"Bringing crypto-assets into the regulatory tent could potentially catalyse innovations to serve the public better."
In a speech at Edinburgh University, Carney said that although cryptocurrencies are "failing" due to extreme volatility and short value, banning them "risks foregoing potentially major opportunities from the development of the underlying payments technologies".
He explained: "A better path would be to regulate elements of the crypto-asset ecosystem to combat illicit activities, promote market integrity, and protect the safety and soundness of the financial system.
"The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system. Being part of the financial system brings enormous privileges, but with them great responsibilities."
The EU and the US now require crypto exchanges to meet the same anti-money laundering and counter the financing of terrorism standards as other financial institutions.
Carney announced that prudential regulators, like the Bank’s PRC, are also in the process of clarifying how the existing regulatory requirements apply to crypto-asset activity.
He said this was important as cryptocurrencies raise a "host of issues" around consumer and investor protection, market integrity, money laundering, terrorism financing, tax evasion, and the circumvention of capital controls and international sanctions.
However in his view, "crypto-assets do not appear to pose material risks to financial stability" as their combined global market capitalisation are less than 1% of global GDP and currently, no major UK high street or online retailer accepts Bitcoin as payment.
He said financial stability risks would only rise if retail participation significantly increased or linkages with the formal financial sector grew without material improvements in market integrity, anti-money laundering standards and cyber defences.
On the upside, Carney said "some of the underlying technologies are exciting", adding that authorities should be careful not to stifle innovations which could in the future improve financial stability and support more innovative, efficient and reliable payment services.
Carney concluded: "In my view, holding crypto-asset exchanges to the same rigorous standards as those that trade securities would address a major underlap in the regulatory approach.
"I trust you have gathered by now that for many reasons the crypto-assets in your digital wallets are unlikely to be the future of money.
"But that is not meant to dismiss them. Their core technology is already having an impact. Bringing crypto-assets into the regulatory tent could potentially catalyse innovations to serve the public better."
