There is a schism coming in Bitcoin, due to bureaucratic overreach such as we're now seeing from NYDFS. This schism will not manifest as a fork in the block chain, but we are going to see two classes of bitcoins emerge, differing only in color. We'll have white bitcoins and black bitcoins. Both will exist on the same block chain and will move on the same P2P network, but they won't be interchangeable.

The "white" bitcoins will be those held at addresses for which personally identifying information has been registered in a state-mandated database. Bitcoins held at licensed depository institutions will be white bitcoins, as will all bitcoins moving through licensed payment processors (e.g., BitPay, Coinbase, etc.).

The "black" bitcoins will be all the rest — those held at addresses for which no identity information has been entered into the state's registry. Almost all bitcoins today are black bitcoins, but this will change. There will be incentives for converting black bitcoins into white bitcoins. The opposite conversion will be illegal.

What do I mean by converting? Well, converting black bitcoins into white bitcoins will be easy: just register your bitcoin addresses with the state, either by directly submitting your addresses and identifying information to the government or by importing your private keys into your account at a licensed depository institution.

Converting back the other way (from white bitcoins to black) will be tricky at best and practically impossible for most. The catch is that white-market businesses will be forbidden by law from receiving black bitcoins and from sending white bitcoins to unregistered addresses. Since the block chain is public, the regulators will be able to monitor for violations of this law and will prosecute companies and individuals who break it.

What this means is that there will be two incompatible classes of bitcoins. White-market businesses will not be able to accept black bitcoins; they'll be required to bounce any received black bitcoins back to the sender. Also, they will not be allowed to send bitcoins to unregistered addresses.

Black-market businesses and individuals (i.e., those operating outside the law — not necessarily immorally) will not be able to trade with white-market businesses and individuals. This will cut them off from a large part of the market. They will be under a strong incentive to convert their black bitcoins to white (necessarily paying any taxes due at the time of registration), just so they can do business in the white market.