A digital currency is a means of payment that only exists electronically. Like traditional money (such as banknotes), they can be used to buy physical goods and services.
Private digital currencies
Private digital currencies combine new payments systems with new currencies that are not issued by a central bank. The most well-known privately issued digital currency is Bitcoin, but other examples include LiteCoin, Ethereum and Ripple. We have assessed private digital currencies
and concluded that while they are interesting, they do not currently pose a material risk to monetary or financial stability in the United Kingdom. We continue to monitor developments in this area.
Distributed ledger technology and blockchain
Bitcoin and other private digital currencies are underpinned by distributed ledger technology
(also known as blockchain), which is an electronic ledger that records and verifies transactions made using the currency. Distributed ledger technology may have many other uses across the financial system, and may be a useful platform to power a central bank digital currency (although existing technology may also be sufficient).
Our fintech accelerator
has carried out a distributed ledger technology proof of concept
, which will help inform our research into central bank-issued digital currencies.
Central bank-issued digital currencies.
At the moment, the Bank of England provides electronic accounts to banks and key financial institutions, but the public can only hold central bank money in physical form – as banknotes. If a central bank were to issue a digital currency everyone, including businesses, households and financial institutions other than banks, could store value and make payments in electronic central bank money in addition to being able to pay with cash.
While this may seem like a small change, it could have wide-ranging implications for monetary policy and financial stability.
We are undertaking a multi-year research programme into the implications of a central bank, like the Bank of England, issuing a digital currency. We first raised the possibility of a central bank-issued digital currency in our research agenda
in February 2015. We have since released a more detailed selection of research questions
on the topic. We welcome continued engagement from the wider central banking and academic community to shape our research in this emerging field.
For further information, email DigitalCurrenciesTeam@bankofengland.co.uk
Publications on digital currencies and distributed ledger technology
To date, we have published the following speeches and documents on the topic of digital currencies and distributed ledger technology: