WASHINGTON — The New York licensing process for virtual currency companies is stoking fears that firms which do apply could inadvertently open themselves up to prosecution.

The first wave of virtual currency firms submitted applications to the New York Department of Financial Services, which crafted the first U.S. license of its kind for such companies, but some worry about a specific section of the form. The application asks whether a company has engaged in virtual currency activity in other states without a license.

The issue, digital currency supporters say, is that not all states have a clear regulatory framework for virtual currency businesses and some have not said whether firms need to have a license. But by acknowledging this on New York's application, a firm could expose itself to future regulatory or legal action.

"You might be operating in a state that you don't think there is a licensing regime that applies to you and a year later the regulator decides it did," said Jason Weinstein, a partner at Steptoe & Johnson.

One of the biggest challenges for virtual currency companies is that many business models require a money transmitter license and each state that they operate within has different requirements for that license. But it's not always clear whether a virtual currency firm needs a license or not.

Asking where else a company is operating on an application for a money transmitter license "historically has not been a very interesting question because… the applicants know that they shouldn't be engaging in money transmitting activity without a license, but with digital currencies it hasn't been clear that any license is required," said Marco Santori, counsel at Pillsbury Winthrop Shaw Pittman.

The stakes are high for virtual currency businesses because engaging in money transmission without a state license is a federal crime under 18 U.S. Code § 1960. An acknowledgment that a firm has been operating in a particular state without a license could potentially constitute a violation of the law.

A business disclosing that it operates in a state without a license when applying for a BitLicense "becomes an admission against one's interest," said Carol van Cleef, a partner at Manatt, Phelps & Phillips.

It opens up the company to potential enforcement if the New York regulator decides to share that information with law enforcement of other state regulators.

"When you submit that sort of information, it is public and capable of being shared," Weinstein said.

As a result, some industry advocates are pushing for businesses to seek a "no-action" letter from state regulators.

"This letter may protect the company from being punished for not having a money transmission license while the state is figuring out how to apply licensing to these types of businesses," said Peter Van Valkenburgh, director of research at Coin Center, a digital currency advocacy group.

But he acknowledged that there are limits with that strategy.

"The problem is that these letters are not binding… this is by no means a low-risk strategy," Valkenburgh said.

A spokesman for the New York Department of Financial Services said it's aware of the issue.

"I think it's fair to say we recognize that this is still an evolving regulatory landscape across the country. As such, we'd consider issues like that on a case-by-case basis," said Matt Anderson, deputy superintendent for public affairs.

Some said the best option may be for firms to spend significant money on compliance so they can convince regulators they are attempting to comply.

"If there does a come a time when a regulator starts knocking on your door, you are going to want to point to the things you did in good faith to establish yourself as a compliant company, like talking to counsel," said Weinstein.

Meltem Demirors, director of community at Digital Currency Group, which has invested in dozens of digital currency companies, said it has found "two dominant approaches to BitLicense." Some companies with a significant customer base in New York are opting to apply for the license while those with a limited customer base are deciding to create a virtual perimeter around New York, a process called "geofencing," and taking a wait and see approach.

The BitLicense does take into account the unique nature of virtual currencies being predominately Internet-based. The license does not take into account whether the company physically operates in the state, but rather where its customer are.

But there are a number of companies that object to this practice, with at least fifteen sponsoring the website pleaseprotectconsumers.org that displays a message objecting to the BitLicense policy that provides for collecting personal information, saying it is "reckless and ethically impermissible" to collect personal information "which inevitably becomes a target for hackers and malicious actors."

But Demirors said overall the license has had some positive effects for the industry.

"The documentation process and compliance process take a really long time, but the good thing in a certain way is for certain companies there is a forcing function to think about security and continuity and [Know Your Customer anti-money laundering] policies," she said. "As precedents start getting set in different jurisdictions our hope is that people sort of converge more than they will diverge."