Part I: The Rise
Digital currencies forcing their way into the economic milieu of the 90s was an event not unlike childbirth and just as painful if they fell afoul of the authorities due to any association with criminality.
e-gold was an independent digital alternative currency developed in 1996 by oncologist Dr Douglas Jackson and attorney Barry K. Downey and considered the forerunner to bitcoin. Its mass adoption, along with its durability compared to other similar ventures of the era, would justify this claim. However, since 2009, e-gold has been mothballed, frozen in time due to insurmountable regulatory hurdles.
The motivation behind the founding of e-gold wasn’t just the expectation of reward for the development of an alternate online digital payment service, it was also the response of a libertarian to the perceived historical flaws of a government ruled monetary system. According to the founder Dr Jackson, although the monetary system is an indispensable economic fact of life and considered by many to be a public good, its stewardship by governments have been disappointing over the centuries—dangerous credit cycles were permitted which in turn precipitated economic trauma and even war.
Dr Jackson and his cofounder’s theoretical solution to this problem was a contractually based digital payment service completely separate from the banking system, with a settlement process that was immediate, final and as irrevocable as any cash transaction—no credit options, no charge backs and with a maximum transaction fee of 1% but often less. The new Netscape browser’s SSL (Secure Socket Layer) encryption protocol ensured that identification and transaction details remained confidential and rendered the concept practicable.
A private enterprise doesn’t have the state to protect against the risk of default, so its digital currency would require a balance sheet replete with asset reserves. Monetary assets were adjudged unsuitable because of the associated default risks, and kind of defeated the point anyway, so Dr Jackson looked at other options available. Because he wanted his digital currency to provide the kind of transaction assurances one expects from a central bank, he decided to draw inspiration from the Federal Reserve; they tabulate a list of their four reserve assets—two of which are held by the International Monetary Fund (IMF)—as follows:
- Foreign Currencies
- Reserve position in the IMF (The amount that can be freely accessed from the IMF without incurring service fees)
- Special Drawing Rights (an artificial accounting unit created by the IMF that can be freely exchanged for currencies subject to agreement between parties or by instruction from the IMF)
- Gold
The infrastructure that includes the weighing, gauging, packing and delivering of gold as set out in accordance with the London Bullion Market Association’s Good Delivery specifications—a set of rules refined over the years that govern the trading standards of gold bullion—was accessible on a wholesale basis at relatively low cost. As the other options were out of bounds to any private entity, and as gold is a universally accepted ancient store of value, it became the only realistic asset of choice.
However, the old convention of gold as a store of value would attract ‘gold bugs’ to Dr Jackson’s burgeoning digital payment platform who were confused as to the purpose of e-gold when it was launched. They would be disappointed because the service on offer was not configured for gold speculation—quite the opposite. Holding money in an e-gold account was a negative investment because there was an account maintenance fee of 1% per annum. It was a wasting asset subject to negative interest rates.
To conclude: two definitions of e-gold in Dr Jackson’s own words.
e-gold is a service that mobilizes the value of gold for payments via the Internet.
e-gold is a medium of indirect exchange, constituting a liability of e-gold Ltd., denominated in weight units and backed 100% by the net gold content of physical bullion held in appropriate custodial arrangements. e-gold is also a book entry settlement platform directly accessed by end users, and therefore usable as a payment mechanism. e-gold is designed to serve as the base money of and settlement platform for an alternative global currency that can be variously referred to as e-gold or AUG (Jackson 2007).
Jackson, Douglas. 2007. "E-Gold Is ...". Blog. Https://Blog.E-Gold.Com/2007/08/E-Gold-Is.Html. https://blog.e-gold.com/2007/08/e-gold-is.html.
