California officials briefly raised hopes among digital currency proponents Friday by releasing a statement that they would drop plans to regulate digital currency businesses and instead defer to the legislature.

But the Department of Business Oversight quickly retracted the statement, saying it had been sent prematurely.

"The statement that we sent out is inoperative," said Tom Dresslar, the department's deputy commissioner for policy and planning. "It was sent in error. The reality is we're still assessing the extent to which, if at all, we want to regulate virtual currencies under existing California law."

A decision to refrain from applying money transmitter licensing requirements and other regulations to Bitcoin and other digital currency firms would have been a welcome surprise for the young industry. According to Carol van Cleef, a partner at the law firm of Manatt, Phelps & Phillips, until now the department was widely expected to provide a legal opinion saying digital currencies fit under California's statute, that Bitcoin has some monetary value and as a result, anyone transferring bitcoin would be subject to licensing requirements.

Despite being home to Silicon Valley, a hotbed for digital currency and other fintech startups, California has been fairly quiet on how to regulate them. By contrast, New York's Department of Financial Services has worked for months to produce the Bitlicense, which aims to regulate Bitcoin businesses without stifling innovation. The final version of departing Superintendent Benjamin Lawsky's regulation is expected at the end of the month.

The California agency's original statement read:

The California Department of Business Oversight has decided to not subject virtual currency businesses to licensure and regulation under either the state's existing Money Transmission Act, or banking or trust company laws. The DBO will work with the Legislature to craft a virtual currency regulatory structure that has as its first priority consumer protection.
It remains to be seen whether bitcoin and the virtual currency industry will fulfill the growth prospects forecast by backers. We believe prudence dictates we take a deliberate approach and let the market further develop. That will better ensure any regulatory regime California ultimately adopts works effectively for consumers, businesses and the market.

The department would not discuss the matter further.

Even before the statement was retracted, legal experts cautioned not to read too much into it, saying the department hadn't really shown its hand yet.

"All that's happening is they're going to wait before they start regulating digital currency businesses," said Marco Santori, legal counsel at Pillsbury Winthrop Shaw Pittman. "The upshot is that they won't be regulating digital currency businesses under existing money transmission law, they'll wait for the [virtual currency] amendment to come through" in the legislature.

Van Cleef said the process could take months.

"What this means is that companies in this space should be able to operate within the state without concern about operating in violation of state law," she said. "This does not mean they don't have to be registered as a money services business [with the Treasury's Financial Crimes Enforcement Network] or that licenses will not be required by other states to offer services to residents in other states."