New York officials: Virtual currency invites real crime
February 17, 2014 10:20 AM

NEW YORK — 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.

Liberty Reserve “provided its users with nearly impenetrable anonymity and enabled them to conduct untraceable financial transactions,” Zabel said.

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