Monday 18 July 2016 5:00 pm

The Bank of England says issuing an official cryptocurrency could raise economic output

Introducing a Bitcoin-style official currency could boost economic output, help maintain financial stability and smooth the cycle of boom-and-bust, the Bank of England has found.

A new report from wonks at Threadneedle Street has modelled the impact of a central bank issuing a new legal tender based on blockchain or distributed ledgers – the technology behind Bitcoin – finding it could create a sizeable and long-term jolt for national economies.

The economists studied what would happen if a central bank introduced a new digital currency worth 30 per cent of the economy into pre-crisis United States, discovering it would "permanently raise GDP by as much as three per cent due to reductions in real interest rates, discretionary taxes, and monetary transaction costs." The 30 per cent figure was chosen because it mirrors the level of quantitative easing unlocked by central banks in the wake of the crisis which saw trillions of dollars in conventional currency pumped into economies around the world.

Read more: Treasury plans crackdown on Bitcoin to stop criminals

The research suggested cryptocurrencies could enter circulation alongside traditional banknotes, acting as a form of competition. It added central bank-backed digital money could even "contribute to the stabilisation of the business cycle" as it gave policymakers another currency to play with in terms of monetary policy tinkering through interest rates changes and quantitative easing packages.

However, while the benefits in terms of higher output and better price stability were "clear cut," the authors observed introducing a new currency could prove hazardous for financial stability. For instance, if digital cash proved popular it could spur a bank run as people fled to exchange their traditional deposits. The flip side, however, would be that digital currencies could add an extra layer of protection against banks becoming "too big to fail" which would be good news for the banking system.

Digital currencies would also let central banks more easily deal with the problems of pushing interest rates below zero that are typically associated with economies based on cash, such as fears of hoarding, since all digital money would have to be stored in some kind of account.

Governor Mark Carney has taken a keen interest in the role of cryptocurrencies, recently announcing a fintech incubator at the Bank of England for start-ups looking to utilise distributed ledgers.