Britain eyes Bitcoin, rivals, with virtual currency rules

Britain took its first steps yesterday towards regulating the rapidly expanding use of virtual currencies, launching a study to look at the opportunities and risks presented by digital currency bitcoin and its rivals.

Unlike conventional money, virtual currencies are not backed by a central bank or government, but have become increasingly used as a means of online exchange with some bricks-and-mortar vendors also accepting them as payment for goods and services.

"The government will look at the potential virtual and digital currencies have for achieving positive change and for encouraging innovation in our world leading financial sector, as well as the potential risks," said a finance ministry statement.

The government said it would begin researching how such currencies could, or should, be regulated in Britain. So far there has been no coordinated global approach to regulating virtual currencies and no country has given them legal status.

Bitcoin, the best known of the 200 or so computer-generated currencies, has come under particular scrutiny since Tokyo-based exchange Mt Gox went bankrupt in February after losing an estimated US$650 million worth of customer bitcoins.

Last month the European Banking Authority published a study advising banks to steer clear of virtual currencies until rules are in place. The European Commission said it was imperative to look at regulating the sector to address the potential for "money laundering and terrorist financing".

Osborne also said the government was enlisting the help of industry and academic experts to look at the increasingly key role of technology in finance and its likely policy implications over the next decade. Financial services makes up about 8 per cent of the British economy, and Osborne said it was vital to harness new technology to ensure Britain remained a global leader and to sustain economic recovery.

He confirmed plans to improve the growth generated by small and medium-sized enterprises by encouraging them to tap the burgeoning alternative finance sector.