Over the past couple of months, numerous central banks and national regulators have issued warnings against the use of bitcoin and other digital currencies.

The US has not clamped down on bitcoin yet, though there are a number of restrictions hampering the adoption of digital currencies in the US. These include restrictive FinCEN rules, regulatory ambiguity and lack of a coherent policy at federal level.

For the most part, it is up to states to regulate the matter. New York State will hold public hearings on bitcoin this week, but it is unclear whether they will result in any significant conclusions or actions.

East Coast vs West Coast

Financial regulation remains a controversial topic in the US, but unlike many controversial regulatory attempts in the country, support and criticism of digital currencies transcend party lines. This makes it very difficult to say with any certainty what US lawmakers and regulators may be about to do with respect to digital currencies.

Attorney Adam Ettinger told Bloomberg that any state that becomes bitcoin-friendly will see “a huge increase in companies” in the digital currency space. The fact that California has plenty of tech talent comes in handy, too. Ettinger explains:

“That will mean the brightest minds working on some of the most innovative payment technology we’ve seen in awhile.”

For the time being, efforts to rewrite – or simply write – the rulebook appear to be in the hands of Silicon Valley and Wall Street. Geeks, by nature, love digital currencies – so there should be no shortage of popular support, at least not in California. State officials have reportedly met with lawyers and compliance experts to discuss the matter, but little is known about the talks.

However, the East Coast establishment is not as enthusiastic. Several high-profile bankers have already voiced their concerns, and the financial sector is not nearly as bitcoin-friendly as many tech companies and online retailers.

Legal ambiguity remains a problem

The legal status of bitcoin and other digital currencies in the US remains unclear, and the fact that the US has 50 different jurisdictions does not help. For example, the Washington State Department of Financial Institutions stresses that digital currency is a medium of exchange not authorized or adopted by any government.

In Washington digital currency is included in the definition of “Money” in the Uniform Money Services Act (UMSA), chapter 19.230 RCW:

“Money means a medium of exchange that is authorized or adopted by the United States or a foreign government or other recognized medium of exchange. “Money” includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more governments.”

As a result, Washington State requires companies wishing to transmit money to its residents to check whether they need UMSA licensing. If they do, then they must get a license before they can start operating.

However, in other states and on a national level, there is simply no consensus on the matter. Washington can be viewed as an exception, as most other states simply don’t have any legislation applicable to digital currencies and they don’t view them as “money” in the legal sense.

Last year, New York State decided to use subpoenas to encourage bitcoin startups to file additional documentation on their businesses. The New York Department of Financial Services (NYDFS) plans to hold public hearings on the regulation of digital currencies on January 28th and 29th.

“In August 2013, NYDFS announced that it had launched an inquiry into the appropriate regulatory guidelines for virtual currencies. As part of an ongoing fact-finding effort informing that inquiry, NYDFS subsequently announced its intention to hold a public hearing on this issue, including the potential NYDFS issuance of a ‘BitLicense’ specific to virtual currencies,” the department said.

California is a bit more liberal. It requires digital currency companies that transmit money to obtain licences from the Department of Business Oversight. However, there are still a number of questions that remain unanswered.

Will other states follow?

California and New York tend to be bellwethers when it comes to financial regulation, so many believe smaller states will simply fall in line once they introduce their digital currency frameworks. It is, however, up to individual states to decide what to do next, as much of the regulatory authority is on the state level, not the federal level.

That problem will not go away. Without harmonized legislation across all 50 states, the use of digital currencies as money transfer vehicles could face numerous challenges. Sales tax is one example of unharmonised legislation in the US – some states have it, others don’t and the rate varies from state to state. This fact irks consumers and businesses and if every state chooses to treat digital currencies differently, it could cause a lot more problems than a few different sales tax rates.

President of the Money Transmitter Regulators Association Stephanie Newberg says bitcoin will dominate the association’s agenda due to its vague legal status. She said:

“Some states have statutes that are broad enough to do it immediately, other states don’t. It’s a state-by-state question.”

As if that wasn’t enough, there are those who believe money transfer regulation should not apply to digital currencies at all.

Lawyer Marco Santori, who advises several bitcoin startups in New York, argues that bitcoin transfers should not be viewed as money transfers, as the funds aren’t being transmitted. He believes the laws are woefully inadequate and nowhere near what they would have to be to regulate bitcoin businesses.