Cryptocurrencies such as Bitcoin are failing as a form of money and have shown clear signs of being a financial bubble, Bank of England Governor Mark Carney said on Friday.
"But their technology could improve the financial system in future."
However, Carney said regulations would be done on a country-by-country basis initially.
This week, the European Union’s financial services chief said Brussels was ready to regulate cryptocurrencies if risks from the sector are not tackled at the global level.
Bitcoin was likened to a "Ponzi scheme” by the head of the Bank for International Settlements, Agustin Carstens, last month.
And China recently banned financial institutions from handling cryptocurrencies.
Carney said that approach risked stifling potentially big opportunities to streamline payments systems, making it easier for example for people in a pub to split the cost of a round of drinks without involving the traditional banking system.
The distributed-ledger technology underlying cryptocurrencies could improve cash settlement in the banking system and other asset transactions, he said.
"Even if the current generation is not the answer, it is throwing down the gauntlet to the existing payment systems. These must now evolve to meet the demands of fully reliable, real-time, distributed transactions," Carney said.
Distributed-ledger technology could also be used for tax and medical records, and business supply chains, though a central bank operated digital currency, he said.
Carney delivered the speech at Bloomberg’s London office, with a video link to Edinburgh, after heavy snow prevented him from delivering the speech as planned in the Scottish capital.