This evaluation of the design and possible benefits of a new kind of digital money is a further step towards its possible creation.
The currency, for use by households and businesses, would sit alongside cash and bank deposits, rather than replacing them.
No decision has been taken on whether to have such a currency in the UK.
But the consultation in 2022 will form part of a “research and exploration” phase and will help the Bank and government develop the plans over the following few years.
Central banks around the world are developing or exploring digital currencies after the rise of crypto-currencies such as Bitcoin.
China, for example, is a front-runner in this global race, and is in the process of testing a digital yuan in major cities including Beijing, Shanghai and Shenzhen.
Its next steps are to improve the eCNY currency’s privacy protections and to improve how it interacts with other payments tools, People’s Bank of China governor Yi Gang said on Tuesday.
The UK’s central bank digital currency (CBDC) is not so far advanced as the Chinese effort, with the earliest date for the launch of a UK CBDC in the second half of the decade.
The consultation paper will set out an assessment from the Treasury and the Bank of the case for a CBDC before a decision on whether to proceed.
“A technical specification would follow the consultation explaining the proposed conceptual architecture for any CBDC.
“This could involve in-depth testing of the optimal design for, and feasibility of, a UK CBDC,” the Bank said in a statement.
Financial services minister John Glen said a retail CBDC would be used by people and businesses for everyday payments needs and help Britain stay at the forefront of innovation and technology in the financial sector.
The European Central Bank in July took a first step towards launching a digital version of the euro, kicking off a 24-month investigation phase to be followed by three years of implementation.
Work on a digital euro accelerated after Facebook unveiled plans to create its own currency in 2019, although Facebook later thought again about its Libra currency after strong opposition from regulators, and renamed it “Diem” .
While China has been at the forefront of CBDC moves, the US Federal Reserve has been more sceptical.
Some central banks have warned that widespread use of CBDCs could deprive banks of a cheap and stable source of funding from consumer deposits.
Last month, Nigeria was the first African country to launch a CBDC pilot and in September, El Salvador became the first country to use the virtual Bitcoin currency as a legal tender, alongside the US dollar.
It led to widespread protests as demonstrators feared it would bring instability and inflation to the country.