One big question in the debate over regulating cryptocurrencies is whether to apply existing rules to these new technologies or craft new ones. A state regulators' trade group recognizes that there may be no one right answer.

The Conference of State Bank Supervisors' Emerging Payments Task Force on Tuesday released its model for regulating virtual currency such as Bitcoin on the state level. The model lets states decide whether to create structures like New York's BitLicense or to regulate new currencies under existing rules, similar to the approach Texas has taken.

"States can come at this from different angles," said David Cotney, commissioner of banks in Massachusetts and chairman of the CSBS task force. "Sometimes a state like New York has an easy and clear path to create a new, tailored framework, while other states may find it easier to work within their existing money transmission framework and tailor that to the virtual currency world."

In many respects, the draft framework closely resembles the BitLicense proposal being advanced by superintendent of the New York Department of Financial Services, Benjamin Lawsky. Lawsky is a member of the CSBS' Emerging Payments Task Force.

State regulators from Florida, Georgia, California, Tennessee, Utah, Texas and Washington D.C. are also a part of the task force.

There's a lot of startups innovating within the virtual currency space, and many state regulators are demanding a clear framework for viewing virtual currency businesses.

"One important objective with this is to continue the Task Force's approach of engagement and transparency around what they're doing," said Margaret Liu, senior vice president and deputy general counsel of CSBS.

The Emerging Payments Task Force is accepting comments on the framework until February 16, 2015. The agency has also released a list of questions for public comment. The CSBS created the activities-based regulatory model for state governments to copy and institute.

The CSBS' model regulatory framework targets businesses that exchange, transmit, hold and/or control virtual currency. The agency recommends that these businesses be subject to state licensure and supervision. The requirements cover wallets, vaults, merchant acquirers, payment processors and kiosks, such as Bitcoin ATMs.

The model includes licensing requirements that assert that virtual currency business' owners, directors and key personnel should be vetted and the company's banking arrangements should be detailed.

To efficiently and effectively evaluate license applications, "a critical piece of such a system is the ability of states to share licensing and enforcement data in real time," the CSBS regulatory framework states.

While every state can make its own laws about the sharing of information with other states, Liu said, the robust information-sharing among regulators will be very important for virtual currency.

The Nationwide Mortgage Licensing System and Registry (NMLS), a Web-based system for registering residential mortgage loan originators, set a precedent for this type of information sharing. The NMLS has expanded to areas outside mortgages in recent years with 30 states on board to share regulatory information as it relates to money transmission.

The NMLS has "greatly enhanced our ability to notify states about issues," Cotney said. The system has kept companies from being shut down in one state only to set up operations in another state, he said.

The framework addresses financial strength and stability, consumer protection, cybersecurity and compliance.

"One of the things that's so important to state regulators is the ability to be flexible to accommodate different business models," Liu said. "So one of the things we want feedback on is suggestions on how to do that in a way that makes sense; we recognize that one size does not fit all…which is particularly important with virtual currency."

Within the community banking space, the CSBS has focused on "right-sizing" regulation and supervision for smaller, local banks, said Liu.

The draft also states that bookkeeping must be done in compliance with federal Electronic Funds Transfer Act and Bank Secrecy Act requirements. Those records must be accessible by regulatory authorities.

Transaction-level data, including names, street addresses and IP addresses of parties in the transaction, must be kept. This was one of the more controversial requirements when New York's Lawsky outlined his proposed BitLicense.

Members of the cryptocurrency industry say requiring businesses to know the recipient of every virtual currency transaction is an overreach.

"It's useful to put that out there as part of the framework but we're looking for feedback," said Liu. "What we're looking to do is balance…regulatory responsibility with what is practical."

Marco Santori, an attorney for Pillsbury Winthrop in New York, said knowing the recipient of every Bitcoin transaction is neither workable nor helpful. A requirement like that would push transactions "into the dark markets," he said.

Many industry experts say the requirement could overburden merchants, especially those operating brick-and-mortar stores, as payment processors ask merchants to collect personal information for them.

After backlash from the virtual currency community, Lawsky has reversed his strict outlook on knowing both sides of the transaction. "To verify a recipient may be a fool's errand," he said last month.

Lawsky also proposed an on-ramp for payment startups, whether or not they handle virtual currency, to allow new businesses to launch and operate for some time without being burdened by costly licensing requirements. He sees Bitcoin as a more cost-effective and time-efficient method for money remittance.

The CSBS model also includes supervision requirements, allowing state and federal regulators to conduct examinations on virtual currency companies, plus giving regulators the enforcement authority to remove officers or directors, impose civil money penalties and take control of the business.

States will not have the ability to remove by operation of law a specific director or officer, but "they could achieve those same ends by conditioning the approval of the application on the removal of an officer or director," Santori said.

Traditional merchants that accept Bitcoin for payment and consumers who use Bitcoin for purchases are not regulated under the CSBS proposal. The proposal also does not affect businesses using blockchain (distributed public ledger) technology to send data.

Someone using the protocol to send data, even though they must also send a very small amount of digital currency value, would not necessarily be covered under the CSBS guidelines, said Cotney.

"We hear that the tech can be used for illegal or illicit activities…but how can it be used to solve problems that in the past we've solved with prescriptive regulations," Cotney said.

For example, he said, regulators require call reports and other financial statements but many industry experts tout that the Bitcoin protocol could be used for real-time balance sheets and income statements. The blockchain could then be used to evaluate whether or not a company is complying with regulation and whether or not it should receive a license, he said.

The Emerging Payments Task Force was put together by the CSBS in February. The task force reached out to a range of stakeholders during its assessment of virtual currency, including state and federal regulators and industry participants. In April, the task force released model state consumer and investor guidance on virtual currency, and in May the group held a public hearing. Then in August, the task force with the Massachusetts Division of Banks released a national survey to investigate consumer awareness of digital currency.