Green also envisions Zerocoin being used for everyday purchases or costs such as visiting a psychiatrist.

To Green and his team, fears of Zerocoin being used for widespread money laundering are overblown. They say they can incorporate a method of allowing law enforcement to identify users suspected of criminal activity while keeping the system anonymous for everyone else.

Besides, said Ian Miers, one of the grad students, "Money laundering isn't about anonymity, it's about making it look legitimate."

Still, authorities and some experts on the issue of virtual currency remain leery — while acknowledging that it will be difficult to stem the tide of virtual, secretive currencies.

"If I'm a drug cartel and I want to deal in cash, it's very difficult for me to move large multimillion-dollar suitcases from point A to point B and to pay many people in my network without being caught," said E.J. Fagan, a spokesman for Global Financial Integrity, a Washington-based anti-money-laundering organization. Zerocoin would make such transactions easier, he said, while handcuffing authorities.

"Any efforts to make these things more anonymous are extremely dangerous," Fagan said.

Dennis Lormel, a consultant on financial crimes and the former director of a division within the FBI that monitors terrorist financing, agrees. "If you're a terrorist or a criminal trying to move money, if you have the ability to do it anonymously, it certainly works to your comfort level," he said.

Other cryptographers say the relatively complicated nature of using cryptocurrencies versus cash or a bank account would limit any criminal use. Nicholas Weaver, a professor in the International Computer Science Institute at the University of California, Berkeley, said accusations that Zerocoin would aid widespread money laundering are "downright silly."

"This anonymity is still imperfect," said Weaver. "It works if there is a large crowd of users, but if there is not, or if there are one or two big users, the anonymity it affords is limited. Any criminal who wants to launder money with Zerocoin will still face the same problem: They need to turn the substantial amount into dollars, and that's a difficult and traceable step."

The U.S. government, like other nations, is still evaluating its response to virtual currencies. Last month, Treasury Secretary Jack Lew called Bitcoin a "phenomenon" but said the federal government should ensure that it does not become a financial haven for criminals and terrorists. Meanwhile, various federal agencies are working out regulations for virtual currencies. The IRS, for example, is developing its own rules, but has not determined yet whether a virtual currency should be taxed as a commodity, asset or currency.

Hudak, of the Financial Crimes Enforcement Network, said his agency issued guidance last year for companies changing Bitcoins or other such currencies into cash — they must register with the government as a money services business and put anti-money-laundering controls in place. About 40 firms have done so, he said.

"There's some tension now between groups that think regulation is good for Bitcoin, that coming under regulation would improve its chances of being a legitimate business activity and lead to greater acceptance throughout the economy," Hudak said. "But there are still other players in the Bitcoin community who take a more libertarian view and think government should stay out of any involvement in Bitcoin's growth."

Zerocoin and Bitcoin have competitors that federal authorities are also watching. There are Anoncoin, Litecoin and a few other currencies that Green's team said were developed as a joke but get some real use: "Dogecoin," as in dog, and "Coinye," a play on recording artist Kanye West's name.

Speculators have driven up the value of one Bitcoin from $250 last April to nearly $1,000 at one point in January, leading some to believe that value is a bubble. Investors include Cameron and Tyler Winklevoss, the twins who engaged in a legal battle with Mark Zuckerberg, arguing that he stole the idea for Facebook from them in a case that netted them a $65 million settlement.

Zerocoin has also attracted attention from other cryptography researchers and from Bitcoin enthusiasts. On the online forum Reddit, those familiar with the money being speculated in Bitcoin ask: "Can we start mining ZeroCoin?" Green said some people have offered the researchers money to complete the project, but they have turned it down.

"This logic is why everyone is hounding us about Zerocoin," said Miers. "They want to get in on it early. If you get in for cheap, it's worth the risk."

Green and Miers say they are not creating Zerocoin as a get-rich-quick scheme. Instead, they warn that once the exchange is live, users should be cautious about putting their money into it. They want to place warning labels on the website, and Green said they plan to eventually "walk away" from it.

"We're cryptographers," Green said. "We're not going to invest our own money in it."

The researchers harbor some worries about practical issues. For example, Zerocoins, which would exist virtually on a user's computer or hard drive, can be stolen, and there would be absolutely no way to get them back or even to know who took them.

Green and his team say they cannot foresee how Zerocoin's popularity will compare with that of other virtual currencies. They hope to release it to the world, step back and watch what happens.

"If people start playing with it, that's all I want," Green said.