Liberty Reserve’s founder Arthur Budovsky was arrested Friday in Spain accused of money laundering.
For now, the company website, LibertyReserve.com, only features a message saying it’s been seized by U.S. law enforcement. The Treasury Department set a precedent in using the 2001 Patriot Act against a virtual currency to sever the link between Liberty Reserve and the U.S. financial system. Liberty Reserve laundered more than $6 billion in criminal proceeds, according to the indictment, which named Budovsky and six others fools. Of course, this is going to be pretty bad for the “internet economy”, but it’s only for a short period of time, hackers and other criminals will turn to smaller competitors that provide similar services.
The parallels between Bitcoin (BTC) and Liberty Reserve (LR) are strong, both are virtual currencies that use an exchange to convert real world currencies into virtual ones. However, there is no evidence of Bitcoin being used for malicious purposes at this time. In March 2013, the Treasury Department’s anti-money laundering unit, the Financial Crimes Enforcement Network (FinCEN) labeled digital currency firms as money transmitters, requiring them to fight money laundering and register with FinCEN, although it is theoretically possible, but difficult, to identify who is behind each Bitcoin transaction. That’s because each Bitcoin transaction is recorded in a public ledger called a block chain that makes it hard to create counterfeit Bitcoins and to track thieves. In the future it could be even harder to track the hackers with Zerocoin, a Bitcoin add-on from a group of Johns Hopkins University crytpographers that could make Bitcoin transactions impossible to trace, if all Bitcoin customers use it.
The law that US government used to shutter Liberty Reserve, could be used as well to close Bitcoin if link that connect the U.S. financial system to its virtual one do not subside with FinCEN regulations or if BTC violate the Patriot Act.