Cryptocurrencies like Bitcoin should be regulated to crack down on illegal activity and protect the financial system, Mark Carney warned.
The Bank of England Governor said their inherent risks could mean investments in digital currencies could lose money.
“It is time to keep the crypto asset ecosystem to the same standards as the rest of the financial system,” Carney said in a speech on Friday.
Cryptocurrencies do not yet pose any risks to financial stability, he said.
But he said that could change if more people invested in them.
Although some countries have banned them, Carney said regulation would be a better approach.
“A better way would be to regulate elements of the crypto asset ecosystem to combat illegal activity, promote market integrity, and protect the security and soundness of the financial system,” he said.
Analysis: Simon Jack, BBC Business Editor
When the world of cryptocurrencies like Bitcoin is the Wild West, a new sheriff is strutting into town.
Bank of England Governor Mark Carney today outlawed the law with a scathing assessment of Bitcoin’s qualifications as money and a warning that it could threaten financial stability if it grew unchecked.
Sheriff Carney says it fails as money because it is extremely volatile, poorly understood, inefficient, and not widely accepted.
Digital currencies threaten stability because people can invest significant sums of money – mistakenly believing they are regulated – and if they collapse, further lose confidence in the financial system.
The cryptocurrency evangelists will dismiss Mr. Carney’s assessment as a predictable response from a financial institution threatening Bitcoin.
If Governor Carney has his way, they’ll say, I fought the law and the law won.
“Down with the kids”
China has cracked down on cryptocurrencies, banned the first coin offers and closed Bitcoin exchanges.
Indonesia and Bangladesh have banned bitcoin as a means of payment, and India’s central bank has issued a series of warnings about bitcoin risks.
However, Mr Carney said the technology on which cryptocurrencies are based “could potentially catalyze innovation to better serve the public”.
Blockchain technology could be used to make payments more flexible, efficient and reliable.
“They show the way where the system needs to go,” by allowing peer-to-peer transactions, he said.
He said the bank was “receptive” to the possible development of a central bank digital currency, but said it should “not be a solution to a problem or an effort by central bankers to deal with the children”. .
Digital currencies can enable anonymous transactions and involve risks such as money laundering, terrorist financing and tax evasion.
But in terms of regulation, “if there’s a will, there’s a way,” said Carney. “It’s relatively easy.”
Cryptocurrency trading organization Crypto UK said it supports new regulation but said policymakers shouldn’t try to adapt existing financial rules to digital currencies.
“This shouldn’t be seen as a crackdown, but as an opportunity to set parameters that will protect consumers while encouraging the largest and best cryptocurrency companies to make the UK their home,” a spokesman said.