Tech

This is what happens when a digital currency, like Bitcoin, gets shut down

By Michael Mayday , May 27, 2013 08:35 AM EDT

Liberty Reserve, a virtual currency similar to the popular Bitcoin, has been shut down in a joint operation between U.S., Costa Rican and Spanish authorities. The founder of Liberty Reserve, Arthur Belanchuk, 39, was arrested in Spain.

Investigators allege Belanchuk and his business, based out of Costa Rica, profited by laundering money for organizations producing illicit products. Those products ranged from child pornography to drugs and malware.

Similar accusations have been leveled at Bitcoin, though that virtual currency hasn't been shut down. Bitcoin is currently under investigation by the Department of Homeland Security. The nature of that investigation is unknown.

When libertyreserve.com, Liberty Reserve's main address, went offline on Thursday, May 23, a good deal of its customers, who often traded in malware sales and banking fraud, according to Kerbs on Security, panicked. Some customers stood to lose up to $25,000 to $50,000 overnight.

Those fears were realized when the domain name servers for libertyreserve.com were changed to ns1.sinkhole.shadowserver.org, a domain owned by Shadowserver. Shadowserver, according to Krebs on Security, is a volunteer nonprofit organization helping Internet service providers to fight against cybercriminals and botnets.

Sinkhole servers are used to capture Internet traffic going to a particular domain name. Typically these sinkholes are employed to stop botnets from operating, though the technique can also be used to capture and analyze traffic for security experts and law enforcement agencies.

"Ironically, as of this writing Shadowserver.org is not resolving, possibly because the Web site is under a botnet attack," Brian Krebs, cybersecurity expert and author of Krebs on Security said.

This isn't Belanchuk's first run-in with the law. In 2006, Belanchuk was arrested for operating an illegal financial business, GoldAge Inc., from his apartment in Brooklyn, N.Y., with his partner, Vladimir Kats.

Both men were sentenced to five years in prison for GoldAge in 2007, though they ended up only serving time on probation.

GoldAge was a virtual currency identical to Liberty Reserve. Customers could open GoldAge accounts without giving up their identity and purchase the virtual currency for personal use or transfers. If a customer desired, they could withdraw their money by wire transfer to virtually any account in the world. Customers could also have checks written to identified individuals for a cash deposit. Belanchuk and his partner would take fees for these services, which, according to the Justice Department, sometimes exceeded $100,000.

Through GoldAge, Belanchuk and his partner managed to transmit at least $30 million to accounts worldwide since 2002. The depth, and financial cost, of Liberty Reserve's shut down is currently unknown.

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