The Government is to regulate bitcoin exchanges to stop their use as money laundering hubs, the Treasury has said.
In a report published alongside George Osborne's annual budget, the Treasury said the new regulation would support innovation and prevent criminal use of digital currencies.
The proposals will be consulted on early in the next parliament.
The government will work with the British Standards Association (BSI) to develop a set of standards that will protect consumers, it said.
The Treasury also announced a new research initiative on digital currency technology, and said it would inject an additional £10m into the area.
Tom Robinson, a board member of the UK Digital Currency Association - which has been involved in the Treasury's consultation process - said the "announcement is significant in that it brings bitcoin and other block chain technologies closer to mainstream adoption".
In a discussion paper published in February, the Bank of England said that digital currencies such as bitcoin showed "considerable promise" and that they showed it was possible to transfer value securely without a trusted third party.
Garrick Hileman, economic historian at the London School of Economics, told the Financial Times: "The £10m in funding for digital currency research demonstrates that this government is serious about making the UK an attractive destination for cryptocurrency entrepreneurs and investment. No other government has made such a positive overture to bitcoin."
Niall Maye - who runs Bitcoin Association Northern Ireland - said that "too much regulation could stifle the industry".
"Retailers should be jumping at the chance to use bitcoin," he said.
"Thousands of developers are now working on bitcoin-related projects. As time goes on, it will be simplified and easier to use."