The Bank of England and the U.K. Treasury have stepped up work to create an official digital currency to sit alongside physical bank notes.
Officials at the two institutions said a central bank digital currency, which has been unofficially dubbed "Britcoin," could present significant opportunities for U.K. consumers and businesses after it's rolled out as early as the second half of the decade.
Adopting a digital currency is part of an effort by central banks around the world to adapt to new forms of payment that work more quickly and smoothly in online transactions. The effort also is aimed at keeping the U.K. government involved in supplying money as consumers shift to card payments backed by companies, and not the government.
"While cash is here to stay, a digital pound issued and backed by the Bank of England could be a new way to pay that's trusted, accessible and easy to use," Chancellor of the Exchequer Jeremy Hunt said.
His remarks brush aside criticism from the House of Lords economic affairs committee, which said the proposed currency is a "solution in search of a problem" and could lead to further financial exclusion for vulnerable households who depend on physical cash.
In a consultation paper published Tuesday, the Bank of England and the Treasury called for opinions and evidence on the effort. A formal decision has not been made on whether to move forward with the project, but the paper attempts to build a case for action.
A separate working paper will also attempt to assuage worries the proposed currency could pose a risk to financial stability by sucking out money from the banking system. The Bank of England said holders will not be able to earn interest on digital coins, and a limit will be imposed on how many coins initially can be bought.
The latter measure is aimed at preventing a mass rush of consumers pulling their money out of traditional banks and buying the coin, if it launches.
The central bank and Treasury are likely to face further questions on what exactly would be the point of the digital pound. As for now, at least, consumers would see little difference in using existing online payment systems.
Though a digital coin would be based on blockchain technology used by speculative cryptocurrencies such as bitcoin, the currency would be issued by the Bank of England and backed by sterling, becoming interchangeable with cash and bank deposits.
"A digital pound would provide a new way to pay, help businesses, maintain trust in money and better protect financial stability," Bank of England Governor Andrew Bailey said. "However, there are a number of implications which our technical work will need to carefully consider. This consultation and the further work the bank will now do will be the foundation for what would be a profound decision for the country on the way we use money."
Former Bank of England Governor Lord Mervyn King has called the "Britcoin" project a "solution without a problem." Lawmakers on the House of Lords Economic Affairs Committee also found in a report last year that there was "no convincing case" for launching a digital currency in the United Kingdom.
Central bank and Treasury officials are focused on the long term when looking at the case for an official digital coin, imagining a world where cash is used less and "big tech" firms such as Amazon and Google parent Alphabet are issuing their own stablecoins to facilitate quick and smooth online payments.