The indictment sealed on 20 May by a Grand Jury in the Southern District of NewYork, charging defendants operating international online digital currency and money transfer service Liberty Reserve with conspiracy to commit money laundering and operate an unlicensed money transmitting business, has raised questions about the future of digital currencies like Bitcoin.
The shutting down of Liberty Reserve “has sent a shudder through the digital currency world,” said Kevin L. Petrasic, Partner at Paul Hastings.“What that means for the continued growth and proliferation of digital currencies remains to be seen. Clearly, an issue that digital currencies must consider is the use of such currencies as a platform to promote anonymity that encourages money laundering activities.”
Described by the DoJ as the ‘largest international money laundering prosecution in history,’ according to the indictment papers it is estimated that 55 million transactions were processed and more than $6 billion of ‘criminal proceeds’ laundered. Established in Costa Rica in 2006, Liberty Reserve enabled users to conduct anonymous international transactions with its own digital currency.
“Many of the issues presented by the Liberty Reserve digital currency are present with Bitcoin, and we have certainly heard speculation about what the indictment and accompanying FinCEN rule to ‘seal off’ Liberty Reserve from US financial institutions could mean for Bitcoin,” adds Petrasic. “The challenge for Bitcoin and digital currencies will be to try to figure out how to detect and track money laundering activities. Succeeding in doing so will restore credibility in the AML context and avoid doubts about the ability of such currencies to survive and remain viable.”
“It’s surprising that FinCEN took such a strong position on payment finality,” said Ryan J. Straus, Attorney at Graham & Dunn. “In noting that Liberty Reserve was a completely irrevocable payment system and digital currency, FinCEN stated that irrevocability makes for a ‘highly desirable system for criminal use and a highly problematic one for legitimate payment functions.’”Concludes Craig Denney, Of Counsel at Snell & Wilmer LLP, “Any entities involved in the digital currency transaction business should be concerned. This indictment should make companies take notice and examine what due diligence protocols they have implemented to know their customers.”
Originally published in E-Finance & Payments Law Policy - Volume 7/ Issue 6 - June 2013.