What Traders Should Know about Liberty Reserve

Back in 2013, the arrest of the founder and subsequent shutdown of Liberty Reserve by U.S. authorities, sent shock waves to retail forex brokers and traders around the world.  Both had come to rely on Liberty Reserve as an alternative method of payment, especially for funding and withdrawing money from forex trading accounts. 

The ease of use, and the privacy it afforded, allowed traders in countries with onerous financial laws, to participate in the markets. Companies like Liberty Reserve made trading available to a wider variety of peoples, by acting as an intermediary between other middle men or “exchangers”-mostly local or regional providers in a user’s home country-and expanding the ability of users to utilize a greater number of services. When Liberty Reserve was closed, the dollar amount of transactions had reached into the billions, with more than fifty five million transactions since it’s founding, and twelve million per year. Merchants around the world had come to trust Liberty Reserve, and many of the top tier forex brokers accepted transactions processed through them. That all came down with a crash in May 2013. 

Some might argue that the zeal to prosecute Liberty Reserve can be attributed to the real desire to protect citizens. U.S. government officials can certainly justify their concern about the need to protect the American public. According to www.informationweek.com, prosecutors in the Liberty Reserve case stated that “one fifth of the services users-200,000 people-are based in the U.S.” 

When the assets of Liberty Reserve were seized by the U.S. government, millions of users-particularly those from some of the poorer nations in Africa and developing nations around the world, lost big.  Sadly, they are likely not to see those funds again.   In Asia, www.thanhniennews.com reported; 

“Many people in Vietnam have reportedly lost money after digital money network Liberty Reserve was shut down for a probe into money laundering in the US. On online forums, individuals reported losing thousands of dollars, while “exchangers” — the middle men through whom everyone had to buy or sell the virtual currency Liberty Reserves (LR) — are thought to have lost even more. 

“The currency is estimated to make up 30-40% of the online money market,” Tuoi Tre (Youth) newspaper quoted a person identified only as D, who claimed to have lost 1,000 LRs, equivalent to US$1,000, as saying. He said LRs were preferred by many people in Vietnam because it does not have stringent requirements about personal information or limits on transaction amounts like PayPal.”

The rationale for the closure of Liberty Reserve, was that the company was engaged in money laundering. Certainly money launderers were attracted to the service. Whether  Liberty Reserve’s owner was a criminal or operated the company with criminal intent is debatable. To many observers, Liberty Reserve provided an alternative for legal transactions and transfers, and filled a gap in the finance community that was not addressed by other companies, including the ubiquitous PayPal and Skrill. 

This was particularly the case for brokers and customers located in countries which imposed high fees and taxes, or had regulations which prohibited money transfers. In essence, the closure has now cut off many prospective traders and investors. 

While a small number of users-or even a large number of users-might have used Liberty Reserve to conduct illicit enterprises, Liberty Reserve seems to have run the business   without scamming or skimming. Indeed, if the owners had intended to cheat, they could have arbitrarily changed the value of exchange used to convert U.S. dollars into Liberty Reserve credits. They could have made many millions doing this, closed up shop and disappeared. They never did, perhaps seeing the long term benefits of keeping the business honest so that all parties in the transfer process would continue to use the service.   Ironically, the forced closure by the U.S. government wiped out many businesses and individuals whom had money in Liberty Reserve accounts.  Reminds one of that saying during the Vietnam War, that they had to “destroy a village to save it.”  

Why Liberty Reserve case is so important.

The history of trade and financial markets is replete with frauds and scams. The need to protect the public from the next Ponzi Scheme and extortion is certainly justified and governments have a legitimate and necessary role in doing such. However, restrictions can be counter productive, and often do more harm than good. The free flow of capital, goods and services, as well as information has always been good for societies as a whole. Overlain on this, has always been the urge of governments to control more than they need or should, and the creative ways that people find to get around government’s overreach. Liberty Reserve was certainly one such manifestation. Swiss banks once provided a way for savers to safely conduct financial transactions in privacy. So too the need in the information age. 

The right of privacy. A novel idea, that is very new in the context of human civilization. Doubly ironic when current events suggest one of the biggest violators of this right is the nation that has it enshrined in their constitution. 

The U.S. government claims that financial facilitators are used by cyber criminals and terrorists, but so are computers and automobiles. So is the U.S. dollar itself. The strength and reliability of the currency is a reason everyone, including criminals “bank on it.” By the logic of U.S. officials, criminals liked using Liberty Reserve, and this was enough to justify the actions of the U.S. government.  In their eyes, anonymous transactions are itself “criminal” even if the transfer is conducted for legal purposes. Buying diapers for one’s children with virtual currency becomes the equivalent of buying or selling child pornography. 

The real questions is what’s next? New modes of transactions will enter the market since the need still exits. Moreover, there is the question of Bitcoin, and even the perennials of gold and silver. Can governments and central banks strip away the anonymity of all transactions? Doubtful, but they will try anyway. 

What’s next? Further scrutiny of other forms of payment processing. That’s a given. Increased legislation and regulations that could impose further obstacles for brokers and traders. For example, the number of brokers offering accounts to U.S. residents is diminishing due to U.S. government regulations concerning financial reporting. This is bad for many brokers whom must forego the U.S. market unless they endure a costly registration process and agree to abide by U.S. regulations and arbitration by U.S. governing bodies. It also reduces competition for U.S. based retail traders and limits their choices and options. 

For now, the choices for retail traders and brokers, are more limited.  Traders need more options and methods than traditional wire transfers and credit-debit card payments. The next “Liberty Reserve” is probably being formed now. Just as governments could not stop or even severely limit offshore online gambling operations, it is unlikely to stop the next wave of payment systems, even those who tout privacy as their mission. The phoenix like rebirth of Kim Dotcom of Megaupload fame is one such example. 

Forex brokers have done their part to a great degree. Much of this has to do with competition as new forex brokerages are entering the market each day, and the competition is fierce, even for the small retail accounts. Brokers have lowered the threshold so that traders can now fund an account with less than $50USD.  Forex brokers understand that there is huge upside given the greater number of potential traders, especially from nations like India and China. Trading, investing, and to some extent gambling, are part of the cultural tableau in many these nations, and as incomes grow, so will the numbers of forex traders. Eastern Europe, Russia and the Middle East are also creating new opportunities.  As the number of forex traders increase from developing countries, there will be a need for new forms of payment. This is especially apparent where the lack of access to financial services combined with stifling and confusing regulations, make it difficult and often prohibitively expensive, for brokers and their clients to do business. 

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