The Treasury has launched a 'call for information' in a bid to improve its own knowledge of the benefits and risks of digital currencies and to assess appetite for it to "take action to support innovation in this area".

The consultation concerns the concept of digital currencies, such as bitcoins, being used for making payments rather than for investment purposes.

The Treasury has asked respondents whether it should "intervene to support the development and usage of digital currencies and related businesses and technologies in the UK" and, if so, to specify what they think the intervention should entail.

It is seeking views on whether it needs to create a "bespoke regime" for digital currencies if it decides payments involving digital currencies should be regulated.

"Should the government regulate digital currencies to protect users?" the Treasury has asked in its call for information paper. "If so, should it create a bespoke regime, or regulate through an existing national, European or international regime? For each option: what are the advantages and disadvantages? What are possible unintended consequences (for instance, creating a barrier to entry due to compliance costs)? What other means could the government use to mitigate user detriment apart from regulation?"

The Treasury said that it had already gathered views from proponents of digital currencies who explained that "low transaction costs and faster processing times" are among the potential benefits that using digital currencies can offer. There are further privacy and security advantages to gain from using digital currencies, according to the proponents, the Treasury said.

"A number of these [potential benefits] flow from the fact that instead of relying on the transfer of money between financial institutions, digital currencies instead rely on the transfer of codes across the internet," the Treasury's consultation paper said. "Digital currency users have argued that this creates a system that is cheaper, faster and safer than traditional payment systems… Digital currencies could offer more security and privacy. Unlike debit cards, for instance, there is no number to link to a customer’s bank account."

However, the Treasury said that there were also risks in using digital currencies. Risks include the potential consumer detriment that could arise if fraudsters manage to access digital currencies stored in digital wallets. The wallets are "vulnerable" to hackers and there are no consumer protection measures in place to allow consumers to recover funds they lose, it said.

Other risks include the fluctuating price of digital currencies and the potential for them to be used in "illicit and illegal activities". Their potential use in criminal activities is helped by the "degree of anonymity" digital currency transactions offer users, the "borderless nature" of the currencies and because transactions happen outside of "regulated financial systems".

Widespread use of digital currencies in place of other fiat currencies could also present "financial stability risks and weaken monetary policy making", the Treasury said.

The consultation closes on 3 December.

Andrea Leadsom, economic secretary to the Treasury, said: "It’s only by harnessing innovations in finance, alongside our existing world class knowledge and skills in financial services, that we’ll ensure Britain’s financial sector continues to meet the diverse needs of customers here and around the globe, and create the jobs and growth we all want to see in the future. So it is right that we are properly consider the potential benefits, as well as the risks, that digital currencies could bring to Britain’s economy, businesses and customers."

Earlier this year, Singapore decided to regulate virtual currencies in an effort to combat money laundering and terrorism.