The Treasury has said it will begin research into how virtual currencies like bitcoin could, or should, be regulated.
The announcement came as part of a package of measures unveiled by finance minister George Osborne aimed at boosting financial innovation in London to help fend off challengers to the City's status as the world's leading financial centre.
Virtual currencies like bitcoin – the best known of the 200 or so virtual currencies – are not backed by a central bank or government, unlike traditional currencies, but have become increasingly used as a means of online exchange for goods and services.
So far there has been no co-ordinated global approach to regulating virtual currencies and no country has given them legal status, but scrutiny of them has mounted especially since Tokyo-based bitcoin exchange Mt. Gox went bankrupt in February after losing an estimated $650m worth of customer bitcoins, prompting some to call for tighter regulation.
"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 Treasury statement.
Last month the European Banking Authority published a study advising banks to steer clear of virtual currencies until rules are in place and 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 around 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 its economic recovery.
He confirmed plans to improve the growth generated by small and medium-sized enterprises (SMEs) by encouraging them to tap the burgeoning alternative finance sector, with new rules obliging banks that reject SMEs for finance to ask whether they want to be referred to third parties who would then try to match them up with challenger banks and alternative lenders.
This would funnel demand for cash toward new sources of funding like online peer-to-peer lending platforms such as Funding Circle and Zopa, which allow individuals to lend money directly to small companies or other individuals, cutting out the banks and lowering the cost for businesses.
"It's good that more SMEs are making use of alternative finance but the big banks still dominate and small businesses often give up if they're turned down for finance by their bank," said Business Secretary Vince Cable.
Britain's fledgling alternative funding market almost doubled in size in 2013, rising to around £1bn. Brokerage Liberum Capital has forecast peer-to-peer lending in Britain could be worth £45bn within a decade.