A group that promotes the digital currency Bitcoin has thrown down the gauntlet with regulators, telling California officials that selling the digital currency does not require a state money transmitter license.

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.

Alana Golden, a spokeswoman for the department, said the June 25 letter was not a formal order. "Regulators send out the letters with the goal of safety and soundness and compliance with the laws we enforce," she said. "Recipients of the letter can contact the department to discuss if the law applies to them or not."

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.

In its response to California, J. Dax Hansen, an attorney at Perkins Coie representing the foundation, notes that his client has no operations in the state (its offices are in Seattle) and that it primarily engages in advocacy and software development.

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.

He also cited a 2011 opinion in which the department said a firm that exchanges dollars for pesos or vice versa without holding customer funds for future transmission is not a money transmitter. "The same rationale that applied to the sale of a peso should prevail under the California statute with regard to the sale of a bitcoin," Hansen wrote.