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“While that could, in theory, change if sterling were abandoned in favour of an alternative currency for a significant fraction of the economy, such a scenario is considered extremely unlikely,” the report said.
Even though potential risks to financial stability could emerge if a digital currency attained “systemic status” as a payment system, the Bank of England (BoE) said most of these could be addressed through regulatory supervision.
But despite rapidly expanding interest in bitcoin, the BoE estimates that just 20,000 people in the UK currently hold any bitcoins, and that most of them see it as a store of value rather than money.
All bitcoin-holding UK citizens combined make as few as 300 transactions a day, and total UK bitcoin holdings are estimated at £60m, which represents less than 0.1% of sterling notes.
The BoE also said there are still "significant barriers" to bitcoin becoming the dominant form of money in the UK.
Digital currency technology could reshape payment systems
However, the report shows that the BoE has an extremely technical insight into the workings of the digital currency, according to The Telegraph.
The BoE points out that the “blockchain” technology which powers it has the potential for application in other areas.
Bitcoin was developed in 2009 as an electronic form of money that allows those who hold it to verify all other users when transactions take place.
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This "distributed ledger" of bitcoin holdings allows users to buy and sell without using a costly centralised accounting system run by a large clearing bank.
"Distributed ledger technology represents a fundamental change in how payment systems could work. And in principle, this decentralised approach is not limited to payments," the BoE report said.
Cyber attacks not holding digital currency back
Bitcoin, which is the best-known digital currency, has come under the spotlight in recent months due to cyber attacks on bitcoin exchanges and the collapse of the largest exchange, MtGox.
Despite this, bitcoin remains popular in the US and China, and it is often championed as a replacement for existing payment systems, according to The Guardian..
Europe is also seen as market ripe for change, the paper said, with the US bitcoin service firm Coinbase recently announcing plans to launch a consumer service across a large part of the eurozone.
Coinbase claims to have found a way to link a bitcoin "wallet" service to the euro payments system, making it possible for users to send money to and from their bitcoin account.
But the BoE report said the rise of service companies to facilitate transactions is likely to increase costs, and that the wallet could be lost or stolen as it is unprotected beyond the user's software.
The Bank of England also believes the limit on the number of electronic coins in circulation and its status as a commodity will make it highly volatile, encouraging speculation, but deterring its widespread adoption as a means of exchange.