diff --git a/brief history of egold - digital currency challenge b/brief history of egold - digital currency challenge new file mode 100644 index 0000000..b87cffd --- /dev/null +++ b/brief history of egold - digital currency challenge @@ -0,0 +1,344 @@ +E-gold +Abstract: The e-gold system emerged in 1996. For the +first time in modern history, this system, backed by gold, +functioned completely independent of conventional +banking institutions. The e-gold software guaranteed a +secure and efficient method for transmitting value and +maintaining records of payment transaction information. +Each digital gram of e-gold was backed by one physical +gram of pure gold bullion held offline. E-gold transactions +were instantaneous, could not be reversed, and cost much +less than traditional bank payments. Founders of e-gold +sought to create a private gold-based monetary system that +included Internet-based transactions which would perform +better than national currency. The e-gold system was +believed to be operating outside of existing Bank Secrecy +Act regulations from 1996 until 2005. +Mullan, Carl P. The Digital Currency Challenge: +Shaping Online Payment Systems through US Financial +Regulations. New York: Palgrave Macmillan, 2014. +DOI: 10.1057/9781137382559.0006. +E-gold  +DOI: 10.1057/9781137382559.0006 +The e-gold system was in operation more than a decade before the +creation of Bitcoin and proved beyond a shadow of a doubt that it +was indeed possible to create and operate a popular digital financial +system completely independent of conventional banking institutions. +Dr. Douglas Jackson recently presented this e-gold innovations time +line. +1996 + e-gold.com online system was deployed in November. + From day one, e-gold had the capability of using a numeraire for +specification of a Spend amount that differed from that of the +settlement currency. For instance, it was possible to order a Spend +of $10 USD worth of e-gold. Calculation of the actual quantity +to convey was made using table of reference exchange rates +maintained by company (manually, every few minutes during the +day, every hour or two overnight). Reference exchange rate and +calculation were displayed on Spend Preview. + Strong non-repudiation (finality of settlement) based on Real Time +Gross Settlement (RTGS) and a strict debit rule. +1997 + The Examiner was deployed on the e-gold website. This showed +an unprecedented real-time indicator of e-metals in circulation +(liabilities) and detailed inventory of the underlying assets backing +them. The bullion reserves data could be drilled down to see +unique details of each bar including vault location, serial number, +refiner, purity, and fine weight. +1998 + The Stats page was deployed showing details of system usage +over previous 24-hour lookback period: it included the number +of accounts, broken down by ranges of balance for each e-metal, +and the number of spends, broken down by range of values and +aggregated by range and total. +2000 + The currency exchange was separated from the core +function of issuance and settlement of Spends. A few +months after this separation multiple independent +providers had emerged offering services on a competitive +basis, differing by currencies and payment methods + The Digital Currency Challenge +DOI: 10.1057/9781137382559.0006 +supported, spreads, liquidity (size of exchanges supported and +timeliness of execution). + The shopping cart and automation interfaces were deployed, the +former allowing specification of an incoming Spend, the latter +automatic entry of an outbound Spend instruction. + A Spend fee cap was implemented, initially at 50 cents US equivalent, +which was later changed to 5 gold cents (0.05 g) for e-gold. +2006 + A sheriff-bot was deployed to monitor Spends in real-time to detect +transactions with indices of illicit activity. The value would be +arrested once it had left the payer account and the recipient account +would be frozen; both would then be flagged as to the nature of the +suspected activity, making a permanent discoverable record and +facilitating seizure or forfeiture. This became so sophisticated that +there were instances where the first Spend to or from an account +would trigger the bot, with hardly any false positives (and these +could be released).1 +Not included in this timeline, but very important, is the fact that e-gold +permitted mobile fund transfers back in 1999, seven years before PayPal’s +commercial mobile payments.2 +E-gold was a secure account-based monetary payment system which +enabled the use of gold as money. The e-gold software guaranteed a +secure efficient method for transmitting value and maintaining records +of payment transaction information. Dr. Douglas Jackson is well known +for having designed and written much of the code himself. The system +operated over the Internet on a global scale completely outside of conventional +banking systems. +e-gold.com was the classic model of a digital gold currency system +from the past decade. It was also the very first digital gold currency +to operate online for public use. Gold & Silver Reserve, Inc. (G&SR), +a Delaware corporation, developed and deployed the e-gold payment +system in 1996 and at that time administered both the payment settlement +and the currency exchange. The company also served as bailee +for the inventory of gold bullion and precious metal held in allocated +storage by third-party custodians. The payment system and website +were both administered by G&SR under the name e-gold. The software +was designed to facilitate both local and global transactions with +E-gold  +DOI: 10.1057/9781137382559.0006 +the same payment convenience. G&SR also offered online e-silver, +e-platinum, and e-palladium which all operated exactly like the digital +gold currency. Every gram of digital metal, including gold, which +circulated online was backed 100 percent, gram for gram, by physical +precious metal. E-gold featured instantaneous settlement of all +transactions at an extremely low cost. Unlike credit cards, payments +across the e-gold system were impossible to reverse. Even in the case +of a legitimate error, the payment remained in the receiver’s account. +Consequently, merchants were happy to accept e-gold knowing that +there was no charge back risk. The terms of use of the e-gold account +very clearly stipulated that all “Spends” were final. In this respect, an +e-gold transaction was very similar to a cash sale. In total contrast, a +PayPal transfer is fully reversible and can be considered more like a +credit card transaction. +E-gold payments were highly divisible. G&SR’s computerized book +entry system was organized using a transaction model that allowed +payments as small as 0.0001 oz. Behind the customer interface, amounts +of metal stored in the e-gold database tables were accurate to 15 digits. +The recognized “Issuer” of the currency was e-gold Ltd., a Nevis W.I. +Corporation. This offshore company was independently created to serve +as the general contractor specifically responsible for the performance of +the e-gold account user agreement. The e-metal system functioned to +protect the online customer payment mechanism from the problems of +conventional financial systems. +All precious metal backing the digital currency was held by the e-gold +Bullion Reserve Special Purpose Trust. This separate trust, which was +formed and operated from Bermuda, existed for the purpose of collectively +retaining all e-gold account holders’ bullion. After a few years +of operation, all metal was held in the form of certified good delivery +bars in allocated storage at repositories certified by the London Bullion +Market Association. +OmniPay was also owned and operated by Gold & Silver Reserve, Inc. +It acted as the primary dealer of digital currency to the public marketplace. +OmniPay was also the largest e-gold exchange operation in the +world. The company exchanged national currency for digital currency, +working between the issuer, e-gold Ltd., and all other third-party independent +exchange agents. As primary dealer, OmniPay maintained both +cash and digital currency liquidity at all times. + The Digital Currency Challenge +DOI: 10.1057/9781137382559.0006 +As a move to further assure e-gold’s freedom from default risk and +finality of settlement, the company structure changed in 2000 by +separating the currency exchange business from the core functions of +issuance and settlement of transactions. This move further dissociated +the e-gold issuer from business risks relating to the exchange operations. +Independent third-party exchange agents in various countries +around the world performed transactions exchanging digital currency +for national currency on behalf of retail customers. This retail customer +group included additional third-party exchange agents. Since retail customer +national currency transactions never occurred at the issuer’s level, +in this classic model of a digital gold currency, the issuer e-gold Ltd. held +no customer financial transaction records. All sales of digital metal from +e-gold took place directly with OmniPay which in turn interacted with +the public. +While e-gold Ltd. maintained the online system, the company never +accessed or handled any customer financial transactions. Financial +transactions containing customer information were exclusively held +by third-party agents. This helped e-gold to guard against the possible +financial loss and risk which accompanies conventional bank products +and practices. No financial transaction information on e-gold account +holders, such as where a wire originated or the date on an outgoing +check, was ever accessible to e-gold Ltd. +An e-gold transaction, also known as a payment order, differed from +bank-issued checks and credit card payments. A paper check is an order +of withdrawal, which becomes a draft when endorsed by the recipient. A +check pulls the payment from a bank account by someone other than the +owner. Additionally, a credit card payment is the settlement of a prior +approved amount withdrawn from the account by someone other than +the account owner. Conventional bank products such as bank drafts +and card payments both pull the payment from the user’s account. An +e-gold payment did not work in this manner. It had to be pushed from +the account by the account owner. No draft or prior approval could draw +upon another person’s e-gold account. Only the e-gold account owner +could initiate a payment which was also labeled a “spend.” This is an +important distinction between e-gold transactions and conventional +bank products. +An Army veteran and graduate of Pennsylvania State University’s +Medical School, in the mid 1990s, Dr. Douglas Jackson was a practicing +oncologist in Melbourne, Florida. His career path and work +E-gold  +DOI: 10.1057/9781137382559.0006 +experience did not include any positions in banking or commercial credit. +Dr. Douglas Jackson is a libertarian, a fan of the gold standard, and critical +of conventional banking systems. A 1998 text from the e-gold website, +which was composed by Dr. Jackson, reflects some of the reasoning and +goals behind the creation of e-gold. +The Gold & Silver Reserve is founded on the conviction that gold and +silver are superior (in the long run) to fiat legal tender. We have developed +the e-metal System of Indirect Exchange; a privately administered transnational +monetary system. It combines the enduring value and desirable +monetary characteristics of gold and silver with the robust efficiency of +digital technology.3 +Further evidence of “why” Dr. Jackson created e-gold is found in a quote +from a 2006 interview with Brian Grow for BusinessWeek Magazine. +Dr. Jackson is quoted as saying he believed the e-gold system would +“advance the material welfare of mankind.”4 + Today, with the e-gold +system sidelined by US Regulations, Dr. Jackson confirms the quote +was accurate but further describes his view from the early days of +e-gold, “That element emphasizes the level playing field aspect of clear +contractual constraints as opposed to a discretionary policy that leads to +winners and losers.”5 + He further states, +I started e-gold as the outgrowth of my own private study and interpretation +of historical events. It appeared to me that many of the worst real world +calamities, wars in particular, could be causally traced back to economic +dislocations—booms and busts—that in turn could be traced to monetary +manipulations. Over time, with discretionary control over monetary policy, +such interventions—which were supposed to attenuate destructive excesses +of credit cycles—ignited and amplified them instead. While there were +some glimmers of a rule-based system with the classical gold standard it too +was fatally flawed and certain to be abrogated when it proved inconvenient. +The system I envisioned was informed by analysis of historic and contemporary +models, one consistent flaw of all of them being the impracticability +of binding a sovereign to inconvenient obligations. Even if a seemingly +airtight system could be devised, a successor regime would have no qualms +about repudiating it. The courts never award damages to those injured +when a state reneges on its monetary obligations. Only a private enterprise +can truly be held accountable to contracts of that nature.6 +The creation of the e-gold system was more than a new business or +money-making venture for Douglas Jackson. He felt it was his role to + The Digital Currency Challenge +DOI: 10.1057/9781137382559.0006 +release this digital currency system into the world. “The belief that it +was now possible to develop and implement a system that could avoid +the embedded flaws and contradictions which had undermined money +since its earliest emergence carried with it a duty to try to accomplish +it.”7 + Unlike the development of other digital currencies during that +time, such as WebMoney Transfer which targeted specific demographic +consumer markets, Dr. Jackson stated that e-gold’s global target market +from day one was all “people who use money.”8 + E-gold was considered to +be an alternative digital currency. The founders of e-gold sought to create +a private gold-based monetary system that included Internet-based +transactions which would perform better than national currency. This +service was to be available for all users at every level of society around +the world. The system operated as an alternative to national currency +and was designed to directly compete with government-issued money. +The term Better Money TM became a trademarked phrase featured on the +website. +Many digital gold currency and e-gold early adopters during the +mid-to-late 1990s were advocates for a single gold standard currency. +These users were often referred to as “Goldbugs” and viewed e-gold as +a technically superior currency. They strongly believed that commodity +money was a better solution than fiat currency. Other early users leaned +toward laissez-faire economics and viewed e-gold as private competition +for government money. People doing business with e-gold’s privately +issued digital currency often viewed themselves as working to restore a +natural economic system unrestricted by government. E-gold was seen +as creating healthy competition in an otherwise government-controlled +fiat currency world. Another segment of those early e-gold users was +considered to be economic anarchists or those who believe in no government +regulations. Today, some of the same groups using Bitcoin can +be closely aligned with these original e-gold users. +Until the mid-1990s, it was understood that banks had a tight control +on the movement of funds around the world. During the 1990s, for +anyone to stop using conventional banks and government-issued money +in favor of a little known private digital gold currency circulating on +the Internet required a strong personal conviction or an overwhelming +desire to reform the monetary system. In all of these cases, during +those early years, many e-gold users were viewed by the mainstream +media as extreme. While much attention had been focused on e-gold +early adopters, there were not many of them. Approximately two years +E-gold  +DOI: 10.1057/9781137382559.0006 +into operation, in April 1998, there were fewer than nine hundred active +e-metal/e-gold accounts.9 +In late 1999, a new product came into the digital currency marketplace +which can now be seen as a contributor to e-gold’s popularity and +growth in the years 2000–2005. This product was known as a High Yield +Investment Program or HYIP. In reality this type of investment program +is simply a Ponzi scheme, but the widespread popularity of these +schemes ballooned using the e-gold payment platform. Online High +Yield Investment Programs were a force in the growth and popularity of +digital currency and e-gold. +In hindsight, it is important to review certain statements expressed +by e-gold’s management in the early years of operation. Because +e-gold’s technology was developed far ahead of present day US financial +regulations, the e-gold operators had provided some disclaimers +and offered their viewpoint regarding existing government regulations. +Since the defining act of banking is to circulate more demand +claims to cash than there is cash in the bank, the e-gold operators +made it clear e-gold was not a bank. From the early years through +2005, Gold & Silver Reserve highlighted this fact. In several instances +of text which had appeared on the e-gold website in both the FAQs +and Terms of Service, e-gold operators published statements describing +how digital gold was different from a bank or bank deposit. It +was their opinion at the time that by operating outside conventional +banking the e-gold system remained outside of existing Bank Secrecy +Act regulations. Here are some examples of this sentiment, from the +e-gold.com website in June 1998: +It is important to note the difference between a digital currency balance and +a bank deposit balance. Deposits in a bank are regarded legally as loans to +the bank. A bank is permitted to make investments (loans) using the money +belonging to their depositors. Metal entrusted to G&SR is not a deposit at +all: it is held as a bailment (like grain in a grain elevator). G&SR may not +allow any encumbrance or lien to be placed on customer metal. G&SR is +not borrowing it from you but rather safeguarding it for you for a fee. The +banking system in general, operates on a fractional reserve basis. This is +perfectly natural and legitimate for money in a savings account or time +deposit. You, as an individual, may do what amounts to the same thing; +borrow money from some people and use it to make loans to other people. +In our view, however, “checkable deposit” is a contradiction in terms. It is +just like in the old days when banks issued more banknotes (purportedly +redeemable in precious metal coin) than they had coins to back. In contrast, + The Digital Currency Challenge +DOI: 10.1057/9781137382559.0006 +any metal entrusted to the Gold and Silver Reserve constitutes a spendable +bailment—every gram of e-gold and the other e-metals is backed 100 by +physical metal.10 +Found in both the e-gold user agreement and the Terms of Service for +OmniPay, e-gold’s primary dealer, were statements that e-gold’s operation +was not a bank and did not hold deposits for customers. From the +December 2001 e-gold user agreement, this paragraph is found under +section 2. +Conditions of Use +User acknowledges that (i) the e-gold service and Issuer are not a bank +(ii) e-gold accounts are not insured by any government agency and (iii) the +e-gold service and Issuer are not subject to banking regulations.11 +This statement is found in the Terms of Service for Omnipay from +February 2003. “User acknowledges that G&SR is not a bank, is not +subject to banking regulations and does not hold any value on account +for User.”12 It is unfortunate that these types of declarations are still being +made today by some new companies in the virtual currency arena. Under +US regulations, today’s virtual currency transactions are considered to +be very similar to e-gold payments. The business of exchanging or transmitting +value online, whether backed by national currency, gold bullion, +or considered a substitute for currency, is a regulated US activity. +Notes + D. Jackson (djackson@e-gold.com), 2013. E-gold History a Few More Questions. +[email] Message to C. Mullan (carl@pdxcurrency.org). Sent September 15, +2013. + C. Mullan, 2006. E-gold Mobile Payments 7 Years Before PayPal? Available at: +http://www.everyjoe.com/2006/10/29/work/e-gold-mobile-payments-7-yearsbefore-paypal-162/ +(accessed: December 13, 2013). + Web.archive.org, 1998. Philosophy and Purpose. [online] Available at: https:// +web.archive.org/web/19980627133939/http://www.e-gold.com/unsecure/ +gsrvision.htm (accessed: December 13, 2013). + B. Grow, 2006. Gold Rush. [online] Available at: http://www.businessweek. +com/stories/2006–01-08/gold-rush (accessed: November 18, 2013). + Jackson, E-gold History a Few More Questions. + Ibid. + Ibid.