The UK has announced that it will apply anti-money laundering (AML) rules to digital currencies in a bid to both encourage and regulate their usage.

The government plans to launch a new £10 million research programme that will see industry working with the Research Councils, Alan Turing Institute and Digital Catapult (a national centre responsible for accelerating the UK's digital economy) to address both the research opportunities and the questions for digital currency technology.

The UK is keen to show it is serious about the use of digital currencies and to both develop their usage – especially in London – and attempt to police the currencies’ darker applications.

Digital currencies such as Bitcoins have been attractive to criminals because they offer additional “layering”, where one digital currency can be exchanged for another before being converted into real-world currency. There is little or no trace left for investigators. Applying AML and Know Your Customer (KYC) regulation can help tackle these concerns and bring digital currencies into the mainstream.

These proposals by the UK government to move cryptocurrencies under AML and KYC regulations present a great opportunity for the UK to lead the way in properly policing their use. Indeed, the UK has shown wisdom in deciding to embrace the digital currency revolution – and on its own terms.

Crucially, to forge a healthy and regulated cryptocurrency environment, the UK government plans to apply regulation to digital currency exchanges in the country: if approved, digital currency exchanges will be required to implement AML and KYC processes into their operations. AML and KYC are part of the framework in countries that have already passed Bitcoin regulations and mark a huge turning point for digital currencies as they become better understood and more widely used.

The UK is also looking at increased training for law enforcement groups and the development of their existing techniques to ensure they have effective skills and the right tools to identify and prosecute criminal activity relating to digital currencies. Several users and digital currency firms have also suggested using trade bodies or other sources of expertise to improve understanding and awareness about cryptocurrencies among police and intelligence agencies.

Given the anonymous nature of digital currencies and the fast turnaround of digital transactions, detecting money laundering can be a daunting task for any business looking to comply with these new regulations. However, technology exists that can help businesses comply in an efficient and cost-effective way.

The right software can integrate AML controls into an organisation's structure, based in a hosted environment, which takes away the need for the business to run the system itself. AML software works by allowing the user to set their own transaction monitoring rules that are then enforced automatically to detect money movements that could be associated with laundering activity.

AML solutions provide companies with a comprehensive system to detect and prevent illicit transactions. With advanced KYC functionality, AML software can also integrate internal client lists with third-party lists which include sanctioned or politically exposed persons (PEPs) and generate automatic alerts where a customer appears on either internal or external lists. This, coupled with effective due diligence and preventative measures, can go a long way to stop misuse of business platforms.

By adopting AML and KYC measures, digital currency exchanges can ensure they are well prepared for upcoming regulatory changes. More importantly, only by taking action to prevent potential abuse can businesses build the right environment for digital currencies to flourish.