From my blog post:
Some people argue once they’ve realized how corrupt and damaging the current global monetary system is and wish to merge the concept of digital payments and gold or cryptocurrencies with gold, for a hybrid gold backed digital crypto project. The problem is it has been tried numerous times before and failed. You can’t build a new financial system around gold simply because governments won’t let you. BitGold was a company founded in 2014 by Joshua Crumb and Roy Sebag. In 2015, it rebranded to GoldMoney, offering services focused on precious metals. It operates as a platform that allows users to buy, sell, and store physical gold securely.
Here’s how it works:
Account Creation: Users create an account on the platform, providing necessary personal information for identity verification purposes.
Buying Gold: Once the account is set up and verified, users can purchase gold through the platform using various payment methods, such as bank transfers or credit/debit cards.
Gold Storage: After purchasing gold, GoldMoney stores the physical gold in secure vaults on behalf of users. Users choose the location of the vault where their gold would be stored, providing options in various countries.
Account Management: Users manage their gold holdings through the platform, monitoring their investments, and making transactions as needed.
Redemption and Withdrawal: Users can sell their gold holdings back to GoldMoney or redeem their gold for physical delivery. This allows users to convert their gold holdings into fiat currency or take possession of the physical gold if desired.
There are several reasons why such a model cannot grow to become a new global financial system that helps humanity escape the current global central banks’ fiat system. These reasons mostly boil down to the regulatory environment, the requirement for transactions to incur capital gains taxes, and the inability to obtain the banking clearances necessary for merchants to send and receive gold. Professor Saifedean Ammous elaborates on this in the short clip below. He himself tried to create something like this from 2011 to 2014 until he realized that the regulatory roadblocks were too many, and thus the idea could not scale:
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Another company that previously offered digital payments of gold was e-gold, which was operated by Gold & Silver Reserve Inc. It was founded in 1996 by Dr. Douglas Jackson and Barry K. Downey. The number of e-gold accounts, as claimed by e-gold, grew from 1 million in November 2003 to 3 million on April 22, 2006. In 2008, the company reported having more than 5 million accounts.
E-gold operated as a digital currency backed by physical gold. Users could open an account on the e-gold website and deposit funds, which would be converted into grams of gold. These grams of gold were then stored in the company’s vaults. Users could subsequently transfer these grams of gold to other e-gold account holders as a form of payment or exchange. Transactions were recorded in a public ledger accessible to all users.
E-gold was unique at the time in that it created the “e-gold Special Purpose Trust,” which held title to the physical bullion on behalf of the users. It also created a real-time statistical reports page that showed the total holdings of each metal in the trust account, a list of gold bars with serial numbers, the total number of accounts, as well as the total number and value of transactions in the previous 24 hours. This transparency enabled many observations to be made about how e-gold was being used. Additionally, users had the option to redeem their e-gold balance for physical gold or fiat currency.
The United States Treasury issued a report on January 11, 2006, titled ‘‘U.S. Money Laundering Threat Assessment,’’ which Gold & Silver Reserve Inc (G&SR) believed was evidence favorable to its legal case, as explained in its January 20, 2006, letter. This apparently confirmed that e-gold accounts were excluded from the definition of “currency” under the United States Congress and Code of Federal Regulations definitions.
‘‘Starting in mid-December 2005, Gold & Silver Reserve, Inc. (G&SR), contractual Operator and primary dealer for e-gold, has been the subject of a warranted search of its premises and records, had its domestic bank accounts frozen, and been the target of a precisely timed, extraordinarily misleading attack by a major business publication.
In an emergency hearing in US District Court January 13, 2006, the freeze order on G&SR’s bank accounts was lifted. Though numerous criminal claims had been made in obtaining the search and seizure warrants, the Government has not sustained these allegations and the only remaining claim is a contention that G&SR has operated as a currency exchange without the proper license. G&SR had previously proposed to the Government that e-gold be classified for regulatory purposes as a currency, enabling G&SR to register as a currency exchange. In a Treasury report released January 11, 2006, however, the Department of Treasury reaffirmed their interpretation of the USC and CFR definitions of currency as excluding e-gold.
G&SR, for nearly a year, has been engaged with an agency of Treasury in a BSA (Bank Secrecy Act) compliance examination it had voluntarily initiated. G&SR, though preferring that the venue was not a courtroom, welcomes the opportunity to extend its discussions with the Government on how best to achieve appropriate statutory or regulatory cognizance of e-gold while continuing to build e-gold’s market share as a medium of international commerce.
Despite the unfounded charges and adverse misleading publicity that have severely damaged both e-gold and G&SR, G&SR has continued to meet all financial obligations and remain completely operational. e-gold remains highly committed to its goal of bringing, for the first time in history, to people of any financial means across the globe, a secure payment mechanism at a fraction of the cost of any other system. e-gold fully expects to transcend the unfortunate events of the past month and resume its exponential growth.’’
In 2007, the US Federal government accused e-gold of money laundering and other crimes, leading to the closure of several exchanges. Despite e-gold beginning to cooperate with prosecutors to monitor transactions, it was subsequently indicted and forced to block all accounts and transfers.
As you can observe, as e-gold gained popularity, regulatory scrutiny increased. Governments around the world began to impose stricter regulations on digital currencies, particularly concerning anti-money laundering (AML) and know-your-customer (KYC) requirements. E-gold struggled to comply with these regulations, leading to legal battles and ultimately its shutdown.
‘‘The USA Patriot Act, passed in the wake of the September 11 attacks more than five years after e-gold had been launched, made it a federal crime to operate a money transmitter business without a state money transmitter license in any state that required such a license. At the time a money transmitter was in most states defined as a business that cashed checks or accepted cash remittances to send from one person to another person across international borders, such as Western Union or MoneyGram. For example, prior to 2010, California regulated money transmitters under the “Transmission of Money Abroad Law”. One of e-gold’s competitors, the e-Bullion company, applied for a money transmitter license from the State of California in 2002, but was informed by the State of California that their business which dealt in gold accounts did not fall under the state’s definition of a money transmitter.
In 2005, G&SR requested that the IRS SB/SE Division conduct a BSA (Bank Secrecy Act) Compliance examination in order to clarify what regulations, if any, e-gold fell under. The United States Treasury issued a report on January 11, 2006 titled U.S. Money Laundering Threat Assessment which G&SR believed was evidence favorable to its legal case as explained in its January 20, 2006 Letter, apparently confirming that e-gold accounts were excluded from the definition of “currency” under the United States Congress and Code of Federal Regulations definitions.
However, in its actions from 2006-2008, the U.S. Treasury Department in conjunction with the United States Department of Justice stretched the definition of money transmitter in the USA Patriot Act to include any system that allows transfer of any kind of value from one person to another, not merely national currency or cash. Using this new interpretation they then proceeded to prosecute the USA-based gold systems, e-gold (and later e-Bullion) under the USA Patriot Act for not having money transmitter licenses, even though these companies had previously been cooperating with regulatory authorities and told they did not fall under the definition of money transmitter. The charge of not having a money transmitter license was eventually dropped against e-bullion. Several years later FINCEN further expanded this definition to apply to foreign companies allowing US persons to open accounts, which forced the Jersey based Goldmoney. com to suspend the ability to transfer value from one holder to another in December 2011.
A November 2013 article in Financial Times noted that “For several years, Mr Jackson had hoped to resurrect e-gold himself, but it became clear he would not be able to obtain the money transmitter licenses required in most US states.”
E-gold’s centralized system was also susceptible to hacking and fraud. Despite efforts to enhance security, instances of fraud and theft occurred, damaging trust in the platform. E-gold’s store of value and large user base made it an early target of financial malware and phishing scams by increasingly organized criminal syndicates. The first known phishing attack against a financial institution was made against members of the e-gold mailing list in June 2001. The technique was refined with attacks against digital gold systems like e-gold and later used to attack other financial institutions starting in 2003.
Therefore, overall, a combination of legal, regulatory, security, and reputational challenges contributed to the failure of e-gold as a digital currency platform.
E-gold was a digital gold currency operated by Gold & Silver Reserve Inc. (G&SR) under e-gold Ltd. that allowed users to open an account on their website denominated in grams of gold (or other precious metals) and the ability to make instant transfers of value (“spends”) to other e-gold accounts.
Another major reason why a gold-backed digital or cryptocurrency won’t work is that it necessitates reintroducing the concept of a third trusted party to hold and centralize the gold. This poses the very problem we are trying to avoid, given that historically, trusting third parties (such as banks, states, and companies) not to inflate the money supply has proven disastrous.
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