And one problem could see consumers ditch their high street banks

There are a number of unanswered questions to be solved, however

But a central bank would still be needed to regulate the currency

It said this could eradicate the need for a third party - such as a bank

The Bank of England (BoE) has suggested that they may consider rolling out their own digital currency at some point in the future.

They highlighted the importance of digital currencies like Bitcoin, and say it could become as common as modern banknotes.

But they warn that there are a number of problems - and if consumers flocked to digital currencies, it might leave high street lenders devoid of customers.

The Bank of England has suggested it could 'mint' a digital currency. In a discussion paper it highlighted the benefits of currencies like Bitcoin (shown). It said this could eradicate the need for a third party - a bank. But a central bank would still be needed to regulate the currency

One of the benefits of using digital currencies is that a third party - such as a bank - is not necessarily needed to complete a transaction.

This reduces some of the steps needed to securely transfer money - but the BoE notes that a means of controlling the digital currency would still be needed.

WHAT IS BITCOIN? Bitcoin is a distributed peer-to-peer digital currency that functions without any central authority, such as the Bank of England. The currency was launched in 2009 and is traded within a global network of computers. Bitcoins can be bought with near anonymity, which supporters say lowers fraud risk and increases privacy. But critics say that also makes Bitcoins a magnet for drug transactions, money-laundering and other illegal activities. However, a huge jump in value of Bitcoins in 2013 allowed some to reap huge rewards. For example a Bitcoin investor, Norwegian Kristoffer Koch, made more than half a million pounds in 2013 after he forgot he bought £17 ($26) of currency four years before. Advertisement

‘The emergence of private digital currencies (such as Bitcoin) has shown that it is possible to transfer value securely without a trusted third party,’ said the Bank of England in a discussion paper.

They added that while existing private digital currencies ‘have economic flaws which make them volatile,’ the process through which Bitcoins are ‘minted’ shows promise.

This is known as the blockchain, where computers must work out the next line in a sequence of code with increasing difficulty to release more bitcoins.

There is no process of actual minting, though - rather, the entire system relies on the steady progress of computers to ‘mine’ bitcoins and release them into the market.

But a system would need to be devised that allowed a digital currency like this to be controlled.

In a scenario where a digital currency is proposed by the BoE, the Bank would create its own digital currencies, and make them available just as they do with banknotes.

The Bank of England highlighted the importance of digital currencies like Bitcoin, and said it could become as common as modern banknotes (stock image shown). But they warn that there are a number of problems - and if consumers flocked to digital currencies, it might leave high street lenders devoid of customers

‘There are several different ways in which a central bank might make use of a digital currency,’ the BoE said.

‘It could be used as a new way of undertaking interbank settlement, or it could be made available to a wider range of banks and NBFIs [non-bank financial institutions].

‘In principle, it might also be made available to non-financial firms and individuals generally, as banknotes are today.’

In a tweet the chancellor George Osborne said: ‘Good that @bankofengland looking into digital currencies - need to ensure UK customers benefit from new tech.’

The BoE notes there are a number of unanswered questions about digital currencies that need to be answered before it can be rolled out.

These include the impact they would have on existing payment systems, and how regular bank would compete with digital currencies.

The BoE warned that consumers may choose to hold all their money in electric money, rather than using high-street lenders, if it ultimately proved successful.