The rise of Bitcoin, the little-regulated digital currency, is challenging law enforcement's ability to keep tabs on the criminal underworld.

The virtual currency is essentially encrypted computer code that is accepted as a form of payment among users, with a fluctuating value set by a market and not by any country or central bank. For those reasons and more, it can be extremely difficult to trace—similar to paying with cash—and thus could be attractive to criminals. In a number of cases, the use of bitcoin has made it harder for police to track financial transactions or seize criminal profits, law-enforcement officials said.

"Law enforcement has to figure out a way to deal with it," said one senior law-enforcement official, who also acknowledged Bitcoin has legitimate uses. (Currency investors and some Web-services sites have adopted it, among others.)

In April, the Drug Enforcement Administration, in the first-known federal bitcoin seizure, took 11.02 bitcoins—or nearly $2,200 at current rates—from a hospitality worker who lives in South Carolina, but they haven't charged him with a crime. Eric Daniel Hughes, who the DEA says was also known as Casey Jones, says the bitcoins didn't belong to him, his lawyer David Aylor said.

The Los Angeles office for the DEA, which made the seizure, hasn't made public what it contended Mr. Hughes was doing with the bitcoins, and says only that the seizure is part of a continuing investigation. (Mr. Hughes also faces state drug-possession charges following a June raid on his apartment. He has pleaded not guilty in that case, which his attorney says is unrelated to the bitcoin seizure.)