The New York State Department of Finance is taking a stab at figuring out the groundwork for virtual currency regulation during two days of hearings.

So if you're considering starting a business that either creates new currency or deals in it, you might want to tune in. What happens in the Empire State is likely to serve as a template elsewhere.

On tap Tuesday afternoon were a variety of panelists, including two attorneys specializing in currency laws, and Charles Lee, the creator of Litecoin, a cryptocurrency. Cryptocurrencies, a subset of the more general virtual currencies, are based on complex software coding, and they are considered safer for transactions because they are more difficult to duplicate.

The best-known and most widely used is Bitcoin. Litecoin is the second-most popular cryptocurrency, with about 25 million in circulation and a market valued at about half a billion dollars.

"Don't regulate too heavily," Lee urged representatives from the Department of Finance.

At issue is the ability of startups to innovate and to create new products and services while following the law. One of the most likely ways such currencies will be regulated is by classifying them as money transmitters, following guidance from the Financial Crimes Enforcement Network within the Department of Treasury. Last year, it said Bitcoin businesses, which included exchanges that turn national currencies into Bitcoin, should be classified as money transmitters.

That sounds simple, but in reality it's complicated and expensive. Forty-eight states require money-licenses, and each one has its own set of application and compliance rules, says Judith Rinearson, a partner at law firm Bryan Cave and head of its payments group, and one of Tuesday's panelists.

Generally speaking, it can take months or years to get licensed, and businesses are required to have net assets that can cover so-called outstandings, or the amount of unredeemed currency backed by cash. That can be as much as $1 million in states such as California, which is a pretty big amount for most new companies.

It also puts them in competition with much larger businesses like MoneyGram and Western Union, which  have money transmitter licenses throughout the country and internationally.

Rinearson also urged regulators to move carefully. She asked them to consider a safe harbor for virtual currency startups, and to consider only regulating exchanges that change so-called fiat currencies--or legal tender that's not backed by physical commodities like gold--into virtual ones. 

"Regulate with a light hand. It's important not to stifle this important, innovative, and creative industry," Rinearson said.

There are more than a dozen virtual currencies, of which cryptocurrencies are a subset. Yet, more and more are expected to come online in the months to come as different countries experiment with their own versions. 

A cryptocurrency debuted in New York just last week called Mint Chip. It's gotten around the regulation problems in Canada because it's issued by the Canadian Mint and backed by the Canadian dollar.

New York Regulators proposed a Bitlicense late last year for businesses operating in New York. Rinearson says that could also be a more streamlined version of the money transmitter's license.

These currencies are considered cash equivalents in the virtual world due to their speed and relative anonymity in transactions. We'll see if regulating them will kill what's cool about them.