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From Wikipedia, the free encyclopedia

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 (prior 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 independent currency, which normally carries the same name as their company. In terms of the most popular providers, e-gold has the greatest number of users and GoldMoney holds the greatest quantity of bullion (as of January 2007^[update]).

As of April 2008^[update], DGC providers held in excess of 9.6 metric tonnes of gold as disclosed reserves, which is worth approximately $280 million, which is a 47% increase since January 2007.^{[citation needed]}

Contents 1 Features 1.1 Universal currency 1.2 Asset protection 1.3 Bullion investing 1.4 Exchanging national currency 1.5 Non-reversible transactions 2 Risks 2.1 Exchange risk 2.2 Management risk 2.3 Political risk 2.4 Data security 3 Providers 4 Criticisms 5 Cultural references 6 See also 7 References 8 External links

[edit] Features

[edit] Universal currency

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. In addition to digital gold currency, GoldMoney, e-Bullion and eLibertyDollar also provide digital currency backed by silver.

[edit] Asset protection

Unlike fractional-reserve banking, DGCs (such as e-gold and GoldMoney) hold 100% of clients' funds in reserves with a store of value. Proponents of DGC systems contend that 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.

[edit] Bullion investing

For example, GoldMoney is accessible and approved for U.S. self-directed Individual Retirement Accounts through The Entrust Group^[1].

All of the other digital gold currency systems can be used to buy, hold, and sell precious metals, but do not promote themselves as an "investment", as this implies an anticipated return.

[edit] Exchanging national currency

Some providers, like e-gold, Pecunix, Liberty Reserve do not sell DGC directly to clients. For those DGCs, e-currency must be bought and sold via a digital currency exchanger such as GoldNow or London Gold Exchange.

Currency exchangers accept payment in national currencies by a variety of methods, including Bank Wire, Direct Deposit, Check, 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.

According to the DGC issuers that do not directly sell DGC to clients, this keeps their system free of any exchange risk, which is instead taken by the independent exchange providers. DGCs are known as private currency as they are not issued by governments.

[edit] Non-reversible transactions

Unlike the credit card industry, DGC issuers generally do not bundle services such as repudiation. Thus having transactions involuntarily reversed, even in case of a legitimate error, unauthorized spend, or failure of a vendor to supply goods is not possible. In this respect, a DGC spend 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 DGC transactions to clear instantly making the funds immediately available to the recipient. By contrast credit cards, checks, ACH and other reversible payment methods generally have a "clearing time" of 72 hours or more.

The lack of payment repudiation in DGCs leaves an opportunity for third-parties to provide payment escrow services to buyers and sellers in untrusted environments, such as internet auction websites.

[edit] Risks

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

[edit] Exchange risk

Digital gold currency is a form of representative money as it directly represents gold metal on deposit or in custody^[2], and denominated in units of mass (grams or troy ounces). 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^[3]. Due to this speculative interference, there are times when purchasing power has also declined. In 2007-2008, gold volatility has closely tracked the recent run-up in oil prices. ^[4].

[edit] Management risk

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".

GoldMoney is the only DGC that is a government registered money service business [1].

Imitating e-gold's success, several companies claiming to be Digital Gold Currencies sprang up and failed between 1999 and 2004, including OS-Gold^[5], Standard Reserve^[6] and INTGold^[7]. All three of these companies failed because the principals diverted deposits for other purposes instead of holding them in the form of gold.

In each of the above cases, account holders lost several million dollars worth of gold when the "institution" failed. However, the warning signs were evident from the beginning. All three of the failed companies were created and operated by people in the high-yield investment program "business", and the people who lost their funds were almost entirely HYIP players. None of the failed pseudo-DGCs had established a governance system to protect the reserves from being pillaged by management.

In contrast to those notable failures, e-gold and GoldMoney have both established governance systems that provide a high level of transparency. E-gold publishes a real-time "examiner"^[8] on their website that shows the total amount of e-currency in circulation, as well as a list of the gold bars held in trust to back the value in the accounts. E-gold's governance system is self-certified, meaning that there is no third-party verification of their published figures. GoldMoney goes a significant step further by publishing quarterly third-party audits^[9] of their system along with a list of the serial numbers of the bullion bars held in trust.

There are no specific financial regulations governing DGC providers, so they operate under self-regulation. DGC providers are not banks and therefore not subject to bank regulations that pertain to fractional reserve lending. However, DGCs do provide a method for transferring money from one person to another, and may therefore fall under regulations pertaining to currency transactions in some 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."^[10] 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.

[edit] Political risk

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 (a small part of which was all the assets of 1mdc which were held in e-gold), and is attempting to bring a case against e-gold.^[11] e-gold has committed to counter what its founders have declared to be groundless allegations.^[12] 1mdc is now defunct, however Pecunix, GoldMoney, e-Bullion and other DGCs appear to have been unaffected, and perhaps have gained market share as a result. (However, e-Bullion's principals are also the principals and operators of "The Bullion Exchange" which was one of the exchange providers whose accounts were frozen by the government's lawsuit.)

The indictment and gold seizure by the Justice Department led to a run on e-gold, as many account holders liquidated, the largest being the court-ordered liquidation of Omnipay's entire gold balance. Defenders of e-gold argue the fact that e-gold was able to satisfy the court order to liquidate the gold and fill all the liquidation orders of account holders is strong evidence that their governance system works.

It should be noted that any regular bank faced with a court order to pay out half the value of its reserves would be unable to do so because banks hold less than 50% of their deposits in reserve and lend the remainder out as long-term loans (fractional-reserve banking). E-gold's self-certified governance has thus far proved to be a successful method of protecting account holders from management risk. As of Spring 2008^[update], e-gold is still in business and doing several million dollars worth of gold transactions per day.

[edit] Data security

Digital Gold Systems are completely dependent on electronic storage and transmission of account ownership information. Therefore the security of a given digital currency account is dependent upon the security of the Issuer as well as the security of the Account Holder's computer.

While the Digital Gold Issuers employ data security experts to protect their systems, the average account holder's computer is poorly protected against malware (trojans, worms, and viruses) that can be used to intercept information that could be used to access the user's DGC account. Therefore the most common attacks on digital currency systems are directed against account holder's computer through the use of malicious spam, phishing and other methods.

Issuers have taken quite different approaches to this problem. E-gold basically places the entire responsibility on the shoulders of the user, and uses 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.

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.

GoldMoney allows the user to login with user-name and passphrase, but sends an email with a unique personal identification number (PIN) that the user must enter in the form to complete the transaction. This reduces the likelihood of a successful attack because the attacker must gain control of the user's email account in addition to his login information, and must further prevent the user from receiving the email with the PIN, which would alert the user that someone is attempting to transfer gold out of his holding.

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.

[edit] Providers

Comparison of DGCs (as of January 2007^[update]):

Digital gold currency	Date founded	GDCA member	Bullion stored	Number of user accounts	DCE transfers accepted	Wire transfers accepted	Annual storage fee	Processing fee (when receiving from another user)
c-gold	2007	Y	1367 oz (as of June 5th 2008[update])	11669	N	N	1%	1 - 5% (with min. 5% plus 0.0002 grams - max. 0.05 grams)
Crowne Gold	2002	N	Undisclosed	Undisclosed	N	Y	1%	0%
e-Bullion	2001	N	Undisclosed	Undisclosed	Y	Y	4 gold grams	0%
e-dinar	2000	N	Undisclosed	Undisclosed	N	Y	1%	1% (with max. 0.015 gold dinar)
e-gold	1996	N	111,779 oz gold, 138,567 oz silver, 400 oz platinum, 396 oz palladium	3,571,496	Y	N	1%	1 - 5% (with min. 5% plus 0.0002 gold grams - max. 0.05 gold grams)
GoldExchange	2006	N	Undisclosed	Undisclosed	N	Y	1%	$0.35 USD
GoldMoney	2001	N	193,921 oz gold, 3,229,907 oz silver	Undisclosed	N	Y	1.2 gold grams, 0.986% silver	1% (with min. 0.01 - max. 0.1 gold grams)
Liberty Reserve	2005	Y	Undisclosed	Undisclosed	Y	N	0%	1% (min. $0.01 - max. $0.25 USD)
Pecunix	2002	Y	2,375 oz gold	Undisclosed	Y	N	0%	0.15 - 0.50% (with min. 0.0001 - max. 3.0 gold grams)
VirtualGold	2006	N	Undisclosed	Undisclosed	N	Y	0%	1% (with min. $0.10 - max. $2.00 USD)

[edit] Criticisms

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.^[13] 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.^[14]

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.

[edit] Cultural references

• The novel Cryptonomicon by Neal Stephenson uses the idea of a gold-based digital currency in combination with strong cryptography.

[edit] See also

[edit] References

[edit] External links

• Digital Currency Merchants directory
• Global Digital Currency Association
• Digital Gold Currency Magazine