New York is moving forward with its plan to regulate bitcoin, which it says will protect consumers and prevent illegal activity. But businesses and startups that have formed around the “cryptocurrency” are worried about how much that regulation will impact their bottom line.

New York calls its plan to deal with cryptocurrencies like bitcoin "BitLicense," and the head of the state’s Department of Financial Services (NYSDFS) says that it has attempted to address the concerns brought up in the first phase of public comments, which often concerned “the compliance costs of regulation on new or fledgling virtual currency enterprises.”

“There has to be a way for startups to start up and play by the rules without getting crushed by huge compliance costs,” Benjamin Lawsky, head of the state’s Department of Financial Services, said Sunday at a conference in Las Vegas.

Members of the existing bitcoin industry argue that the NYSDFS has not explained the problems that many of the new rules are meant to address. Other rules, they say, are impossible to comply with.

The current proposal includes a stipulation that people must be able to identify the exact source of any funds they receive. Anonymous transfers would then need to be rejected by the recipient, according to the suggested rules.

“Which is kind of fascinating, because the way bitcoin works, you can’t stop someone from sending funds to you,” said David Ripley, chief executive of Glidera, a bitcoin marketplace and digital wallet service. “And you can’t always identify them.”

If the state was willing to more clearly explain to businesses the goals of each proposed regulation, companies would then be able to better comply, Ripley said. To that end, Lawsky said the state would consider a “transitional BitLicense” that allowed small businesses and start-ups more flexibility. The NYSDFS would then weigh potential consumer risks as well as the company’s size and scope.

“We are also considering designating a small group of specialized examiners... to deal with startups and their license applications,” Lawsky said, to help them better understand the challenges startups face, and help the state tailor its rules to their situations.

The Federal government’s Financial Crimes Enforcement Network, or FinCEN, has already provided guidance on how bitcoin operators should operate while complying with U.S. law. Some critics of the plan argue that additional regulations at the state level are unnecessary.

The NYSDFS is now taking comments from interested parties as it enters the second 45-day phase of its plan to regulate bitcoin, with new rules it has said should be in effect by January of 2015.

“Once we start talking about consumer protection, we have to also look at the amount of costs that it takes to comply with those regulations,” the CEO said. “Undoubtedly all of that costs gets transferred over to the consumer.”