IRS, Obama Admin Aim to Kill Liberty Reserve With $6B USD Suit
May 30, 2013 10:16 AM
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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
U.S. Department of Justice
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 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 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. (
) 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
(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.
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
expand warrantless surveillance of Americans
, while publicly preaching that it supports "civil rights" and "free speech".
The takedown of the LR should be viewed in a chilling light by
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..."
U.S. Department of Justice
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RE: Police state
5/30/2013 4:52:31 PM
Article 1 Section 8 of the US Constitution is very clear about this. Only Congress has the power to "coin money and regulate the value thereof" within the US. Every nation has similar laws with regard to their money. Without respect to any of the other potential issues you mention, this one certainly is not ignoring the Constitution, but rather enforcing it.
RE: Police state
5/30/2013 6:27:54 PM
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
6/2/2013 2:00:25 AM
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
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.
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