Before Bitcoin changed cryptocurrency and made it both a viable alternative economy and a valid investment for traditional finance thanks to exchanges and conversion platforms, cryptocurrency was a set of rather divergent principles and technological ideas.
Whilst most of the principles of the blockchain were established in the 1980s by Dr David Chaum, his attempt to commercialise the technology led to the palpably unsuccessful DigiCash in the 1990s, foiled by a reliance on the banking infrastructure that crypto would set itself apart from.
By contrast, there were popular digital currencies at the time, such as e-gold, but they struggled due to a lack of understanding of the regulatory frameworks surrounding money and alternative finance.
The case of Liberty Reserve has an even more contentious legacy, highlighting both the issues and potential ideological necessity for cryptocurrency in a world following the Great Recession.
What Was Liberty Reserve?
In the early days of online banking, before PayPal reached a critical mass of users, an alternative online payment system was digital gold currency, facilitated by currencies such as e-gold and exchange platforms such as The Gold Age.
The Gold Age was an extremely early independent digital currency exchange, allowing fiat currency to be exchanged into e-gold, 1mdc and e-Bullion, the three big digital currencies of the era.
Unfortunately, e-gold was subject to a legal injunction in 2007, which also ended 1mdc, whilst e-Bullion was closed due to the murder of Pamala Fayed, for which her husband Jim was sentenced to death for capital murder, closing the business they both owned.
Before this happened, Arthur Budovsky and Vladamir Kats, the two owners of Gold Age were indicted on charges of operating an illegal financial business, similar to the charge that would ultimately be used to shut down e-gold as well.
However, Mr Budovsky fled the country, settling in Costa Rica and setting up a similar private currency exchange system in the country in 2007.
The First Stablecoin
Whilst it did not use the blockchain, Liberty Reserve was possibly the first digital currency that was more than a payment processor but had a token pegged to the value of an existing fiat currency.
The main token was Liberty Reserve Dollars, with Liberty Reserve Euros also available, pegged to the value of the US Dollar and the Euro respectively. An alternative service also pegged Liberty Reserve tokens to ounces of gold.
Liberty Reserve itself did not process either deposits or withdrawals, which in combination with its incorporation in San Jose, Costa Rica means that it was initially seen as more of a payment processor, especially since it made money through percentage-based charges on transfers/
It found itself becoming popular in frontier and emerging markets and managed to catch the revival of online industries following the bursting of the dot-com bubble. It met the same need stablecoins and crypto exchanges would over a decade later.
It was particularly popular amongst some forex brokers and fast-paced technology markets, in no small part because it followed the same approach of “move fast and break things”.
Unfortunately, this oversight would ultimately be the undoing of the entire system.
The Fall Of Liberty
Liberty Reserve ran from 2006 until 2013, but even as early as 2009, there were concerns about the business and its lack of transparency.
It worked primarily through middlemen who bought Liberty Reserve Dollars to sell to other people, which they believed would be enough to allow the company to run.
Costa Rican financial authorities informed Liberty Reserve that they needed a license to run as a money-transmitting business, something that they were denied in 2011 due to questions surrounding how the business operated, including issues surrounding know-your-customer rules.
There was possibly a way to divest the company or ensure it could meet internationally accepted requirements to ensure it could still run. Instead, Mr Budovsky attempted to get around the rules by running the company through five shell companies based in Costa Rica, something that would inevitably cause issues.
It would inevitably be seized in 2013 under the United States Patriot Act; because the company handled US dollars it could be stopped, seized and its owners and operators arrested.
It was connected to a huge number of crimes by the US government, which they claimed led to criminal proceeds of over $6bn.
Ultimately, Mr Budovsky accepted a plea deal, but that still led to a 20-year prison sentence, and it ensured that any alternative stablecoins operating on the blockchain would be far more diligent in how they operated.