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G&SR (e-gold Operator) office, 1998-2014

e-gold was a digital gold currency operated by Gold & Silver Reserve Inc. (G&SR) that allowed users to open an account on their web site denominated in grams of gold, or other precious metals, and that let users make instant transfers of value ("spends") to other e-gold accounts. The e-gold system was launched in 1996 and had grown to five million accounts by 2009, when transfers were suspended due to legal issues. At its peak in 2006, e-gold was processing more than US$2 billion worth of transactions per year, on a monetary base of US$71 million worth of gold (about 3.5 metric tons). e-gold Ltd. was incorporated in Nevis, Saint Kitts and Nevis with operations conducted out of Florida, USA.

Beginnings

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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. By 1998, G&SR (the system operator) was an Affiliate Member of NACHA and a Full Member of NACHA's The Internet Council.

The company was launched two years before PayPal but did not manifest exponential growth until 2000. By 2004, there were over a million accounts. It was the first successful digital currency system to gain a widespread user base and merchant adoption, noted July 13, 1999 in the Financial Times as "the only electronic currency that has achieved critical mass on the web". It was also the first non-credit-card payment service provider to offer an application programming interface (API) enabling other services and e-commerce transactions to be built on top of it.

After initial demonstration of an e-gold Spend via PalmPilot in February 1999, e-gold introduced support for wireless mobile payments.

e-gold was used by both individuals and merchants for services including metals trading, online merchants, online auctions, online casinos, political organizations, and non-profit organizations.

From 1996 through 1999, currency exchange services referred to as “InExchange” and “OutExchange” were directly supported on the e-gold platform. This arrangement exposed the system’s operator, G&SR, to the financial risks attendant to provision of exchange services. It also tended to inhibit third parties from offering exchange services on an independent competitive basis.

In 2000, the system was restructured to separate currency exchange activities from the core functions of e-metal issuance and settlement of transfers. G&SR devolved ownership and responsibility for these core functions to e-gold Ltd., a newly formed offshore company organized for that express purpose. G&SR itself, now a customer of e-gold, continued to offer exchange services under the newly created OmniPay brand.

Beginning in early 2000, there was a proliferation of independent exchange services marking the first emergence of an industry providing exchange between conventional national currencies and a privately issued brand of money. By 2001, several dozen companies and individuals from around the world were offering third party exchange services between national currencies and e-gold, further extending e-gold's international user base.

By the early 2000s, the capability of immediate settlement, as implemented by e-gold, was recognized as key to the emergence of systems for peer-to-peer transfers of digital rights such as "smart contracts".

Criminal abuse

e-gold was a target of financial malware and phishing scams by criminal syndicates and was used for illegal activities.

Hackers

Because it did not sufficiently verify the identity of account holders, e-gold began to suffer from an increasing rate of criminal activity against its users. In addition to phishing, attackers exploited 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.

Jackson said that e-gold is a book entry system with account histories, making it possible to identify users who had engaged in illicit activity. e-gold accounts were pseudonymous, allowing an account's creator to use any name. However, account and transaction records—even failed log-in attempts—were permanently recorded, enabling linkage of seemingly unrelated accounts secretly under unified control. The data mining this enabled, combined with inputs from independent exchange services, allowed law enforcement to identify numerous criminal users of the service.

Fraud

The Western Express Cybercrime Group, a five-man fraud syndicate based in Eastern Europe, engaged in carding, selling illegally obtained goods and using e-gold and other digital currencies to store the proceeds. e-gold enabled criminals and hackers in Romania to move money from victims in America. Several of the cyber crime gangs that plagued and used e-gold were based in Râmnicu Vâlcea, Romania.

Criminal prosecution

The USA Patriot Act 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. Jackson told the Financial Times in a November 2013 article that he had hoped to resurrect e-gold himself, but that he had not been able to obtain the licenses required in most US states.

In 2007, a U.S. federal grand jury indicted e-gold, accusing it of serving identity thieves and child pornographers. The company denied the charges.

In July 2008, the company and its three directors entered into a plea agreement. Jackson pleaded guilty to operation of an unlicensed money transmitting business and conspiracy to engage in money laundering. In November 2008, 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. 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. Jackson had faced a maximum sentence of 20 years in prison and a $500,000 fine. Judge Rosemary Collyer opted for a much more lenient sentence because of Jackson's significant personal debt. "Dr. Jackson has suffered, will continue to suffer, and may never be successful with e-Gold," said the judge.

Suspension of service and e-gold Value Access Plan (VAP)

The 2007 e-gold indictment was accompanied by seizures (and forced redemption) of the e-gold balances of multiple exchange providers, resulting in an almost overnight decline in the amount of e-gold in circulation (and gold reserves) from 3.5 to 2.6 metric tonnes. Additionally, the government filed a Post-Indictment Restraining Order (PIRO) which prohibited redemption of e-gold for gold bullion without the approval of the prosecutor. The primary purpose of the PIRO was to prevent dispersion of assets (the gold reserves) which the government had been unable to seize due to the custodial arrangements whereby the e-gold Bullion Reserve Special Purpose Trust held title to the gold.

The combination of adverse publicity and disrupted exchange markets led to a precipitous decline in e-gold usage and demand. Whereas under normal circumstances a decrease in demand would have resulted in a decrease in circulation (without impacting exchange rates), this combination led to e-gold Users being unable to exchange their e-gold for conventional money and discouraged any potential recipient from accepting payment in e-gold.

In 2008, the Plea Agreement detailed requirements for e-gold to resume operation as a regulated financial institution. While e-gold had already complied with the majority of requirements by the time of sentencing, it was discovered that the guilty Plea itself effectively precluded the companies (or any company controlled by the e-gold directors) from being licenseable in any US state. In accordance with the Plea, e-gold suspended all remaining Spend activity, in effect locking up all e-gold account balances.

The challenge was then how to restore customer access to the value in their e-gold accounts. Lacking licenses as a money transmitting business, any plan to liquidate the system and distribute value to customers would risk being construed as an additional violation of operating without required licenses.

In 2009, the e-gold directors approached the US government with a proposal whereby the government might serve as middleman for disbursing the value due to e-gold customers. Following a year of negotiation, the e-gold VAP was approved calling for monetization of reserves and a claims mechanism, under the authority and oversight of Judge Hollander. The VAP protocol entailed the companies consenting to a voluntary seizure action of the aggregate e-gold. The companies were then responsible for “monetizing” the value, that is, redeeming the e-gold, liquidating the bullion released from reserves and turning over the proceeds to the Secret Service.

Due to a fortuitous drop in USD value relative to e-gold, the net realized monetization rate for VAP was $1583 per troy ounce, over twice the maximum e-gold exchange rate during the interval Spend activity was curtailed and then suspended c. 2007-2009. Altogether, G&SR turned over more than $92.8 million to the Secret Service in 2012.

Some of the e-metal in e-Gold accounts was criminally derived, but much of the e-metal was owned by innocent account holders. The court ordered Rust Consulting, a private company in Maryland, to process refunds to account holders following validation of their identity by e-gold. The balance of unclaimed funds will be forfeited to the US government. 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.

Aftermath

After the e-gold and e-Bullion cases, California (2010) 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".

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." 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 and Goldmoney.com 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. 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. According to GoldMoney's website, BitGold announced the acquisition of GoldMoney on May 22, 2015.

Petition to vacate 2008 convictions

On July 2, 2020, e-gold Ltd, Gold & Silver Reserve, Inc, Douglas Jackson, Barry Downey, and Reid Jackson filed a writ of coram nobis petition in the United States District Court for the District of Columbia seeking to vacate, with prejudice, their 2008 convictions. The petitioners allege that the government intentionally withheld exculpatory evidence from its Brady disclosure that would have resulted in the defendants declining to enter into plea agreements for any of the counts on the indictment and should have informed the court’s ruling on the defendants’ motion to dismiss the money transmitter specific counts on the indictment against them.

Specifically, the petitioners allege that a business substantially similar to that of E-gold Ltd was advised by the District of Columbia Department of Insurance, Securities, and Banking that it did not require a money transmitting license pursuant to D.C. law, causing  the petitioners to realize that the government may have misrepresented the applicability of state money transmitting laws to e-gold. The petitioners further allege that this resulted in public records requests which yielded evidence that the government had instructed the Florida Office of Financial Regulation to refrain from issuing or publishing its legal opinion that neither of the companies were money transmitters per Florida law during the pendency of the grand jury investigation of the companies.

See also

References

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