NEW YORK — In what was described as the biggest-ever international money-laundering scheme, a federal grand jury has indicted a company on criminal charges that it used "virtual" currency to launder more than $6 billion in ill-gotten gains.
Among the world's largest Internet-based currency companies, Liberty Reserve amounted to a financial hub for the black market, becoming "the bank of choice for the criminal underworld," Preet Bharara, the U.S. attorney in
"Its entire existence was based on a criminal business model," Bharara said, adding that the indictment against Liberty Reserve and seven of its principals and employees is part of a broader effort to reign in "the Wild West of illicit Internet banking."
The case marks the latest black eye for the emerging world of virtual currencies and payment systems based on them. Virtual currency services have drawn growing interest from venture capitalists and entrepreneurs, who see them as an opportunity to revolutionize how people pay for just about everything. They believe such systems can dramatically lower the cost of doing business and make all types of finance far more efficient.
Chris Larsen, co-founder of virtual currency payment system OpenCoin, said such crackdowns are to be expected as entrepreneurs push the boundaries of these new payment systems.
"I think it's kind of a natural evolution," said Larsen, whose company has attracted investment from major Silicon Valley venture capital firms including
That was the case a decade ago, when
Among the new breed of financial companies,
Regulators worry these new payment systems are creating a kind of lawless frontier, leaving the government scrambling to keep dirty money out of the U.S. financial system as transactions increasingly take place on the Internet, on mobile phones and even with newfangled cyber currencies.
U.S. officials were careful to say Tuesday that they were not targeting digital currency systems — so long as they comply with the law.
"If they do so, they have nothing to fear from Treasury," said David Cohen, the U.S. Treasury's under secretary for terrorism and financial intelligence.
Online payment systems and digital currencies hold great promise for consumers and for increasing their access to financial services, Cohen said, emphasizing the indictment "does not mean that we are trying to eliminate virtual currencies."
The government's continuing probe has taken investigators around the globe. Liberty Reserve operated through a network of exchangers that would change real currency into Liberty Reserve funds. The exchangers operated with little regulation in countries such as Russia, Nigeria and
Account holders could transfer those virtual funds to whomever they did business with, directly or through an exchanger that could convert them back to cash.
Authorities arrested five defendants in Brooklyn, Costa Rica and Spain, and seized $25 million in bank accounts, Web domains and computer servers in 17 countries.
"As crime goes increasingly global, the long arm of the law has to get even longer, and in this case it encircled the Earth," Bharara said.
Among the individuals indicted were Liberty Reserve's founder, Arthur Budovsky, and co-founder Vladimir Kats, as well as five other employees. Their defense attorneys could not be reached. Two of the seven indicted remained at-large in Costa Rica.
Tangel reported from New York and O'Brien from San Francisco.