e-gold

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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 but the operations were conducted from Florida.

In 2007 the proprietors of the e-gold service were indicted by the United States Department of Justice on four counts of violating money laundering regulations. In July 2008 the company and its three directors pled guilty to charges of "conspiracy to engage in money laundering" and the "operation of an unlicensed money transmitting business" in the U.S. District Court for D.C.[1] The company faces fines of $3.7 million.

As of October 2008, e-gold Ltd has registered with FinCEN as a money transmitting business, and is working with various U.S. state authorities to obtain licensing as a money transmitting business where required. e-gold Ltd has recently implemented a Customer Identification Program. Users must update their Point of Contact Information to a consistent format, in addition to providing their Date-of-Birth and Personal Tax Identification number.

According to the company's website, as of April 2007, e-gold had 112,188 oz (3,492.0 kilograms) of gold and 138,567 oz (4,313.1 kg) of silver in storage, which is worth approximately US$86 million. [2] There are typically 66,000 e-gold "spends" each day totalling 15,000 oz (470 kg), which is about US$10.5 million. There are over three million e-gold accounts of which about one quarter are active. [3]

Contents

[edit] History

e-gold was founded in 1996 by Dr. Douglas Jackson and Barry K. Downey.[4] 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 — there is a charge of 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. [5] As of July 2008, the company reports more than 5 million accounts.

[edit] Features

[edit] Asset protection

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). [2] Clients hold an unallocated share of this allocated bullion. The gold reserves are externally audited annually by a LBMA approved auditor.

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 (996 g) gold bar, which is worth approximately $29,500. However in practice, most users permit the company to store the metal for them.

[edit] Bullion investing

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

e-gold does not promote itself as an investment. However, since e-gold is a form of commodity money, some users may put a portion of their assets into the form of e-gold to maintain a liquid store of value as a hedge. As commodity money, e-gold account values are subject to the price fluctuations of that commodity against each national currency. If the price of gold drops versus a national currency, the value of e-gold drops in that currency. The account balance, which is denominated in gold grams[citation needed], 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 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 increased over the past five years,[6] 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.

[edit] Exchanging for currency

e-gold does not sell its e-metal directly to users. Instead digital currency exchangers, such as OmniPay (a sister company of e-gold), and numerous independent companies act as market makers selling e-metal in exchange for other currencies and a transaction fee. Conversely, these exchange providers will buy e-metal with other currencies, again taking 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 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 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 its 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 free of financial risk. They claim e-gold does not possess currency of any nation or even have a bank account.

[edit] Fees

e-gold charges 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 processing fees (or "spend fees") deducted from the recipient. As of 2007 these spend fees vary on a sliding scale from about 5% for spending 0.1 grams of gold to 1% for 5 grams of gold. Over 5 grams of gold, the fee is capped at 0.05 gram of gold (about $1.48 with gold at US$922 per ounce). [7]

e-gold "spends" clear instantly, in contrast to cheques or credit card transactions.[citation needed] Unlike other online payment systems such as PayPal, there are no distinctions between merchant and non-merchant e-gold accounts. Before recent restrictions on account creation, anyone could instantly create a "merchant account" (there was only one type of account). All e-gold accounts carried the same fees and had the same capacity to receive and transmit e-gold account holdings.

[edit] Universal currency

Proponents claim that e-gold offered the first truly borderless global currency system which was independent of exchange rate variations.[citation needed] Gold (XAU), silver (XAG), platinum (XPT) and palladium (XPD) each have recognised three-letter international currency codes under ISO 4217.

[edit] Crime and fraud

e-gold has been perceived by the United States government as the medium of choice for many online con-artists, with pyramid schemes and high-yield investment programs ("HYIPs") commonplace. This has been blamed on e-gold's policy of irreversible transactions. However, e-gold has been blocking accounts where fraud is proven or suspected since 2001.[8]

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 10 kg of gold (approximate value $200,000) by April 2006.[3] As digital gold currency providers are not banks but may be considered money service businesses, they are legally required to perform various sorts of "know your customer" background checks.

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. [9] 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. [10]

In response, 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." [11]

In August 2006, WORLDLawDirect lawyers announced e-gold officials and their legal counsel to be the subject of a U.S. Federal Court subpoena. They believe e-gold 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 [12] large scale high-yield investment program (HYIP) scam. [13][citation needed] On 27 April 2007, a federal grand jury in Washington, D.C. indicted e-gold Ltd and its owners on charges of money laundering, conspiracy, and operating an unlicensed money transmitting business.[14] e-gold, however, claims that the charges are groundless, and has responded to the allegations. [15]

In July 2008, the brother of Everton F.C. footballer Joseph Yobo was kidnapped in Nigeria. The kidnappers demanded a ransom of $10,000 paid through e-gold.[16]

[edit] 2007 indictment

In April 2007, the US government ordered e-gold administration to lock/block approximately 58 e-gold accounts, owned and used by The Bullion Exchange, AnyGoldNow, IceGold, GitGold, The Denver Gold Exchange, GoldPouch Express, 1MDC (a Digital Gold Currency, based on e-gold), and others, and forced G&SR (owner of OmniPay) to liquidate the seized assets [17]. In addition, a few weeks later, e-gold themselves were indicted with 4 indictments [18] . However, e-gold are still in business, and are growing at the rate of approx. 95,000 new accounts per month. [3][citation needed]

The essence of the allegations in the indictment is twofold: 1) e-gold is an unlicensed money transmitting entity as defined by [19] 2) e-gold was a de facto means of moving money from illegal activities to wit: high-yield investment programs which are Ponzi scams, credit card and identity fraud sites and retailers of child pornography.

The indictment alleges (paragraph 34) that the defendants knew of the activities associated with the accounts and noted those activities in the e-gold database with notations such as: "child porn", "scammer", and "CC fraud".

The indictment further alleges that knowing that certain accounts were associated with illegal activities e-gold placed "value limits" on the accounts and suggested that the account holders open new accounts and placed no restrictions on the customer's ability to move funds out of the account.

Partly due to this reason e-gold's gold bullion reserves have dropped from 112,188 oz in April 2007 to 84,856 oz (from 3,491.0 kg to 2,461.2 kg) by June 2007. [2] As of July 2008 reserves have stabilized at 2,420 kg.

Here is the public rebuttal by CEO Jackson, CEO [15]

[edit] 2008 court trial

E-gold was tried with violation of 18 USC 1960 in UNITED STATES OF AMERICA v. E-GOLD, LTD, District of Columbia court. The court found against E-gold, ruling 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."[20] In July 2008 the company and its three directors pled guilty to money laundering.[1] The company faces fines of $3.7 million, however, the guilty plea is part of a plea bargaining process in which the DA dropped most charges. Regardless, the company has vowed to continue operations following the new Federal KYC guidelines. One upside of the court case for e-gold users is that the judge has rejected any charges of fraud regarding the e-gold user agreement and has confirmed the veracity of the company's gold reserve audit.

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.[21] 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, 300 hours of community service, and ordered to pay a $2,500 fine and a $100 assessment fee each.

[edit] Criticisms

[edit] Non-reversible transactions

Unlike credit cards, there is no way of having transactions reversed (without the seller's cooperation), even in case of a legitimate error or an unauthorized expenditure. e-gold's Terms of Use stipulate that all transactions 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.

[edit] 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 malware (such as keystroke logging spyware).

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 (web-based email accounts without a secure login are especially 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 issue, 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 the e-gold system, 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 [22] . While trojans usually silently record the login details of the unsuspecting user, the trojan in question ( [23]) 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 without a disability should always use a mouse and the popup window provided (SRK Passphrase Entry). However this is not a panacea as advanced spyware can take a screen shot and read the mouse clicks. 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 [24]

[edit] Regulatory challenges and 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) [25] 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 and 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).

On 24 November 2006, e-gold suspended all accounts held by customers located in Iran. [26]

[edit] 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. [2] While proponents generally consider this assuring enough, critics remain skeptical as there is no way of determining if the web page's portrayal is accurate.

[edit] 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.[27].

[edit] See also

[edit] References

  1. ^ a b Grant Gross (2007-07-22). [http://www.thestandard.com/news/2008/07/22/internet-currency-firm-pleads-guilty-money-laundering "IDG News Service Internet currency firm pleads guilty to money laundering"]. http://www.thestandard.com/news/2008/07/22/internet-currency-firm-pleads-guilty-money-laundering. 
  2. ^ a b c d e-gold Examiner
  3. ^ a b c e-gold Statistics
  4. ^ e-gold Corporate
  5. ^ e-gold Statistics
  6. ^ http://kitco.com/LFgif/au3650nyb.gif
  7. ^ e-gold Fees Overview
  8. ^ E-Gold Gets Tough on Crime
  9. ^ Gold Rush
  10. ^ The Hindu Business Line : Gold's the bait
  11. ^ Letter from Dr. Douglas Jackson; Chairman, e-gold, Ltd
  12. ^ Solidinvestment.com
  13. ^ WORLDLawDirect - Solidinvestment.com investment scam
  14. ^ Online Payment Network Abetted Fraud, Child Pornography
  15. ^ a b e-gold Founder Denies
  16. ^ "Kidnappers Demand e-gold For Safe Return of Nigerian Soccer Player’s Brother". DGC Magazine. 2008-07-16. http://www.dgcmagazine.com/blog/?p=133. 
  17. ^ http://www.usdoj.gov/opa/pr/2007/April/07_crm_301.html DoJ press release
  18. ^ http://www.usdoj.gov/criminal/pr/press_releases/2007/04/CRM_07-301_042707_egold_indict.pdf full text of the indictment
  19. ^ http://www2.law.cornell.edu/uscode/uscode18/usc_sec_18_00001960----000-.html Title 18 USC Section 1960
  20. ^ Linda Friedman Ramirez (2008-05-13). "International crimes: E-currency subject to licensing requirements". http://obtainingforeignevidence.blogspot.com/2008/05/international-crimes-e-currency-subject.html. 
  21. ^ Stephanie Condon (2008-11-20). "Judge spares E-Gold directors jail time". CNET. http://news.cnet.com/8301-13578_3-10104677-38.html. 
  22. ^ http://www.vericept.com/Downloads/NewsArticles/industry_news/2005/Now,%20Every%20Keystroke%20Can%20Betray%20You%20-%20Los%20Angeles%20Times.pdf
  23. ^ http://www.lurhq.com/grams.html Win32.Grams
  24. ^ Security Recommendations
  25. ^ 04-366 ASIC acts to shut down electronic currency trading websites - Australian Securities and Investments Commission
  26. ^ Herpel, Mark (2006-12-04). "e-gold Closes All Iranian Accounts". Digital Money World. http://digitalmoneyworld.com/e-gold-closes-all-iranian-accounts/. Retrieved on 2007-01-08. 
  27. ^ eBay: Redirect

[edit] External links

(April 2000)

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