation of a UK central bank digital currency (CBDC).
The consultation will set out the central bank and Treasury’s case for introducing the CBDC, as well as outlining the possible benefits and implications for users and businesses, as well as the “main issues” at hand.
It will help the bank decide whether it would be appropriate to move the plans for a UK cryptocurrency into development phase, which would then span several years.
The earliest the CBDC would be launched is the second half of the decade.
Economic secretary to the Treasury, John Glen, said the consultation would begin an “open discussion” on the role a UK central bank digital currency might play in the UK.
"I’d encourage everyone to contribute to the discussion so we can explore the opportunities this could bring, as well as understanding any risks it may pose.”
CBDC would be a new form of digital money issued by the bank that uses blockchain technology. It would be available for households and businesses to use and would exist alongside cash and bank deposits, instead of replacing them.
At present, payments rely on either cash or deposits held with commercial banks. The CBDC would be an electronic form of central bank money provided for retail use, and would therefore be a direct liability of the central bank.
Sushil Kuner, principal associate at law firm Gowling WLG, said: "This is an exciting moment for the UK in its positioning as a leader in the FinTech space and it is great to see the UK government and BoE taking steps towards adopting a digital currency which could, theoretically, speed up transactions, cut costs and promote further financial inclusion."
The proposed CBDC, although a form of cryptocurrency, would be different to bitcoin.
The currency would be issued and backed by the BoE, and would be denominated in sterling and its value would be tied directly to liquid assets.
This would avoid the fluctuations in value seen in particular by bitcoin in the past few years, and mean the CBDC could be directly exchanged for sterling.
The CBDC would therefore be more similar to stablecoin, the term for a cryptocurrency whose value is pegged to another currency, commodity or other cryptocurrency.
Arguments for the introduction of a digital currency include that it could provide a faster, easier and cheaper alternative to the current card payment system.
However, some have warned that it might impact the effectiveness of existing monetary policy, as digital currency does not pay interest and isn’t tied to bank lending.
It could also undermine faith in the central bank unless it was protected by astute regulation.
In April last year the central bank and Treasury created a CBDC taskforce to co-ordinate the exploration of a possible central bank cryptocurrency, and there are also two forums focused on engagement and technology made up of industry and academic experts as well as members of the public.