Isn't cash more popular than Liberty Reserve and just as anonymous? (Albeit more cumbersome to transmit around the world.)

So isn't your argument also that cash encourages crime? And if so shouldn't it be abolished so that we can prevent activities that damage society?

Things aren't so clear cut. Laws have to draw boundaries around things all the time, even if the particular location of any particular boundary cannot be easily justified, the necessity of the boundary's existence most certainly can. In this case, we can regulate electronic transactions, but we can't regulate cash. Furthermore, it happens to be the case that when you allow electronic transactions willy-nilly bad things happen, and it's harder for those bad things to happen when cash is involved (Breaking Bad would have been completely different if Walter White had hid is money in Bitcoin). So, we regulate electronic transactions more than we do cash. It doesn't solve all the problems, but it does mitigate them.

>So even die hard libertarians who value personal freedom such as anonymity a great deal have to acknowledge that the real life consequences of exchanges like Liberty Reserve are a net negative to society.

I'm not sure I agree at all with this statement. Replace "liberty reserve" with Bitcoin and I certainly don't agree that it's a net negative to society.

Unless by "society" you mean the current status quo, in which case I'd agree but this changes the tone of your message significantly.

I think Bitcoin's extremely cool, and I think it will take off and increase in value, but it's not yet obvious if it will be a net positive or negative for the population as a whole.

> Illegal operations (the vast majority of which are doing tremendous damage to society) stand to gain the most from anonymous money exchanges.

If we ended the war on individual freedom that is the drug war it would eliminate the vast majority of these illegal operations and the "tremendous damage to society" they cause.