The Treasury Select Committee will look at the role of digital currencies in the UK, hoping to assess both the risks and opportunities they bring to consumers, businesses and the government.

It will examine distributed ledger technology – such as blockchain – which underpins virtual currency and how it impacts financial institutions and central banks.

The inquiry will also scrutinise the government’s, regulator’s and Bank of England’s response to digital currencies.

Chair of the Treasury Committee, Nicky Morgan MP, said: “People are becoming increasingly aware of cryptocurrencies such as Bitcoin, but they may not be aware that they are currently unregulated in the UK, and that there is no protection for individual investors.

“The Treasury Committee will look at the potential risks that digital currencies could generate for consumers, businesses, and governments, including those relating to volatility, money laundering, and cyber-crime.”

‘Striking the right balance between protection and innovation’

Morgan said striking the right balance between regulating digital currencies to provide adequate protection for consumers and businesses, while not stifling innovation, is crucial.

“As part of the inquiry, we will explore how this can be achieved. We will also examine the potential benefits of cryptocurrencies and the technology underpinning them, how they can create innovative opportunities, and to what extent they could disrupt the economy and replace traditional means of payment.

“The distributed ledger technology that supports digital currencies is said to have significant transformative potential, not least within the financial services sector,” she said.

Alison McGovern MP, Member of the Treasury Committee, added: “This inquiry comes at the right time, as regulators and governments wrestle with recent events in cryptocurrency markets. New technology and wallets such as the Ledger Nano S vs X offers the economy potential gains, but as recently demonstrated, it may also bring substantial risks.

“It is time that Whitehall and Westminster understood cryptocurrency better, and thought more clearly about the policy environment for blockchain technology.”

In December, economic secretary to the Treasury, Stephen Barclay, said the government is seeking to bring Bitcoin and other cryptocurrencies under greater regulation amid concerns virtual money can “enable and facilitate cybercrime”.

The financial regulator has also issued a warning of the risks associated with tools allowing investors to speculate on a change in the price of assets such as cryptocurrencies.