California’s Department of Business Oversight has concluded that they have the authority to regulate virtual currencies.

Bitcoin is big business in the Golden State. No other state can match its number of Bitcoin-accepting merchants. The state has nearly 400 businesses that accept BTC as payment for goods and services, with only some of them located in the large cities.

As Bitcoin becomes more widely accepted, government agencies begin sharpening their regulatory knives. The first agency in California to take this plunge is the state’s DBO. The Department of Business Oversight is responsible for regulating money-transfer businesses, such as Xoom and Western Union.

After holding numerous internal meetings on the subject of digital currencies, Tom Dresslar, a spokesman for the department, gave the following statement:

“The consensus among staff is that the department and commissioner could regulate virtual currency, to some extent, under current state law. Consumers would be the prime concern of any regulatory structure we build—making sure they are fully aware of the risks associated with virtual currency and providing effective, reasonable safeguards against those risks.”

The interesting part of Dresslar’s statement is that it does not address money laundering or the use of virtual currencies by criminals. These are the usual reasons given by government for their interest in regulating Bitcoin.

California is the world’s eighth largest economy. Venture capitalists in the state’s Silicon Valley have invested billions of dollars in Bitcoin startups over the past few years. This could explain the lighter hand that seems to be California’s style in response to Bitcoin.

The state seems to be treating virtual currencies very lightly, which may be a good idea for them. The money these new technologies are generating can help the state repair some of its disastrous financial problems. California Governor Jerry Brown may have been thinking this when he recently signed a bill, AB 129, making virtual currencies legal in the state.

While California regulators are paying more attention to Bitcoin, the state is not alone in struggling to adapt to market changes. Colorado recently legalized the recreational use of marijuana, and that state is reaping tax benefits from the new businesses that are cropping up. The businesses themselves are not having the same luck, though, as banks refuse to deal with any business that sells the herb.

Colorado is finding it difficult to track business’s tax bills because those businesses are forced to deal in only cash. The banks are telling both the pot vendors and state officials that federal rules prohibit them from doing business with any “illegal drug enterprises,” and under federal law, recreational marijuana is still illegal.

As a consequence of the federal regulations, some of the businesses are moving their assets into Bitcoin, and at least one is accepting Bitcoin in payment for their products. This means that Colorado will potentially begin to consider regulating Bitcoin, at least for tax purposes.

California and Colorado have a unique opportunity to build a regulatory regime for virtual currencies around consumer protection. The DBO has scheduled a meeting with the task force assigned to study the issue in mid-December, and new rules could come from their recommendations. The department will also have to consider the reaction of Governor Brown and his support of Bitcoin.

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