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Part III: The Fall.
Continuing from the spectacular rise of the first unconventional method of exchanging value via the internet to achieve mass adoption—e-gold—we now examine its demise. The causes of which had a lot more to do with naivety than hubris.
In a candid interview, Dr Jackson admits his KYC (know your customer) protocol was far too lax. In his mind, such procedures were a necessary inconvenience only for those who sought credit from creditors where authenticity and accountability are an unavoidable factor. As credit is alien to the concept of e-gold, it ought not to be a consideration. And in that sense, KYC genuinely wasn’t an issue for the company.
These days crypto customers are painfully aware of the identification procedures when attempting to convert their fiat currency: awkward selfies with passports folded open and sometimes with a written message to prove authenticity like a hostage photo. Twenty plus years ago, it was a different matter. Anyone could sign up for an e-gold account with a valid email address and were granted full permissions with next to no scrutiny, including both good and bad actors. This policy was in effect as fatal to the fortunes of e-gold as any hack.
By 1999, the first indication of suspicious activity was becoming apparent: the criminal class had begun to sniff out an opportunity, drawn by the prospect of both ‘anonymised’ transactions and the ease of shifting funds from one country to another with impunity. The parent company of e-gold was soon cooperating fully with law enforcement agencies such as Scotland Yard of London and the Russian Ministry of Internal Affairs; also with the authorities of France, Egypt, Nigeria and others.
By 2005, the company had complied with over a thousand subpoenas and cooperated extensively, developing useful investigative methods along the way to assist with the investigations. Helped by the fact that transactions were actually pseudonymous rather than anonymous and often left a trail of breadcrumbs for the authorities to follow.
Nevertheless, putting out the fires, however effectively, is no substitute for fire prevention. Prevention would have meant that right from the get-go, there was a robust universal customer identification program that inquired into the intentions of customers, and the nature of the businesses signing up to utilise e-gold, and then assessing the risks. It seems shocking now, but the company had no anti money laundering (AML) measures in place at all, more so considering one of the founding partners was an attorney.
Certainly, Dr Jackson made the assumption that the law governing the licensing of a money transmitting business was drafted with the express intention of prohibiting the operation of a Western Union type of remittance service without proper authorisation rather than a digital asset. The impression is that Dr Jackson was convinced these types of laws didn’t apply to e-gold.
18 U.S. Code § 1960 - Prohibition of unlicensed money transmitting businesses
(a)Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both ...
… (2)the term “money transmitting” includes transferring funds on behalf of the public by any and all means including but not limited to transfers within this country or to locations abroad by wire, check, draft, facsimile, or courier ...
Perhaps e-gold was only analogous to ‘money’ and not money in the legal sense, like the dollar for example.
The company requested a report from the IRS to clarify what regulations the operation was subject to. The Treasury seemed to indicate that e-gold was not a ‘currency’ according to the terms defined by the United States Congress and Code of Federal Regulations. This kind of semantic wriggling will only get you so far. Especially in light of how far the post 9-11 Patriot Act had increased not only the powers of AML investigators but also how it had stiffened the legislation prohibiting money transmitting with an amendment that made it a federal crime and precluded ignorance of the law as a defence in court.
Under these conditions and despite a fruitful relationship with law enforcement both domestically and internationally, the Secret Service and FBI secured warrants on a dubious set of pretexts according to Dr Jackson and raided the offices of Gold & Silver Reserves Inc., the parent company of e-gold, in Melbourne, Florida on the evening of December 19, 2005. Dr Jackson’s private residence nearby was also raided and the authorities gained access to the company’s servers in Orlando.
Although no charges were brought against Gold & Silver Reserves Inc. in this instance, it was the beginning of the end. In 2006-2008, the Treasury and Department of Justice had apparently acted to broaden the definitions of the law governing money transmission to include any transmission of value (Dixon, 2013) and the company along with their owners were indicted on April 24, 2007 for four counts of transmitting money without a license and money laundering. Each charge carries a maximum sentence of five years and twenty years, respectively.
There were lurid allegations of complicity with the profiteers of child pornography and various other scum of the earth.
“The advent of new electronic currency systems increases the risk that criminals, and possibly terrorists, will exploit these systems to launder money and transfer funds globally to avoid law enforcement scrutiny and circumvent banking regulations and reporting,” said Assistant Director James E. Finch, of the FBI’s Cyber Division. “The FBI will continue to work closely with the Department of Justice and our federal and international law enforcement partners to aggressively investigate and prosecute any, and all, persons or organizations that use these systems to facilitate child pornography distribution, to support organized crime, and to perpetrate financial crimes.” (Department of Justice, 2007)
The Department of Justice were keen to stress that these were only allegations and naturally everyone is ‘innocent until proven guilty’. The reality is that under the weight of the United States legal system and the prospect of such draconian prison sentences, everyone pleads guilty in return for a lighter sentence. Which is precisely what happened.
References
"Digital Currency Business E-Gold Indicted For Money Laundering And Illegal Money Transmitting". 2007. Justice.Gov. https://www.justice.gov/archive/opa/pr/2007/April/07_crm_301.html.
Dixon, Julia. 2013. "The E-Gold Story | DGC". Dgcmagazine.Com. http://dgcmagazine.com/the-e-gold-story/.
