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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?

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