Shortly after a judge ruled that Bitcoin is a legal currency in the United States, a financial regulator in New York has issued subpoenas to a number of prominent Bitcoin players in the U.S.  Are Bitcoin’s days as the currency of the wild west of the internet coming to a close?

bitcoins A storm is brewing for Bitcoin in the U.S.

Bitcoin’s coming of age party is in full swing now as regulators close in on the virtual currency.

Yesterday, Forbes reported that nearly every major U.S.-based player in the Bitcoin industrial complex was subpoenaed by New York’s financial regulator. Now this doesn’t mean that the regulator believes there is criminal conduct or tax avoidance going on at the moment, it just wants these parties to appear before it to explain themselves.

A day after, the Senate Homeland Security and Governmental Affairs Committee published a letter to its website where it asks for:

Information related to any ongoing coordination of your agency with any other federal agencies or state and local governments related to the treatment of such currencies; and,

any plans or strategies regarding virtual currencies and information regarding any ongoing initiatives you have engaged in regarding virtual currencies and the name of the person most knowledgeable about any such plans, strategies, or initiatives.

Quite likely this means New York’s regulator and the Senate are in the process of crafting a regulatory framework, and it needs these parties to provide expert testimony. A memo written by the superintendent of New York’s Department of Financial Services says his department wants to work with stakeholders to “legitimate business enterprise”.

“It is in the common interest of both the public and the virtual currency industry to bring virtual currencies out of the darkness and into the light of day through enhanced transparency. It is vital to put in place appropriate safeguards for consumers and law abiding citizens,” Benjamin Lawsky, the superintendent, writes.

So regulators are concerned about some of the characteristics that make people flock to the virtual currency in the first place: it’s highly anonymous nature, and by extension, the ability to purchase things that can only be bought in a highly anonymous way concern law enforcement entities.

No kidding. A currency that powers Silk Road, a bazaar where drugs and guns can be purchased with Amazon.com like ease, should concern regulators. Years of tough-on-crime regulation that attacks drug and gun runners are set to be undone as high-level dealers of both vanished from the streets into the encrypted tunnels of Tor.

Certainly there are legitimate uses of Bitcoin. It can be a great way to stick it to payment processors, who charge between 2-5 percent of the transaction’s total for the simple task of acting as an intermediary.

But as Bitcoin ventures from a novelty to a full-on investment vehicle and currency, regulators are going to be curious. After all by its very nature the government has a monopoly on control of what is legal tender. Bitcoin won’t be going away anytime soon, but much to the chagrin of its libertarianish fanboys, the United States will use her hegemonic reach to squeeze Bitcoin exchanges around the globe into compliance.

Currencies from the Taiwan Dollar, to the Mexican Peso and Norwegian Krone are only valuable because they can be exchanged for goods and services in their respective countries, and are easily convertible into a reserve currency like the United States Dollar or E.U. Dollar. Central banks need to hold a basket of currencies, especially reserve currencies, in order to make their country’s currency exchangeable and give confidence that this status won’t change in the future.

If U.S. regulators wanted to force Bitcoin exchanges into compliance, they could simply have their dollar accounts frozen by using their leverage with banks. Banks around the world generally say yes enthusiastically to U.S. demands, lest they be cut off from being allowed to operate in the U.S, so they would comply with the demand. Cash strapped Europe would also play along seeing a way to recoup lost tax revenue.

Without the ability to readily convert Bitcoins into dollars, its value will plummet fast. While the virtual currency can be exchanged for drugs, guns, webhosting, coffee and an assortment of other things, it can’t pay for the staples of life. It’s doubtful that a landlord would accept a currency as volatile as Bitcoin for monthly rent, nor a bank for down payment on a home. If people don’t have the confidence to trust Bitcoin for large transactions, it won’t go anywhere on its own, and needs to be exchangeable for dollars.

Bitcoin is on the path to being a regulated currency. It needs the securities of dollars as an anchor. Many won’t like it, but it was bound to happen.