BRUGG, Switzerland (Reuters) - The Swiss National Bank is wary about cryptocurrencies like Bitcoin and Ether, Chairman Martin Schlegel said on Thursday, adding physical cash would retain an important role in the Swiss payments system in future.

"Bitcoin and other virtual currencies have grown enormously in recent years," Schlegel told an event organised by the Aargauische Kantonalbank in Brugg, Switzerland.

"But despite this growth, these currencies remain a niche phenomenon," Schlegel said.

Although he declined to give a view on the future of cryptocurrencies, Schlegel raised concerns such as the strong fluctuation in values that meant they were not practical for payments.

Cryptocurrencies also required a huge amount of energy, Schlegel said, and were also linked to illegal activities and were difficult to police.

Still, the SNB was not standing still on technological change, Schlegel said, and is for example running a pilot project using central bank digital currency to ease payments between financial institutions.

In August the central bank also introduced instant payments, which means money can be transferred from one account to another in seconds rather than days.

Schlegel said cash would continue to play an important role, with the SNB announcing last week that it would launch a new range of banknotes.

"Despite the digitalization of the electronic payment system, we believe that cash will play an important role in the future," Schlegel said.

"Cash offers many advantages. It does not require any technology. It is anonymous, for example, you can simply pay with a banknote."