E-gold

Logo for e-gold Ltd

Logo for e-gold Ltd

e-gold is a digital gold currency operated by Gold & Silver Reserve Inc. under e-gold Ltd., and is a system which allows the instant transfer of gold ownership between users. e-gold Ltd. is incorporated in Nevis, Lesser Antilles.

According to the company's website, as of September 2006, e-gold had 111,779 oz (3,465,149 grams) of gold and 138,567 oz (4,295,577 grams) of silver in storage, which is worth approximately US$86 million [1]. There are typically 66,000 e-gold spends each day totalling 15,000 oz (460 kilograms), which is about US$10.5 million. There are over three million e-gold accounts of which about one quarter are active [2].

History

e-gold was founded in 1996 by Dr. Douglas Jackson and Barry K. Downey [3]. Transactions using e-gold have grown dramatically since 2005. The total amount of gold bars (over three tonnes) in the e-gold system is approaching the size of the national reserves of smaller countries. e-gold now generates a substantial income from spend and storage fees — it costs a few cents to make each e-gold "spend" and e-gold itself now earns well over a million USD per year from fees.

The number of e-gold accounts (as claimed by e-gold) grew from 1 million in November 2003 to 3 million on 22 April 2006. That represents a compound growth rate of approximately 55% per annum. This high growth rate has been sustained by e-gold almost since inception. [4]

Role in global commerce

Many small businesses in the U.S., Europe and Asia, each with full-time staff now operate as "digital currency exchangers," doing nothing other than buying and selling digital gold currency for "fiat currencies," as gold bugs term the euro, pound, yen and U.S. dollar.

e-gold transactions — a "spend" — are completed electronically, usually using the web interface, and they always settle by weight of the metal even if denominated in some other way. A user may send (or "spend") a tiny amount of gold (a fraction of a gram, ounce or kilogram) to another user account instantly, anywhere in the world.

Even though e-gold is careful to not advocate any particular political agenda, as the Liberty Dollar does for example, e-gold could be viewed as a libertarian form of private currency [5].

Features

Asset protection

e-gold is, according to their website, "100% backed by gold"

Unlike fractional-reserve banking, e-gold holds 100% of clients' funds in reserves with a store of value. Proponents of the e-gold system contend that e-gold deposits are protected against inflation, devaluation and other possible economic risks inherent in fiat currencies. These risks include the monetary policy of countries or territories, which are perceived by proponents to be harmful to the value of paper currency.

The repository of the actual bullion bars with serial numbers and other data can be seen using the live "Examiner" function on the e-gold web site. Bullion is held in allocated storage with Brink's Global Services (part of The Brink's Company), Transguard Security Services (part of The Emirates Group) or MAT Securitas Express AG (part of the VIA MAT Group) [6]. Clients hold an unallocated share of this allocated bullion.

The user may take physical delivery of the precious metal upon payment of an additional fee, and provided the user has an available balance of at least the weight of the smallest individual item displayed in the Examiner. This is currently a 32 troy ounce gold bar, which is worth approximately $20,000. However in practice, most users permit the company to store the metal for them.

Bullion investing

Main articles: Gold as an investment and silver as an investment

e-gold is a form of commodity money, so it is subject to the price fluctuations of that commodity. If the price of gold drops versus your national currency, the value of your e-gold drops in that currency. The account balance, which is denominated in gold grams, does not change, but its purchasing power will change in relation to the gold price.

This can, of course, work both ways. Proponents of the e-gold system would argue that the risk of significant price fluctuation is small compared to the risk of value fluctuations among fiat currencies. The opposite argument is that a typical user is more affected by changes in the price of e-gold than of fiat currencies; this is because most people are paid in and spend their local currency, while the use of e-gold will typically involve a foreign exchange transaction each time. In both cases, long-term shifts in the price of a currency or e-gold affect its owner, but anyone who frequently buys and sells e-gold will be exposed to short-term fluctuations as well. The price of gold has happened to increase over the past five years [7], so this factor has worked out to the advantage of anyone holding e-gold over that period.

As well as digital gold, e-gold also offers e-silver, e-palladium and e-platinum. Funds can be switched between e-metals using their sister company OmniPay. Metal-to-metal (or M2M) exchanges are completed at spot price with no bid/offer spread.

Exchanging fiat currency

e-gold does not sell its currency directly to clients. Instead numerous digital currency exchangers, such as OmniPay (a sister company of e-gold), and some independent companies such as IceGold and GoldNow act as market makers selling e-metal in exchange for fiat currency and a transaction fee. Conversely, these exchange providers will sell fiat currency in exchange for e-metal, and a transaction fee. In this manner e-metals can be converted back and forth to a variety of national currencies. The amount of a particular fiat currency or e-metal necessary to complete a transaction is determined by the spot price of the metal in relation to the value of the fiat currency. e-gold is known as private currency as it is not issued by governments.

Compared to other systems like PayPal, the process of buying e-gold can be confusing to a person unfamiliar with the e-gold system. e-gold, unlike e-Bullion for instance, does not sell digital currency directly to the user. According to their website the reason e-gold does not provide an in-house exchange service is so there can be no debt or contingent liabilities associated with the business, making e-gold Ltd. absolutely free of any financial risk. They claim e-gold Ltd. does not possess currency of any nation or even have a bank account.

Fees

e-gold charge an account fee (or Agio Fee) of 1% per annum (deducted in monthly payments) on all e-metal stored.

Spending e-gold is free, with transaction fees (or Spend Fees) deducted from the recipient. As of 2006 these spend fees vary on a sliding scale from 55% for very small amounts (0.0004 grams of gold, worth about 1 cent) to 5% for amounts on the order of 0.1 gram (about $2) to 1% for amounts of over 1 gram (about $20), with a maximum fee of .05 grams (about $1).[8]

e-gold spends clear instantly, in contrast to cheques or credit card transactions. Unlike other online payment systems such as PayPal, there are no distinctions between merchant and non-merchant e-gold accounts. Anyone can instantly create a "merchant account" (there is only one type of account). All e-gold accounts carry the same fees and have the same capacity to receive and transmit e-gold account holdings.

Universal currency

Proponents claim that e-gold offered the first truly global and borderless world currency system which was independent of exchange rate variations. Gold, silver, platinum and palladium each have recognised international currency codes under ISO 4217.

Incentive program

e-gold clients can place a referral link on a website to generate a few cents in referral income. If a new client sets up an e-gold account from someone else's referral link, it is harmless and does not cost the new client any money when performing future e-gold transactions [9].

Crime and fraud

e-gold has notoriously been the medium of choice for many online con-artists, with pyramid schemes and HYIPs ("High Yield Investment Programs") commonplace. This is presumably partly due to e-gold maintaining its policy of irreversibility of e-gold transactions.

e-gold and OmniPay have also been accused of being a medium for money laundering, although this is questionable given that there were only 24 customer accounts holding over 10kg of gold (approximate value $200,000) by April 2006 [10]. As digital gold currency providers are not banks, they are not legally required to perform various sorts of "know your customer" background checks. However, many e-gold exchange providers require a high level of identification, sometimes more intrusive than a bank.

Opening an account at www.e-gold.com takes only a few clicks of a mouse. Customers can use a false name if they like because no one checks. With a credit card or wire transfer, a user buys units of e-gold. Those units can then be transferred with a few more clicks to anyone else with an e-gold account. For the recipient, cashing out — changing e-gold back to regular money — is just as convenient and often just as anonymous. [11]

In January 2006, BusinessWeek reported on the use of the e-gold system by ShadowCrew, an 4000-strong international crime syndicate involved in massive identity theft and fraud [12]. Omar Dhanani of Fountain Valley, California, connected to the ShadowCrew, is an e-gold customer and is reported to have moved amounts ranging from $40,000 to $100,000 a week from proceeds of crime through e-gold [13].

In response, Chairman and founder, Dr. Douglas Jackson published a letter which stated that "e-gold operates legally and does not condone persons attempting to use e-gold for criminal activity. e-gold has a long history of cooperation with law enforcement agencies in the US and worldwide, providing data and investigative assistance in response to lawful requests." He further noted that "Our staff has participated in hundreds of investigations supporting the FBI, FTC, IRS, DEA, SEC, USPS, and others." [14].

In August 2006, WORLDLawDirect lawyers announced e-gold Ltd. officials and their legal counsel to be the subject of a U.S. Federal Court subpoena. They believe e-gold Ltd. is subject to U.S. Federal Court jurisdiction and may be held liable for some or all of the investors' losses (and potential triple damages) in the Solid Investment (Solidinvestment.com) large scale HYIP scam [15].

Criticisms

Non-reversible transactions

Unlike credit cards, there is no way of having transactions reversed, even in case of a legitimate error or an unauthorized spend. e-gold's Terms of Use stipulate that all spends are final and e-gold cannot be held responsible for any spend. In this respect, an e-gold spend is more akin to a cash transaction (except for the fact that there is a fee levied) while PayPal transfers, for example, could be considered more similar to credit card transactions.

Security

As with any online payment system, e-gold is vulnerable to various threats, notably phishing (for example, forged emails asking for login details) and spyware (such as keystroke logging).

e-gold offers no protection whatsoever if an attacker succeeds in obtaining:

• the user's e-gold account number
• the user's e-gold password
• access to the user's registered email account (free web-based email accounts are specially vulnerable)

as the e-gold account will then be completely open for malicious use.

All three pieces of information can be gathered with a trojan keylogger which monitors accesses to the e-gold web-site. All online services are affected by this security issues, but what makes e-gold especially vulnerable is that any losses resulting from a security breach cannot be undone since transfers are non-reversible, and unlike online banking, e-gold do not provide any insurance against such abuse. Also if funds are stolen, e-gold will not block a recipient's account without being issued with a court order. Since there is a lag time in obtaining a court order, the stolen funds can easily be withdrawn from the offending account and e-gold, rendering the recovery of any funds virtually impossible. This is not clearly stated in e-gold's user agreement, but an abused user will receive the following explanation from the company:

Unfortunately we will not be able to refund

your money because all e-gold spends are final and not reversible as stated in the e-gold account user agreement. e-gold is also contractually prohibited from freezing e-gold accounts or releasing e-gold account information in the absence of a court order or subpoena. You might want to consider obtaining some combination of help from a legal professional or law enforcement to obtain a court order, if the size of your loss warrants

expenditure of your resources (time and money) to resolve.

In 2005, the Los Angeles Times reported on a specially created trojan horse that compromised "dozens" to "the low hundreds" of e-gold accounts [16] . While trojans usually silently record the login details of the unsuspecting user, the trojan in question (Win32.Grams) emptied the accounts themselves by transferring the contents to the attacker's accounts.

To partly counter the threat from keystroke logging it is imperative that users never enter their password via a keyboard when logging-in, or authorising spends, if the computer they are using is potentially infected. Instead users should always use a mouse and the popup window provided (SRK Passphrase Entry). Other security recommendations from e-gold include restricting access to a single IP address or browser (Account Sentinel) plus using Mozilla Firefox, a firewall and antivirus software [17].

Some competing DGCs offer similar features to combat typical, simple, "mass" phishing attacks and keystroke loggers. e-Bullion utilizes a "two-factor", token-based authentication solution from CRYPTOCard, an alternative to RSA's "SecureID". Pecunix has an extremely secure, somewhat complicated, log-in procedure. 1mdc has a simple PIN-pad addition. GoldMoney allow user certificates to be used. Most systems also include an optional or compulsory "email confirmation" type of process when logging-in or authorising spends.

Regulatory challenges & shortcomings

e-gold Ltd. was registered in Nevis, Lesser Antilles in 1999, but was temporarily removed from the register. e-gold cleared an administrative issue and as of July 14, 2006 it is properly registered in Nevis.

In September 2004, several Australian based e-gold currency exchangers ceased operation as they did not hold an Australian Financial Services licence (AFSL) [18]. Australian based digital currency exchangers that closed down voluntarily, due to the Australian Securities and Investments Commission (ASIC) licencing requirements, included:

• goldex.net
• sydneygoldsales.com
• ozzigold.com

Whilst exchange providers can still operate in Australia, many have found it impractical to do so due to licencing or proxy issues. Australian residents can exchange e-gold via exchangers in the U.S., Europe or other countries. There appears to be no issues about New Zealand citizens buying e-gold in NZ, and a number of AU citizens have opened NZ bank accounts, specifically to purchase e-gold from NZ based exchangers (even though e-gold doesn't denominate e-gold in NZD).

Bullion storage

As of November 2005, it is unclear if e-gold has an independent auditor of the physical bars, so there is no way of knowing if e-gold Ltd. really has the reserves to back the currency in the e-gold system. e-gold does maintain an "Examiner", a web page with updated statistics on outstanding liabilities and the total amount of each precious metal in its holding [19]. While proponents generally consider this assuring enough, critics remain skeptical.

Limited use

Beginning January 2006, eBay has restricted buyers and sellers from using many online payment systems and encouraged them to use Paypal, which is wholly owned by eBay. eBay specifically named e-gold as one of the online payment systems that will result in them cancelling a seller's account if used [20]. e-gold runs a non-reversible transaction policy, meaning that there is no protection for purchasers if vendors fail to supply goods.

See also

• Digital gold currency
• Digital currency exchanger
• 1mdc
• Full-reserve banking
• Gold as an investment
• Gold standard
• GoldMoney
• WebMoney
• PayPal
• Private currency
• Silver as an investment

External links and references

• official e-gold website
• InformationWeek article (January 2006) on e-gold
• Indomitus report (January 2005) on e-gold
• Beware of e-gold - THE HINDU Business Line
• Wired magazine article (January 2002) on e-gold and e-dinar
• Would a Global Crisis Make e-gold Glitter? - BusinessWeek Online article (April 3, 2000)
• GDCA Online - The Global Digital Currency Association
• E-gold Directory - Directory of e-gold