Bitcoin enthusiasts are expressing confusion and surprise after Casascius Coin, which encodes a digital bitcoins onto physical coins, halted operations after receiving notification from the Financial Crimes Enforcement Network that it is subject to the department's oversight.

At Casascius Coin, founder Mike Caldwell received digital bitcoins from customers, and then stored the bitcoins in a private key within the coin under a tamper-evident hologram. Customers could purchase brass, silver or gold-plated silver coins, or gold bars.

"Because [Casascius Coin] is an Internet business, the activities are very visible…and so we can observe and address that activities that we think are subject to our regulations," says Steve Hudak, a spokesperson with Fincen. "We've sent several letters to businesses that we think may be subject to our regulations."

In March, Fincen issued guidance categorizing exchangers and administrators of digital currency as money services businesses needing to register with the department and take steps to comply with Know Your Customer and Anti-Money Laundering rules.

Caldwell has suspended operations, according to his website. He has also hired a lawyer.

Caldwell did not return request for comment. He received a letter from Fincen shortly before Thanksgiving telling him that the arm of the Treasury Department believes he's a money transmitter, according to a report from Wired on Dec. 12.

"We're happy to engage with businesses who have questions. Until all the facts and circumstances are known [the conclusion] is subject to interpretation," Hudak says.

Caldwell and his lawyer need to send a letter to Fincen asking for an explanation of the deadlines to meet the requirements and draw out Casascius Coin's business model, says Faisal Islam, director of Centra Payments Solutions.

This is "so Fincen can review and adjust their position possibly," Islam says. "It's happened many times."

Registering with Fincen is an easy process, says Islam. The real struggle comes when states categorize a business as a money transmitter, meaning the business must get a license in most states it operates in. Only three states do not require a license.

State financial regulators reported recently that they haven't received very many applications for licensing Bitcoin businesses even though they've handled many inquiries about them.

If Caldwell doesn't have the time, money or desire to become a money transmitter, he may need to tweak his business model, says Islam.

The issue is that the company doesn't necessarily know that the person that purchased the bitcoin was the same person that received the physical bitcoin, says Islam.

On the online forum reddit, a user going by jcoinner says Casascius Coin could sell empty physical coins that customers could load with bitcoin on their own.  Islam agrees that adjustment could allow Casascius Coin to appease Fincen.

Other reddit users say Fincen's conclusion is absurd. "According to their logic, I would be a money transmitter if I mailed someone a private key to an unfunded address written on a gum wrapper," says a user by the name rumplefistbump.

Bitcoin users are unaffected by the Fincen ruling. The real target is third party companies working on behalf of many users.

The Bitcoin community "is testing boundaries," says Gil Luria, an analyst at Wedbush Securities who recently took to researching the popular digital currency. "Fincen has specific boundaries they're charting; the government isn't saying Bitcoin isn't OK, they just want to apply the existing infrastructure for regulation to the virtual currency market."

Luria says Fincen's action is reminiscent of the New York State Department of Financial Services August subpoenas, which were sent to 22 emerging payments companies including many that handle bitcoins.

Through the subpoenas, the DFS attempted to gather more information about the business model of the companies and determine if they were transmitting money. Observers say this process could have been handled in a less dramatic way.

"Part of the evolution of Bitcoin and digital currency is to find out where the regulatory boundaries are," says Luria. "It doesn't seem the boundaries are that tight or constrictive; compliance is a huge issue for everyone; the regulation is not being applied unfairly to Bitcoin."

Whether or not a company handles bitcoins, "you can't mint money and send it in the mail," Luria says.

Luria acknowledges that this could set a precedent for any method of physically transmitting bitcoins. Paper wallets have become a popular and secure way to store large amounts of bitcoins, especially after the recent hacks and thefts of bitcoins stored online.

"This is something clearly the Bitcoin Foundation needs to be involved in defending and defending aggressively," says Jon Matonis, executive director of the trade group.

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