This will effectively negate the objective of cryptocurrency, as anonymity through the blockchain is one of its main selling points.
Bitcoin and other digital currencies can be traded anonymously, making it attractive to those who wish to "wash" money or those looking to avoid paying the correct tax.
The UK Treasury will lead the effort into regulating cryptocurrencies like bitcoin, bringing it under the purview of anti-money laundering and counter-terrorism financing legislation.
John Mann, a member of the U.K. Treasury select committee, told The Daily Telegraph that an inquiry into the regulation of bitcoin and other cryptocurrencies was necessary given their growing popularity. If successful, the policy will discourage people from using cryptocurrencies to bypass tax laws. "The UK government is now negotiating amendments to the 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".
It expects changes to new EU-wide rules to come into effect by the end of December or early next year.
Nicholas Gregory, chief executive of London-based CommerceBlock, which helps firms do businesses in cryptocurrency, said the move was a "stamp of approval" recognising the "pivotal" role digital currencies are set to hold for the global economy.
For criminals, acquiring Bitcoin or selling it will now simply be a matter of hopping onto another exchange where these regulations do not apply, or using services like Localbitcoins. Claiming that it has concerns about money laundering and tax evasion, the Treasury aims to bring it in line with its financial regulations.
"The UK and Europe are playing catch up to some degree here but they are on the right page. If anything, regulation will only increase bitcoin's rate of growth as regulation lends credibility and engenders trust".