What Liberty Reserve's Takedown (Doesn't) Mean For Bitcoin

    By Eric Markowitz | Small Business

    The takedown of Liberty Reserve has plenty of people wondering about what will happen to Bitcoin. Here's why it could actually be a good thing.

    Earlier this week, federal prosecutors issued an indictment against Liberty Reserve, claiming that the Costa Rican company used online currency to launder more than $6 billion. The indictment stated that the company's virutal currency "was designed so that criminals could effect financial transactions under multiple layers of anonymity and thereby avoid apprehension by law enforcement."

    Because Bitcoin's virtual currency operates in the same fuzzy confines as Liberty Reserve's, the tech press was quick to draw comparison between the two businesses, wondering if Bitcoin would suffer a similar fate. "Bitcoin Users Will Freak Out When They See The Cruise Missile The Justice Department Just Fired Against Another Digital Currency," read a headline at Business Insider. Forbes asked: "After Liberty Reserve Shut Down, Is Bitcoin Next?" Mashable croaked: "Bad News for Bitcoin? Feds Shut Down 'Paypal for Criminals.'"

    But targeting Bitcoin would be tricky. Unlike Liberty Reserve, Bitcoin is a global network without a central office that could be raided. More importantly, it has no identifiable leader or founder. Dan Kaminsky, a respected security researcher that consults for Fortune 500 companies like Cisco, says those who believe the Liberty Reserve fiasco signals at the demise of Bitcoin are just plain wrong. "Bitcoin is larger than any individual exchange," he says. "It's not a self-branded currency like Liberty Reserve was. It is its own thing. Bitcoin is just code. Government could go and arrest the developers involved in Bitcoin, and there'd be 100 more developers to fill their place tomorrow."

    Jonathan Mohan, founder of BitcoinNYC, a volunteer organization based in New York that unites Bitcoin enthusiasts, says the Fed's takedown of Liberty Reserve was downright good for Bitcoin--and that many people in the Bitcoin community see the Liberty takedown as a "benefit" for virtual currencies. "It means that the government is finally taking the space seriously," Mohan says. "The thing that I find so exciting about Bitcoin is that it's creating innovation in a space that hasn't seen much change in a long time. It's a financial instrument that hasn't existed before. And regulation is inevitable--so this is a good thing. This is a step in that direction."

    Federal regulators have been increasingly interested in virtual currency. Last year, the FBI conducted a report that examined the proliferation of criminal activity through the Bitcoin network. The exploratory research study, intended to advise authorities going forward, concluded that it was likely that the virtual currency had been used for illegal activities, including money laundering.

    In March, the Financial Crimes Enforcement Network, a division of the U.S. Treasury, made its first steps toward regulation when it issued an "an interpretive guidance to clarify the applicability of the regulations implementing the Bank Secrecy Act ("BSA") to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies." Recently, Mt. Gox, a Bitcoin exchange based in Japan, had its assets seized by the Department of Homeland Security because it had not registered as a money transmitter with the U.S. Treasury Department.

    Despite the cloud of controversy, Bitcoin continues to become more mainstream. Right now, the BTC market cap is hovering around $1.6 billion. And, as the industry attracts real-money investment from real-life investors with real-life dilligence, Bitcoin operators will inevitably move more closely towards a regulated economy where verification--not anonymity--is key. (Besides, as the New York Times pointed out, Bitcoin isn't all that anonymous, since each transaction is recorded in a public ledger.)

    Some major Bitcoin players have already begun to move towards tighter restrictions. On Thursday, Mt. Gox announced new verification procedures that require users to offer more personal information when extracting real currency from their accounts. "It is our responsibility to provide a trusted and legal exchange, and that includes making sure that we are operating within strict anti-money laundering rules and preventing other malicious activity," the statement read.

    Dwolla, a start-up that allows payments and money transfers to be made through the Internet, has been affected by increased scrutiny as well. On his personal blog, founder Ben Milne wrote that the hype around Bitcoin may work out well for the currency. "It means government is kicking in some oversight," he wrote. "It means all the hype caused by speculation is boosting a really interesting virtual currency economy, and the world is starting to treat it like other currencies, as value, which is regulated."

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