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Liberty Reserve court case marks the dawn of a new era

Before Satoshi Nakamoto was able to figure out the right recipe for decentralizing currency, there were several attempts at centralized online currencies, or ‘internet money,’ unaffiliated with any state. The last of the bunch to thrive outside of the U.S. financial framework was the Costa Rican startup Liberty Reserve, which was taken down in 2013. Friday’s sentencing of the corporations founder, Arthur Budovsky, landed him in a U.S. prison for 20 years, and requires him to pay a US$500,000 fine for the crime of money laundering.

Before Satoshi Nakamoto was able to figure out the right recipe for decentralizing currency, there were several attempts at centralized online currencies, or ‘internet money,’ unaffiliated with any state. The last of the bunch to thrive outside of the U.S. financial framework was the Costa Rican startup Liberty Reserve, which was taken down in 2013. Friday’s sentencing of the corporations founder, Arthur Budovsky, landed him in a U.S. prison for 20 years, and requires him to pay a US$500,000 fine for the crime of money laundering.

“Liberty Reserve founder Arthur Budovsky ran a digital currency empire built expressly to facilitate money laundering on a massive scale for criminals around the globe,” Manhattan U.S. Attorney Bharara said at the sentencing in New York Friday. “Despite all his efforts to evade prosecution, including taking his operations offshore and renouncing his citizenship, Budovsky has now been held to account for his brazen violations of U.S. criminal laws.”

The alleged “black market bank” processed 78 million transactions, from 5.5 million user accounts, and was accused of laundering US$8 Billion in criminal proceeds over six years before being raided and shut down in April 2013.

At a time when bitcoin’s price was making record highs, the Liberty Reserve website went offline forever, despite millions of happy users worldwide, most of whom lived outside of the U.S. In the websites place was a domain seizure notice from the U.S. Financial Crimes Enforcement Network (FinCen) and the Secret Service.

Before being taken down, the payment network operated in a very similar manner to that of Bitcoin. The main difference was a central company controlling the ‘Liberty Reserve’ funds, instead of a complex algorithm. This allowed them to peg the price to the U.S. dollar.

The primary set of laws that Liberty Reserve broke, however, were U.S. Anti-Money Laundering (AML) laws, which are designed to ensure ownership of money is clear and traceable.

Liberty Reserve wasn’t the first cyber money to precede bitcoin, nor the first to get raided and shut down. CyberCash, e-Gold, e-Bullion, First Virtual, and DigiCash, to name a few, all offered centralized online currencies, and each ended poorly.

Many of these services claimed to hold gold reserves, backing the currencies value. While the gold reserves were often easy to confirm, it was often harder to audit the amount of currency issued.

CyberCash was an early internet payment service founded in August 1994. They later offered "CyberCoin," one of the few online currencies not targeted by government action. The Y2K bug caused their server to start recording double payments in the system at the turn of the century, and the company filed for bankruptcy just three months later. VeriSign picked up the pieces, and PayPal acquired them from Verisign in 2005.

E-gold was the first widely known online currency service, and started just two years before PayPal, in 1996. The company offered web-based payments denominated in grams of metals, with reserves held in a safety deposit box in Florida.

By 2000, the service had taken off. A public audit trail indicates that the company held US$71 million in gold and other precious metals at their peak.

A short time later, the 2001 Patriot Act changed the definition of what it means to be a money transmitter, and the Justice Department eventually decided that e-gold fit the new definition, leading to criminal prosecution and seizure of assets in 2007.

Despite the federal judge on the case ruling that the founders of e-gold "had no intent to commit illegal activity," e-gold’s owners were each prosecuted, fined, had the entire business taken from them, and suffered three years of probation with 300 hours of community service.

E-bullion was started  by a husband and wife team in 2001, and had a very similar model to E-gold. At their height, they claimed one million users and 50,000 ounces of gold bullion in reserve. They applied for a money transmitter license in California in 2002 but were told by the State that their business, since it dealt in gold accounts, did not fall under the state’s definition of a money transmitter, as was the law before the patriot act.

This case took a dark turn when the wife was murdered and the husband was charged for it in 2008, and he resides on death row to this day. As soon as the murder charges were filed, the justice department swiftly shut down the business, confiscated all holdings, and refused to return any customer funds. Their eventual justification for doing so was based on the new money transmitter laws, despite the company’s attempts to comply with them.

What made Liberty Reserve different, however, is that no part of it was based in the United States. Founder Budovsky had previously been a U.S. citizen and moved to Costa Rica before starting his business down there. Even still, as Liberty Reserve started to surpass the record of all the previous online currency services in 2013, the U.S. Global Illicit Financial Team had him arrested while he was on holiday in Spain, as they shut down his business, seizing all assets. They then transported the Costa Rican national to New York for trial.

Since none of his business resided in a U.S. state, however, Budovsky could not have been brought up on state-based money transmitter laws, the only way previous convictions in this space had been made. AML laws had to be used instead, and in January, just three days before his court case began, Budovsky pled guilty to one count of conspiring to commit money laundering.

Bitcoin’s peer-to-peer, decentralized nature has changed the game drastically, forcing the government to find a new target for their investigations. With no central administrator to the system, only the “onramps and offramps,” such as exchanges and merchants, can be prosecuted for money transmission or laundering violations.

This is perhaps one of the reasons why Satoshi Nakamoto has kept their identity so well hidden. If the creator of Bitcoin is ever identified, the U.S. government may well attempt to hold him responsible for bitcoin AML violations.

“The significant sentence handed down today shows that money laundering through the use of virtual currencies is still money laundering, and that online crime is still crime,” Assistant Attorney General Caldwell said at Friday’s ruling. “Together with our American and international law enforcement partners, we will protect the public even when criminals use modern technology to break the law.”

At a time when so many of the world’s governments are singing the praises of Bitcoin and the blockchain, events like Budovsky’s sentencing remind us that cryptocurrencies could easily become the target of criminal investigations.


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