E-gold

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E-gold was a digital gold currency operated by Gold & Silver Reserve Inc. under E-gold Ltd. that allowed users to open an account on their web site denominated in grams of gold (or other precious metals) and the ability to make instant transfers of value to other E-gold accounts. The company was founded in 1996 and had grown to five million users by 2009, when transfers were suspended due to legal issues. At its peak in 2008 E-gold was processing more than USD 2 billion worth of precious metals transactions per year,[1] on a monetary base of only USD 20 million worth of gold (~2.54 metric tonnes),[2] indicating an extremely high monetary turnover (velocity) of about 100 times per year (similar to M-PESA). E-gold Ltd. was incorporated in Nevis, Saint Kitts and Nevis with operations conducted out of Florida, USA.

Beginnings[edit]

E-gold was founded by oncologist Douglas Jackson and attorney Barry Downey in 1996. The pair originally backed the services accounts with gold coins stored in a bank safe deposit box in Melbourne, Florida.

The company was launched two years before PayPal and had over a million user accounts by 2002. It was the first successful digital currency system to gain a widespread user base and merchant adoption. It was also the first website or payment service provider to offer an application programming interface (API) enabling other services and e-commerce transactions to be built on top of it. E-gold was used by both individuals and merchants for services including metals trading, online auctions, online casinos, and a donation platform. By 2001 several dozen companies and individuals began offering third party exchange services between national currencies and E-gold, allowing E-gold to become a company with an international user base.

E-gold, which allowed transactions as small as one ten-thousandth of a gram of gold, was also the world's only successful micropayment system. The company's payment statistics were published live and showed hundreds of thousands of micro-transactions were being made daily by computer programs using the API.

Governance[edit]

E-gold was unique at the time in that they created the "E-gold Special Purpose Trust" which held title to the physical bullion on behalf of the users.[3] They also created a real-time statistical reports page[4] that showed the total holdings of each metal in the trust account, 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.

Imitators[edit]

E-gold's market success by 2001 spawned a wave of imitators. These included Goldmoney.com, e-Bullion.com, CrowneGold.com, Pecunix.com, INTgold.com, and several others including a multi-million dollar Ponzi scheme with no gold at all called OSgold.com.[5]

Criminal abuse[edit]

E-gold's early success also proved to be the cause of its demise. 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.[6] The technique was refined with attacks against the digital gold systems like E-gold and later used to attack other financial institutions starting in 2003.

Hackers[edit]

With no effective means of verifying the identity of account holders, E-gold began to suffer from an increasing rate of criminal activity mainly perpetrated by Russian and the Ukrainian hackers against its users. In addition to phishing, the attackers made widespread use of flaws in the Microsoft Windows operating systems and Internet Explorer web browser to collect account details from millions of computers to compromise E-gold accounts.[7]

Jackson's theory was that E-gold is a book entry system with account histories, making it simple to conduct an investigation to track down misappropriated funds after the fact.[8] However, the public perception was that E-gold accounts were anonymous. E-gold accounts were "pseudonymous",[9] allowing the creator of the account to use any name or label he wished to use. However, the account history was permanent, and E-gold could in most cases correlate a person's real identity to an E-gold account when they funded or liquidated an account with Gold & Silver Reserve (G&SR), the E-gold's parent company and primary exchanger to US dollars.

E-gold users did not have the same ability to determine the real identity of the owner of an E-gold account, which facilitated an increase in auction fraud and other types of identity fraud using E-gold accounts.[citation needed]

Fraud[edit]

Various fraud artists from Western countries were also able to take advantage of the E-gold system as a means of funding their schemes, enabling for the first time in history, international Ponzi schemes, calling themselves "high-yield investment programs" or HYIPs.[10] DGC Magazine Editor Mark Herpel asserted that the source of E-gold's mysterious micropayments was probably automated interest payments made by Ponzi schemes to their tens of thousands of members.[11]

Perpetrators of auction fraud on eBay would sell fake or non-existent items on the site. These criminal syndicates preferred their victims to pay in E-gold because it was the fastest and easiest way for them to move the funds overseas.[12]

The increase of online crime linked to E-gold led to complaints to government authorities by defrauded account holders, who often did not understand the difference between E-gold and the fraudulent person or company that encouraged them to open an E-gold account and wire money to fund it.[12]

Systemic problems[edit]

As an online transactions system with exchange agents worldwide, E-gold enabled criminals and hackers in Romania to move money quickly and easily from victims in America back to the country from which the attacks were originating. Several of the cyber crime gangs that plagued and used E-gold were based in Râmnicu Vâlcea, Romania.[13]

E-gold was unknowingly part of a larger systemic problem with the banking system. The banking and credit system in the United States were not designed for a digital environment, and were therefore fundamentally insecure and highly vulnerable to identity theft and check fraud, as well as trust based attacks such as phishing. The willingness of credit card companies to allow people to apply for a card without being identified in person enabled rapid growth of identity theft.[14] (Ironically, not verifying the identities of account holders would be one of the main criticisms raised against E-gold.)

Goldmoney[edit]

In 2001, Goldmoney.com was founded by James Turk and became a competitor to E-gold. Turk filed patents on a digital gold payment system in 1993 but launched his system five years behind E-gold. Turk recognized the E-gold crime problem and began positioning Goldmoney as the "white glove" gold system that required identity verification to open accounts, versus E-gold as the irresponsible "wild west" operator riddled with crime.[15]

By 2006, Goldmoney had USD 1 billion worth of gold in user accounts.[16] While Goldmoney succeeded in becoming the world's largest gold storage system, and held patents for a gold payment system,[17] they were never able to replicate E-gold's success as a payment system. Goldmoney prohibited the development of independent exchange agents, which greatly limited their global reach. In January 2012, Goldmoney turned off the ability to make payments from one account to another citing "insignificant" demand for P2P metal transactions as not justifying the high cost of regulatory compliance.[17][18] It was E-gold's usefulness and ease for payments combined with their international network of exchange agents that made it a magnet for crime.

There were early reports where E-gold had actively helped to catch and collar cyber criminals, such as the one who stole Cisco Systems' firewall code and offered it for sale to be paid in E-gold.[8] In June 2007, Jackson claimed to have "aided 300 investigations and reported 3,000 suspected child pornography buyers to the National Center for Missing and Exploited Children".[19] Goldmoney, and then federal law enforcement agencies began to characterize E-gold as the payment system of choice for criminals, terrorists and child pornographers.[19]

Criminal prosecution[edit]

Changing definition of a money transmitter[edit]

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".[20] 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 2004 G&SR requested that the United States Department of the Treasury conduct a compliance examination in order to clarify what regulations, if any, E-gold fell under.[21] The Treasury issued a report on January 11, 2006 confirming that E-gold accounts were excluded from the definition of "currency" under the United States Congress and Code of Federal Regulations definitions. The Treasury did not want E-gold to be acknowledged as a form of money, which made it impossible to obtain a money transmitter license.

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.[22]

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 licences required in most US states."[23]

Allegations against E-gold[edit]

Banks suffer from the same problems with criminal activity, phishing, ponzi schemes and money laundering on a much larger scale, and some of the biggest banks have even knowingly participated in money laundering.[24] E-gold's status as a controversial alternative currency system made it an attractive target.

While E-gold had begun implementing stronger controls against abuse by users of the system by 2005, and was actively combating the use of its system for child pornography as a founding member of the Financial Coalition Against Child Pornography,[25] the Justice Department indicted the E-gold proprietors on four counts of violating money laundering regulations and knowingly allowing a transaction to purchase child pornography.[15]

Resolution[edit]

The case against E-gold was brought under Title 18 USC section 1960 in UNITED STATES OF AMERICA v. E-GOLD, LTD, District of Columbia court. E-gold filed a motion to dismiss the case on the grounds that they did not fit the definition of a money transmitter. The court ruled against E-gold, stating that "a business can clearly engage in money transmitting without limiting its transactions to cash or currency and would commit a crime if it did so without being licensed."[26] This ruling enshrined in case law the Treasury Department's expansion of the definition of a money transmitter to include any system by which stored value of any kind may be transferred from one person to another, even if the stored value is neither cash, nor national currency.

After vigorously contesting the charges for a year, in July 2008 the company and its three directors accepted a bargain with the prosecutors and pled guilty to one count of "conspiracy to engage in money laundering" and one count of the "operation of an unlicensed money transmitting business", in exchange for the other charges against them (allowing a transaction to pay for child pornography) being dropped.[27] The company was ordered to pay fines of $3.7 million.

In November Gold & Silver Reserve CEO Douglas Jackson was sentenced to 300 hours of community service, a $200 fine, and three years of supervision, including six months of electronically monitored home detention.[28] He had faced a maximum sentence of 20 years in prison and a $500,000 fine. Judge Rosemary Collyer said the men deserved lenient sentences because they did not intend to engage in illegal activity. Jackson's lawyer claimed Jackson was spared the heavier fine because he is deeply in debt - the Judge said "Dr. Jackson has suffered, will continue to suffer, and may never be successful with E-Gold". Reid Jackson, Douglas Jackson's brother, and E-Gold director Barry Downey were each sentenced to three years of probation and 300 hours of community service, and ordered to pay a $2,500 fine and a $100 assessment.[28]

Gold seizure[edit]

In the summer of 2008, E-Gold pleaded guilty in United States v. E-Gold, Ltd., Criminal Number 07-109. Initially the United States Attorney for the District of Columbia entered a motion to seize and liquidate the entire gold reserve of E-gold under asset forfeiture law. However, the federal judge in the case denied the motion and ordered the reserves to be held and liquidated for the E-gold account holders who could prove the origin of their funds.[29] Some of the e-metal in E-Gold accounts was criminally derived, but much of the e-metal was owned by innocent account holders.[30]

E-gold was placed into receivership and the gold reserve was liquidated for USD 90 million.[30] The court ordered Rust Consulting, a private company in Maryland, to organize refunds to account holders who could prove legitimate sources for the funds.[31] The balance of unclaimed funds will be claimed by the US Attorney's Office for the District of Columbia under the asset forfeiture law. A three month window was set from June 3, 2013 to October 1, 2013 for E-gold account holders to submit a claim on their funds, then extended to December 31, 2013.[32]

Aftermath[edit]

After the E-gold and e-Bullion cases, California (2010)[20] and several other states amended their regulations to follow the federal precedent to define all digital value transfer systems as money transmitters. However, California's 2010 law is worded as to define a range of Internet startup companies, such as the room booking service Airbnb, as "money transmitters".[33]

E-gold was an early pioneer of Internet payments. The company was the first successful online payment system which pioneered many of the systems and techniques of e-commerce, including making payments over an SSL encrypted connection, and offering an API to enable other websites to build services using E-gold's transaction system.

Though E-gold was ultimately shut down by the US government, the federal judge on the case ruled that the founders of E-gold "had no intent to commit illegal activity."[28] After the resolution of the criminal case, the directors of E-gold Ltd vowed to continue operations following the new Federal know your customer guidelines.

E-gold's failure was ultimately due to their inability to provide a system of reliable user identification and the failure to provide a workable dispute resolution system to identify and cut off illegal and abusive activity in their user community. Other transaction systems such as Webmoney.ru[34] and Goldmoney.com[35] learned from E-gold's mistakes and were able to successfully field similar systems with low rates of abuse by addressing these deficiencies. While PayPal has done a better job of addressing abuse than E-gold did, they now contend with the same kind of Internet fraud that took down E-gold.[36][37] Financial cryptographers have observed that Bitcoin has repeated the same fundamental errors that E-gold made, and that despite its decentralized nature the cyber crime-wave might bring Bitcoin to a similar ending.[38][39]

See also[edit]

References[edit]

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  2. ^ "How the Man finally brought e-gold down". Stake Ventures. Retrieved 2013-09-20. 
  3. ^ "e-gold Bullion Reserve Special Purpose Trust". Web.archive.org. 2002-02-10. Archived from the original on 2002-02-10. Retrieved 2013-09-20. 
  4. ^ "e-gold Statistics". Scbbs.net. 2010-02-23. Retrieved 2013-09-20. 
  5. ^ "FBI — Arrest in Multi-Million-Dollar Internet “Gold-Unit” Ponzi Scheme". Fbi.gov. 2009-02-24. Retrieved 2013-09-20. 
  6. ^ "GP4.3 - Growth and Fraud - Case #3 - Phishing". Financial Cryptography. 2005-12-30. Retrieved 2013-09-20. 
  7. ^ "[e-gold-list] Large Criminal Hacker Attack on Windows NT E-Banking and E-Commerce Sites". Mail-archive.com. 2001-03-08. Retrieved 2013-09-20. 
  8. ^ a b "E-gold Tracks Cisco Code Thief". Smartdevicecentral.com. 2004-11-05. Retrieved 2013-09-20. 
  9. ^ "e-gold Blog: Buy Online Privately (but not Anonymously) with e-gold". Blog.e-gold.com. 2007-09-12. Retrieved 2013-09-20. 
  10. ^ "e-gold and HYIP scams". WORLD Law Direct. Retrieved 2013-09-20. 
  11. ^ "Ponzi Scams - Digital Currency's Dirty (not so Little) Secret - Yahoo Voices". voices.yahoo.com. 2007-08-17. Retrieved 2013-09-20. 
  12. ^ a b "e-gold Security Alerts". E-gold.com. Retrieved 2013-09-20. 
  13. ^ "How a Remote Town in Romania Has Become Cybercrime Central | Wired Magazine". Wired.com. 2012-08-27. Retrieved 2013-09-20. 
  14. ^ "Partners in Crime; The Fundamental Cause of Identity Theft". Web.archive.org. Archived from the original on 2011-11-19. Retrieved 2013-09-20. 
  15. ^ a b Ed Dickson (2007-04-30). "Fraud, Phishing and Financial Misdeeds: E Gold accused of being a money laundering vehicle for financial fraudsters and child pornographers". Fraudwar.blogspot.com. Retrieved 2013-09-20. 
  16. ^ "Gold Rush". Businessweek. 2006-01-08. Retrieved 2013-09-20. 
  17. ^ a b "Bitcoin hits 200 but where did this digital money trend really start". Pando. 2013-10-28. Retrieved 2014-07-14. 
  18. ^ "Goldmoney Pulls Out of the Payments Market" (49). DGC Magazine. December 2011. p. 4. Retrieved 2013-09-16. 
  19. ^ a b "Feds out to bust up 24-karat Web worry". NY Daily News. 2007-06-03. Retrieved 2013-09-20. 
  20. ^ a b Authors Jonathan L. Pompan. "Venable LLP | News & Insights | Publications | Newsletters | Credit Counseling Alert". Venable.com. Retrieved 2013-09-20. 
  21. ^ "e-gold® welcomes". Web.archive.org. 2006-03-22. Retrieved 2013-09-20. 
  22. ^ "DGC Magazine December 2011 by DGC Magazine". ISSUU. Retrieved 2013-09-20. 
  23. ^ Stephen Foley, November 28, 2013 E-gold founder backs new Bitcoin rival, Financial Times
  24. ^ Thompson, Jennifer (2013-05-24). "HSBC ‘humbled’ by magnitude of Mexico money laundering scandal". FT.com. Retrieved 2013-09-20. 
  25. ^ "Financial and Internet Industries to Combat Internet Child Pornography". Web.archive.org. Archived from the original on 2007-07-13. Retrieved 2013-09-20. 
  26. ^ Linda Friedman Ramirez (2008-05-13). "International crimes: E-currency subject to licensing requirements". 
  27. ^ Grant Gross (2007-07-22). "IDG News Service Internet currency firm pleads guilty to money laundering". Archived from the original on 2009-04-14. 
  28. ^ a b c Stephanie Condon (2008-11-20). "Judge spares E-Gold directors jail time". CNET. 
  29. ^ "e-gold Value Access Plan – Monetization Preparation". blog.e-gold.com. 12 August 2011. Retrieved 14 July 2014. 
  30. ^ a b "E-Gold Claims Process FAQ". Rust Consulting, Inc. 2013. Retrieved 14 July 2014. 
  31. ^ "About the Administrator". E-Gold Claims Process. Retrieved 14 July 2014. 
  32. ^ "e-gold Value Access Plan – Claims Filing Deadline Extended a Third Time". Blog.e-gold.com. Retrieved 2013-12-19. 
  33. ^ Owen Thomas (2012-07-11). "This Innovation-Killing California Law Could Get A Host Of Startups In Money Trouble". Business Insider. Retrieved 2013-09-20. 
  34. ^ "WebMoney.Passport - Verification Service". Passport.wmtransfer.com. Retrieved 2013-09-20. 
  35. ^ "GoldMoney Introduces Automated CAP Verification". Runtogold.com. 2008-12-17. Retrieved 2013-09-20. 
  36. ^ "Pay Pal - Paypal Fraud, Hack, Email Scam, Account Warning". Auditmypc.com. Retrieved 2013-09-20. 
  37. ^ "Paypal Fraud : Buyers Scamming Sellers". eBay. Retrieved 2013-09-20. 
  38. ^ "FC++: Bitcoin & Gresham's Law - the economic inevitability of Collapse". Financial Cryptography. 2012-02-23. Retrieved 2013-09-20. 
  39. ^ Wheeler, Lynn (2011-06-14). "BitCoin - the bad news". Financial Cryptography. Retrieved 2013-09-20. 

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