Monday, February 17, 2014
NEW YORK (AP) — The account information given by a new customer at Liberty Reserve read like a not-so-clever prank: Joe Bogus, 123 Fake Main Street, Completely Made Up City, N.Y.
But at the multibillion-dollar virtual banking operation, it didn't matter. Mr. Bogus — in reality, an undercover federal agent — was free to begin transferring funds, no questions asked.
Authorities say the recent investigations of Liberty Reserve and the hidden website Silk Road, a vast black-market bazaar for narcotics and other contraband, demonstrate how the anonymity inherent in the use of virtual currency is attracting a legion of flesh-and-blood criminals.
"The perpetrators feel they can more easily conceal their activity, their identities and their proceeds," Deputy U.S. Attorney Richard Zabel said at a hearing last month held by the New York State Department for Financial Services.
Hard cash carries the burden of needing to be physically smuggled and hand-delivered, Zabel said. By contrast, in the Silk Road case, "users were able to purchase drugs from drug dealers located anywhere in the world, essentially with a push of a button," he said.
At the same hearing, Manhattan District Attorney Cyrus Vance Jr. urged state regulators to put tighter controls on digital currency exchanges to tame "a digital Wild West."
New York's chief financial regulator, Benjamin Lawsky, said in a speech last week that he's considering new rules requiring businesses to obtain a Bitlicense if they use the new currencies and comply with know-your-customer guidelines to prevent money laundering activities.
The dialogue comes at a time when Bitcoins and other virtual currencies have been gaining the backing of legitimate investors and mainstream businesses. Last month, Overstock.com became the first major retailer to accept digital money. An online florist, Bloomnation, also began accepting Bitcoins in time for Valentine's Day.
Users exchange cash for digital money using online exchanges, then store it in a wallet program in their computer. The program can transfer payments directly to a merchant who accepts the currency or to private parties anywhere in the world, eliminating transaction fees and the need to provide bank or credit card information.
Some Bitcoin advocates say they welcome limited regulation but claim the negative publicity brought by criminal prosecutions is misleading. In the past year, there are signs that the virtual currency phenomenon has moved beyond the early days when it was an oddity embraced by a small cadre of libertarians and computer geeks and later by criminals during its "vice phase," said Fred Wilson, a partner in a Manhattan venture capital firm.
"The vice phase is in the rearview mirror," Wilson said. "Are people still doing bad things with Bitcoin? Sure. Is the majority of the Bitcoin activity vice? Not a chance."
The Liberty Reserve case had no shortage of vice. Prosecutors estimated that over roughly seven years, the Costa Rica-based operation processed 55 million illicit transactions worldwide for 1 million users and laundered $6 billion in proceeds for credit card thieves, child pornographers, drug traffickers and other criminals.
People banking with Liberty Reserve couldn't transfer money into their accounts or withdraw it directly — a system that would normally leave a paper trail. Instead, to add another layer of anonymity, it required customers to wire money to and from third-party money exchangers in locations in Malaysia, Russia and Vietnam with little or no money-laundering oversight.
Once an account was funded, a customer could make deals — for stolen credit card numbers, drugs and other illicit services — with other Liberty Reserve account holders using a virtual currency called LR. Liberty Reserve would charge a 1 percent transaction fee, plus an optional privacy fee that allowed users to hide their account number.
Liberty Reserve "provided its users with nearly impenetrable anonymity and enabled them to conduct untraceable financial transactions," Zabel said.
In the Silk Road case, investigators found that the website protected users with an encryption technique called onion routing, designed to make it "practically impossible to physically locate the computers hosting or accessing websites on the network," court papers said.
Among those arrested in the case was a defendant using the name BTCKing, who operated a service that allowed customers to obtain Bitcoins by depositing cash into a bank account controlled by a third party. The only identifying information provided was an email address.
The Silk Road case has turned the U.S. attorney's office in Manhattan into a large holder of Bitcoins — 29,655 found on a server. The government also is seeking forfeiture on an additional 144,336 seized from computer hardware belonging to the alleged mastermind, Ross William Ulbricht.
Prosecutors haven't revealed what they plan to do with their Bitcoin haul, possibly because they face a volatile market for the decentralized currency. The exchange rate for Bitcoins, which has peaked at around $1,000, plunged recently on reports that a major Japanese exchange had halted trading to deal with transaction glitches.
Ulbricht, 29, has pleaded not guilty and is contesting the forfeiture. A website established to help fund his defense accepts donations in Bitcoins.
Associated Press writer Larry Neumeister contributed to this report.