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  (Source: AP)
Gaming- and crypto-currency exchanges may soon be banned in the U.S.

Liberty Reserve (LR) was a Costa Rica based digital currency site, as well as a titular cyber currency.  Like other popular digital currencies -- the Linden, Bitcoins -- LRs could be traded with real-world money via third-party partners.  And like its counterparts, one key driver of the currency was its ability to grant anonymity.

Now LR is the first digital currency to be killed by the U.S. federal government.  And if the ambiguous rhetoric of Obama administration officials are any indication it may not be the last -- other currencies like the Bitcoin may soon face similar takedowns.

I. Liberty Reserve Gets Taken Down Hard

In its twelfth year of operation, LRs have just hit a major roadblock -- the U.S. Internal Revenue Service (IRS) and U.S. Department of Justice (DOJ) seized the service's internet domains under criminal money laundering accusations (18 U.S.C. § 982(a)(1)) and charged founder Arthur Budvosky and six other exchange employees with conspiracy to commit money laundering, conspiracy to operate an unlicensed money-transmitting business, and operating an unlicensed money-transmitting business.  

The first charge (money laundering) carries a maximum sentence of 20 years in prison, while the other charges carry up to 5 years each.  Thus the defendants face a maximum (consecutive) prison term of up to 30 years in U.S. federal prison.

Preet Bahara
Preet Bahara United States attorney in Manhattan suggests anonymity in itself may be criminal, commenting, "The coin of its realm was anonymity." [Image Source: NYT]

Richard Weber, IRS's criminal investigation division chief in Washington, D.C., remarked at a press conference, "If Al Capone were alive today, this is how he would be hiding his money.  Our efforts today shatter the belief among high-tech money launderers that what happens in cyberspace stays in cyberspace."

"As alleged, the only liberty that Liberty Reserve gave many of its users was the freedom to commit crimes — the coin of its realm was anonymity, and it became a popular hub for fraudsters, hackers and traffickers.  The global enforcement action we announce today is an important step toward reining in the ‘Wild West’ of illicit Internet banking. As crime goes increasingly global, the long arm of the law has to get even longer, and in this case, it encircled the earth."

Unlike Bitcoin where anonymity is preserved via encryption, LR preserved anonymity by allowing users to register (allegedly) accounts on the exchange with false information, and then further cover their tracks by transferring in money through third-party money exchangers in regions with poor records keeping like Malaysia, Russia, Nigeria and Vietnam.

II. Freedom isn't Free

LR at its peak had over 1 million customers, 200,000 of which were in the U.S., according to federal prosecutors.  The exchange conducted 55 million transactions over the last seven years and is accused of laundering $6B USD.

To register for an account on LR, all that was necessary was an email address -- you could use a pseudonym without challenge.  In fact the feds cite "blatantly criminal monikers" in use by some accounts, such as "Russia Hackers" as "proof" of the site's criminal nature.  One agent registered an account on "Fake Street" with the name "Joe Bogus" and an account purpose "for cocaine".

In total the feds seized five domains, including the primary exchange domain.  They also restricted 45 bank accounts used by site operators and their partners.

Liberty Reserve
Liberty Reserve stands accused of granting anonymity to users -- some of which are allegedly criminals. [Image Source: True Internet World]

The feds "graciously" allowed "legitimate" users to contact their office to get refunds on their now unaccesible accounts, while dismissing that most of the users were criminals (the site's userbase is referred to in the indictment as "overwhelmingly criminal in nature") and likely would not seek refunds.

The indictment comments, "[The site's users] included, for example: traffickers of stolen credit card data and personal identity information; peddlers of various types of online Ponzi and get-rich-quick schemes; computer hackers for hire; unregulated gambling enterprises; and underground drug-dealing Web sites."

Of course the most widely used criminal currency in the U.S. remains the U.S. dollar.

III. PATRIOT Act -- The Next Chapter

Some in the security industry praised the move.  Trend Micro Inc. (TYO:4704) VP Tom Kellermann tells The New York Times, "Organized crime and terrorist groups are now financing their operations through these anonymous payment systems.  The financial sector no longer has a monopoly on moving capital around the world."

Some at this point may be wondering how the U.S. is shutting down a currency exchange based out of Costa Rica.  The answer lies in the USA PATRIOT (Uniting (and) Strengthening America (by) Providing Appropriate Tools Required (to) Intercept (and) Obstruct Terrorism) Act.

The PATRIOT Act has provisions that allow the U.S. to seize domains, charge foreigners, and restrict foreign bank accounts to "fight terrorism".  This was the first time these provisions were used against a digital exchange, providing yet another example of the absolute powers granted by the PATRIOT Act.

U.S. police trooper
Powerful forces have been working to erode Fourth Amendment protections in the U.S. over the last decade, clearing the way for an unchecked "police-state". [Image Source: Reuters]

The charges come at a less than auspicious time for the IRS.  The agency currently is grappling with waves of resignations over a scandal that the organization targeted conservative groups -- including the "Tea Party" -- groups with "patriot" in their mission statement, groups seeking to reform the government, and Jewish political action groups.

But the IRS is backed in its latest action by the U.S. Treasury Department and other federal agencies.

IV. Takedown is an Attack on Privacy; Bitcoin May be Next

So what does all this mean for Bitcoin -- LRs' more popular sister digital currency?  First, it's important to point out that Bitcoins operate via a much broader base -- a multitude of different exchanges in different jurisdictions.  Plus their implementation of anonymity is much different (as outlined above).

The most immediate impact is the loss of a key route to funnel real world currencies into an out of the "Bitcoin economy".  LR was a popular hopping point for Bitcoin fans when exchanging money.

Secondly, the takedown of LR has an overtone of the feds cracking down on the privacies afforded by digital currencies -- indicating that Bitcoin may be next.  The Obama administration has gone to great lengths to expand warrantless surveillance of Americans and internet surveillance, while publicly preaching that it supports "civil rights" and "free speech".

The takedown of the LR should be viewed in a chilling light by Bitcoin fans.

Take the words of Mr. Weber who says we've entered the age of "the cyber age of money laundering", commenting, "[Criminals] are gravitating toward digital currency alternatives as a means to move, conceal and enjoy their ill-gotten gains."

Note that he indicts not just the LR, but digital currency in general -- a sweeping generalization that seemingly implicates Bitcoin and Lindens in unproven illegality.  

But ultimately in today's era of PATRIOT Act actions proof is not really necessary for aggressive Orwellian federal crackdowns.

Remember, at the end of the day both Bitcoins and LR lose anonymity as soon as their users put them to use in the real world for purchases.  In other words, if investigators did their jobs, this issue would be immaterial.  But that's not what the Obama administration and federal politicians on both "side of the aisle" want.  For the last decade they pushed to remove the "burden" of due process and put in easy routes to strip U.S. citizens of their privacy and anonymity.

Bitcoins offer a similar "threat" as LRs. [Image Source: Nerd Merit Badgets]

If LRs were being used for crime, then charge the criminals.  The current charges adversely affect law abiding and law breaking citizens alike and hence run inherently against the spirit the nation was founded upon -- then again, of course, the nation has strayed far from the spirit it was founded upon as the protections of the Constitution have been slowly eroded as federal government has grown bloated and corrupt.

Don't be surprised if the feds come a-knocking on Bitcoin exchanges door next.  After all the Bitcoin offers the same threat to unchecked federal power that Liberty Reserve did -- anonymity.  And the administration's rhetoric seems to clearly set a foundation for accusing not just Liberty Reserve -- but all digital currencies of the ultimate "crime" -- wanting to preserve folks' privacy.

A popular aphorism regarding one of the great evils of the last century may one day be repurposed "First they came for the Liberty Reserve..."

Source: U.S. Department of Justice

Comments     Threshold

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By Flunk on 5/30/2013 11:34:39 AM , Rating: 2
I would trade in your Bitcoins today if I were you. The US government is dead-set against anything that competes with its monetary system. I certainly understand their point too, untraceable cryptocurrencies make money laundering a breeze.

*I used to Bitcoin mine for fun, but this and ASICs have convinced me that I'm done.

RE: Bitcoin
By Motoman on 5/30/2013 12:01:34 PM , Rating: 2
I would think that if Bitcoin or whoever could simply provide valid identity proof and transaction tracking, in the event that they got subpoenaed, they'd be OK.

Lots of other currencies compete with the dollar. The US isn't trying to kill other currencies, they're trying to make sure there's a money trail that can be followed.

The biggest problem is simply the anonymity. That's what makes LR a hub for money laundering. If user accounts are validly tied to a person's true identity, then there's no problem.

I don't use Bitcoins or anything else, and don't care I don't know what their accounting is like. But I would have to imagine that if they don't have reasonable accounting, they'd better shape it up fast. Or go the same way as LR.

RE: Bitcoin
By othercents on 5/30/2013 12:11:21 PM , Rating: 3
So what stops someone from going to another country and trading their US currency into something else and then later on trading it back? I never had to show ID when trading currency in a foreign country.


RE: Bitcoin
By Motoman on 5/30/2013 12:43:23 PM , Rating: 2
You can't easily do large-scale laundering that way.

Sure, I can take a $100 US bill to a store in Canada, buy a pack of gum and get $90 CAD back...but that's not helpful to a criminal organization that needs to launder tens or hundreds of thousands of dollars.

RE: Bitcoin
By othercents on 5/30/2013 1:07:29 PM , Rating: 2
You can take $1,000 USD to almost any exchange in the world without having to provide personal information and with minimal or no surveillance. China, Turkey, South Africa, Brazil, and Mexico would be the most notable places for exchange.

I suspect a criminal organization would be looking for millions of dollars to be laundered, however I'm certain you can find people in those countries to do that too.

RE: Bitcoin
By BRB29 on 5/30/2013 1:50:30 PM , Rating: 2
In the US and many other countries, any transaction amount over $10k is logged for the IRS.
Every transaction is logged but only those are flagged for the IRS.

RE: Bitcoin
By Devilboy1313 on 6/1/2013 1:38:21 AM , Rating: 2
Or you could just go to HSBC and they can do it for you ;)

RE: Bitcoin
By inighthawki on 5/30/2013 3:36:46 PM , Rating: 2
Quite and expensive pack of gum :)

RE: Bitcoin
By ironargonaut on 5/31/2013 7:08:14 PM , Rating: 2
You can't leave w/over 20K w/o declaring it. If you do and they find it. It will be seized and not returned. Plus, an additional fine. Also, if you wish to leave permanently and take your money with you there is an exit tax if you have enough money.

RE: Bitcoin
By kleinma on 5/30/2013 1:13:36 PM , Rating: 3
It is not about bitcoin competing. It is about the fact that people are paying no taxes on the transactions. The government never has a problem with anything so long as they can tax the shit out of it.

RE: Bitcoin
By Jaybus on 5/30/2013 5:01:19 PM , Rating: 4
And no taxes are being collected by ANY government. The US will not be alone on this one. I expect bans by other nations will soon follow.

But it's not just taxes. There is no regulation of any kind. And if you get screwed by an online bank, who will defend you? A bank that is above the law of any nation? That's just crazy scary.

RE: Bitcoin
By wifiwolf on 6/2/2013 9:37:06 AM , Rating: 2
I totally agreed and by the way can anyone tell me what's so important about hiding your money other than legal issues?

RE: Bitcoin
By ScotterQX6700 on 6/2/2013 7:42:10 PM , Rating: 2
How about what is so important about hiding *anything* from the government? In other words, remember that saying, "Guilty until proven innocent?"

RE: Bitcoin
By ScotterQX6700 on 6/2/2013 7:46:11 PM , Rating: 2
How about customers?
Seriously, it's a lot more efficient to remove government from the equation.

RE: Bitcoin
By inperfectdarkness on 5/31/2013 2:23:32 AM , Rating: 5
I wish the US had 1/10th as much fire under its ass to do something about the Yuan.

RE: Bitcoin
By Totally on 6/6/2013 4:36:16 PM , Rating: 2
*adjust tin-foil hat*
Say you are one of the many corporations pulling strings in Capitol Hill. Are you going to rock the boat with major holdings in a certain country?

By foolsgambit11 on 5/31/2013 2:39:16 AM , Rating: 3
Try again. There are several other currencies that have been created and are in use within the United States - look up Ithaca Hours for one example. What is true is that States are not allowed to coin their own currencies, and that US Dollars are the only currency that is required to be accepted for payments of debts, although people are able to accept other currencies (or goods) if they so choose.

By stevepaige on 5/31/2013 11:18:47 AM , Rating: 4
Congress hasn't printed money since 1913. The Federal Reserve does. The Federal Reserve is not a government agency at all but a privately owned bank that prints money at interest us. It is tied in with all of the other privately owned 'national banks' throughout the globe. These are all tied in with the International Monetary Fund. It too is a privately owned institution. And being private, none of these entities answer to any person or government.

Since most of the worlds governments owe money in the form of interest to these banks, they do what they are told to do.

So the only reason there will be any case is because the Federal Reserve is not getting it's share.

By stevepaige on 5/31/2013 11:33:03 AM , Rating: 2
When it started the U.S. gave this bank all of it's gold reserves and the bank started lending money back to the U.S. at interest. The government can only pay back, by law, the interest on the debt with Federal Reserve notes. It cannot pay off the actual debt unless it has a hard asset (gold, silver, land). It is tied in with all of the other privately owned 'national banks' throughout the globe through the International Monetary Fund. It too is a privately owned institution. And being private, none of these entities answer to any person or government.

By BRB29 on 5/31/2013 11:45:06 AM , Rating: 2
Congress hasn't printed money since 1913. The Federal Reserve does.

The US Treasury prints currency. The Federal Reserve distributes it. Printing does not necessarily create money either.

Federal Reserve is separate from the federal government to avoid political influence. It is also mostly private. Its board members are from the regional banks. It's too long to explain, just google the thing.

By stevepaige on 5/31/2013 11:31:38 AM , Rating: 2
Congress hasn't printed money since 1913. The Federal Reserve does. The Federal Reserve is not a government agency at all but a privately owned bank that prints money at interest us.

When it started the U.S. gave this bank all of it's gold reserves and the bank started lending money back to the U.S. at interest. The government can only pay back, by law, the interest on the debt with Federal Reserve notes. It cannot pay off the actual debt unless it has a hard asset (gold, silver, land). It is tied in with all of the other privately owned 'national banks' throughout the globe through the International Monetary Fund. It too is a privately owned institution. And being private, none of these entities answer to any person or government.

Since most of the worlds governments owe money in the form of interest to these banks, they do what they are told to do.

So the only reason there will be any case is because the Federal Reserve is not getting it's share.

By Dorkyman on 6/5/2013 11:38:11 PM , Rating: 2
Stupidest comment I've read all day.

By ironargonaut on 5/31/2013 7:16:43 PM , Rating: 2
and this makes them different from a Swiss bank how?

By EricMartello on 6/2/2013 5:43:20 PM , Rating: 1
The only thing that the prosecutors really needs to prove is that Liberty Reserve were knowingly and willfully allowing criminals to use the sites and made no attempt to restrict the use of the site to legal purposes.

If LR is not verifying the identities of their users then they cannot "knowingly and willfully" be aware of what their system is being used for.

Tell me why is deniability and ignorance a valid "defense" for public officials who abused the power of the IRS for their own interests - Holder and Lerner - and yet somehow the law allows the FBI to seize the assets of LR on the supposition that they are 'knowingly' facilitating money laundering.

Moreover, by helping conceal the source of the money, Liberty Reserve was helping to protect over 200,000 criminals from prosecution. Was it used for legitimate purposes and have it's legitimate users been left in the dark?

Anonymity does not equate to illegal activity, and in this day and age it is probably smarter to make all attempts possible to anonymize your electronic transactions. You are a complete imbecile if you think that any government institution, including within the US, is infallible and devoid of corruption.

We REPORT what the government needs to know about our income and spending on our tax returns; they do not need to have their finger in every crevice of our personal lives nor should they. The notion that we need to allow this intrusiveness to exist is purely propaganda.

Perhaps you may be better off reserving your outrage until you have something to go on other than a case brief and pure conjecture.

You mean like the FBI essentially shutting down LR based purely on their accusations and questionable "evidence"? Sorry, no dice. Let's clean up the criminals posing as politicians and public officials in DC first before we have a crusade against foreign scammers who are mainly guilty of separating gullible idiots from their money.

Police state
By talikarni on 5/30/2013 2:43:49 PM , Rating: 3
We are in a police state already... police are already ignoring the Constitution breaking down doors without a warrant and coming after law abiding citizens.
It is only a matter of time before King O proclaims martial law, suspends the Constitution, cancels all future elections, nationalizes most utilities and large companies (google, MS, bing, as well as most parent companies), and starts coming after anyone with an R on their voter registration card or is found a member of the NRA.
The question is, would you rather live in a "safe" slavery prison state under a dangerous Hitler-like leader (aka King Obama), or a dangerous free country where you have a voice and the right to defend yourself?

RE: Police state
By Jaybus on 5/30/13, Rating: -1
RE: Police state
By TSS on 5/30/2013 6:27:54 PM , Rating: 5
A quick google search proves you very, very wrong.

The constitution isn't a list of what the government can't do, it's a list of what they can do and everything else is probited. NOWHERE does it say "only" congress has the power to coin money, it simply states that congress has the power to coin money.

In article 10 it states that states cannot coin their money. This statement is needed because it's also stated in the constitution that anything not stated in the constitution is not a matter of federal government but a matter left to the states or to the people . Article 10 limites the states, not the people. It then says states can only make gold and silver legal tender to pay debts, so a state could accept, per the constitution, either money, gold or silver to settle debts.

So infact, the people can coin their own money. Note: their OWN money. the people cannot coin federal money as that is a power given only to the federal government by article 1 section 8 of the constitution.

This isn't just legal, but actually happening not just in the states but all over the world, where there's small local currencies. Here's a short list for the US:

Why do you think they don't outright ban bitcoin but go after a exchange? Because they *can't*.

Please google "US constitution" the next time you claim that it's very clear on anything. You've just been put to shame by a foreigner who's never even read the darn thing, but knows how to use google regardless.

As for this move by the US government, it's nothing more then proof for their goal to shackle the US citizen to the dollar and thus, it's debt. For as long as outright dictatorship isn't feasible yet. This isn't like 1984. It is 1984, and it has been for quite a while now.

RE: Police state
By Fritzr on 6/2/2013 2:00:25 AM , Rating: 2
Congress passed a law that makes it illegal to make, possess, use or trade metal coins. Paper money & metal "tokens" remain legal though.

There are many "private" currencies printed and used in the US. One that comes up in these discussions regularly is the Liberty Dollar. It was banned due to the use of metal. The paper Liberty Dollars were completely legal, the Liberty Dollar coins got them shut down.

Banks were (and still are) authorized to issue bank backed "redeemable" paper currency. The US government got into the game with currency backed only by the good faith of the government in 1862 when "Legal Tender" replaced "Demand Notes"

Congress does have the power to pass laws concerning currency and they do pass those laws. Two acts passed in 1863 & 1864 created the National Banking system. Following the panic of 1907 the Federal Reserve was created by Act of Congress in 1913 regulating National Banks (State Banks were managed by their state government) This has been modified in the years following, but essentially, the Fed runs the Federal & National Banks and the FDIC is responsible for regulating the various types of Bank. Credit Unions and Savings & Loans are managed by othder government institutions. FCUIC and FSLIC.

Separately. The Federal Reserve Note is not the only US currency. US Bank Notes were issued by the Federal Government through 1971. If you see a US dollar bill in any denomination with RED treasury seals and serial numbers, take it to a coin shop for appraisal. US Bank Notes are collectibles that are usually worth more than face value. Also watch for dollars that have the words Gold Certificate or Silver Certificate in the place where Federal Reserve is normally seen. These bank notes are also worth more than face value. The Certificates were metal backed US currency.

RE: Police state
By brshoemak on 5/30/13, Rating: -1
RE: Police state
By Dorkyman on 6/5/2013 11:42:28 PM , Rating: 1
There's tinfoil, and then there's ominous trends.

Came out today that the Feds have decided that they don't need "probable cause" to search and/or seize any electronic devices of Americans coming back through customs. They actually used the word "hunch" to describe when they would demand to see your internal docs.

Hmmm... if W had done something like that, it'd be front-page news. But with Messiah, not so much.

LRs and Bitcoin????
By syl123 on 5/31/2013 2:49:50 AM , Rating: 2
Do you know the difference between the two?? You talk about Bitcoin being LR's sister currency. LR isn't a currency, it's an exchange service. You further prove your misunderstanding by saying that the feds are claiming that LR's and Bitcoin are used illegally with no proof. Again, LR is NOT a currency. Bitcoin is the currency. LR is an exchange that allows the exchange of funds between two currencies such as USD and Bitcoin. The allegations are against LR's business practice of supporting money laundering of USD via Bitcoin.

Your total lack of understanding of the above tainted your entire article given LR and Bitcoin are the main focal points.

RE: LRs and Bitcoin????
By Belard on 5/31/2013 10:09:19 AM , Rating: 1
And yet... you were voted down.

This is a political right-wing article, nothing more. It has nothing to do with Obama. Its like saying when he (Jason) got a ticket for speed - it "from an Obama police officer".

Oh well... according to Google. Dailytech is a malware site. Don't want to get herpes by spending more time here.

RE: LRs and Bitcoin????
By Dorkyman on 6/5/2013 11:43:43 PM , Rating: 2
It's okay with the rest of us if you decide to leave. Really.

Don't steal...
By alpha754293 on 5/30/2013 1:44:03 PM , Rating: 2
...the government hates competition.

RE: Don't steal...
By Director12 on 5/30/2013 6:22:40 PM , Rating: 2
Yup. This.

"If Al Capone were alive today, this is how he would be hiding his money."

Doesn't he mean "If Al Capone were alive today, this is how he would be protecting his turf."?

After all, only the Fed and other associated cronies are allowed to counterfeit money out of thin air right? And I was under the impression that 'money' was anything agreed upon by two parties as a medium of exchange. Since when did it become the property of 'government' to be owned and used for control?

And then there's the money laundering accusations in which it looks like there's two sets of rules (again,) one for the big banks and one for everyone else. A quick search on 'money laundering big banks' will provide many examples of this.

What a con.

(P.S. He also moved to kill off a new Glass Steagal bill recently as well. )

Cash is still King
By spamreader1 on 5/30/2013 1:31:34 PM , Rating: 2
Cash is still King

By vision33r on 5/30/2013 11:21:33 PM , Rating: 2
The whole design around Bitcoin just like Bittorrent is at the root it's anti-government. It abolishes control from any central entity. You take one down, others will keep going. The Feds have taken the 1st step to try to contain this peer to peer currency because there are already billions of $$ stash into this and removes the govt the ability to seize assets.

People in Cyprus have been pouring their savings accts over to Bitcoin and USD in order to prevent their govt from hitting them with unwarranted taxes.

LR popular...
By syl123 on 5/31/2013 2:58:57 AM , Rating: 2
I forgot to address that part of your article. Mt. Gox exchange handles 70% of Bitcoin exchanges, so it is by far the favorite things change service among Bitcoin users. Mt. Gox as you may or may not know was targeted by DHS the other week because it allowed US citizens to conduct business through this financial service without the service reporting under money laundering regulations. I believe that has now been corrected and they are back in business.

Money laundering?....Seriously?
By random2 on 6/5/2013 4:18:13 AM , Rating: 2
I don't think Washington and the big banks need worry about Bitcoins infringing on their traditional money laundering business. There isn't even enough Bitcoin in the wild to cover a small cartels operations. The only people capable of biting off big hunks of dirty money produced by the major cartels are the big boys on Wall Street and Canary Wharf in London.

I guess Washington still has to go through the motions to let everyone know this laundering business is paramount on their minds.

Agree and disagree
By polishvendetta on 5/30/13, Rating: 0
Well now
By TexMurphy on 5/30/13, Rating: 0
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