Coinbase has raised $25 million in a Series B round led by Andreessen Horowitz in the largest funding to date for a company focused on the Bitcoin digital currency. Existing investors Union Square Ventures and Ribbit Capital also participated.

The round brings the total raised by Coinbase up to $31 million.

Coming out of Y Combinator last year, Coinbase provides a wallet and payment processor for merchants, analogous to what PayPal created a decade ago to provide a simple online means for transactions.

Coinbase now has around 600,000 consumer wallets, according to co-founders Fred Ehrsam and Brian Armstrong. That’s up from 130,000 it announced in May alongside its first venture round of $5 million from Union Square Ventures.

This growing number of Bitcoin users might make it especially attractive as a payments processor to merchants, of which it already has 16,000, as it would allow them to manage all Bitcoin transactions in a single place.

The possible downside to the company in serving both groups is that it has to build multiple products, while other Bitcoin service providers like Bitpay are focusing on payment processing.

The money will go towards expanding the company from eight to 50 or 60 by this time next year, and continue building on recent products like SMS payments and recurring payments for subscriptions by providing more services for developers.

Chris Dixon, who led the round for a16z, has been looking at Bitcoin seriously since he became a VC last year, and told us onstage at Disrupt New York in May that he was planning to make investments in Bitcoin-related companies. He’ll join the board along with Union Square Ventures’ Fred Wilson.

Dixon said in a phone interview yesterday that Bitcoin adds an economic layer that has long been needed on the Internet.

Bitcoin’s low-level technical protocol creates a clear and universal measure of agreed-upon value between transacting parties, cutting charges from intermediaries like credit card companies.

The Bitcoin market has been at a tipping point of sorts — or the peak of the bubble, as some critics of its massive fluctuations have said. A pricing bubble in the early spring of this year piqued VC interest in Bitcoin. But many companies from that period, such as BitInstant and Tradehill have been unable to move forward either because of regulation or because they have been unable to find a U.S. bank partner.

It has gained considerable international attention, especially in China over the past weeks. And JP Morgan has filed patents for its own crypto-currency exchange. As Bitcoin has grown more widely known, central banks from China to the Bank of France have stepped up to issue guidance on the crypto-currency — with mixed signals.

The People’s Bank of China recently said that it does not consider Bitcoin a currency, prompting divisions of several leading Internet and mobile companies like Baidu to strip Bitcoin from their payment options.

But the U.S. has taken a more favorable approach, with a recent Senate hearing that had officials from FINCEN and the Department of Justice acknowledge the crypto-currency’s benefits, so long as money-laundering risks are handled properly.