The Internet Archive Federal Credit Union, an experimental financial institution run by the eponymous nonprofit that archives web history, has established itself as a Bitcoin haven. In contrast to traditional banks, which snubbed businesses built around the virtual currency, the IAFCU basically put up a Bitcoin welcome sign. "These are not drug dealers, money launderers, or whatever. These are average folks," IAFCU CEO Jordan Modell told Wired.

That all changed yesterday, however, when the credit union announced it will be dumping its Bitcoin clients.

"Certain operational and regulatory issues came up including some that apply to new credit unions like ours," IAFCU CEO Jordan Modell wrote in a blog post. "Until we have further clarity, we are unable to service some of our corporate members."

Regulatory scrutiny of Bitcoin has increased over the past few months

Bitcoin, the semi-anonymous virtual currency that approximates cash on the internet, has seen an increase in regulatory scrutiny in the US over the past few months. It started in March when FinCEN, a division of the Treasury Department, announced that certain Bitcoin businesses must register with the federal government. The largest Bitcoin business in the world, Mt. Gox, is currently beset by legal troubles that may lead to its demise.

IAFCU's decision to cut off Bitcoin will make it even harder for those businesses to operate in the US. Bitcoin exchange Tradehill had recently registered with FinCEN and shifted its accounts to the IAFCU, an attempt to comply with US law while affording its clients security for their deposits. But just six days later, the credit union cut Tradehill off. The loss seemed to be too much for Tradehill, which has halted trading indefinitely "due to banking and regulatory issues."

Bitcoin advocates went to Capitol Hill earlier this week to talk to regulators and legislators, who are concerned that the currency facilitates crime including the drug trade, tax evasion, and money laundering. Bitcoiners hope to clear up the currency's ambiguous legal status and set precedent for a peaceful coexistence with the US dollar. The fact that regulators were willing to meet with them is encouraging, but it's likely the start of a long, complex negotiation with an uncertain outcome.