Will Liberty Reserve prompt the regulation of Bitcoin?

The only similarity between BitCoin and Liberty Reserve is claims about money laundering on the platform. BitCoin is more similar to the Euro than it is Liberty Reserve. The problem with approaching BitCoin in the same way as LR is that you'd effectively have to outlaw legitimate currencies to shut down BitCoin, or you'd have to be so specific in your legislation that any change to BitCoin would immediately circumvent the laws created to stifle it.

The only thing regulators can do is regulate cash going out of the traditional economy into BitCoin - regulated Foreign Exchange, just as the way governments regulate the trade on foreign currencies today. It makes no sense to try to stop BitCoin or make it illegal unless you want to make all future legitimate digital efforts on money transfer like MintChip (Royal Canadian Mint) also illegal.

The problem is not BitCoin itself, it is the anonymous nature of those trading in the currency/commodity. Allow a process for identifying the individual trading and BitCoin holds no real threat to the status quo. 

Brett, I completely agree that the things that need regulating are (a) the identity of the counterparties and (b) the points at which you convert between digital currency and real-world currency.

It will, however, be interesting to see how many people would still see a value in using a digital currency if that happens.  I absolutely agree that digital currencies have a part to play in the broader financial world, but at the moment the lack of regulation is keeping them out of the mainstream.

Chirs; You are right to distiguish between the "counterparty identity" issue and the digital currency itself.

In mainstream payments world, we can look at a payment as the movement of value (represented by bits and bytes) from one digital identity (called a bank account number) to another digital identity (another bank account number). It is the Know Your Customer process that a bank undertakes in establishing that digital identity, and the liabilities/entitelements which go with it- which bring Trust in payments systems (something which end-customers all largely take for granted, because it works). That KYC process is then overlaid by a set of contractually binding operating rules (eg as found in a Cheque Clearing Syatem) that brings the interoperability between banks/their customers. The opportunity for banks, large and small, to consider is whether to leverage that same KYC capability beyond the payment application into other apps which transfer value in the form of "bits and bytes" from one digital identity to another. JohnB

Hopefully, after this high-profile case, the "cash must go" camp will stop associating money laundering, drugs and other nefarious activities exclusively with cash. Now that law enforcement has caught on to shady alternative payment networks, I hope the day is not far when the ax falls on other providers who block merchants from withdrawing their funds under the guise of verifying the nature of the transaction but don't bother with such formalities while pulling out the money from the payer's account, slapping their fees on top and enjoying the float for months.