There are a growing number of digital currencies, the most well-known is Bitcoin. They are a purely electronic way of making payments anywhere in the world. At present only a very small percentage of the population use them for this purpose. The Bank of England recently wrote two Quarterly Bulletin articles which explain in more detail how digital currencies work and the economics behind them.
Innovations in payment technologies and the emergence of digital currencies
Modern electronic payment systems rely on trusted, central third parties to process payments securely. Recent developments have seen the creation of digital currencies like Bitcoin, which combine new currencies with decentralised payment systems. Although the monetary aspects of digital currencies have attracted considerable attention, the distributed ledger underlying their payment systems is a significant innovation. As with money held as bank deposits, most financial assets today exist as purely digital records. This opens up the possibility for distributed ledgers to transform the financial system more generally.
Although digital currencies could, in theory, serve as money for anybody with an internet-enabled device, at present they act as money only to a limited extent and only for relatively few people. The economics of the schemes as currently designed, both in terms of individuals’ incentives and at a macroeconomic level, pose significant challenges to their widespread adoption. Digital currencies do not currently pose a material risk to monetary or financial stability in the United Kingdom. The Bank continues to monitor developments in this area.