There was confusion yesterday as half the financial world briefly and mistakenly thought the U.S. government had shut down Bitcoin. The target was not Bitcoin, but the Costa Rica-based LR, comparable in scale but not nearly so well known. The indictment says substantially all of the transactions in LR were for money-laundering purposes, and the issuer, Liberty Reserve, was operating in secret in Costa Rica after authorities there started to ask questions about its money-laundering controls.
Money laundering is a potential problem in any currency but especially in digital currency, where secret identities and low transaction costs make it easy to divide a single payment of millions of dollars into thousands of transactions among what looks like thousands of unrelated parties, thus disappearing into the background noise of small transactions and becoming almost impossible to trace. Money laundering happens in physical cash too, I must add, but there, its scale is limited by the physical work of moving cash from place to place and party to party. There is no such physical work in digital currency, so it is more open to abuse.
The largest money laundering operations probably are not done in money of any kind, but in derivatives, which can be made to act like money and which, compared to digital currencies, are flexible, highly secretive, and effectively unregulated. It is just another reason why secret derivatives contracts shouldn’t be allowed, and why it is so important to have new laws that require all derivatives contracts to be published.