The British government announced yesterday [PDF] that it would start to regulate digital currency exchanges in line with anti-money laundering regulations.

Already a critical piece in the $5trn/day (approx. £3trn) market for conventional currencies, Britain is also among a number of nations spearheading the adoption of digital currency and is keen to mark itself as Europe’s leading ‘FinTech’ hub. Many international cryptocurrency firms have chosen to base their headquarters in the UK, including Australian bitcoin services company CoinJar.

Alongside finance minister George Osborne’s annual budget statement, the government published a report outlining the new rules which aim to support innovation within the field as well as prevent criminal activity. The new proposals for the future regulation of digital currency are expected to be discussed soon, following the installation of the new government.

According to Tom Robinson, co-founder of London-based bitcoin insurance vault Elliptic, the governmental move to regulate digital currencies served as a “stamp of approval.”

“It provides enough oversight to provide legitimacy without stifling innovation […] I think it is a good balance between on the one hand the U.S. and specifically New York, which I think have gone too far, and what a lot of countries are doing which is just completely ignoring it,” said Robinson.

The risks related to illegal use and fraudulent transactions has deterred many nations from dealing with digital currencies. Last year, U.S. regulators said that they were the ‘Wild West’ of finance as they are not necessarily supported by a central national bank or government as is the case with traditional currencies.

Further concerns have also been raised regarding cryptocurrencies’ susceptibility to drastic fluctuations in value and its appeal to hackers. On Valentine’s Day this year, Chinese bitcoin exchange Bter was hacked and cyber criminals managed to get away with roughly $2mn worth of the customer cryptocurrency.

However, support for bitcoin and other crypto-alternatives remains strong and many believe digital systems have the potential to revolutionise the global market. The Bank of England confirmed in a published paper in February that digital currencies showed “considerable promise.”

The report released with the Treasury review yesterday read: “Digital currencies such as bitcoin have the potential to replace traditional currency and, by extension, the need for central banking and regulatory systems…”

It was also revealed that a new initiative would be launched to research cryptocurrency technologies bringing together the research councils, Alan Turing Institute and Digital Catapult. The government have pledged an additional £10mn of investment to support the scheme and also said it will work alongside the British Standards Association to create guidelines to protect crypto-consumers.