There’s at least one lesson to be learned from the recent closure of Liberty Reserve for alleged money laundering: whether you use “real” government-backed fiat or a distributed digital currency controlled by no one in particular, what you use it for is subject to laws and regulations of many kinds. Fall afoul of those, and the authorities will sooner or later come looking for you.

The Costa Rica-based Liberty Reserve used its own digital currency -- also called the Liberty Reserve, or LR -- to provide low-cost payment processing services to customers around the world. Its ease of payments is credited with helping early Bitcoin adopters use their dollars or euros to buy and sell the digital currency via exchanges.

However, Liberty Reserve’s minimal verification requirements (“Essentially, all a customer needed to open an account was an e-mail address,” noted the New York Times.) appears also to have appealed to those looking for a way to make illegal transactions "anonymous and untraceable," according to the 27-page indictment handed down against the company and its principles in US federal court on Tuesday.

“Through the defendants’ efforts, Liberty Reserve has emerged as one of the principal means by which cyber-criminals around the world distribute, store, and launder the proceeds of their illegal activity,” the indictment states. “Indeed, Liberty Reserve has become a financial hub of the cyber-crime world, facilitating a broad range of online criminal activity, including credit card fraud, identity theft, investment fraud, computer hacking, child pornography, and narcotics trafficking.”

The indictment notes that “virtually all of Liberty Reserve’s business derived from suspected criminal activity,” adding that the scope of its unlawful conduct was “staggering.”

“Estimated to have had more than one million users worldwide, with more than 200,000 users in the United States, Liberty Reserve processed more than 12 million financial transactions annually, with a combined value of more than $1.4 billion,” the indictment states. “Overall, from 2006 to May 2013, Liberty Reserve processed an estimated 55 million separate financial transactions and is believed to have laundered more than $6 billion in criminal proceeds.”

Arthur Budovsky, described as Liberty Reserve’s principal founder, and Vladimir Kats, a company co-founder, were both arrested this past week – Budovsky in Spain and Kats in Brooklyn. Also arrested was Azzeddine El Amine, a company principal. Two others – past manager Ahmed Yassine Abdelghani and manager/part-owner Allan Esteban Hidalgo Jimenez – reportedly remain at large in Costa Rica.

This is not Budovsky’s or Kats’ first run-in with the law. Both were arrested in 2006 when US authorities determined their digital currency exchange, Gold Age – which dealt in the digital currency e-gold – was conducting “money transmittal without a license”. The two were sentenced to five years of probation in 2007. (Around this same time, Budovsky emigrated to Costa Rica; he later renounced his US citizenship and became a Costa Rican citizen.)

The unlicensed money transmission charge is the same one used recently by the US Department of Homeland Security to seize Bitcoin exchange Mt.Gox funds held in Dwolla.

The Costa Rican financial regulator SUGEF in 2009 denied Liberty Reserve’s application for a money transmitting business license, noting – according to the US indictment – that “Liberty Reserve did not have even basic anti-money laundering controls in place such as ‘know your customer’ procedures, and otherwise lacked any effective means of tracking suspicious activity within its system.”

Liberty Reserve subsequently set up a computer portal that “appeared to give Costa Rican regulators the ability to access Liberty Reserve transactional information and monitor it for suspicious activity.” However, the indictment adds, most of the data appearing in the portal was fake and could be manipulated to hide information from authorities.

By late 2011, Liberty Reserve had also been flagged by the US Financial Crimes Enforcement Network (FinCEN), which warned financial institutions about the risks of providing services to the company.

FinCEN earlier this year issued new guidance that applies to “persons administering, exchanging or using virtual currencies.” In the wake of that release, several Bitcoin exchanges ceased operations.

“I’m not surprised,” Bitcoin Foundation general counsel Patrick Murck said at the time. “Since long before the guidelines came out I have been counseling bitcoin exchange operators, both formally and informally, to register with FinCEN as Money Service Businesses (MSBs) and to run a thorough AML/KYC (anti-money laundering/know-your-customer) compliance program for all users of their service. FinCEN stepping in is the least surprising aspect of the guidelines being released.”

Figuring out how the Bitcoin ecosystem fits within a regulatory environment designed for fiat currency is “still a work in progress,” Murck added.

Both alt-currency businesses and traditional regulators are feeling the growing pains, and minimizing those pains will require the two groups to communicate better with each other and educate each other.

“The biggest threat to FinCEN realizing its own goals and mandate (to prevent financial crime) is that they lean too hard on the existing, centralized system of exchanges and push market share to further decentralized peer-to-peer exchanges,” Murck noted. “FinCEN has talked a big game about public-private partnerships but hasn’t followed through.”

Part of following through effectively, he added, is recognizing that regulators – while pursuing their anti-crime efforts online and off – need to make room for legitimate uses of digital currencies in today’s evolving economy.

“The genie is out of the bottle and distributed, math-based currency is here to stay,” Murck said.

But that genie still has to obey the law. Or face some harsh consequences.