SHAKEDOWN: United States Attorney for the Southern District of New York Preet Bharara describes charges against Costa Rica-based Liberty Reserve, one of the worlds largest digital currency companies.

As undercover police aliases go, it was hardly convincing.

Name: Joe Bogus. Address: 123 Fake Main Street, Completely Made Up City, New York.

But unlike other undercover sleuths out to create a plausible alternative persona, this US investigator was doing the exact opposite: creating an online financial account so blatantly, ridiculously false that surely someone would flag it.

They didn't, and now US prosecutors are using it as a prime example of a culture they're describing as "the Wild West of illicit internet banking".

US authorities have had their biggest win yet against cyber financial criminals, announcing on Tuesday they had shut down Liberty Reserve, a $6 billion money-laundering operation masquerading as an online currency exchange and payment system.

But questions remain as to whether this is just the tip of the iceberg in the fast-growing and shadowy world of online finance.

"We're now entering the cyber age of money-laundering," said Richard Weber, chief of the Internal Revenue Service's Criminal Investigation division. Criminals "are gravitating toward digital currency alternatives as a means to move, conceal and enjoy their ill-gotten gains," he said.

"If Al Capone were alive today, this is how he would be hiding his money."

'Purpose-built for criminals'

Liberty Reserve was an online financial hub not only used by, but designed specifically for, cyber criminals dealing in everything from credit card fraud, identity theft and computer hacking to child pornography and drug trafficking, prosecutors have alleged.

With more than a million users and 12 million transactions, it was one of the world's largest digital currency systems.

But there are many more.

And questions are increasingly being asked about who is benefiting from the ability to trade currencies so anonymously.



"A lot of these digital currencies are purporting to be legitimate but aren't," says Nigel Phair, director of the Centre for Internet Safety at the University of Canberra.

"The only reason people would use them is to hide their identities, and the only reason you're going to do that is because you've got something to hide."

How it works

Liberty Exchange used third party "exchangers" to avoid collecting cash directly. Labelled the PayPal of criminals, it used the internet to transcend traditional geographical confines, and therefore international banking regulations. These exchangers were mostly unlicensed money transmitting services based in Malaysia, Nigeria, Russia and Vietnam, according to prosecutors.

"The only liberty that Liberty Reserve gave many of its users was the freedom to commit crimes," US Attorney Preet Bharara says.

The service allowed people to move money anonymously from one account to another online with virtually no questions asked. Users had to supply a name, address and date of birth, but there was no verification process. All you effectively need is a valid email address - an attractive prospect for hackers and criminals.

Perhaps the best known digital currency is Bitcoin, which gained mass media attention when the value of the currency shot up earlier this year.

In many ways, it operates in a similar way to Liberty Reserve - you can buy bitcoins with your cold, hard Aussie dollars (or indeed any "real-world" currency) via online exchanges. Some - though not all - of these third parties require identification; but once you have your bitcoins, you are free to conduct for all intents and purposes unregulated and untraceable transactions online, legal or otherwise.

Mr Phair confirmed to Fairfax Media that drug trafficking and other illegal activities in Australia have been traced to Bitcoin.

Unlike Liberty Exchange, which has a "real" founder (Arthur Budovsky, who was arrested in Spain last week as part of the sting), Bitcoin was designed by Satoshi Nakamoto, widely regarded as just a pseudonym for the person or group responsible for the currency.

Day-to-day, Bitcoin is run by thousands of users around the world, making it incredibly hard for the US to prosecute the entire decentralised collective.

Mr Phair agrees, citing the "online conundrum" in the policing of criminal activity in cyberspace.

"I don't see how you could regulate it. No one knows who's behind it, there's no place to go to."

Moreover, if the US did attempt to regulate or even prosecute Bitcoin, it would likely drive the crypto currency further underground, making it more attractive to cyber criminals already looking for a new beat with the closure of Liberty Exchange.

"It could drive more people to it," said Mr Phair. Bitcoin's still alive and well out there as volatile as the currency might be."

Lead Bitcoin developer Gavin Anderssen recently told The New Yorker he would happily stop what he was doing if the US legislated against it. "But that wouldn't be very effective, because there are people all over the world who could pick up and reimplement it," he added.

Prosecutors could target individuals, but likely never destroy the entire network - making it difficult for governments to legislate and regulate the flow of funds online.

Even without Bitcoin or Liberty Exchange, security experts say there are plenty of online payment systems that allow users to move money without verifying their identities.

"Organised crime and terrorist groups are now financing their operations through these anonymous payment systems," said Tom Kellermann, a vice president at security firm Trend Micro. "The financial sector no longer has a monopoly on moving capital around the world."

Mr Phair believes the best place to catch cyber criminals is at the point of a "real-world" transaction.

"At some stage you've got to get money into it and you've got to get money out of it," he says. "At the end of the day you want to get cash."

-with agencies