The Secret Service has arrested five individual and seized bank accounts in connection to a $6 billion money laundering case that the authorities are describing as “staggering” and may be the largest case of international money laundering.

Bank accounts and domains associated with a Costa Rican based website, Liberty Reserve, have been seized.  Liberty Reserve deals in digital currency, however in this case not Bitcoins.

The founder of Liberty Reserve, Arthur Budovsky, has been arrested in Spain; he renounced his US Citizenship in 2011.  His partner, Vladimir Kats is in custody in New York.  In total the indictment charges seven of the company’s principals and employees.

Liberty Reserve would allow users to open accounts under fictitious names to redeem digital currency for cash in any part of the world using third party exchange companies.  Aditya Sood, who has studied this underground economy, described Liberty Reserve as “a no-questions-asked alternative…with little more than a valid email needed to open an account and start moving money across borders.”

“There’s no way to trace an account. That’s the beauty of the system.” Sood said.

Per the Secret Service statement, Liberty Reserve has approximately one million users worldwide with more than 200,000 US users. The company is said to have processed an estimated 55 million financial transactions.

The indictment described the group as “one of the principal means by which cyber criminals around the world distribute, store and launder proceeds of their illegal activity…including credit card fraud, identity theft, investment fraud, computer hacking, child pornography and narcotics trafficking.”

Similar to the Mt. Gox seizure earlier in the month, those arrested in the Liberty Reserve case have also been charged with illegal money transmitting.

Naturally not all users of Liberty Reserve were committing illegal activity.  Many legitimate businesses also used their service and are unfortunately now left in legal limbo while it gets sorted out.  Mitchell Rossetti of ePayCards.com says his business has around $28,000 tied up in Liberty Reserve accounts.

So is this the beginning of the end for the unregulated digital currency?  Will merchants stop and think two or three times before they trust in the companies like Liberty Reserve?  Is the revolution of digital currency worth the risk of getting caught up in a seizure like Mt. Gox or Liberty Reserve?

Only time with tell if digital money is really here to stay or will simply be turned into another regulated or fiat currency.