Last week the watchdog issued subpoenas to outfits connected to the crypto-currency - including BitInstant, Coinsetter, Dwolla, Andreessen Horowitz, Google Ventures, and Winklevoss Capital Management - asking questions related to money laundering, investment strategies, and consumer protections.

Now, in a memo posted on its Web site, the DFS has confirmed that it is running an inquiry into the appropriate regulatory guidelines for bitcoin and other virtual currencies.

The regulator warns that firms engaged in money transmission are already required to post collateral to safeguard customer money, as well as undergo periodic safety and soundness examinations to ensure compliance with money laundering laws.

But, the memo says, new rules could also be introduced specifically aimed at virtual currencies, tailored to their "unique characteristics", and designed to stop the area turning into a "virtual Wild West".

The DFS highlights three areas of particular concern: ensuring payments are processed quickly to build user confidence that money will not "get stuck in a digital black hole"; ensuring virtual currencies do not become the tool of choice for terrorists, drug smugglers, illegal weapons dealers, money launderers, and human traffickers; making sure that the use of bitcoin as an investment is governed properly.

In a related development, the US Senate's committee on homeland security has stepped up its interest in crypto-currencies with the launch of an inquiry. The powerful group of politicians have written to Homeland Security secretary Janet Napolitano asking for details on her department's policies and procedures relating to the likes of bitcoin