WASHINGTON — When people talk about regulating digital currency businesses, they usually mean one of two things: protecting customers' funds, or preventing money laundering, terrorism financing and other financial crimes.

While the two goals are not mutually exclusive, they are different — and a debate brewing over a model law for state legislatures is bringing that difference to the fore.

The outcome of that debate will be important for startups in the cryptocurrency and blockchain industry, which has raised some $1 billion of venture and angel capital since 2012. Entrepreneurs have struggled to obtain money transmitter licenses under existing laws that differ from state to state. A template for state legislation, if adopted nationwide, could simplify the regulatory regime.

"Forcing small businesses to comply with varying regulatory requirements in 50 jurisdictions can be crippling," said Perianne Boring, the president of the Chamber of Digital Commerce, a Washington trade group. "That said, any legislation must be drafted to make clear what activity is regulated and what is not."

Such calls for clarity have emerged as a major sticking point, however, with the Treasury Department lobbying for the model law to leave regulators discretion about which activities are covered.

Digital currency advocates argue the model legislation's licensing requirements should exclude certain businesses that don't control customer funds. These include "multisignature" bitcoin wallet services that hold a customer's backup credentials but cannot unilaterally transfer money from an account. Even if such a firm became insolvent, customers wouldn't lose their money as a result, the thinking goes.

The "original sin" that money transmitter licensing laws were meant to rectify — the risk that unsupervised companies could abscond with customers’ money — "is actually not possible under a multisig environment," said P. Faisal Islam, a fintech payments, compliance and anti-money-laundering consultant.

The Treasury is strongly resisting such clear-cut exemptions, arguing that they would create an opening for companies otherwise subject to AML rules to get around them.

Such businesses could "evade regulation by structuring their businesses to require multi-sig permissions," warned Anne Shere Wallwork, the senior counselor for strategic policy at the Treasury's Office of Terrorist Financing and Financial Crimes, in a Feb. 26 letter to the model bill drafting committee.

Instead, Wallwork has been pushing for less detailed definitions of the activities covered by the model bill (storage, transfer and exchange).

"[T]he minutia of whether particular business models and technologies fit under the regulatory definitions," she wrote, should be "based on all the relevant facts and circumstances of the particular case." The Treasury declined to comment further for this story.

The Uniform Law Commission, a nonprofit organization based in Chicago, develops baseline regulation for states to adopt or modify as they see fit. In May of last year it appointed a drafting committee to write a digital currency rule.

The 12-member committee is headed by University of Oklahoma College of Law professor Fred H. Miller and composed of lawyers and law school faculty. The drafting committee and interested parties are set to meet this weekend in Chicago for the third time to discuss the current draft.

Federal officials are understandably concerned about the possibility of "regulatory arbitrage," said Carol Van Cleef, a partner at Manatt, Phelps & Phillips who has participated in the discussions.

For Van Cleef, this danger is particularly acute in the digital currency industry because of its shifting nature. "The technology is still evolving," she noted. "It's important [to] be able to adjust to the changes that are going to occur."

"This is not a government-driven exercise," she added. But "what Treasury is saying [is that] we don't want to get too locked in these black-and-white positions too early in this process."

But that defeats the purpose of producing unified state regulation, argued Marco Santori, a partner at Pillsbury Winthrop Shaw Pittman. "It's just kicking the can down the road. ... As a matter of policy we're worse off than we were before."

And vagueness is not an option for the companies that operate in the digital currency space and need to know whether or not to apply for a license in their states, industry representatives say, especially since the USA Patriot Act made noncompliance with state money transmitting license rules a federal crime whether or not a business is aware of the violation.

"I don't know if it’s fair to say that basically [certain activities] are already possibly covered," said Peter Van Valkenburgh, the director of research at Coin Center, an industry think tank. "You're 'possibly' a felon?"

Industry defenders also argue that the Treasury should not be imposing its anti-money-laundering compliance-focused views on the process, which is supposed to produce a consumer protection rule.

"Different regulators have different policy goals," said Van Valkenburgh, whose organization has suggested language from its own model framework for state digital currency regulation for the committee's draft.

"There is and should be a real debate over whether" virtual currency companies "should have to engage in Know Your Customer regulation, things like that," he said. But "that's a decision that Treasury would have to make" through the issuance of guidance or new rulemaking, he said.

"I do think it's useful that Treasury's there," Van Valkenburgh added. "It's important that state regulators who do the licensing process ensure that the companies are compliant with the Bank Secrecy Act to the extent that they need to be."

But, he said, if regulators don't come together soon to create a more uniform regulatory landscape, the digital currency industry in the U.S. will suffer. "There's a sword hanging over their head all the time and they're probably going to want to leave the country or [register with] the Bank of England."

The regulatory frameworks for digital currency companies vary widely across different states, which has saddled a young industry with high compliance costs, limiting its expansion, noted Houman Shadab, a law professor at the New York Law School. "Having a separate money transmitter license in each state prevents companies from operating nationally."

But once the Uniform Law Commission adopts the model Virtual Currency Businesses Act — which is slated to be finalized in the summer of 2017 — the fight is hardly over, he added.

"It’s unlikely that all states are going to adopt the uniform law exactly as drafted in the model," said Shadab. Still, he said, "a model law from the Uniform Law Commission can at least set a baseline or standard from which each state can deviate."

Another alternative to simplify the regulatory landscape would be a federal statute on digital currency companies "that explicitly preempts state law structure," he said. But that solution could be more of a wild card. "If the industry has more input over the Uniform Law Commission, that may be a more attractive route for the adoption of national laws," Shadab said.

Drafting a rule on digital currency that states could uniformly enforce has been a tricky process overall, participants said.

"When you try to apply words from a physical world to a digital world," Santori said, "you don't get the clear, tight solid regulations that entrepreneurs can understand."

Part of the problem is that there are no clear parallels in traditional financial services for inventions like multisig.

"All we have are metaphors from the legacy financial institutions," Van Valkenburgh said.