The decentralized private digital currency Bitcoin has made enormous strides in public attention, respect, and value in the past few months. It has grown from an obsession of tech-geek libertarians to a staple of financial news and a subject of great interest to government financial regulators.

Maybe its good fortune lately can be attributed to bank unrest in Cyprus, or maybe it’s just an idea whose time has come. A largely anonymous method of online payment that doesn’t require intermediaries and that can’t be overinflated in quantity by governments—with the side advantage of zooming up in value (and the disadvantage of zooming down again)—seems a good fit for the Internet age.

Bitcoin’s anonymity, as most people can’t resist mentioning, also makes it a natural choice for buying illegal things over the Internet, a fact that led Rep. Chuck Schumer (D-NY) to condemn it as merely a tool for money laundering.

He’s not the only one in government who’s been thinking about Bitcoin in terms of money laundering. In March, the Treasury Department’s Financial Crime Enforcement Network (FinCEN) issued guidelines defining virtual currency exchangers and administrators (which would include those who “mine”/create Bitcoins) as “money service businesses” under the Bank Secrecy Act. (Mere “users” of Bitcoin—someone using it to buy something not money—do not fall under the regulations.) Last week, an account associated with the prominent Japan-based Bitcoin exchange Mt. Gox was seized by the Department of Homeland Security essentially because the government claims that Mt. Gox was legally required to register as a “money transmitting business.”

This was not a sign of any overarching “crackdown on Bitcoin,” others in the business insist. Tony Gallippi of BitPay, another Bitcoin exchange, told Coindesk that the Mt. Gox action is nothing more than what it appears on the surface, normal enforcement of noncompliance with licensing requirements for money service businesses.

Perhaps coincidentally, as Jerry Brito reported at Reason yesterday from a weekend conference sponsored by the Bitcoin Foundation, the big players in the field are eager for the normalization of regulation, turning the Bitcoin world from a hotbed of rebel crypto-outlaws to lobbyists trying to manage and ameliorate regulations that are sure to come. As Declan McCullagh notes at CNET, attempts to influence or make nice with regulators when it comes to virtual currencies have a sad track record: They “didn't stop the E-Gold online payment system from being shut down after a federal indictment on charges of money laundering. Not only did E-Gold chairman Douglas Jackson interact with regulators, he even testified before the U.S. Congress a year before the indictment took place.”

As soon as FinCEN made its March announcement of intent to regulate, some folks cynical about the intentions of the U.S. government declared Bitcoin as good as dead and various players in the Bitcoin exchange field folded up shop. Canadian financial regulators, according to a report yesterday in the British tech publication The Register, have sent a letter assuring some Bitcoin exchangers that Canada can be a safe haven for them, as they do not consider them to fall under the category of “a money services business in Canada as per the Proceeds of Crime (Money Laundering) and Terrorist Financing and its associated Regulations.”

Jeff Tucker, the executive editor of Laissez Faire Books and an enthusiastic Bitcoin advocate, wrote yesterday that while he understands why the big players in Bitcoin might think that “every regulation confers a welcome legitimacy on the currency/payment system, and grants it greater chance for market success,” it’s a sad state of affairs that even arising from such a libertarian pedigree that the Bitcoin world has come to see only two choices, “government prohibition or government management,” with laissez-faire not an option. Tucker foresees a sad world ahead for early Bitcoin adopters who loved it because it was a pure market creation. Although the “first round of regulation will continue to target the exchanges, and focus on reporting requirements,” he writes, “Users will be next, with a focus on moving money from here to there. There will be dollar-based triggers on how much in Bitcoin funds can be moved without self reporting.”

Those in the game of Bitcoin for anonymity and the advantages of an inflation-shielded currency might want to stick to using it to buy items in the real world—that is, stay strictly a “user” in FinCEN’s terms and avoid the nexus of Bitcoin and government fiat currency that officials everywhere see as their business. Many Bitcoin enthusiasts are sure that as long as there is any nexus between Bitcoin and government fiat currencies at all, the Bitcoin dream of free anonymity is dead.

Maybe this just means that U.S. businesses under FinCEN will be at a competitive disadvantage in the international world of Bitcoin—the currency is a far bigger deal overseas these days anyway. But regulators, especially financial regulators, always strive to make banking and money laundering regulations international in scope, so anyone who wants to try to obey the law may find turning Bitcoin into a “real” fiat currency harder and harder to do with anonymity in the future. It is difficult to try to live under bank secrecy laws and not know who your customers are. As a group of panelists at the weekend Bitcoin conference concluded, regulatory compliance for Bitcoin exchanges is now job number one, it can be very time-consuming and expensive, and even using Bitcoin's could well strike the Feds as inherently suspicious in a regulatory context, and even going offshore isn't going to mean you are free from U.S. financial regulations.

The FBI knows it has to worry about Bitcoin, and declared in a “intelligence assessment” from last April that while “Bitcoin does not have a centralized authority, the FBI assesses with medium confidence that law enforcement can identify, or discover more information about malicious actors if the actors convert their bitcoins into a fiat currency. Third-party bitcoin services may require customers to submit valid identification or bank information to complete transactions. Furthermore, any third-party service that qualifies as a money transmitter must register as a money services business with the Financial Crimes Enforcement Network (FinCEN) and implement an anti-money laundering program.”

While Bitcoin qua Bitcoin will certainly still have value to many, the recent furor over its dollar price soaring shows that a great deal of the value people place on Bitcoin depends on its ability to be converted to more common fiat currencies. The ability to do that and maintain Bitcoin’s essentially Bitcoinness, especially when it comes to anonymity, seems in danger.

Bitcoin—or some successor or rival digital currency—seems technologically unstoppable. The idea exists, the protocols exist, the computing power exists, and none of those can be destroyed. It is one of many things that the government might not like but can’t stop, like the production and use of illegal drugs, or 3D-printed weapons.

That doesn’t mean government can’t, along the way, ruin things for people, take their property or liberty, and prevent those who want to obey the law, however stupid and annoying, to avoid those bad ends from making free choices that would benefit them and harm no one. That’s why the fight for liberty is a long way from being merely a technological one; it will always be an ideological one as well.

What the government cannot stop (and ought not try to stop) it can still interfere with, and ruin lives in the process. Those who think it necessary that Bitcoin be regulated, even if they want to be in on making the regulations as sane and harmless as possible, need to remember that every regulation has a punishment attached for violating it. Whoever rightfully owns the resources in the account that the federal government confiscated from Mt. Gox won’t forget that.