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Liberty Reserve Shut Down by Government Officials, Owner Arrested

May 27 2013

This Friday Liberty Reserve, an e-wallet popular amongst forex brokers and traders, was shut down after is owner Arthur Budovsky Belanchuk was reportedly arrested in Spain on an accusation of money laundering. 

The Costa Rican newspaper Tico Times quotes prosecutor Jose Pablo Gonzalez saying that Budovsky, a former U.S. citizen and naturalized Costa Rican of Ukrainian origin, has been under investigation since 2011 for suspected money laundering. Budovsky allegedly used apparent shell companies he created to run Liberty Reserve. The investigation on his activities was run together with the US authorities, and some sources claim that Budovsky's business was funded by money from child pornography and drug trafficking. 
As Bitcoin Magazine reports, in 2011 Liberty Reserve was one of the main ways to move money into bitcoin together with Dwolla (the latter has also been put under scrutiny when the US Department of Homeland Security froze the Dwolla accounts of Mt. Gox, the worlds biggest bitcoin  exchange). The reason for the popularity of the two payment processors was that they both offered no chargeback capabilities, thus enabling chargeback fraud. In 2012 Dwolla changed its rules to include protection against that but Liberty Reserve continued operating as before. 

Liberty Reserve's shutdown impact on online forex

This news about Liberty Reserve having shut down caused quite the commotion in the forex world – the wallet is a payment option vastly used by traders for funding their forex and/or CFD accounts because of its peculiar set of features: it's fast, it's flexible, it's cheap, and it's unregulated. 
The lack of regulation makes Liberty Reserve a particularly attractive payment method for residents of countries, where banks do not allow transactions to foreign entities. Such countries are Pakistan, Nigeria, Malaysia, Brazil, etc. While this can be considered a positive, there's also the fact that being unregulated allows Liberty Reserve to accept registration without requiring any sort of identification. This way, the platform can easily be used for illegal money transmitting, money laundering, and other types of shady operations. 
Obviously, Liberty Reserve is not the only e-wallet available on the market, however most of the alternatives are regulated and comply with way stricter requirements. Moneybookers/Skrill, for example, is regulated by the FCA in the UK, and demands document verification from its users so even if the payment provider is used for illegal purposes, the involved parties can easily be tracked down. And that is not the case with Liberty Reserve. 
Which is not to say that everyone who uses Liberty Reserve is a fraudster – it's only that the platform allows for fraudulent transactions, and apparently someone has taken advantage of this, as the site going down and the arrest of Budovsky suggest. Unfortunately, the measures taken (a little too late, I might add) are also affecting honest users who currently have no idea what would happen to their money kept with Liberty Reserve. 
Another question that should be addressed is the one of withdrawals: many brokers require traders to cash out their profit using the same payment option that they have used for depositing – so I wonder whether adequate measures will be taken to allow traders who have made deposits via Liberty Reserve to withdraw. 

Is there light at the end of the tunnel 

Liberty Reserve is not the first venture of Arthur Budovsky; he previously ran another similar business with his partner Vladimir Kats: the GoldAge Inc. payment processing company. In 2007, GoldAge was shut down and the two buddies were sentenced to 5 years in prison for engaging in the business of transmitting money without a license, a felony violation of state banking law; they did, however, end up receiving 5 years probation instead.  Back then the US Department of Justice said that Budovsky and Kats had illegally transmitted at least $30 million to digital currency accounts around the world. And now Budovsky does it again (some people just never learn their lesson). 
Up to date, officials have not yet commented on how much money was handled by Liberty Reserve and what would happen with it, and the number of affected customers remains unclear too. We can only hope that more information is released soon, and hopefully such that can set affected users at peace. 
TAGS: Liberty Reserve  online payments  Moneybookers  Skrill  fraud  scam  GoldAge  money laundering 
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