The government has launched a call for information on the benefits and risks of digital currencies, such as Bitcoin, to support Britain's growing financial technology sector.
It is looking for views on digital currency from a number of sources, ranging from the general public through to established players in the financial industry.
An estimated 20,000 people in the UK use Bitcoin, and around £60m worth of the digital currency is thought to be in circulation within the British economy.
The government believes that digital currencies like Bitcoin or Litecoin could enable more innovation and competition in the banking sector, and bolster the UK's position as a leader in the global financial market.
Chancellor George Osborne said that embracing digital currency will "bring jobs here and give new services to British customers".
With digital currencies enabling payments to be made directly between the payer and payee – bypassing financial institutions – their impact on the banking sector could be significant.
Andrea Leadsom, economic secretary to the Treasury, believes a thorough consideration of digital currencies is key to Britain's future financial success.
"It is right that we properly consider the potential benefits, as well as the risks, that digital currencies could bring to Britain's economy, businesses and customers," she said.
While digital currencies may present the financial technology sector with alluring opportunities, there are risks involved. For example, Bitcoin allows for virtually untraceable payments to be made that can anonymously cross the digital borders of countries, allowing the virtual money to be used in illegal activities.
Digital currency also lacks the security and protection normally given to hard currency by banks and other financial institutions.
As such, the government is looking at understanding how digital currency can potentially damage Britain's financial technology sector by putting customers at risk of being exploited and causing financial instability.
Some could view the government's interest in digital currencies as a move for it to regulate the borderless currency and so limit some of the freedoms people enjoy by using virtual money.
The government is not alone in wanting to explore the potential of digital currency, as earlier this year MIT students launched a $500,000 Bitcoin development project.
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