The UK Home Office believes the government should consider creating its own digital currency that limits anonymity and increases the traceability of transactions.
The government department, which is responsible for immigration, counter-terrorism, police and drugs policy, recognised the low cost of transactions and increased speed of payments provided by digital currencies.
However, the document, which was obtained by CoinDesk via a freedom of information request, also highlights some of the associated downsides, such as the fact cryptocurrency affords a degree of anonymity to criminals.
With this in mind, the Home Office said in its submission: "We believe that there might be a number of advantages of any digital currency for the UK being created and owned by central government."
It goes on to say one major advantage of government-created digital currency is that it could be designed to limit use for criminal and terrorist purposes.
"In particular, a digital currency owned by the UK government would be controlled by a central body ... It could also be pegged to a fiat currency, to reduce potential fluctuations in its value," the submission continues.
The response suggests a government-issued digital currency should be designed in such a way that its ownership and use can be traced, enabling law enforcement agencies to identify whether it has been used for criminal or terrorist purposes and who by. It continued:
"Access to such information would need to be restricted, but would be of use to law enforcement agency investigations and anti money laundering work. It would also have the additional benefit of acting as a deterrent to criminal use, as criminals would be unlikely to want to use a currency that it is traceable."
Regulation should also require that any digital currency involved in criminal activity can be seized by the authorities, the department's response states.
The Home Office highlights that, as bitcoin transactions are irreversible, fraudulent payments can be made without recourse.
It suggests a government-created cryptocurrency should be designed in such a way that fraudulent transactions can be reversed.
"It would make sense to identify how fraudulent transactions can be unwound and the digital currency reimbursed to the legitimate owner," the submission states.
However, it does not mention that the irreversibility of transactions is seen, by some, as a positive feature of bitcoin. Many merchants favour this feature as it means they are not subject to fraudulent chargebacks.
According to the Home Office, cryptocurrency exchanges should be licensed, with their licenses withdrawn if they fail to meet certain requirements, such as the monitoring of transactions and reporting suspicious activity to the National Crime Agency.
The department suggests digital currency companies, such as wallet providers and exchanges, should be required to carry out the relevant anti money laundering and know-your-customer checks on its users.
Essentially this would mean digital currency exchanges face the same requirements as other financial institutions.
In order to ensure the success of regulation created in the UK, however, the Home Office claims international cooperation is "essential". The response states:
"The conversion point where fiat currency becomes digital, and vice versa, is hard to oversee, given digital currencies have global reach. Without global consistency in approach, oversight and security is difficult."
The Home Office response offered some similar recommendations to the response submitted by Citi's Treasury and Trade Services Technology and Innovation Team. Citi also suggested the Treasury should consider creating its own digital currency.
The response from MasterCard, on the other hand, emphasised the risks associated with cryptocurrencies and stated that currencies such as bitcoin don't have many, if any, strong benefits.
Another company to submit a response was Accenture, which suggested the UK government should consider regulating bitcoin wallets and apply the same identification requirements to wallet providers as it does to banks.
Little action has been taken by the Treasury since it received responses to its call for information. In March, it published a report, stating plans to apply anti-money laundering regulations to digital currency exchanges.
The report said the Treasury will also hold a "full consultation" on the topic of cryptocurrencies and revealed that £10m had been earmarked for research into digital currency technology.
View the Home Office response to the call for information in full below: