The Government department is looking to introduce regulation for the crypto-currency to force traders to reveal their identities and report suspicious behaviour.
Bitcoin has a reputation of being used by organised criminals and tax avoiders because of the ability to trade in the online currency anonymously.
The increasing popularity of Bitcoin has forced the Treasury to regulate the money and bring it into line with legislation on anti-money laundering and counter-terrorism rules.
Stephen Barclay, the Economic Secretary to the Treasury, said: “The UK Government is currently negotiating amendments to the anti-money-laundering directive that will bring virtual currency exchange platforms and custodian wallet providers into Anti-Money Laundering and Counter-Terrorist Financing regulation.”
In a written response to the Treasury Select Committee, he went on to explain how “national competent authorities” or regulators would oversee their activities.
Mr Barclay added: “We expect these negotiations to conclude at EU level in late 2017/early 2018.”
Drug dealing, cyberfraud, prostitution, gun-running and other major crime profits are being ploughed into the internet currency.
Drug pedlars are using high street bitcoin ATM machines to deposit cash from deals, and there are 77 such ATMs in Britain.
The value of a single bitcoin has soared from £714 in January to a record high of £8,300 last week.
The total value of bitcoins in existence is currently £130billion.
However, John Mann, who sits on the Treasury select committee, fears the regulation will not go far enough.
Speaking to the Telegraph, he said: “These new forms of exchange are expanding rapidly and we’ve got to make sure we don’t get left behind – that’s particularly important in terms of money-laundering, terrorism or pure theft.
“I’m not convinced that the regulatory authorities are keeping up to speed. I would be surprised if the committee doesn’t have an inquiry next year.
“It would be timely to have a proper look at what this means. It may be that we want to speed up our use of these kinds of thing in this country, but that makes it all the more important that we don’t have a regulatory lag.”
A Treasury spokesman also told the newspaper: “We intend to update regulation to bring virtual currency exchange platforms into Anti-Money Laundering and Counter-Terrorist Financing regulation.”