With the government cracking down on digital currency players such as Liberty Reserve and Mt. Gox, many ask whether it's a move to squash the development of virtual currencies and what action the government will take next.

The Financial Crimes Enforcement Network's director, Jennifer Shasky Calvery, recently stated that she considers digital currencies an example of the "great innovation" taking place in financial services  but the companies that handle digital currencies have "obligations to protect the U.S. financial system from money laundering [that] need to be taken seriously."

This means the success or failure of Bitcoin and other currencies rests upon the businesses that choose to support them.

Regulators "prefer that the banks solve this problem for themselves, and if they don't, then they will sanction the bank for ineffective controls, as opposed to chasing down Bitcoin holders around the world," says Terry Maher, an attorney with Baird Holm LLP in Omaha, Neb.

Banks complain often about this approach since "they are forced to be the beat cop for the government," he says.

On May 28, federal prosecutors in New York indicted Liberty Reserve, a virtual currency issuer, and several of its principals for their roles in the alleged $6 billion money laundering scheme and for operating as an unlicensed money transmitter. At the same time, Fincen proposed a rule to seal off the U.S. financial system from Liberty Reserve.

In an unrelated action on May 15, funds from Mt Gox's accounts at Dwolla and Wells Fargo were seized by the Department of Homeland Security after the Tokyo-based bitcoin exchange was accused of operating as an unlicensed money-transfer business.

"After these two cases, the banks are rushing to see if they are holding any of these accounts and closing them down if they find them," he says.

Several banks have already taken steps to distance themselves from Bitcoin businesses. In April, Capital One Financial Corp. suddenly closed Bitfloor's bank account, leading the New York-based Bitcoin exchange to halt operations. FastCash4Bitcoins, a service offered by Tangible Cryptography of Chesapeake, Va., said PNC had closed its bank account, preventing it from accepting wire transfers. PNC would not discuss the matter and Tangible did not return calls.

Several other Bitcoin businesses in the U.S. and abroad have suspended operations or closed down since Fincen issued guidance on virtual currency in March. The guidance described Bitcoin businesses, including exchanges, as money services businesses (MSBs), which must register with Fincen. Many states are mandating that Bitcoin businesses apply to be licensed as money transmitters.

Some Bitcoin businesses seem to be working peacefully with banking partners, including CoinLab Inc.'s relationship with Silicon Valley Bank. Other companies, such as Crypto Street, a professional cryptocurrency exchange still in beta, hedge by opening multiple bank accounts.

"It's pretty clear to me that there's a concerted effort in U.S. law enforcement to address virtual currencies and their threats and vulnerabilities," says Juan Llanos, executive vice president of operations and compliance officer at Unidos Financial Services Inc.

Llanos is a certified AML specialist with more than a decade of experience building and managing regulatory compliance programs. He has been watching the Bitcoin space as the federal government takes steps to regulate virtual currency.

While Liberty Reserve was an outlier, Bitcoin businesses should still be preparing for further interruption from the U.S. government, he says. "As an entrepreneur, I would stop hesitating and hire a specialized law firm to start building a compliance operation to execute."

Mt. Gox still faces potential action from the U.S. government, says Llanos. Further action could target the many exchanges that are registered with Fincen but have yet to obtain the proper state licenses, he adds.