"Surveys suggest that six in 10 1p and 2p coins are used in a transaction once before they leave the cash cycle".
It also suggests, however, there is demand from overseas for these notes, where they are saved alongside dollars and euros.
But the Prime Minister's official spokesman attempted to play down the prospect of 1p and 2p coins being consigned to history.
The government paper - Cash and Digital Payments in the New Economy - questions whether the current mix of eight coins and four banknotes meets modern needs.
As a result of the rise of contactless and other digital payments, the document says there has been a "much more significant decline in the use of cash for transactions that are less than £5 compared to higher-value transactions".
An extra 500 million copper coins need to be minted each year to replace those falling out of circulation.
"There is also a perception among some that £50 notes are used for money laundering, hidden economy activity, and tax evasion", the report says.
But Tory MP Ian Liddell-Grainger told MailOnline: 'A lot of charities live for those pennies.
"But, it's still a good idea", he posted, highlighting how there is a "global move to phase out big notes" due to fears they are mainly used illicitly.
Caroline Lucas, the Green co-leader and MP for Brighton Pavilion, said: "I do think it would be a great shame to lose our 2p machines on the pier - and wonder if the government hasn't just found another way to ruin peoples' fun".
Sara Coles, personal finance expert at investment firm Hargreaves Lansdown, warned that savers could be hit.
Original plans to get rid of the 1p and 2p coins were announced by former Chancellor George Osborne.
Past year a bill was introduced in the US Congress which would have abolished the one cent coin. "This will affect the long-term demand for new coin from the Royal Mint", the document said.
Coppers are not legal tender if used in batches worth more than 20p - if you try to use them to pay 21p or more in a single transaction, you break the 1971 Coinage Act.
60 per cent of coppers are used only once before never being used again.