Digital gold currency

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Digital gold currency (or DGC) is a form of electronic money based on ounces of gold. It is a kind of representative money, like a US paper gold certificate at the time (from 1873 to 1933) that these were exchangeable for gold on demand. The typical unit of account for such currency is the gold gram or the troy ounce, although other units such as the gold dinar are sometimes used. DGCs are backed by gold through unallocated or allocated gold storage.

Digital gold currencies are issued by a number of companies, each of which provides a system that enables users to pay each other in units that hold the same value as gold bullion. These competing providers issue a type of independent currency.

Features[edit]

Universal currency[edit]

Proponents claim that DGC offers a truly global and borderless world currency system which is independent of exchange rate variations and political manipulation. Gold, silver, platinum and palladium each have recognized international currency codes under ISO 4217.

Asset protection[edit]

Unlike fractional-reserve banking, DGCs hold 100% of clients' funds in reserve as gold, silver, and/or platinum, which can be exchanged via digital certificates. Proponents of DGC systems say that deposits are protected against inflation, devaluation and other economic risks inherent in fiat currencies. These risks include the monetary policy of countries or territories, which are said by proponents to be harmful to the value of paper currency.

Bullion investing[edit]

All of the other digital gold-backed currency systems[clarify] can be used to buy, hold, and sell precious metals, but do not promote themselves as an "investment", as this implies an anticipated return.[clarification needed how can I tell "this system" from others?]

Exchanging national currency[edit]

Some providers do not sell DGC directly to clients. For those DGCs, e-currency must be bought and sold via a digital currency exchanger.

Currency exchangers accept payment in national currencies by a variety of methods, including Bank Wire, Direct Deposit, Cheque, Money Order. Some exchangers also sell and fund pre-paid debit cards to make it easier for their clientele to convert DGC into an easily spendable form of national currency.

DGCs are known as private currency as they are not issued by governments.

Non-reversible transactions[edit]

Unlike the credit card industry, digital gold currency issuers generally do not have services to dispute or reverse charges. So, reversing transactions, even in case of a legitimate error, unauthorized use, or failure of a vendor to supply goods is difficult, if not impossible. This means that using digital gold currency is more akin to a cash transaction, while PayPal transfers, for example, could be considered more similar to credit card transactions.

The advantage of this arrangement is that the operating costs of the digital currency system are greatly reduced by not having to resolve payment disputes. Additionally, it allows digital gold currency transactions to clear instantly, making the funds available immediately to the recipient. By contrast, credit cards, checks, ACH and other reversible payment methods generally have a "clearing time" of 72 hours or more.

Risks[edit]

As with all financial media, there are several types of risk inherent to the use of DGCs: management risk, political risk, data security and exchange risk.

Management and political risks[edit]

DGCs, like all financial institutions and public securities, have a layer of risk in the form of the management of the issuing institution. Controls aimed to limit management risk are called "governance".

All other[clarification needed] DGC providers operate under self-regulation. DGC providers are not banks and therefore not subject to many bank regulations that pertain to fractional reserve lending as they do not engage in lending. However, DGCs do provide a method for transferring currency from one person to another, and therefore may fall under regulations pertaining to money transmitting in various jurisdictions.

The Global Digital Currency Association (GDCA), which was founded in 2002, is a non-profit association of online currency operators, exchangers, merchants and users. The GDCA is an example of the DGC industry's attempt at self-regulation. On their website they claim their goal is to "further the interests of the industry as a whole and help with fighting fraud and other illegal activities, arbitrate disputes and act as escrow agent when and where required."[1] Of the current DGC providers, Pecunix, Liberty Reserve and eight others have become members of the association. It costs one gram of gold to file a complaint if you are not a member, and the list of filable complaints is not exhaustive. Their domain name is registered anonymously through domains by proxy, see whois.

OS-Gold, Standard Reserve and INTGold[edit]

Several companies claiming to be Digital Gold Currencies sprang up and failed between 1999 and 2004, such as OS-Gold,[2] Standard Reserve[3] and INTGold.[4] All these companies failed because the principals diverted deposits for other purposes instead of holding them in the form of gold. In each of these cases, account holders lost several million dollars' worth of gold when the "institution" failed.[citation needed]

e-gold and 1mdc[edit]

Following April 27, 2007, the United States Department of Justice forced e-gold to liquidate some 10 to 20 million dollars' worth of e-gold, and is attempting to bring a case against e-gold.[5] e-gold has committed to counter what its founders have declared to be groundless allegations.[6]

1mdc was backed by e-gold, so events that affected e-gold also affected 1mdc. Once e-gold Ltd. was instructed by the US government to freeze and liquidate all 1mdc accounts, 1mdc became insolvent by default along with all other e-gold accounts seized in the April 27 action.[citation needed]

e-Bullion[edit]

Main article: e-Bullion

E-Bullion was a digital-gold currency exchange that had risen, then become defunct around 2008.

In August 2008, James Fayed, the owner and chief executive official of the E-Bullion Company, was taken into United States Federal custody to face felony charges of conducting unlicensed money transactions and the murder of his business partner.[citation needed] In January 2010, e-Bullion had closed for business and the website had ceased to be available.[citation needed] In June 2011 a California jury found Fayed guilty of murder and sentenced him to death.

Data security[edit]

Digital gold systems are completely dependent on electronic storage and transmission of account ownership information.[citation needed] Therefore the security of a given digital currency account is dependent upon the security of the issuer as well as the security of the accountholder's computer.

While the digital gold issuers employ data security experts to protect their systems, the average accountholder's computer is poorly protected against malware (trojans, worms and viruses) that can be used to intercept information used to access the user's DGC account. Therefore the most common attacks on digital currency systems are directed against accountholders' computers by the use of malicious spam, phishing and other methods.[citation needed]

Issuers have taken quite different approaches to this problem. E-gold basically places the entire responsibility on the user, and employs a user-name and password authentication system that is weak and highly vulnerable to interception by malware. (Though it is the most common authentication method used by online banks.) The "not our problem" approach to user security has negatively contributed to e-gold's public image, as not a few e-gold accounts have been hacked and swept clean by attackers..[citation needed]

e-Bullion offers account holders a "Cryptocard" security token that changes the passphrase with each logon, but charges the account holder USD $99.50 for the token. E-bullion does not require customers to use the Cryptocard, so account holders who choose not to get one may suffer from the same security issues as e-gold customers.

Pecunix devised a unique rotating key system that provides many of the benefits of a security token without requiring the user to buy one. Pecunix also supports the use of PGP signatures to access an account, which is probably the strongest of all authentication methods.

Exchange risk[edit]

Digital gold currency is a form of representative money as it directly represents gold metal on deposit or in custody. This depends on the issuer. Most issuers have the gold on deposit - i.e., the issuer will redeem the digital currency obligation with physical metal. Just as the exchange rates of national currencies fluctuate against each other, the exchange rates of DGCs fluctuate against national currencies, which is reflected by the price of gold in a particular currency. This creates exchange risk for any account holder, in the same way one would experience exchange risk by holding a bank account in a foreign currency.

Some DGC holders make use of the digital currency for daily monetary transactions, even though most of their normal income and expenses are denominated in the national currency of their home country. Fluctuations in the value of gold against their national currency can create some confusion and difficulty for new users as they see the "value" of their DGC account fluctuate in terms of their native currency.

In contrast to exchange risk, caused by gold's fluctuation against national currency, the purchasing power of gold (and therefore DGCs) is measured by its fluctuation against other commodities, goods and services. Since gold has historically been the refuge of choice in times of inflation or economic hardship, the purchasing power of gold becomes stronger during times of negative sentiment in the markets.[7] Due to this speculative interference, there are times when purchasing power has also declined. For example, in 2007–2008, gold volatility closely tracked the run-up in oil prices.[8]

Providers[edit]

Comparison of operating DGCs (as of September 2014):

Digital gold currency Birth Death Financially regulated GDCA
member
Bullion
stored
Bullion audit
trail
Number
of user
accounts
DCE transfers accepted Wire transfers accepted Annual storage fee Processing fee
(when receiving from another user)
e-dinar 2000 Red XN Red XN Undisclosed Red XN Undisclosed Red XN Green tickY 1% 1% (with max. 0.015 gold dinar)[9]
Pecunix 2002 2014 Red XN Green tickY 2,777 oz gold Green tickY Undisclosed Green tickY Red XN 0% 0.15 - 0.50% (with min. 0.0001 - max. 3.0 gold grams)[10]
iGolder 2005 2013 Red XN Red XN Undisclosed Red XN Undisclosed Red XN Green tickY x% 1%
Liberty Reserve 2004 2013 Red XN Red XN Undisclosed Red XN Undisclosed Red XN Red XN x% 1%
gbullion 2007 Red XN Red XN Undisclosed Red XN Undisclosed Red XN Red XN x% 1%
e-gold 1999 2008[11] Red XN Red XN Undisclosed Green tickY blocked by USG Red XN Red XN 1% 1%
eCache ~2007 <2014
Gold Bullion International LLC Near zero when used with Ripple_(payment_protocol)

Criticisms[edit]

DGC providers and exchangers have been accused of being a medium for fraudulent high-yield investment program (HYIP) schemes. In January 2006, BusinessWeek reported that ShadowCrew, an online gang, used the e-gold system in a massive identity theft and fraud scheme.[12] Traditional banks are also used frequently for such fraud. Allegations that e-gold is a safe medium for crime and fraud are strongly denied by its Chairman and founder, Dr. Douglas Jackson.[13] Further, it can be argued that such problems lay with the source of the information or monies, rather than the location of storage of such ill-gotten gains. In other words, it would be difficult to claim the bank as villain when the criminal activity occurred by other parties away from the storage location.

Many DGC providers do not disclose the amount of bullion stored (see table), or do not allow independent external bullion audits, raising concerns that such companies do not maintain a 100% reserve ratio, or that their currency is entirely virtual and not backed by physical gold at all.[citation needed]

Due to increase of compliance requirements for payment service providers, Jersey-based GoldMoney decided to suspend its DGC service as from January 21, 2012[14]

Cultural references[edit]

See also[edit]

References[edit]

  1. ^ Global Digital Currency Association Ltd.
  2. ^ "OS-Gold", The Gold Economy Magazine, September 2002
  3. ^ "Why Standard Reserve Failed", The Gold Economy Magazine, May 2003
  4. ^ "INTGold", The Gold Economy Magazine, September 2003
  5. ^ "Digital Currency Business E-Gold Indicted for Money Laundering and Illegal Money Transmitting". US Department of Justice. April 27, 2007. Retrieved 2008-01-22. 
  6. ^ "e-gold Founder Denies Criminal Charges". e-gold. April 30, 2007. Retrieved 2008-01-22. 
  7. ^ Tang, Frank (January 22, 2008). "US gold bounces on inflation fears, safe haven bid". Reuters. 
  8. ^ "TedBits", Ty Andros, Trader View, April, 2008, http://news.goldseek.com/GoldSeek/1207289100.php
  9. ^ https://www.e-dinar.com/cgi/?page=dinardirham&a=_1 [The Islamic Dinar is a specific weight of 22k gold (.917) equivalent to 4.25 grams]
  10. ^ http://www.pecunix.com/money.refined...ind.feestructure
  11. ^ wired.com/threatlevel/2009/06/e-gold
  12. ^ "Gold Rush". Business Week. January 9, 2006. Retrieved 2008-01-22. 
  13. ^ "Letter from Dr. Douglas Jackson; Chairman, e-gold, Ltd.". 6 January 2006. Retrieved 2008-01-22. 
  14. ^ http://www.dgcmagazine.com/blog/index.php/2011/12/21/goldmoney-pulls-out-closes-payments-part-of-business/
  15. ^ Stephenson, Neal (2002). Cryptonomicon. New York: Avon Books. pp. 387, 476–477, 500, 659. ISBN 0-06-051280-6. 
  16. ^ Murphy, Robert P. (2004). "Minerva". strike-the-root.com. 
  17. ^ Kyler, Carl (2010). "The Way to Freedom".