The Bank of England could approve its own Bitcoin-style currency within a year.
A research unit set up by the bank to investigate the possibility of issuing a crypto-currency could report back within the next 12 months, paving the way for the system to be introduced.
The new currency would be linked to the value of sterling and could allow people to keep their money with the central bank itself, cutting out the need for a retail bank.
The Bank of England has been researching crypto-currencies such as Bitcoin and could issue its own version within the next year, it is reported
Such a move would be a revolutionary shake-up for high street banking, The Telegraph reported.
The Bank of England announced last year that it had produced a theoretical currency called RSCoin which could be used by central banks.
WHAT IS BITCOIN?
Bitcoin was created in 2008 by a man going by the pseudonym Satoshi Nakamoto – it is a virtual currency and does not exist in the form of physical coins or notes.
You are given a credit entry for your Bitcoins in a vast online computer ledger, which has an address that is identified by a string of digits and letters.
Bitcoin is created by ‘miners’ who use their computers to solve fiendishly difficult maths puzzles. Each time their computers come up with a correct answer, the prize is a Bitcoin.
A single Bitcoin reached its highest value of almost $20,000 (£14,795) earlier this month, but is now valued at $14,000 (£10,450).
In December, bank governor Mark Carney told politicians that using blockchain technology which underpins crypto-currencies could improve the way banks carry out transactions.
But he warned there could be financial stability risks if such an approach were rolled out across the whole economy.
Central banks already use electronic money but this is exchanged in a centralised fashion, across accounts at the central bank.
Cryptocurrencies allow parties to transact payments directly without a central intermediary, by means of technology that uses a shared ledger that verifies, records and settles transactions in a matter of minutes.
With no need for a central intermediary to facilitate and track transactions, consumers holding central bank-issued cryptocurrency could open accounts at any bank, including the central bank.
‘You (could) create a situation where you can have an instantaneous (bank) run.
‘So as soon as there were any concern, people can switch in their account at the Bank of England,’ Carney said.
Mark Carney said crypto-currencies could improve the way banks manage transactions, but has warned of ‘fundamental problems’ if the system is introduced across the entire economy
That could also cause the BoE to accumulate huge volumes of deposits that it would need to invest into different assets.
‘There are many talents of the Bank of England, but I think credit allocation across the entire economy would not be a good idea,’ he said.
‘So there are some fundamental problems if you push the retail design all the way down, unless you restrict the amount that people have.’
In September, the Bank for International Settlements said it was too soon to determine whether central banks should issue their own cryptocurrencies.
It concluded that the peer-to-peer nature of the technology meant that a cryptocurrency for consumers could enable the anonymity that cash currently provides. But if that were not considered important, it said, it was unclear what further benefits it could provide.
BoE chief economist Andy Haldane in 2015 floated the idea of abolishing physical cash and introducing a state-run digital currency as a way to give more muscle to central banks that cut interest rates below zero to boost their economies.