The shutdown of online currency exchange Liberty Reserve and the arrest of its CEO and founder Arthur Budovsky may not have surprised some in the security industry. The company did not require its users to establish their identities and further removed themselves from direct contact by accepting withdrawals and deposits only via third party brokers.
But more interesting - and concerning for digital currency operators such as Bitcoin - is how commentators have focused on the aspect of anonymity in Liberty Reserve’s operating model as the quintessential signature of its criminality.
When considering the demise of Liberty Reserve, it is worth remembering a number of points about the case:
[1] Budovsky had previously been sentenced to five years of probation in the US for operating an illegal financial business. He fled to Costa Rica in 2007.
[2] It was Costa Rican authorities who launched the investigation into Liberty Reserve after denying it a licence to operate as a money transmitting business in 2011. Their main concern was the lack of transparency about how the business was funded. Budovsky continued to operate regardless, using five other Costa Rican businesses to do so.
[3] Liberty Reserve has long been associated with known transactions that involved criminals and hackers.
Hardly surprising then that US authorities finally shut down the domains and indicted the employees of Liberty Reserve. Possibly more surprising is that it took this long.
However, as a consequence of the belief of the association between anonymity and crime, all other services that offer anonymous exchange of funds have come under renewed scrutiny. Chief amongst these is Bitcoin, whose central characteristic is that it allows for near-anonymous exchange. And of course, it has been tainted by being the currency of choice for Dark Markets like the [Silk Road](http://en.wikipedia.org/wiki/Silk_Road_(marketplace) on which you can buy drugs, stolen credit cards and other contraband.
Bitcoin however is very different to the Liberty Reserve case. Liberty Reserve was shut down because it was allegedly an illegal operation, not because of the fact its services could be used by criminals. In fact, if companies were targeted because it was easy for criminals to use them for laundering stolen goods then eBay in particular would have a real problem as it is a favourite of scammers and “carders” - people buying goods with stolen credit cards and converting it to cash by selling them online.
Mt Gox, the company that exchanges about 80% of all Bitcoin (according to its website)), says it will improve its attempts to verify the identity of its users by requesting identity documents. It will also suspend an account if the site is accessed from behind an anonymising service such as a proxy or Tor network. It also learned the consequences of not complying with US Federal laws after one of its Wells Fargo accounts was seized after Mt Gox failed to complete the correct documentation about its services.
The pervasive association between anonymity and crime has permeated arguments about establishing identity on social networks, with governments requiring proof of identity on the Internet and security experts basically stating anonymity is a synonym for crime.
A basic fallacy of this view of course is that when dealing with cybercrime, assuming a fake identity is really not that hard and so would not act as any form of deterrent to criminals’ use of a service. Perversely, it could help in giving legitimate users a false sense of security when dealing with others on that service.
It is also worth remembering that cybercriminals are first and foremost, business men and women. Services like Liberty Reserve were attractive and useable because their value was fixed. One LR was always the equivalent to US$1. The problem with Bitcoin, as investigative journalist Brian Krebs has pointed out is its value fluctuates wildly and most of the activity in Bitcoins has come from speculative traders, not people actively using it as an everyday currency.
If you agree to transfer Bitcoin to someone for laundering, the value can increase or decrease to such an extent that it significantly impacts the agreed exchange value. It is not possible to conduct a “business” on that basis.
The main beneficiary of the demise of Liberty Reserve will in all likelihood be WebMoney, which for all intents and purposes operates in the same way as Liberty Reserve did. It is based in Russia, away from the scrutiny of the US authorities.
WebMoney spokesman Vyacheslav Andryushchenko has stated its 20 million users have all agreed to not engage in money laundering and their accounts are monitored for suspicious activity. However, to be on the safe side, WebMoney is restricting its business in the US - and presumably its owners won’t be in a rush to travel there.