'Cease and Desist': Bitcoin Foundation Receives Jail Threat

Getty Images

Not-for-profit organization the Bitcoin Foundation has been sent a "cease and desist" letter from California's financial regulator for allegedly engaging in money transmission without a license, according to one of the foundation's senior members.

The California Department of Financial Institutions mailed the warning following a bitcoin conference event in San Jose last month, according to Jon Matonis, a member of the Bitcoin Foundation and an e-money researcher.

(Read More: How Bitcoin Is Sacrificing Its Soul to Survive)

"At this stage, it's difficult to tell whether or not it was a general blanket action and if other bitcoin-related entities received cease and desist letters from California. If Bitcoin Foundation was not the only recipient, then expect other companies to come forward in the days and weeks ahead," Matonis said in his regular column for Forbes magazine on Sunday.

The letter, which Matonis has uploaded for viewing on Scribd, shows that the foundation is accused of being in breach of financial code 2030, which states that "a person shall not engage in the business of money transmission in this state" unless the person has a license from the Commissioner of Financial Institutions or is exempt.

(Read More: US Charges Eight in $45 Million Cybercrime Scheme)

The letter also states that a breach of this law could result in imprisonment or a fine of between $1,000 to $2,500 per violation or per day. It adds that it's also a felony to engage in money transmission without a state license, or to fail to register with the U.S. Treasury Department. This activity, it says, can result in a $250,000 fine or up to five years in prison.

A spokesperson for California's Department of Financial Institutions (DFI) told CNBC that it was unable to comment as the communications are confidential. Additionally the regulator wanted to clarify that the letter in circulation is not a "cease and desist" order and is instead meant to be a warning to businesses that are unlicensed. Recipients of letters can contact DFI to discuss if the law applies to them or not, it said.

(Read More: What Is Bitcoin?)

Bitcoin is a virtual currency that allows users to exchange online credits for goods and services. While there is no central bank that issues them, bitcoins can be created online by using a computer to complete difficult tasks, a process known as mining.

The aim of the Bitcoin Foundation is to standardize bitcoin and help promote and protect the alternative currency, according to its website. It receive generous support from individuals and corporations to advance those objectives, Matonis said, as well as boasting a significant international membership.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81.