The Chancellor is commissioning a review into the cryptocurrency’s pros and cons.
George Osborne is set to explore turning Britain into a Bitcoin hub, as he looks into regulation of the cryptocurrency.
The Chancellor will outline the Treasury plans in a speech today as he seeks to make the UK into a centre of financial innovation, embracing Bitcoin and other virtual currencies.
He has told Treasury staff to examine the pros and cons of Bitcoin, which is not controlled by a central bank, for a study that will investigate cryptocurrencies' potential to slot into the economy.
Speaking at an Innovate Finance launch event in London later today, Osborne will announce: "Key to the Government's long term economic plan is cementing Britain's position as the centre of global finance.
"It's only by harnessing innovations 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, here and around the globe, and create the jobs and growth we all want to see in the future."
The news follows HMRC's decision in March to scrap VAT on Bitcoin, believing it to be a barrier to international trade.
However, the Financial Conduct Authority (FCA) has been reluctant to issue any guidance on how cryptocurrencies might be regulated.
But Bitcoin proponents like the UK Digital Currency Association (UKDCA) believe regulation will make the currency more trustworthy and mainstream after scandals such as the closure of exchange Mt. Gox, which lost 650,000 bitcoins in February, allegedly to hackers.
Osborne's announcement also comes after Swiss computer scientists claimed Bitcoin price crashes can be predicated by a surge in web searches for the medium of exchange.
"Our analysis suggests that the successive waves of growth of the Bitcoin economy were driven by corresponding waves of new users from public circles gradually opening to the currency," wrote the researchers.