The Bank of England will research whether issuing a digital currency such as Bitcoin would help it achieve its monetary policy, financial stability and regulatory goals.
The technology underlying existing digital currencies "may have considerable promise," the BOE said in a paper published Feb. 25. "This raises the question of whether central banks should themselves make use of such technology to issue digital currencies."
Usage by a central bank could include interbank settlements and supporting use by non-financial companies and individuals, according to the paper. The bank published it as part of its introduction of its new research facility.
While the BOE noted digital currencies' "economic flaws," they've nevertheless shown it's possible "to transfer value securely without a trusted third party," the paper said. "This has potentially profound implications for a financial system whose payments mechanism depends on bank deposits that need to be created through credit."
A technical hurdle to central bank digital currency comes from the need to develop a protocol for transferring value over the Internet. Such a standard would be akin to the achievement of Tim Berners-Lee, the creator of the World Wide Web, for transferring information, the paper said.
Bitcoin, the most popular digital currency, had $1.5 billion in circulation at the end of August 2013, according to a website managed by Bitcoin developers.
"A central bank-issued digital currency might be a more easily controlled means of settlement and exchange," Michael Kumhof, senior research adviser at the bank's new research project, said at a conference in London.
"Under digital currencies, identification and verification may have significantly higher real resource costs than other means of settlement," Kumhof said at the conference. However, a central bank would also save on the costs of production and distribution of physical money, he said.