Can't find a direct link to this article so I've provided the key section from it which will be acceptable under UK fair use:
Last month, an undercover US federal agent set up an account with Liberty Reserve to demonstrate just how easy it is to transfer criminal proceeds illegally, says Kara Scannell in the FT. Registering online, the agent typed the name “Joe Bogus”, the account name “tostealeverything”, and an address: 123 Fake Main Street. Within a few keystrokes, he had converted dollars into the virtual currency, the “LR”, and sent it to other undercover accounts, where it was swiftly redeemed as hard cash.
Given the set-up of the scheme, it’s a wonder it lasted so long, says James Surowiecki in The New Yorker. The LR was supposedly pegged to the US dollar on a one-for-one basis. But there was nothing to stop Budovsky flooding the market and devaluing everyone else’s holding. Hordes of criminals nonetheless put their faith in the system. “Like good disciples of Adam Smith,” they relied “not on Budovsky’s benevolence but on his pursuit of his own self-interest”: the long-term value of the business “depended on it not screwing over its customers”. It’s a testament to markets’ capacity to flourish without legal enforcement that there is “honour even among thieves”.
But anyone with cash in the system when the Feds swooped is nursing large losses now, notes Brian Krebs on Krebsonsecurity. com. Liberty Reserve’s shutdown has caused “a major upheaval” in the cybercrime economy. It’s also “shaken the burgeoning world of digital currencies”, leaving some wondering who’ll be next, says Schumpeter in The Economist. Attention has inevitably turned to that “darling of virtual currencies”, the Bitcoin. “But the two are not the same.” Bitcoin, while hardly squeaky clean, is already a mainstream currency and aficionados argue that the Liberty takedown will only strengthen Bitcoin’s viability if it leads to improvements in regulatory oversight. That’s already starting to happen, says Stephen Foley in the FT. Criminals might have been “the first adopters” of digital money – but it’s here to stay.
Original article MoneyWeek, Issue 643, 7th June 2013, P34:
http://moneyweek.com/wp-content/uploads/2013/06/Issue-643.pdf
