By Tom Jowitt
The Bank of England has warned that the digital currency Bitcoin could pose a threat to financial stability in the UK should it see widespread adoption.
However the bank accepted it was not a material risk at present to the financial health of the Great Britain Plc, because it used by relatively few people.
The warning came in a new report that examined the potential issues for the British economy arising from the adoption of digital currencies.
"Digital currencies represent both innovations in payment systems and a new form of currency," said the bank in its report.
It went to warn that if there was widespread adoption, it could pose a risk to current banking systems, but said that this was unlikely, because of its inherent volatility, restrictions on the number of coins in circulation, and the prospect of higher transaction costs.
"Digital currencies do not currently pose a material risk to monetary or financial stability in the United Kingdom, given the small size of such schemes," it said. "This could conceivably change, but only if they were to grow significantly. The bank continues to monitor digital currencies and the risks they pose to its mission."
The bank believes that only 20,000 people in the United Kingdom currently hold bitcoins worth around £60m, with approximately 300 transactions daily. However bitcoins are much more popular in countries such as the United States and China, where two thirds of Bitcoin transactions take place.
Bitcoin is a decentralized cryptocurrency especially popular among people interested in keeping their transactions secret. It is not tied to any real money, but traded on various electronic exchanges to establish its price.
Ups and Downs
Last month, it was reported that eBay was working to integrate Bitcoin into Braintree, a subsidiary of the online auction giant’s payments service PayPal. That development could potentially drive Bitcoins further in to the mainstream as a viable payment option for millions of Internet users.
Yet it is fair to say that the virtual currency has had its ups and downs, as the value of the currency has fallen dramatically in the past year. Last year a Norwegian citizen made the headlines thanks to a small investment in Bitcoin, which allowed him years later to purchase a flat in Oslo.
But since then the value has dropped, and matters have not been helped by the collapse of the Mt Gox exchange earlier this year, along with increasing pressure from regulatory authorities around the world.