A senior Central Bank official has warned that virtual and digital currencies have the potential to challenge the sovereignty of states.

Gareth Murphy was this afternoon addressing Bitfin 2014, a conference on digital money in Dublin.

Mr Murphy said rivals to national legal tender pose challenges to central banks' ability to influence the price of credit for the whole economy.

He also warned that there would be a substantial threat to the country's finances if more and more transactions for goods and services disappear from the tax net through the use of digital currencies.

Mr Murphy cautioned that a loss of consumer confidence in currencies can cause uncertainty, which in turn can lead to a drop in economic activity.

The Central Bank has consistently said that it does not recognise and therefore does not regulate digital currencies such as Bitcoin in this country.

As a result, those that utilise them in Ireland do not enjoy any consumer protection.

Mr Murphy, who is Director of Markets Supervision at the Central Bank, said it was well-documented that virtual currencies could provide an alternative channel for people to purchase goods and services using the proceeds for crime.

In such scenarios, he added, the application of current anti-money laundering regulations will be tested.

Mr Murphy warned that any failure of the payments and settlement infrastructure or "financial plumbing" in Ireland, would have a severe impact on consumer confidence and economic activity in the country.

He also cautioned that virtual currencies pose a new challenge to central banks' control over the important functions of monetary and exchange rate policy.

Their more widespread use would also make it more difficult for statistical agencies to gather data on economic activity, which are used by governments to steer the economy.

He said supervision of digital currency compliance requires resources.

Mr Murphy also said that supervisory authorities are competing in a tight market for scarce talent with strong technology skills.

But, he added, that supervisory authorities have the additional handicap of operating in a public sector pay environment.