Major UK banks, including Barclays and Royal Bank of Scotland, have warned that Chancellor George Osborne's plan to turn Britain into a hub for the virtual currency trade could help terrorists and criminals.

The warning came in a letter to the Treasury from the British Banker's Association (BBA), which represents the leading British banks.

Anthony Browne, chief executive of BBA, told The Telegraph that "if terrorist and criminals harness these unregulated currencies they will be far harder for the law enforcement and intelligence agencies to track down."

British bankers are urging caution in response to Osborne, who last year said: "It's only by harnessing innovation in finance, alongside our existing world class knowledge and skills in financial services, that we'll ensure Britain's financial sector continues to meet the diverse needs of businesses and consumers."

Banks are concerned about the threat Bitcoin is to sterling and that it may aid criminals due to the anonymous nature of the virtual currency.

"The impact that digital currencies can have on monetary or financial stability currently is limited given the size of the digital currency market," the BBA's letter to the Treasury reads. "However, if 'convertible' digital currencies were to reach mass adoption in the UK, there is a possibility this may have an increasing effect on sterling."

"In contrast to transactions made through the existing regulated payments system, the anonymity offered by digital currencies can facilitate transactions with the purpose of laundering money financing terrorism, or purchasing illegal goods and services," the BBA warns. "Furthermore, users may unknowingly be committing criminal offences, such as money laundering or terrorist financing, through their interactions with digital currency."

The BBA is asking for clarity around the virtual currency. "Ultimately, PSPs (Payment Service Providers) need to be able to demonstrate that transactions are legitimate and that they are not supporting criminal or terrorist activity. At present, PSPs are unclear on their responsibilities with regards to servicing those working with, paying or receiving digital currencies."

What the industry body is saying isn't anything new. Cryptocurrencies have long been known to facilitate crime alongside legitimate uses, and Bitcoin's initial growth was largely on the back of its ability to facilitate anonymous drug sales on the Internet. But it's a fresh sign of the established financial industry's ongoing uncertainty with regards to virtual currencies.

Some have criticized the BBA's warning. Writing for pro-virtual currency website CryptoCoinsNews, former banker Evander Smart urges the Treasury to "let digital freedom ring... It worked for the Internet."

It's unlikely that Bitcoin will prove an immediate threat to sterling, however. The virtual currency has seen a significant price drop in recent weeks, and is currently sitting at low levels not seen since the end of 2013. The crash has alternately been blamed on the hack of exchange BitStamp and a vicious downwards spiral as businesses are forced to sell off reserves of the virtual currency to stay afloat, driving the price down further. It's currently fluctuating around the $210-mark — a quarter of what it was a year ago.

Compounding its woes, the Russian government has begun cracking down on Bitcoin websites over fears of a "shadow economy." And the Telegraph reports that virtual currency business could risk breaking new European Union VAT laws due to uncertainty over where customers are located.

French bankers have also previously criticised Bitcoin, saying in 2014 that its "substantial price fluctuations" means it has a "limited future."