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Cryptocurrencies aren’t going to displace traditional currencies anytime soon, but there is great potential in the underlying technology to help transform aspects of the existing financial system, and a role for regulation to support innovation, argues Mark Carney, governor of the Bank of England.

In a speech to an economics conference at Edinburgh University on Friday, Carney says that cryptocurrencies such as bitcoin are so far failing to fulfil the basic functions of money.

“The long, charitable answer is that cryptocurrencies act as money, at best, only for some people and to a limited extent, and even then only in parallel with the traditional currencies of the users. The short answer is they are failing,” he says.

It’s not clear that they will ever become an effective medium of exchange, Carney says, given that the transaction costs are so high, and likely to rise.

Moreover, crypto-assets currently represent a host of risks, he warns, including consumer and investor protection issues, market integrity, money laundering, terrorism financing and tax evasion.

At this point, these assets don’t pose material risks to the global financial system, Carney says, but that could change, if retail adoption significantly increases without major improvements in market integrity, anti-money laundering standards and cyber defences also taking place.

While policymakers may be tempted to try and isolate crypto-assets from the mainstream financial system in order to contain the risks, this risks stifling innovation, Carney argues.

Indeed, the blockchain technologies underlying cryptocurrencies, “are exciting,” he says, stressing that policymakers should be careful not to suppress innovation in this area, which could make financial system infrastructure safer and more efficient.

A better approach, he says, “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.”

“Bringing crypto-assets into the regulatory tent could potentially catalyse innovations to serve the public better,” he says, by improving payments systems to allow reliable, real-time, distributed peer-to-peer transactions. The securities settlement system is also “ripe for innovation,” Carney says.