Existing cryptocurrencies are unlikely to last as a means of payment over the long term, Bank of England governor Andrew Bailey told a virtual session at the World Economic Forum on Monday.
Mr Bailey said there has been huge innovation in payments in recent years and there are “still some very big gaps to fill” with cross border remittances an obvious area for upgrading because the cost of making payments is too high.
While he said digital innovation is here to stay because there are “big challenges to solve”, existing currencies do not have a structure that will allow them to last.
“Have we landed on what I would call the design, governance, and arrangements for what I might call a lasting digital currency,” he asked the panel.
“No, I don't think we're there yet, honestly. I don't think cryptocurrencies as originally formulated are it", he said.
There was a surge of interest in cryptocurrencies last year, with the price of Bitcoin soaring more than 300 per cent in 2020, and recording a rise of almost 50 per cent in December alone.
This was driven by interest from institutional investors, with SkyBridge Capital, the US fund of hedge funds led by Anthony Scaramucci, launching a SkyBridge Bitcoin Fund earlier this month.
While Bitcoin hit a record high of $42,000 earlier this month, its price dropped to $28,800 last week, a reflection of the far greater volatility digital currencies experience compared to regular currencies.
"The whole question of people having assurance that their payments will be made in something with stable value ... ultimately links bank to what we call fiat currency, which has a link to the state," Mr Bailey said.
The BoE, along with the European Central Bank, is examining the feasibility of issuing its own digital currency. This would allow people to make sterling electronic payments without involving banks, as is currently possible with banknotes, and would in theory help avoid the volatility that renders bitcoin impractical for commerce.
Mr Bailey said the appropriate level of privacy for digital currencies was likely to be debated further and was potentially underrated as a challenge in setting one up.
"This is a big one that is coming on to the landscape, the whole question of a privacy standard for transactions made in any form of digital currency, and where the public interest lies," he said.