After the authorities went after Liberty Reserve, underground forums buzzed with comments from people mourning the potential loss of frozen funds and others offering alternatives, including Bitcoin, the peer-to-peer payment network started in 2009 to offer a centralised way to create and transfer electronic cash around the world.
In closed underground Russian-language forums, one person wrote, "I had almost 6k there. Where to now?" Another suggested, "Maybe another alternative is Perfect Money? I wonder if Bitcoin exchange rate will go up or not."
Indeed, the value of the Bitcoin virtual currency spiked temporarily on news of the Liberty Reserve shutdown. But law enforcement officials say Liberty Reserve operated with more anonymity than Bitcoin. Unlike Liberty Reserve and other anonymous payment systems, Bitcoin transactions are stored in a public ledger, called a block chain, that make it possible to trace Bitcoin transactions even years after the fact.
"You can track specific Bitcoin movements just as you would the serial number on a US dollar," says Jeff Garzik, a Bitcoin developer. The real concern, security experts say, are private payment services that claim to do due diligence, but do not do even the most basic verification.
Typically, money transfers are subject to strict regulation, which include maintaining customer identification records, filing suspicious activity reports, mandatory reporting on large currency transfers, and know-your-customer requirements. But security experts say there are a multitude of anonymous payment systems that require no customer identification and have little capability to detect or report suspicious activities.
"You would think they would be regulated but there is no regulation," Kellermann says.
Of online payment processors, PayPal is considered the gold standard. The company, now owned by eBay, has payment experts to ensure PayPal is compliant with "know-your-customer" regulations and with law enforcement agencies in each country in which it operates.
"It's unfortunate that as many of these new services come on board; it's the people looking to abuse them who are the first to use them," says Anuj Nayar, a spokesman at PayPal. "There's a lot more than just having the right technology in place to be an efficient global payment processor."
In March, the Treasury Department's Financial Crimes Enforcement Network, or FinCen, began applying anti-money laundering rules to virtual currencies, amid worries that new forms of cash purchased on the web, such as Bitcoin, were being used to finance illicit enterprises.
While Bitcoin is just a software system, there are multiple gateways and exchange points that let Bitcoin owners exchange their Bitcoins for cash. Federal authorities recently seized accounts associated with a US intermediary of Mt Gox, the world's largest Bitcoin exchange, for not being FinCen compliant. It, and other exchanges in the US, are now racing to be fully compliant with know-your-customer laws and anti-money laundering requirements.
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