By David Benoit

The Bitcoin Foundation is defending the virtual currency to California's banking department, explaining bitcoin doesn't qualify as a payment instrument under the state's money-transmission rules.

In a lengthy letter addressed to Tara Murphy, an assistant attorney general in the California Department of Financial Institutions, the Washington-based group also stuck up for itself, saying it doesn't sell or exchange the virtual currency.

The foundation is one of several entities that recently have been called out by state regulators who are trying to sort out the bitcoin conundrum. They are taking their cue from federal regulators, who in March said that bitcoin exchanges must follow the same anti-money laundering rules that apply to the likes of Western Union Co.

California is known to be particularly aggressive in enforcing money-transmission rules. In the letter, the foundation made it clear that it doesn't even operate in California.