As noted here at Reason by Mike Bruschini in June, the state of California leaned on the Bitcoin Foundation (not, of course, the inventors or or in any sense owners or operators of the decentralized digital currency), insisting that it needed to be licensed to operate under the California Money Transmission Act.

Now the Foundation has responded, as reported at American Banker:

In a July 1 letter to the California Department of Financial Institutions, lawyers for the Bitcoin Foundation also clarified that the nonprofit does not itself sell bitcoins to consumers or run an exchange. But even if it did, such activity would not be regulated in California, the foundation says, arguing that selling bitcoins does not meet the state law's definition of "money transmission."

The response to California's June 25 "cease and desist" letter thus makes a case for the state to lay off not only the foundation but also its member companies that exchange bitcoins for dollars and other currencies. It comes as federal and state regulators have been cracking down on such businesses, saying they must follow anti-money laundering and know-your-customer regulations, including registration and licensing requirements.

Last month the department accused the Bitcoin Foundation of defying the California Money Transmission Act but did not say how the nonprofit had done so. Many observers surmised that the regulator either sent the warning by mistake as part of a mass mailing to Bitcoin businesses, or that it was trying to pressure the foundation for information on actual transmitters....

The Wall Street Journal reported that at least two other bitcoin-related organizations have received similar warnings from California and that other states have taken actions against such firms....

The state law defines money transmitters as firms that sell or issue "payment instruments" or "stored value" or "receive money for transmission." Hansen cited a 2001 ruling in which the department said it defines an "instrument" as "a written, signed document … similar in nature to a check or a draft."

"This confirms that a product can only be an 'instrument' if it involves a writing," Hansen wrote, and since bitcoins are digital, they aren't instruments. Stored value is defined under California law as "a claim against the issuer that is stored on an electronic or digital medium," but Bitcoin has no issuer, Hansen noted.

The full letter from the Bitcoin Foundation.

Big deal Bitcoin exchanger Mt Gox has given into federal leaning on the "register with us" thing, as noted on Reason 24/7.

My May article on how regulatory chipping may blunt what's awesome about Bitcoin.