The shutdown of the Liberty Reserve money transfer service and the arrest last week of its two founders and three other employees on charges of money laundering highlight the role that digital currencies have in the cybercrime food chain. Incorporated in Costa Rica, Liberty Reserve had more than 1 million customers worldwide and processed more than $6 billion in transfers, much of which came from the proceeds of credit-card fraud, computer hacking, identity theft, and other cybercrimes, according to a statement published this week by the U.S. Attorney's Office for the Southern District of New York.
While that seems enormous, it's hardly surprising: Almost every criminal transaction in the black market uses virtual currencies, Dmitry Bestuzhev, head of the global research and analysis team for Kaspersky Lab's Latin American operations, stated in an e-mail interview. Focusing on that aspect of cybercrime should be a priority for law enforcement agencies, he says.
"Maybe in the future we are going to see other interesting scenarios where, instead of only fighting malware, law enforcement will just cut out online payment systems and cybercriminals will be left without their main motivation -- money," Bestuzhev says.
The focus on money is as old as law enforcement's investigation of financial crimes. However, with new technologies and the increasing movement of money through virtual worlds and online exchange systems, law enforcement has only scratched the surface with its crackdown on Liberty Reserve.
Already, online users of exchange services have begun moving their money to other services. Exchange system PerfectMoney.com, for example, stated on May 27 that it was adding new servers to help manage the load caused by an influx of customers. In addition, bitcoins have become popular, and while less convenient than many other currencies, they allow anonymity -- a key attribute sought by criminals. Virtual currencies also pose a money laundering threat. In 2007, anti-fraud experts began recommending that law enforcement authorities take a hard look at virtual currencies -- those used in virtual worlds, such as Linden Labs' Second Life and Blizzard's World of Warcraft.
Just as Liberty Reserve became popular following the 2007 shutdown of a similar service, E-Gold, another service will likely crop up to replace Liberty Reserve.
[An international cybercrime ring hacked an unnamed credit card processor, stole prepaid debit cards, and quickly cashed them out in a highly orchestrated operation that spanned the globe. See 8 New Yorkers Indicted As Part of $45 Million Cyberheist Of Prepaid Debit Cards.]
"There has been an awakening to the threat of these digital currencies -- at least in the United States, and I think in other countries," says Alan Brill, senior managing director for cybercrime at global security firm Kroll. "It is really going to be a matter of how well the government is able to work with operators that are trying to do the right thing, and how those operators fare in the marketplace relative to the people who are not taking those steps."
The Financial Crimes Enforcement Network (FinCEN), part of the U.S. Department of the Treasury, issued guidance in March that classified money exchangers -- defined as persons or groups trading virtual currency for real currency -- as a money service business, or MSB, and thus open to regulation by FinCEN under the Bank Secrecy Act. Earlier this month, the U.S. Department of Homeland Security used the rule to seize U.S.-based funds of Mt.Gox, the largest bitcoin exchange, as part of its investigation into the site for unregulated money transfers.
In addition, virtual worlds -- from Second Life to the World of Warcraft -- have become potential digital pipelines for money laundering. In early May, in response to the FinCEN ruling, Linden Labs -- the creator of Second Life -- changed its terms of service to cut off third-party exchangers.
Yet the digital currency is not to blame for the problems, says Clare Chambers-Jones, an associate professor of banking and finance law at the University of the West of England (UWE) Bristol Law School.
"Because the currencies are there, you are going to have the criminals trying to use them as means to get money out of the country," she says. "It is not the digital currency that is creating a cybercrime -- it is the people. It is really that simple in my mind."
While digital currencies have not had much success in the U.S., they are starting to take off in other countries to work around their less developed or reliable banking systems. While U.S. citizens are likely to have at least one credit card to pay for online goods, for example, citizens of other countries are more likely to use some form of stored value on their mobile phones, Chambers-Jones says.
That means that digital and virtual currencies are here to stay. And while law enforcement and some federal agencies have used novel tactics to interdict the flow of criminal gains, legislators are still behind, so new regulations will be delayed, she says.
"The digital currencies are decentralized, unregulated, and these are the aspects that confuse legislators," she says. "It takes so long for any form of law to come into being, that they can't really keep up with the pace of technologies."
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