Digital currencies could find themselves regulated by the Financial Conduct Authority, after a government report recommended a consultation on this matter.
The government's Cryptoasset Taskforce, made up of the Financial Conduct Authority, HM Treasury and the Bank of England, published its report after considering the growth of these assets over the past year.
The report has recommended a consultation in early 2019 which will look into whether so-called initial coin offerings (ICOs), which is where issuers accept a cryptocurrency such as Bitcoin or Ether in exchange for another one related to a specific firm or project, should be regulated.
There will be another consultation - by the end of the first quarter in 2019 - on whether the sale of derivatives, including contracts for differences, options and futures referencing certain types of cryptoassets should be banned to retail investors.
Andrew Bailey, chief executive of the FCA, said: "There is limited evidence of the current generation of cryptoassets delivering benefits, but this is a rapidly developing market and benefits may arise in the future.
"There are substantial potential risks associated with cryptoassets, and the most immediate priorities for the authorities are to mitigate the risks to consumers and market integrity, and prevent the use of cryptoassets for illicit activity."
The taskforce has said guidance will be issued by the end of this year on which cryptoassets fall within the existing regulatory perimeter and those which may fall outside.
The government will also issue a third consultation in early 2019 to further explore whether and how exchange tokens, and related firms such as exchanges and wallet providers, could be regulated effectively.
Cryptoassets have found themselves in the spotlight after they experienced a surge in growth during 2017.
In January 2017 the market capitalisation of cryptoassets was $17bn (£13bn) and grew significantly from July 2017, reaching a peak in January 2018 at $830bn (£650bn).
Since then it has fallen and fluctuated and as of the end of August 2018, the total market cap of the cryptoasset market was $191bn (£149bn).
Meanwhile the growth of ICOs has been significant and from January 2018 to end May 2018, approximately $10bn (£7.8bn) was raised through these globally.
The taskforce raised concerns about the use of cryptoassets for financial crime and money laundering, and said while this is currently low it is also growing.
The report said the government would bring fiat-to-cryptoasset exchange firms and custodian wallet providers within the scope of anti-money laundering and counter-terrorist financing regulation.
Last year, during the surge in cryptoasset values, the FCA warned these digital currencies had no discernible value and investors should be prepared to lose all their money, a position it reiterated with the publication of the taskforce's report.
Last month the Treasury select committee called for greater regulation of the "Wild West" of the cryptocurrency market and said the government's position was too ambiguous and unsustainable.