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Bitcoin to be regulated in 10-20 years: Digital CEO

Bitcoin will be regulated like any other currency or asset class in a decade or two, insists Jeremy Allaire, whose start-up aims to make use of the virtual currency more mainstream.

(CNBC explains: What is Bitcoin?)

As with other virtual currencies, concerns linger that the anonymity of bitcoin, which allows users to exchange online credits for goods and services, means it could be used for fraud, money laundering and other criminal activities.

Siegfried Layda | Getty Images

"Today in the global financial system there are common regulations around things like 'knowing your customer' and anti-money laundering, and I think those are going to get applied in this (bitcoin) as well," said Allaire, the CEO of Circle, which builds products that let businesses and individuals pay and accept bitcoins.

"As the monetary base in digital currency grows, it will create new issues for central banks to think about how this interacts with their existing systems from a financial stability perspective — but that is going to take a good decade or two," Allaire added.

Circle was launched last October with a $9 million investment from venture capitalist Jim Breyer, Accel Partners and General Catalyst Partners.

(Read more: Canada rules bitcoin is not legal tender: Report)

Some 12 million bitcoins are believed to be in circulation at present, even though no central bank issues them. They are instead generated online, via a process known as mining, and their volume is capped at 21 milion.

Allaire forecast a decline in the very high level of volatility seen in the price of bitcoin of late.

"As you see more institutionally focused exchanges set up in places like London and New York, that provide mechanisms like derivatives, shorting and hedging, and real institutional participation, I think you will see a much more stable price," Allaire said.

(Read more: Here's what should bolster bitcoin in 2014)

The currency peaked at $1,242 last November, before tumbling due to concerns about Chinese regulation and a speculative bubble. Prices fell to below $600, before stabilizing around $800 for most of December and January.

"Today it is clearly highly volatile," said Allaire. "Just to put it in perspective, the total volume of bitcoin that trades on any given day is 30,000 to 50,000 bitcoins — that is like a small cap stock. So when you have low volume, low liquidity and mostly retail market participants, you end up with a high degree of volatility."

There was some good news for virtual currency users on Friday, as the world's longest-standing bitcoin trading platform resumed trading in China. BTC China had stopped accepting yuan-denominated trades in December, after a clampdown by the Chinese central bank.

(Read more: Bitcoin back: Major exchange resumes yuan trading)

—By CNBC's Katy Barnato. Follow her on Twitter: @KatyBarnato

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