Central banks should consider introducing their own cryptocurrencies to counter the risks from the explosive growth in bitcoin and other virtual currencies, the Bank for International Settlements said in a new report.

The 16-page analysis, tucked into a broader quarterly review from the consortium of major central banks, based in Basel, Switzerland, comes as prices of digital currencies have skyrocketed until recently. They fell sharply last week after China started cracking down on domestic trading venues for bitcoin.

The surging popularity of trading in virtual currencies—of which bitcoin is the largest—is creating a dilemma for central banks whose role is to manage their country’s currency and money supply, and maintain stability in the financial system. Soaring cryptocurrency prices have sparked concerns about the pitfalls often associated with speculative trading, and raised the specter of authorities potentially losing control over their monetary systems.

The BIS report, which highlighted what it called “a new taxonomy of money,” discussed the pros and cons of central banks issuing their own digital currencies. It noted the potential for digital currencies’ underlying technology—used to process and record transfers—and the uncertainty related to possible unintended consequences.

“While it seems unlikely that bitcoin or its sisters will displace sovereign currencies, they have demonstrated the viability of the underlying blockchain or distributed ledger technology,” the BIS said. Blockchain is best known as the open-ledger technology that processes bitcoin transactions by recording them on a public ledger.

Some central banks, including the Bank of England and Bank of Canada, have experimented with ways to use blockchain technology, such as dealing in interbank payments. India’s central bank, the Reserve Bank of India, is considering issuing its own digital currency and is looking for ways to use blockchain technology in the financial sector, according to a person familiar with the matter.


If central banks were to issue digital cash, it would mean that money could exist in digital wallets outside of bank accounts, allowing consumers and businesses to potentially bypass banks when making payments to one another.

The BIS report highlighted how central banks could issue a digital-cash substitute that would allow transactions for goods and services to be anonymous, just as they are with traditional cash.

“The prospect of central bank crypto- or digital currencies is attracting considerable attention,” the BIS wrote in its report. “But making sense of all this is difficult.”

Bitcoin is attracting attention as a wildly volatile, all-digital currency. How does it work? How are criminals taking advantage of it? How risky an investment is it? In this Bitcoin explainer, WSJ’s Jason Bellini has “The Short Answer.” (Originally Published April 12, 2013)

The dollar price of each bitcoin, which peaked above $5,000 earlier this month, currently trades about $3,900, according to research site CoinDesk. A fund manager survey released last week by Bank of America Merrill Lynch found bitcoin was “the most crowded trade.” Its price is up more than 500% from a year ago, according to CoinDesk.


Overall, the debate about how central banks should best consider embracing cryptocurrencies is currently more important in countries such as Sweden, where cash use is dwindling rapidly, according to the BIS report. But the issue is one that other central banks around the world should not ignore, it noted.

“In making this decision, central banks will have to consider not only consumer preferences for privacy and possible efficiency gains—in terms of payments, clearing and settlement—but also the risks it may entail for the financial system and the wider economy, as well as any implications for monetary policy,” the BIS said.

—Manju Dalal contributed to this article.

Write to Steven Russolillo at steven.russolillo@wsj.com