The UK Treasury has announced a series of initiatives dealing with digital currency in a landmark report published in conjunction with the Chancellor of the Exchequer's annual budget speech today.

The announcement is the government's first major attempt to grapple with the regulatory and consumer safety issues surrounding digital currencies.

The report is largely positive towards digital currencies, noting its potential as a payments technology, while also underlining its nascent state and the potential risks associated with its use.

The report said:

The most significant announcement is the government's plan to apply anti-money laundering (AML) regulations to digital currency exchanges.

HM Treasury will lead an effort to seek the views of digital currency companies and the general public in a "full consultation" on the issue early in the next Parliament, according to the report. The UK is due for a general election on 7th May and the new parliamentary year will begin soon after that.

The government will ask for feedback on crucial questions like who should fall under mandatory regulation and which institution should play the role of regulator.

The planned consultation will also cover law enforcement, to ensure that tools and legislation are in place to identify and prosecute criminal users of digital currencies and that illicit funds can be seized.

Applying AML rules to exchanges is necessary to "support innovation" and prevent the illicit use of digital currencies, the report said.

The Treasury report is the result of a call for information on digital currencies issued last November. That attracted more than 120 responses from digital currency companies, banks, payments firms, academics and other government departments and agencies, the report said.

One of the government's goals with its package of policy measures is to create an environment for digital currency entrepreneurs to "flourish", including gaining access to banking and other professional services, which UK bitcoin businesses have so far struggled to obtain.

Banks have claimed that the lack of regulation is the key reason for denying services to digital currency businesses, the report said. It noted that other submissions said banks hadn't worked to correctly assess the risk posed by digital currency companies.

Three banks, including HSBC, the Royal Bank of Scotland and Citi, are listed among the groups that made submissions to HM Treasury.

The digital current report dovetails with another announcement made today that HM Treasury will work with the financial services regulator, the Financial Conduct Authority, and the Prudential Regulatory Authority to look into developing a "regulatory sandbox" for financial technology companies. Entrepreneurs could then test ideas in a lightly regulated environment, and with the "informed consent" of customers.

Another major initiative announced in the report is £10m earmarked for research into digital currency technology.

The research initiative will involve Research Councils, which are publicly funded research agencies; the Alan Turing Institute, a new government-funded organisation that will look into "big data", and Digital Catapult, a non-profit that works on data-sharing projects to aid small businesses.

The development of a "pioneering" framework of voluntary standards for consumer protection is another component of HM Treasury report. The government will work with the British Standards Institution and the digital currency private-sector to create a series of "best practice" standards for consumer protection. The BSI is the UK's National Standards Body.

The voluntary framework will address the risks of digital currency use, identified in the report as the storage security, fraudulent or insolvent exchanges and price volatility. The framework will also help industry avoid a "disproportionate" regulatory burden, the report said.

The full report can be read here.

Featured image: No 10 via Flickr