One of the largest players in bitcoin has warned fledging startups to remain vigilant on regulatory compliance issues.

Coinbase‘s associate counsel Sarah Hody urged entrepreneurs to follow the firm’s “proactive” stance in front of a packed audience at bitcoin developer meetup in San Francisco’s South of Market district.

Hody, who worked at several different law firms prior to joining the cryptocurrency space, noted that a number of other sectors, including food services and the automotive industry, have regulatory bodies that ensure consumer protection.

It is becoming more apparent that bitcoin will someday be in the same category as other industries that must heed compliance in the US, said Hody, adding: “Federal agencies have expressed interest.”

Because bitcoin is a protocol, a payment network and a digital currency – often simultaneously –it may attract the interest of various different regulators, she said.

Complexity requires compliance

As Coinbase has grown, adding more services for its user base has meant an increase in regulatory compliance for the company.

This was especially true when Coinbase launched its US bitcoin exchange; the company had to begin not only holding bitcoin but also US dollars. Keeping US dollars in Coinbase’s wallet was a service it launched months prior to the exchange – likely a precursor to its launch.

Adding features such as US dollar holdings – as well as GBP and the euro just recently – makes Coinbase much more intricately structured in terms of how regulators look at the company’s operations.

Coinbase, according to Hody, is a cautionary tale in how bitcoin startups will have to face ever-more complicated rules as they expand.

She said:

“Inherent in having an exchange means having both dollars and bitcoin for users. Coinbase is handling all the dollars and bitcoin in the background.”

Federal and state level

Hody listed in her presentation a number of federal level agencies that have talked about jurisdiction over bitcoin.

This included the Security and Exchanges Commission (SEC) the Commodities Futures Trading Commission (CFTC) and the Internal Revenue Service (IRS), among others. What might be most confusing for bitcoin startups, however, is the fact that regulators on both the federal and state level require often overlapping compliance standards.

FinCEN, the Financial Crimes Enforcement Network, was used as an example.

Hody pointed out that FinCEN information already gets passed down to over 350 law enforcement agencies, many at the state level.

Despite what may seem like byzatine rules, Hody advocated that startups intensely evaluate their business models and open up relationships with regulators.

“It’s always time to ask: why might a regulator want to regulate your project?”

Protecting users

Hody made it clear that the purpose of regulation in the digital currency industry is about protecting consumers, restricting money laundering and making sure taxes are properly collected.

Because these are issues regulators are concerned about, Coinbase keeps records about customers, and must ensure that developers using its API are operating in a legal manner.

The company also keeps a list of activities users of its services are prohibited from participating in, and maintains a watchful eye on its platform.

Hody said: