By Thomson Reuters Reporting Team

NEW YORK, June 3 (Thomson Reuters Accelus/Reuters) – These are unsettling times for digital currency businesses and the venture capitalists backing them.

On Tuesday, the authorities in Spain, Costa Rica and New York arrested five people at the digital currency firm Liberty Reserve, including its founder Arthur Budovsky, and seized related bank accounts and Internet domains.

It was a further wake-up call for those involved in digital currencies, such as the most prominent, Bitcoin, that they need to comply with anti-money laundering rules or risk facing a crackdown.

They had already been put on notice – first by an April 2012 report from the U.S. Federal Bureau of Investigation that explained how Bitcoin was being used by criminals to secretly transfer money around the world, and then this March by the U.S. Treasury Department. Its anti-money laundering arm, the Financial Crimes and Enforcement Network (FinCEN) stated that digital currency firms needed to comply with the same anti-money laundering rules as other financial institutions, including monitoring customers and reporting suspicious activity to the government.

As regulators tighten the screws, businesses built around digital currencies are trying to satisfy new monitoring
requirements without letting public enthusiasm for the technology-based concept slip away.

“I think the whole ecosystem is maturing very quickly and we have young companies that are just beginning to understand how to navigate the regulatory issues,” said David A. Johnston, co-founder and executive director of BitAngels, a new venture which only this week announced it had raised $6.7 million to fund startups tied to Bitcoin.

Digital currency is electronic money that can be passed between individuals without the use of the traditional banking or money transfer system.

Different currencies are structured in different ways. Some, like Liberty Reserve’s “LR” digital currency, use units of value that are tied to an existing hard currency, such as the U.S. dollar. By contrast, the value of Bitcoin, the best known virtual currency, fluctuates according to supply and demand.

Bitcoin, which has been embraced by a number of venture capitalists in Silicon Valley, exists through an open-source software program that any users with enough skill and computing power can access. It is not managed by a single company or government. Users can buy bitcoins through exchanges that convert real money into the virtual currency.

Liberty Reserve, which was closed last week, however, was a firm that U.S. prosecutors said created a platform that enabled criminal gangs to launder more than $6 billion.

Bitcoin’s supporters cite a host of legitimate reasons for using a digital currency: It can be transferred using less infrastructure than traditional currencies, and with fewer service fees. A virtual currency could also be safer than using a regular credit card for online purchases, because it is not attached directly to any bank account.

But law enforcement officials see Bitcoin as another vehicle for criminals to anonymously transfer money.

FinCEN’s statement in March set off a rush inside the community to learn about anti-money laundering rules and figure out how to comply with them. At the 2013 Bitcoin Conference in San Jose, California two weeks ago, discussion focused heavily on regulatory compliance – its intricacies and its costs.