Federal prosecutors have shut down Liberty Reserve, an alternative payment network that they say was a $6 billion scam "designed to help criminals conduct illegal transactions and launder the proceeds of their crimes." (Read the indictment.) This is a case anyone with Bitcoins in their virtual wallet is going to want to watch very closely.

The lead defendant, Arthur Budovsky, has a history of building money-transfer businesses that attract unwelcome attention from federal regulators. In 2006, Budovsky faced charges  relating to another money-transmission business, called Gold Age, that authorities said had not complied with money-laundering regulations. He was convicted and sentenced to five years' probation. Undeterred, Budovsky moved to Costa Rica, renounced his U.S. citizenship and started a new financial network called Liberty Reserve. Now that, too, has come under U.S. government scrutiny, and Budovsky has been arrested in Spain.

In the view of federal prosecutors, Liberty Reserve was deliberately designed for illegal activities. "Liberty Reserve has become a financial hub of the cyber-crime world, facilitating a broad range of online criminal activity," the indictment states. "Unlike traditional banks or legitimate online payment processors, Liberty Reserve does not require users to validate their identity information, such as by providing official identification documents or a credit card. Accounts can therefore be opened easily using fictitious or anonymous identities."

Of course, that description could just as easily describe Bitcoin. Anyone can create a new address for accepting bitcoins and then transmit funds to other Bitcoin addresses without furnishing identifying information. This feature has raised concerns that the currency has been used for activities such as drug dealing or illegal gambling.

The U.S. government faults Liberty Reserve for requiring users to fund their accounts through intermediaries called "exchangers." In the prosecutors' view, these intermediaries helped the core Liberty Reserve network avoid collecting identifying information about their users. The Bitcoin economy has a similar structure. Users buy bitcoins with conventional currencies via online exchanges. Some of these intermediaries do collect information about their users, but once users have purchased their bitcoins they can conduct unregulated, and practically untraceable, transactions with other Bitcoin users.

For their part, leaders of the Bitcoin community have tried to stay within the bounds of the law. "If the U.S. government decided that Bitcoin was a bad thing and told me, 'Stop doing what you’re doing,' I’d stop doing what I’m doing," said Gavin Andressen, Bitcoin's lead developer, in a recent interview.

But there's also at least one important difference between Bitcoin and Liberty Reserve: If the authorities concluded that Bitcoin were a money laundering scheme, it's not clear whom they'd prosecute. There's no Budovsky for Bitcoin. Rather, the online currency was created by "Satoshi Nakamoto," widely regarded as a pseudonym. Bitcoin transactions are processed in a distributed fashion by thousands of "miners" around the world. It would be difficult for the United States to indict all of them, and doing so would likely drive Bitcoin mining underground -- which could make it even more attractive to criminals.

That sprawling, decentralized network would create a dilemma for federal regulators if former Liberty Reserve users switched to Bitcoin. The crypto currency doesn't fit well into existing money-laundering laws, and there's no one who can be required to reform the network to bring it into compliance. Trying to shut down Bitcoin could prove futile — the feds can make life hard for individual Bitcoin users but likely could not destroy the network altogether.

Civil libertarians have long lauded the Internet's ability to resist government's efforts to control the flow of information. The emergence of Bitcoin could threaten the United States' ability to control the flow of electronic funds, too.