A Bitcoin coin is seen in an illustration picture.Benoit Tessier/Reuters
The world's central banks can't sit back and ignore the growth in cryptocurrencies as it could pose a risk to the stability of the financial system, according to the Bank for International Settlements.
It said central banks will need to figure out whether to issue a digital currency and what its attributes should be, although the decision is most pressing in countries such as Sweden, where cash use is dwindling.
Institutions need to take into account not only privacy issues and efficiency gains in payment systems, but also economic, financial and monetary-policy repercussions, the BIS said in its Quarterly Review.
Read more: Canada's debt threat remains 'critical,' global body says
Ian McGugan: A new way to get in on today's hottest investment – and why you shouldn't do it
The analysis comes at the end of a rough week for digital currencies, with JPMorgan Chase & Co. chief executive Jamie Dimon calling bitcoin a "fraud" and China moving to crack down on domestic trading of cryptocurrencies.
But with bitcoin and others gaining in popularity as payment systems go mobile and investors pour in money, central banks are beginning to delve into them and their underlying blockchain technology, which promises to speed up clearing and settlements. At the Bank of England, Mark Carney has cited cryptocurrencies as part of a potential "revolution" in finance.
To better understand the system, the Dutch central bank has created its own cryptocurrency, albeit for internal use only. U.S. officials are exploring the matter too, although in March, Federal Reserve Governor Jerome Powell said there were "significant policy issues" that needed further study, including vulnerability to cyberattack, privacy and counterfeiting.
According to the BIS, one option for central banks might be a currency available to the public, with only the central bank able to issue units that would be directly convertible with cash and reserves. There might be a greater risk of bank runs, however, and commercial lenders might face a shortage of deposits. Another question to be resolved would be the question of privacy.