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Bitbills, a physical representation of the virtual currency Bitcoin, in Amherst, Mass., June 30, 2011. A rise in value of the digital currency that began in January 2013 has experts questioning whether the rise is real value or evidence of a bubble.Nancy Palmieri/The New York Times

Things are getting serious for Bitcoin this month: a federal judge declared it real money, Bloomberg gave it an experimental ticker (XBT), and New York's financial regulator announced an interest in regulating it. Declaring Bitcoin "a virtual Wild West for narcotraffickers and other criminals," the New York State Department of Financial Services is stepping into the sheriff's boots.

"We believe that – for a number of reasons – putting in place appropriate regulatory safeguards for virtual currencies will be beneficial to the long-term strength of the virtual currency industry," said NYSDFS superintendent Benjamin Lawsky in a statement.

The department is starting out by subpoenaing 22 digital-currency companies and investors to get a lay of the Bitcoin land. They sent letters to the major Bitcoin players asking them to hand over information regarding their money laundering controls, consumer protection practices, source of funding, pitch books (for Bitcoin start-ups) and investment strategies (for Bitcoin investors). The recipients of the subpoenas are nationwide and include everyone on the "people making real money on Bitcoin" list, such as Bitcoin exchanges and processors, " mining equipment" maker Butterfly Labs, and major investors, such as the Winklevosses, Marc Andreessen & Ben Horowitz, and Google's venture fund. (Full list below.)

A subpoena doesn't mean criminal activity has taken place. A person familiar with the matter says the two-year-old department wants to make sure Bitcoin isn't a conduit for illicit activities and is gathering information in order to decide whether to issue regulation for virtual currencies. The department has the authority to create regulation if there is no other primary regulator. Liberty Reserve – a virtual currency recently taken down by the feds for its use in money laundering and child porn rings – is on the mind of the department as it investigates Bitcoin.

In addition to rooting out illegal activity, the department says it wants to make sure Bitcoin company customers' funds are "safe and sound," expressing concern about consumer complaints "about how quickly virtual currency transactions are processed." On the same day the inquiry was announced, some Bitcoiners with Android wallets for their digital coins discovered their banks are not so sound: they are at risk of theft thanks to a flaw in a number of Android apps, reports BBC News.

The virtual currency Bitcoin has already been getting lots of attention on the federal level. The IRS has been encouraged to make sure people pay tax on it. The FBI realizes it's useful as a currency for illicit activity. The SEC has argued that it is indeed money and that people should go to jail for using it in Ponzi schemes. And the Department of Treasury has issued guidance for Bitcoin money transmitters. State regulators paying attention will help to further legitimize the currency, but it will also increase the start-up costs for Bitcoin money transmitters. The NYSDFS notes in its statement that "virtual currency exchangers may be engaging in money transmission as defined in New York law, which is an activity that is licensed and regulated by DFS." That means ponying up bond money, as pointed out in the Wall Street Journal:

"Although a growing number of bitcoin exchanges have registered their businesses with the U.S. Treasury Department's Financial Crimes Enforcement Network, they have moved more slowly at the state level. In part, that is because the process of getting a license in each of the 48 states that require them is complicated and lengthy. In addition, states also typically require companies to put up a bond that could run as much as several million dollars."

"We look forward to working with the virtual currency industry and other stakeholders as our inquiry proceeds, and we move to put in place appropriate regulatory guardrails to protect consumers and our national security," said NYSDFS superintendent Benjamin Lawsky in a statement.

In addition to responding to the subpoenas, a few of the Bitcoin companies below are likely going to need to register as money transmitters in New York. And New York is not the only state paying attention to Bitcoin businesses. Earlier this summer, California sent out at least one warning letter to the Bitcoin Foundation.

That will be a hassle but it's better than being a Bitcoin business in Thailand. That country declared the virtual coin illegal.

List of companies subpoenaed by the New York State Department of Financial Services

  • BitInstant
  • BitPay
  • Coinabul
  • Coinbase Inc.
  • CoinLab
  • Coinsetter
  • Dwolla
  • eCoin Cashier
  • Payward, Inc.
  • TrustCash Holdings Inc.
  • ZipZap
  • Butterfly Labs
  • Andreesen Horowitz
  • Bitcoin Opportunity Fund
  • Boost VC Bitcoin Fund
  • Founders Fund
  • Google Ventures
  • Lightspeed Venture Partners
  • Tribeca Venture Partners
  • Tropos Funds
  • Union Square Ventures
  • Winklevoss Capital Management

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