Bitcoins aren't just an abstract financial instrument living somewhere in the digital ether anymore. They're now a physical currency capable of taking a ride in your pocket or scratching off your lottery tickets.

The physical Bitcoins, called Casascius Bitcoins and created by a guy in Utah named Mike Caldwell, are made of brass, with gold electroplating on the 25 Bitcoin denomination. And, of course, they're tied to the peer-to-peer, open-source digital currency that's been exchanged on the Internet for a while now.

casascius.com

Each coin has a unique Bitcoin address and a redeemable "private key" under a hologram on the coin. That key can be used to redeem the value of the Bitcoins online, but the hologram sticker leaves a honeycomb mark when peeled back, so you'll know if your Bitcoins have been tampered with.

The coins play a function similar to a gift card or certificate with a magnetic strip or bar code. In other words, it provides a tangible means of carrying around the digital key that contains the actual value. There's just one problem--the physical Bitcoins may well be illegal.

U.S. statutes prohibit the creation of a currency that competes with the good ol' dollar. Before automatically crying foul, remember that PayPal uses dollars and other official currencies, and that things like various points and mileage programs and even gold and silver don't directly compete with the dollar, at least not yet.

Because Bitcoins have been digital-only up until now, it's been easy to argue that they don't compete either. The Bitcoin Wiki argues that the system is no different than bartering using chickens or some other commodity:

...in general trading in any commodity, including digital currency like Bitcoin, game currencies like WoW gold or Linden dollars, is not illegal.

The problem is that Bitcoins have been used to purchase drugs and other illicit products, and that's drawn the ire of legislators in Washington who have threatened to go after Bitcoin. The feds also tend to be more likely to freak out when anyone goes so far as to actually mint or print an alternative currency.

Casascius/Bitcoin Wiki CC

Earlier this year, a District Court in North Carolina convicted a man who designed and minted "Liberty Dollars" of, among other things, issuing and passing coins "intended for use as current money; and of conspiracy against the United States." Ouch.

To be fair, in the case of Liberty Dollars, they were very explicitly intended to compete with the official currency. Nobody expects to be able to walk in to a store and slap down some Bitcoins in exchange for goods and services... or do they?

The existence of things like the Casascius Bitcoin POS system, which is based on a Verifone point-of-sale unit that we're all familiar with, might not completely make the case that Bitcoins are a competing--and therefore illegal--currency, but it sure seems like a sophisticated means of circumventing the official currency if nothing else. The lawyers will have to sort out whether there's a difference between the two.

Of course, we might not have to have that argument. The long-term viability of Bitcoins has been in doubt since one of the exchange servers was hacked earlier this year, causing the value of the currency to plummet.