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“If Al Capone were alive today, this is how he would be hiding his money," said U.S. prosecutors about Liberty Reserve, the popular digital currency site.
Liberty Reserve described itself as the “oldest, safest and most popular payment processor... serving millions all around a world." However, the users in the mushrooming world of digital currencies were in for a rude shock on May 28 when Liberty was held up by U.S. regulators on charges of money-laundering operations amounting to $6 billion.
The regulators labeled Liberty as "the bank of choice for the criminals." The Costa Rica-based digital currency provider allowed users to convert euros or US dollars into Liberty Reserve Dollars or Liberty Reserve Euros simply by providing an email address. Moreover, these funds could be transferred to other real and digital financial institutions by being either anonymous or untraced.
Liberty: A Playground for Criminals
Liberty did not process cash payments made by clients directly. Rather, third party exchangers were employed to credit or debit the accounts of its clientele so that no sign remained of their banking and other personal information. This provided the leeway for criminal proceeds from frauds, including credit card scams, narcotics trafficking, computer hacking and child pornography, to name but a few.
Regulators charged Liberty for laundering billions of dollars from about 55 million transactions involving millions of clients all over the world, 200,000 from the U.S.
Seven people, including founder Arthur Budovsky, were charged by the U.S. regulatory body. Budovsky is no stranger to illegal money laundering activities. In 2006, he was found guilty of breaching money transmission guidelines associated with E-Gold. In 2011, he surrendered his U.S. citizenship and built a new financial network in Costa Rica.
Budovsky ran out of luck in that country, as well. His company was charged for violating money laundering rules in 2011. However, Costa Rican regulators were duped by a false computer portal which provided fake data. Meanwhile, Liberty continued to run its operations through subsidiary companies in Malaysia, Russia, Nigeria, Cyprus, Hong Kong and Australia.
No Liberty, No Crime?
Bitcoin, Litecoin and Namecoin are the main virtual currencies that accept real currency and convert it to electronic currency.
In May, a unit of Bitcoin had a run-in with the federal authorities. The regulators seized accounts of Mutum Sigillum, a mediator of Mt. Gox -- the Tokyo-based Bitcoin exchange, having almost 80% of the market share. The Fed accused Mutum Sigillum of not being appropriately registered as a money transmitter with the Treasury Department.
Bitcoin is, however, not in the same shaky ground as Liberty Reserve is. Right from its commencement, Bitcoin was designed to be both undetectable and decentralized. Moreover, it was programmed exclusively to prevent misuse or criminal activities.
Litecoin and Namecoin also use scrypt in their proof-of-work algorithm -- a sequential memory-hard function, which makes these foolproof and safer than Liberty.
Authorities Cracking the Whip
The worldwide use of virtual currency has left regulators with a nagging headache thanks to the risky dealings prompted by it. In March, the Federal Financial Crimes Enforcement Network issued regulations for virtual currencies, entailing them to register with the government. This means that every source of virtual currency has to worry about conformity to certain standard laws.
Moreover, regulatory bodies are investing heavily in their cybercrime software and equipment. Such measures have made money-laundering operations hard to transfer criminal proceeds without being traced.
This has resulted in noticeable changes in the digital currency business. Companies like Perfect Money and WebMoney are no longer accepting U.S. customers. Further, some organizations are steering clear of Bitcoin exchanges. Certain consumer Internet companies such as Facebook (FB - Analyst Report), eBay (EBAY - Analyst Report), Amazon (AMZN - Analyst Report) and Netflix, Inc. (NFLX - Analyst Report), which use virtual money, could be hit by the regulations.
The overwhelming success of digital currency has been the foundation of the fast growing online money transmission business. With online games as well as dating and shopping sites gaining popularity, virtual currency has also been well received. The Liberty clearout, however, will have prosecutors over the world keep a watchful eye on this booming business.