States Besides New York Deciding on how to Regulate Bitcoin, Other Cryptocurrencies

Now that consumers can use digital currencies like bitcoin to buy rugs from Overstock.com, pay for Peruvian pork sandwiches from a food truck in Washington, D.C. and even make donations to political action committees, states are beginning to explore how to regulate the emerging industry.

Digital currencies — also known as virtual currencies or cash for the Internet —allow people to transfer value over the Internet, but are not legal tender. Because they don’t require third-party intermediaries such as credit card companies or PayPal, merchants and consumers can avoid the fees typically associated with traditional payment systems.

Advocates of virtual currencies also say that because personal information is not tied to transactions, digital currencies are less prone to identity theft.

With about $7.8 billion in circulation, bitcoin is the most widely used digital currency; others include Litecoin and Peercoin. All are examples of cryptocurrencies, a subset of digital currencies that rely on cryptography to function.

Many of the headlines generated by bitcoin and other digital currencies to date have focused on problems with the system. In January, for example, federal prosecutors charged the chief executive officer of BitInstant, a major bitcoin exchange company, with laundering digital currency through Silk Road, an online drug marketplace. Mt. Gox, based in Tokyo and once the largest bitcoin exchange in the world, stopped trading in February and filed for bankruptcy protection, saying it had lost half a billion dollars in virtual money.

Although digital currencies are far from widespread in their acceptance, their growing popularity — and potential for misuse — has prompted states to weigh in on what was previously uncharted territory.

“As far as we know, most state laws are completely silent on this topic,” said David J. Cotney, chairman of the Conference of State Bank Supervisors’ Emerging Payments Task Force, which in March began exploring virtual currency.

Among the questions the task force will consider, Cotney said, is whether bitcoins should be classified as currencies, investment securities or commodities, which could determine which regulators should apply.

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