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Bitcoin losing shine after hitting the spotlight

California regulators recently warned a nonprofit organization related to the online "crypto-currency" Bitcoin that it may face charges for unlicensed money transmission. Misunderstanding may lie at the core of the warning, but the bleeding-edge experimental money has seen no end of legal troubles since it started becoming more well-known.

In 2010, a Bitcoin user paid 10,000 Bitcoins for a pizza — no doubt a gag purchase made with what were at the time essentially worthless online tokens. Today, those Bitcoins would be worth over $1 million. A sudden jump in value like that results in as many problems as opportunities. Bitcoin now struggles for legitimacy in the eyes of the law — the U.S. Commodity Futures Trading Commission is considering whether the virtual currency should be subject to its rules — while trying to build consumers' trust that it can scale to accommodate a global community.

The explosive growth of Mt. Gox, the largest Bitcoin "exchange" where users store and trade the currency, has led in the past few weeks to major downtime, hacker attacks and legal trouble. Other exchanges and services have simply shut down or gone out of business when faced with the unexpected liability and legal requirements of handling assets suddenly worth potentially millions of dollars.

The latest wave of bad news hit the Bitcoin Foundation, a nonprofit organization that promotes and invests in Bitcoin services and companies. Jon Matonis, who sits on its board of directors, wrote in Forbes that he received a warning letter from California's Department of Financial Institutions accusing the foundation of unlicensed money transmission, a felony charge that could result in hundreds of thousands of dollars in fines.

Both Matonis and the Department of Financial Institutions declined to comment further on specifics. But Matonis wrote in an email to NBC News that the foundation is definitely not engaged in money transmission, and he viewed the case as "an opportunity to educate state regulators on issues related to the bitcoin industry."

Whatever happens with Bitcoin, it seems education is needed. "It's like the early days of the Internet," Tony Gallippi, CEO of Bitcoin-handling company BitPay, told NBC News recently. "Everything that's happened so far has been a learning experience."

Bart Chilton, head of the U.S. Commodity Futures Trading Commission financial regulatory body, also thinks it's important to investigate new technologies early on. "I don't think we need to regulate everything," he told NBC News last month. "But we need to be more proactive in looking into things. It would be irresponsible of us not to look into it."

Six months ago, Bitcoin lacked visibility. Not only are the concept and inner workings too complex for the average Internet user to understand, but there wasn't really a reason to try. Unless they planned on buying drugs on the shady, anonymous "Silk Road" online store, there wasn't much a normal consumer could do with the currency.

It must have been a surprise for the users of this obscure system, then, when mainstream news media suddenly began covering the currency. The small community was thrust into the limelight, whether they liked it or not.

Bitcoin made for a great story: operating entirely online, near-impossible to game, with a seedy past and a mysterious genius of a creator. (Speculation is still rampant on the identity of the inventor, who goes by the pseudonym Satoshi Nakamoto.) But as we're finding out, it still has a ways to go before it can be a great tool.

The old, informal methods of using Bitcoin are dying out: Of the two largest "exchanges" where Bitcoins are bought and sold, one, Bitfloor, shut down in April following a major theft, and the other, Mt. Gox, is facing potential criminal charges after failing to properly disclose its financial practices to FinCEN, a U.S. regulatory body. FinCEN recently acknowledged "decentralized virtual currencies" like Bitcoin as being real money, prompting scrutiny of their systems and investment.

New firms are learning from predecessors, working with regulators and established financial players from the get-go, and structuring themselves in order to handle large amounts of money without meltdowns. Gallippi's BitPay is a relative newcomer that aims to use Bitcoin for serious, legal businesses, and the Winklevoss twins — of Facebook and "Social Network" movie fame — have launched a new exchange called BitInstant.

"Price increases tend to bring increased awareness, and then after the price volatility settles a bit, the ecosystem is left with the infrastructure builders," Jon Matonis wrote in an earlier email to NBC News. "It's a good thing," he said.

Gallippi, too, sees optimism with the maturing of the system. "Today, when you use the Internet, do you talk about IP addresses? Do you talk about HTTP, TCP/IP?" asked Gallippi. The nitty-gritty details of Bitcoin "mining," day-to-day price fluctuations, and yes, the occasional scam, shouldn't matter to users. For illustration, he alluded to the dollar: Do you worry about its strength versus the yen, or about the effect of counterfeiting and minting?

Regulation and oversight, too, will ultimately result in a stronger ecosystem, both Gallippi and Matonis suggested, but things need time to catch up. As Gallippi put it: "You can't apply the rules for the horse and buggy to an automobile."

Devin Coldewey is a contributing writer for NBC News Digital. His personal website is