Cyber currencies spawn 21st century gold rush
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By MARCELO BALLVE
June 17, 2001 | SAN JUAN, Puerto Rico (AP) --
In a strange quirk of fate, the Internet may be breathing new life
into an ancient currency -- gold.
Several Caribbean-based Web companies have begun storing gold in
places like Dubai, Zurich and London and allowing Internet users to
own pieces of the metal and use it as an online currency.
So
instead of relying on credit cards -- the dominant online payment
system -- people can opt for bullion-based cybermoney, which purveyors
tout as a quick, cheap and private alternative.
An array of Web businesses already accept it.
"We've got people using it all over the world,'' said James Turk,
founder of GoldMoney, a Bahamas-based online payment business. The
advent of globe-spanning e-commerce has allowed transactions to skip
easily across national boundaries, making for easy shopping for anyone
with a modem. But most transactions in cyberspace still involve
national currencies, fraught with risk of fluctuating exchange rates
and the cost of bank commissions.
Various Internet entrepreneurs have attempted, without success, to
devise digital payment schemes that would simplify online purchasing.
The creators of digital gold believe they have the answer.
Their currency offers an international purchasing solution that
economists have only begun to contemplate: a stable, cashless currency
that offers instant purchasing power across borders.
Digital currency holders can use the Internet's anonymity to buy
things online, send money to other users or simply exchange national
currencies into cyber-gold.
But the ease of hiding ill-gotten gains in virtual gold scares
financial crime fighters and regulators, who struggle to track shady
offshore banks and money launderers.
"There is tremendous potential in using these products for money
laundering,'' said U.S. Secret Service Agent Eddy Lugo, who works for
the Treasury Department in Washington, D.C.
The speed and volume of transactions with digital currency has
investigators like Lugo worried the industry will become ungovernable.
So far, no digital currency business has established bank-like
standards for reporting suspicious activity, Lugo said.
For their part, the digital currency entrepreneurs say they seek
legitimate customers who wish to make large, low-fee online
international transactions.
To set up an account at a digital currency Web site, customers need
only register with an e-mail address and password. They then go to a
currency exchange Web site that converts payments via bank draft or
wire transfer to a gram-equivalent in virtual gold.
That amount is credited to their account.
Digital gold owners then patronize sites equipped to receive it such
as Bananagold.com, where you can use its interface to shop at
Amazon.com and spend 1.7 ounces of gold to buy a $450 Palm Pilot. At
other sites, the digital currency can be used to dabble in Asian stock
markets -- or play casino games.
The idea of independent currencies free of government control is not
new.
Neither are the accompanying fears of financial crime.
In the mid-19th century, as many as 8,000 U.S. state-chartered banks
issued private currency that was often redeemable for gold or silver.
But some notes were bogus or circulated by shadowy banks that folded
overnight. Forgeries were widespread.
After the Civil War, the government set standards for a national
currency that became the U.S. dollar.
Worldwide, other governments snuffed out privately issued bank notes
and replaced them with money printed by central banks and managed by
monetary boards like the U.S. Federal Reserve.
But now, experts have pondered the resurgence of what might be called
private money.
Mervyn King, deputy governor of the Bank of England, thinks the
Internet could provide the catalyst for an end to the state monopoly
on issuing currency.
"Just like every country had its own national currency, the Internet
needs its own money too,'' Turk said.
For the past 30 years, gold's importance in international commerce has
dwindled. Many currencies used to be freely convertible into gold. But
once the powerful U.S. dollar abandoned this gold standard in 1971,
paper currencies based on floating exchange rates became the main
means of international exchange.
When the World Wide Web began to blossom, ideas were hatched for
anonymous digital currencies. Two businesses, Digicash and Cybercash,
failed to sell online merchants on the idea. Both companies have filed
for bankruptcy.
The founders of the digital gold ventures believe their products will
eventually succeed. Humans have used gold through the ages and will do
so again, they argue.
"What we offer is gold you can actually use,'' explains E-gold's
founder, retired physician Douglas Jackson of Melbourne, Fla.
Launched in 1996 and registered on the Caribbean island of Nevis,
E-gold claims more than 200,000 accounts and more than $14 million of
currency in circulation.
A third company, Standard Reserve, is based in the British Virgin
Islands.
For now, most consumers will continue to use credit cards for online
purchases, argues Kenneth Clemmer, an analyst at Forrester Research.
"Right now we're just a speck in the world economy,'' admits
GoldMoney's Turk, a former Chase Manhattan international banker. "But
I'm optimistic that we will grow.''
The three main metal-backed digital currency issuers say they like the
Caribbean's stability and a hospitable business environment free of
red tape and legal hassles. Those include secretive banking laws and
no-tax or low-tax regimes, and the opportunity to register companies
whose only presence may be a sheaf of papers in a law office.
The digital currency issuers charge a small fraction for transactions
or for gold storage. At E-gold recently, the fee was 0.0018 ounces of
gold for a 20-ounce gold purchase.
The companies say the virtual gold is backed by gold bars stashed in
their vaults and verified by chartered accountants. E-gold, for
example, posts a report on its site by Ernst and Young.
The actual computers that host the accounts may be elsewhere, though.
GoldMoney, for example, contracts South Africa's Dimension Data to run
its Web site from the island of Jersey in the English Channel.
E-gold's system is operated by a partner company in Florida.
As business grows, so does scrutiny.
On Nevis, Finance Secretary Laurie Lawrence said authorities who
registered E-gold as an offshore company still were trying "to get a
handle'' on how digital currency operates and whether to regulate it.
The government of St. Kitts and Nevis is drafting its first
money-laundering regulations.
Both E-gold and GoldMoney said they are developing safeguards,
including certificates that aim to identify clients as legitimate
depositors with a clean financial record.
And because the currenciest racked by computer, all transactions are
recorded and traceable to an Internet service provider.
"You can't build a solid business by catering to criminals,'' said
Jackson.
The U.S. Secret Service, which tracks financial crimes, said it could
not confirm money laundering was occurring with digital currencies,
but added that the currencies were "wide open'' to this type of crime.
Justin........
My hindsight is 20/20.........
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