Liberty Reserve exchange shuts down, founder arrested

Liberty Reserve

, a Costa Rica-based private currency exchange with its own digital currency, has shut down around the same time its founder has been arrested in connection with a money laundering investigation.

Arthur Budovsky, the exchange's founder, was arrested Friday in Spain, according to the Costa Rican newspaper The Tico Times. The paper reported that the money laundering investigation was a joint operation between authorities in the US and Costa Rica. (This YouTube video, posted Saturday, features a Costa Rican prosecutor discussing the investigation.)

It added that US authorities are likely to seek to extradite Budovsky to the US.

Liberty Reserve used its own digital currency -- also called the Liberty Reserve, or LR -- to provide payment processing services to customers holding US dollars or euros.  Bitcoin Magazine credits Liberty Reserve with being "one of the chief enablers of the Bitcoin economy's early growth", noting that in 2011 Liberty Reserve and Dwolla were among the few services then available for people who wanted to transfer funds to exchanges to buy bitcoins.

In addition to enabling such transactions for a low fee -- a flat 1 percent with a maximum of $2.99 -- Liberty Reserve, like Bitcoin, didn't allow chargebacks. However, the LR exchange has experienced significant security problems several times in the past.

In April 2011, it was revealed that Liberty Reserve customer information was accessible to Amazon. And a reported script problem in August 2012 ended up locking many users out of their accounts, some of which had thousands to tens of thousands of dollars in them.

Liberty Reserve's founder himself has had past run-ins with the law. According to Bitcoin Magazine, Budovsky and a partner -- Vladimir Kats -- were arrested in 2006 when US authorities determined their digital currency exchange, Gold Age, was conducting "money transmittal without a license". The two were sentenced to five years of probation in 2007.

Budovsky later left the US for Costa Rica, where he founded Liberty Reserve.

Because Liberty Reserve enabled customers to set up accounts "using little more than a valid email address," the exchange attracted a large number of users involved in cybercrime, security reporter Brian Krebs wrote Saturday in his blog, Krebs on Security. In fact, the first signs of the latest troubles for Liberty Reserve appeared on Thursday, before Budovsky's arrest, when the exchange's website went down.

"The outage set off increasingly anxious discussions on several major cybercrime forums online, as many that work and ply their trade in malicious software and banking fraud found themselves unable to access their funds," Krebs wrote.

Around the same time Liberty Reserve's website went offline, so did the sites for several other digital currency exchanges, Krebs added. They include asianagold.com, exchangezone.com, milenia-finance.com, moneycentralmarket.com and swiftexchanger.com.

In the wake of these developments, Bitcoin users expressed mixed feelings about the potential impact on their preferred digital currency. Some said Liberty Reserve's demise would prove a plus for Bitcoin, while others worried it could drive more cybercriminals to start using bitcoins.One reddit user had a more sanguine response."LR was never a 'competition' to Bitcoins, it 'lived' totally on its own, therefore in my opinion, its closure has no effect on Bitcoins whatsoever," noted reddit user Ponulens. "I used LR for many years, alone with other payment processors and its demise is simply a logical outcome for any and all payment systems out there, which are 'short' of getting money transmitting licenses all over the world and in US in particular. I've seen many of them "come and go" (e-gold, e-bullion, INTGold, StormPay, altergold, ePassporte... ) and for LR it was only a matter of time. The most important conclusion one should make from all these closures of the past, is to NEVER keep excessive amounts of funds in any of such payment processor systems."