Stephen Barclay, the economic secretary to the Treasury, told Parliament that negotiations were under way with the European Union to bring Bitcoin under anti-money laundering and counter-terrorist financing regulation.
It follows increasing concerns that digital currencies can be used to enable cybercrime and while there is little evidence at the moment it them being used to launder money, the Treasury expects this to grow.
Replying to a written Parliamentary question in November Mr Barclay said: "The UK government is currently negotiating amendments to the fourth Anti-Money Laundering Directive that will bring virtual currency exchange platforms and custodian wallet providers into Anti-Money Laundering and Counter-Terrorist Financing regulation, which will result in these firms’ activities being overseen by national competent authorities for these areas.
"The government supports the intention behind these amendments. We expect these negotiations to conclude at EU level in late 2017 or early 2018."
The rules being considered by the EU will mean online platforms where bitcoins are traded will have to carry out extra checks on suspicious transactions, particularly involving large quantities of money.
Robert Langston, partner at accountancy firm Saffery Champness, said: “Right now in the UK, cryptocurrencies do come under the taxman’s purview, with HMRC relying on three possible treatments – trading profits subject to income tax, speculative transactions treated as gambling and therefore not subject to income tax, and capital gains subject to capital gains tax.
“Regarding trading profits, a large volume of cryptocurrency transactions, where positions are taken for a short time only, may reflect a number of potential ‘badges of trade’, but if viewed by the courts in the same way as personal share dealings, cryptocurrency profits are very unlikely to be treated as trading profits.
“Many investors have sophisticated investment and trading strategies which do not rely solely on chance. It is therefore difficult to see how the profits on mainstream cryptocurrencies could be seen as gambling profits."
He added: “HMRC’s existing guidance pre-supposes that cryptocurrencies can be chargeable assets for CGT purposes. This is probably correct; they are intangible assets which carry certain rights, and can be bought and sold.”
Demand for Bitcoin has seen its value exceed $11,000 (£8,150), an increase from just $1,000 (£745) at the start of the year.
In September the rapid rise in bitcoin's value led the vice-president of the European Central Bank Vitor Constancio to compare it to the "tulipmania" of the 17th century, generally considered the first speculative bubble.
Meanwhile Jamie Dimon, chief executive of JP Morgan has called the virtual currency a fraud and said those who invest in it are "stupid".
The Financial Conduct Authority and the European Securities and Markets Authority have recently warned about the increasing number of initial coin offerings, which are ways of raising money from investors using virtual coins or tokens such as bitcoin, where these are issued and put for sale in exchange for fiat money for other virtual currencies such as bitcoin or ether.
In its warning the FCA said ICOs are “very high-risk, speculative investments” where there is likely to be no investor protection.
Meanwhile Esma said consumers risk losing all their capital if they invest in ICOs, adding that some of these coins had “no tangible value”.
David Scott, an adviser at Clydebank Financial Services, said Bitcoin is the "poster child of an unhinged financial system".
He said abundant liquidity and rising debt levels in the global economy resemble conditions last seen before the global financial crisis of 2008, with even the reality of rising interest rates unable to halt the rise in asset prices.
david.thorpe@ft.com
