The state of Illinois has issued a cease-and-desist order to Square, the mobile-payments company.

State regulators wrote in the order (PDF) that Square is "engaged in the business of transmitting money without a license."

Thomas Noyes, a former Citigroup executive, first noticed the order and tweeted about it, then TechCrunch reported it.

Payments is a heavily regulated business, and startups must deal with a patchwork of state regulations as well as federal ones.

Some payments startups have been able to argue that they aren't subject to regulation because licensed banks or other financial institutions actually handle the funds in question.

In its home state of California, after initially arguing that it didn't need a money-transmitter license, Square decided to seek a license, which it recently obtained.

Regulations vary widely by state, but ultimately it may be hard for Square to argue that it's somehow a money transmitter in one state and not a money transmitter in another.

While Square faces fines of $1,000 a day for violating the order, it is likely that those fines will be waived if the company and regulators ultimately come to an agreement on how Square should be licensed.

Square, which said in a statement that it has held conversations with Illinois regulators for "several months," may ultimately be forced to get a license in Illinois as well.

That's because Square recently entered the gift-card business, creating digital gift cards that customers can buy for specific merchants.

Gift cards are deemed stored-value instruments under many state laws, including Illinois code, by our reading.

Illinois's cease-and-desist order specifically mentions these digital gift cards as a concern.

PayPal, when it was a young startup, faced similarly regulatory battles. Louisiana issued a cease-and-desist order against it in 2002. Ultimately, PayPal got licensed in all 50 states and in other jurisdictions overseas. (It even owns a bank in Europe to better comply with regulations.)