The UK Government is looking to step up regulation of bitcoin amid concerns criminals are using cryptocurrencies to launder money and avoid taxes.

The Treasury wants to regulate bitcoin under European Union anti-money laundering rules, forcing traders in the cryptocurrency to disclose their identities and any suspicious activity.

It expects changes to new EU-wide rules to come into effect by the end of December or early next year.

Bitcoin currently works by anonymous trading, which has fuelled fears that it could be an attractive way of funding illegal activity.

A rise of 1,000 per cent in value this year has worried MPs and banks alike.

Speaking to The Telegraph, Treasury Select Committee member John Mann said he expects the Government to carry out an inquiry over regulating digital currencies.

“These new forms of exchange are expanding rapidly and we’ve got to make sure we don’t get left behind – that’s particularly important in terms of money-laundering, terrorism or pure theft”, he said.

"It would be timely to have a proper look at what this means. It may be that we want to speed up our use of these kinds of thing in this country, but that makes it all the more important that we don't have a regulatory lag."

A Treasury spokesperson said: "We are working to address concerns about the use of cryptocurrencies, by negotiating to bring virtual currency exchange platforms and some wallet providers within Anti-Money Laundering and Counter-Terrorist Financing regulation".