Before Bitcoin came into existence, there have been numerous attempts at creating digital currencies. Most of the ventures were centralized, and failed fairly quickly. Even Liberty Reserve, once a very popular company, ultimately succumbed to government pressure.
The Creation of Liberty Reserve
On paper, the Liberty Reserve project could have worked out well. It introduces a centralized digital currency designed for e-commerce. With its headquarters in Costa Rica, a proper location with healthy regulations was chosen. At its peak, over one million users benefited from the services provided.
The main objective of this project was to let users send money by using a name, email address, and birth date. It is a much improved system compared to available options even today. However, it did not take long for core flaws to come to light. With no verification of user identities, a big problem ensues.
Depositing funds could be done through various means. Plenty of third party services could be used. Deposit options, such as credit cards and bank wires, are still commonly used by payment processors today. Liberty Reserve never made an attempt to directly process deposits or withdrawals in any way.
Once a deposit completed, it was converted to Liberty Reserve Dollars or Euros. The digital currency of this platform has its value linked to the US Dollar, Euro, or ounces or gold. Transaction sizes had no limits either, highlighting another big problem.
Every transfer was subject to a 1% fee. This model is somewhat similar to how PayPal operates. It too charges users for every transaction. Not the best business model, but it seems to work well for the company.
Topping it all off is the irrevocable nature of Liberty Reserve transactions. This is similar to Bitcoin’s technology, albeit both ecosystems operate very differently from one another. For LR users, once a transaction was sent, there’s no chargeback option. An interesting experiment, albeit it creates another big problem.
Attracting the Wrong Crowd
Based on the information above, it’s not hard to see where things went wrong for Liberty Reserve. The service, while targeting e-commerce players, attracted a very different crowd. Most of its users were currency brokers, MLM companies, and criminals abusing the system.
This latter aspect is facilitated by all of the flaws in the business model. Not verifying identities often leads to fraudulent activity. Combined with no transaction limits, a lot of illicit money enters the system. Supporting credit cards – often subjected to fraud in general – creates a very potent and dangerous cocktail of conditions. Ultimately, this is what started the downfall of Liberty Reserve.
Making matters things worse is the internal company policy. Employees had to sign a confidentiality agreement. No information regarding the company or its operations was allowed to be made public.
Furthermore, this information has to remain secretive for 15 years after leaving the company. Liberty Reserve shut down in May of 2013. It is possible that a lot of unsavory information will come to light throughout this decade.
Criminal Investigations Galore
Despite initial successes, Liberty reserve ran into legal trouble after just a few years. Things were off to a rocky start with the Gold Age digital currency exchange. It is one of the third-party services associated with LR.
The founders of this platform were indicated for running an illegal financial business. Five years of jail turned into five years of probation. Arthur Budovsky, one of Gold Age founders, incorporates Liberty Reserve in 2006. It is evident that this come back to haunt the controversial service sooner or later.
Fast forward to 2009, and more trouble becomes apparent for the company. Costa Rican officials suddenly demand the firm to obtain a license. That license request is rejected in 2011. Reasons for rejection include a lack of transparency and questions regarding operational funding. The involvement of Budorsky doesn’t help matters much either.
Suspicious bank activity regarding Liberty Reserve results in a second investigation in early 2011. Several months later, the US gets involved in the process. Ultimately, funds were seized from the company at least three times. The 2011-2013 period was very rough for the company in this regard.
Shutting Down in 2013
Mounting pressure by governments and law enforcement usually doesn’t end well. For Liberty Reserve, the company is on the verge of collapse by 2013. Officials across 17 countries are investigating the company and its operations at this time. In May of 2013, the US government issues an indictment. By this time, the company is suspected of handling $6 billion in criminal proceeds.
A snowball effect ensues fairly quickly. The arrest of Arthur Budovsky in Madrid is the star breaking the camel’s back. Days prior, his homes and shell corporations were raided as well. Officials ultimately arrest six individuals across three different countries.
In May 2013, the Liberty reserve domain goes offline. A court order is issued in Costa Rica to seize Budovsky’s financial products. Several days later, the US indictment is unsealed. It charges seven employees and the company itself with money laundering and unlicensed money transmitting business operations.
In 2016, Budovsky pleads guilty to one of the charges. He currently serves 20 years in prison. Former Liberty Reserve CTO Mark Marmilev serves five years in prison for running an unlicensed money transmitting business.