Digital Currency Liberty Reserve Busted for Money Laundering


About 1 million users worldwide, including 200,000 in the U.S.; 55 million transactions; and $6 billion in ill-gotten gains.

Those are the numbers defining the case of Liberty Reserve, a digital currency and online payment service incorporated in Costa Rica in 2006. On Tuesday, an indictment was unsealed showing that seven men have been charged with running the unlicensed Liberty Reserve as a "bank of choice for the criminal underworld." According to The Wall Street Journal, "The system allegedly was designed to give criminals a way to move money earned from credit-card fraud, online Ponzi schemes, child pornography and other crimes without being detected by law enforcement." Five of the seven men are in custody, having been arrested on Friday in Spain, Costa Rica and Brooklyn, N.Y. Extradition will be sought for the suspects who are overseas; the other two remain at large.

For the first time, officials invoked the post-9/11 Patriot Act to shut down a virtual currency when they cut off Liberty Reserve from the U.S. financial system. The drastic measure comes at a time when digital alternatives to traditional currencies such as Bitcoin are drawing wider interest from the public.

Even for an online alternative currency, Liberty Reserve allowed its users an extreme level of opacity. According to Newsday, "Liberty was so lax that investigators were able to open an account in the name of 'Joe Bogus,' listing an address of '123 Fake Main Street' in 'Completely Made Up City, New York,' officials said. Actual accounts bore names like 'Russian Hackers.'"

Liberty reserve
Richard Drew, APPreet Bharara, U.S. Attorney for the Southern District of New York, describes a chart showing the global interests of Liberty Reserve, during a news conference in New York, Tuesday, May 28, 2013.

The service was founded by Arthur Budovsky, and wasn't his first foray into legally questionable money-transmission. In 2006, he was convicted of violating money-laundering laws with a business called Gold Age. Sentenced to five years probation, Budvosky moved to Costa Rica and renounced his U.S. citizenship. When the Costa Rican authorities became suspicious of his new operation, Budovsky told them he'd shut it down, but in fact used shell companies to keep Liberty Reserve running.

In one prominent case of illegal application of Budovsky's services, officials said the eight New Yorkers charged with stealing $45 million from ATMs used Liberty to move their loot. And while better-known online currencies like Bitcoin are being used more legitimately and gaining acceptance among some established merchants, the Liberty Reserve case carries obvious implications for them. Already authorities have confiscated money from the Japan-based Bitcoin exchange Mt. Gox, claiming it was not complying with U.S. money-laundering laws. In an obvious warning to Bitcoin, Acting Assistant Attorney General Mythili Raman told The Washington Post,

"other virtual payment systems should take notice of today's announcement and ensure that they comply with . . . regulatory obligations and ensure they are not designed to be a safe haven for criminals to launder their criminal proceeds."

Which puts Bitcoin in something of a bind: As an alternative to regular dollars, the asset depends for its appeal on greater privacy and flexibility. But those some qualities provide potential prosecutorial openings for the governments whose authority Bitcoin in some measure challenges.