The Bank of England and the Treasury have announced they are setting up a taskforce to explore the possibility of a central bank digital currency.
The aim is to look at the risks and opportunities involved in creating a new kind of digital money.
Issued by the Bank for use by households and businesses, it would exist alongside cash and bank deposits, rather than replacing them.
No decision has been taken on whether to have such a currency in the UK.
However, the government and the Bank want to "engage widely with stakeholders" on the benefits and practicalities of doing so.
The taskforce will be jointly led by the Bank's deputy governor for financial stability, Sir Jon Cunliffe, and the Treasury's director general of financial services, Katharine Braddick.
The Bank has previously said it is interested in a central bank digital currency (CBDC) because "this is a period of significant change in money and payments".
The use of cash in financial transactions has been steadily declining in recent years, while debit card payments have been on the rise. Use of credit cards and direct debits have also been increasing.
The Bank also sees having its own digital currency as a way of "avoiding the risks of new forms of private money creation", including crypto-currencies such as Bitcoin.
"If a CBDC were to be introduced, it would be denominated in pounds sterling, just like banknotes, so £10 of CBDC would always be worth the same as a £10 note," the Bank said.
"CBDC is sometimes thought of as equivalent to a digital banknote, although in some respects it may have as much in common with a bank deposit.
"Any CBDC would be introduced alongside - rather than replacing - cash and bank deposits."
Enter Britcoin. The Bank of England has been pontificating about digital currencies for some time. Now it and the Treasury will seriously look into establishing an alternative digital currency to be used by households and businesses. The flotation of Coinbase and the stellar performance this year of various crypto-assets such as Bitcoin and Ethereum is the backdrop.
It would basically be a digital version of sterling, backed by the Bank of England, that could change the payments system, the plumbing of the financial system. It would not be a Bitcoin-style speculative asset with wild fluctuations in value. But there will be limited appeal for the fans of crypto, who invest precisely because of their scepticism about central banks.
Instead, the revolutionary thing here could be the direct relationship that ordinary citizens might have with the central bank, which cannot go bust. It could yield simple, direct means of stimulating the economy and even applying negative rates. Central banks would in theory know when and where every e-cash transaction occurred. China is already ahead in its digital yuan experiments. Part of the rationale is to ensure that the UK remains at the forefront of financial innovation.
Most of the world's central banks are looking into the possibility of creating such a currency, but the only one already in existence is China's digital yuan, which is currently undergoing public testing.
Among the objectives of the UK taskforce is monitoring international developments, "to ensure the UK remains at the forefront of global innovation".
The Bank also announced the creation of a CDBC engagement forum and a technology forum, as well as a CBDC unit within the Bank itself, overseen by Sir Jon.
No timetable was announced for the taskforce's operations.