Factors such as inherent volatility means digital currency unlikely to win over enough users to supplant existing banking system

Bitcoin could pose a threat to financial stability in the UK should the digital currency's popularity take off, according to a series of reports by the Bank of England.

But restrictions on the number of coins in circulation, its inherent volatility and the prospect of higher transaction costs means it is unlikely to win over enough users to supplant the existing banking system, the central bank says.

The Bank argues the current centralised banking system, which stores and protects customer funds, will continue to dominate retail and business transactions "over any foreseeable horizon" under the current design of digital currencies.

Bitcoin, which is the best known of several digital currencies in circulation, has come to prominence in recent months after a string of mishaps and scandals. The collapse earlier this year of the largest bitcoin exchange, MtGox, which accounted for around 80% of global trading volume at its peak, left many customers out of pocket.

But it remains popular in the US and China, which account for around two-thirds of transactions combined, and is often championed as a replacement for existing payments systems in emerging economies.

Europe is also seen as market ripe for change. On Wednesday the US bitcoin service firm Coinbase, which has raised $31m in venture capital, said it plans to launch a consumer service across a large part of the eurozone .

The company said it had 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. The service covers 13 of the 18 eurozone countries.

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. 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.

The report says the distributed ledger – which draws on advances from a range of disciplines including cryptography, game theory and peer-to-peer networking – represents a fundamental change in how payment systems can be made to work.

But the rise of service companies to facilitate transactions is likely to increase costs. The report also says the wallet is unprotected, other than by the user's software, and could be stolen or lost.

The limit on the number of electronic coins in circulation and its status as a commodity, will also make it highly volatile, encouraging speculation, but deterring its widespread adoption as a means of exchange.