US central banks have issued a warning that the bitcoin could spark a financial crisis in the US and other nations.
The Federal Reserve, the US central banking agency, has warned that bitcoin is not backed by a legally recognised monetary system.
In a statement, the central bank said: “Bitcoin has not yet been deemed to be backed by any central bank, nor does it have any legal status or monetary base that can be used to settle transactions.”
Bitcoin is a digital currency that can operate without a central authority.
Bitcoin has been widely adopted by people in developing countries in recent years, but has not gained traction in the developed world, where the vast majority of transactions take place.
Earlier this year, the International Monetary Fund warned that virtual currencies were not a credible alternative to central bank currencies.
“Bitcoin is not a reliable store of value,” it said in a report.
It warned that “the use of virtual currencies by speculators or criminals may pose a risk to financial stability”.
“The risks of using virtual currencies to circumvent the global financial system, such as through digital currencies, may be greater than those associated with traditional currencies.”
Bitcoin has also attracted the attention of regulators in Asia, where authorities have begun to crack down on virtual currency use.
This has led to a spike in the price of the digital currency, which has surged to more than $400 (£260) from around $200 last year.
According to data compiled by the CoinDesk Bitcoin Price Index, which tracks the price in the currency’s name, bitcoin has risen from around US$40 in January to over $700 last week.
With the value of bitcoin rising so rapidly, some investors have taken advantage of the bitcoin bubble to buy large amounts of assets that were previously out of reach.
But it has come with a growing risk.
Over the past few months, the price has taken a sharp fall and has now fallen back below US$100.
There have also been signs of the cryptocurrency becoming a popular investment vehicle.
Last week, bitcoin prices hit a record high of $1,250, according to data from Bitfinex, which allows investors to trade the digital asset on exchanges.
As a result, there have been calls for regulators to regulate the cryptocurrency.
A group of US senators are pushing for the Federal Reserve to regulate bitcoin and other digital currencies as money and a form of “corporate debt”.
In February, the Federal Deposit Insurance Corporation (FDIC) announced a $5bn (£3.2bn) fund to help the banks with the regulation of the technology.