The Fate of “E-gold” As a Warning To Cryptocurrencies

“E-gold” was a digital payment system, created in 1996, in the early days of the internet, by an American oncologist, Douglas Jackson, and an attorney, Barry Downey.

The idea was simple: develop a system which enables people to pay each other with gold, instead of with U.S. Dollars, whereby the transfer of the physical gold between clients of the website is facilitated through the use of internet technology, obviously with all kinds of safety precautions. The Gold that was owned by E-gold clients was stored by banks in Europe and Dubai. Without the internet, such a system could have never been as performant. In the 1990s, with the arrival of the internet, it really was an idea whose time had come. Technology made it possible for people to easily pay each other in gold, and avoid state money.

The E-gold system of facilitating payment in gold turned into a great success. E-gold, which was founded two years before PayPal, was described by the Financial Times in 1999 as “the only electronic currency that has achieved critical mass on the web”. By 2004, it counted two million users and by 2006, 3 billion of transactions had been happening through E-gold.

There were of course hacking attempts, while also criminals have used the system, but according to founder Douglas Jackson, a lot of criminals were also caught as a result of their use of the system.

The “Patriot Act”, American legislation passed in the wake of the attacks on September 11th, 2001, which violated civil liberties, according to its opponents, introduced new restrictions on transmitting money. The U.S. Treasury and Justice Departments came up with a stricter interpretation on what was legally allowed in 2006, on the basis of which E-Gold was been charged with several federal charges, including money laundering, conspiracy, and operating an unlicensed money transmitting business. This eventually led to the company’s demise.

Despite founder Douglas Jackson denying that the tough treatment by U.S. authorities was inspired by fears E-Gold or similar initiatives could eventually emerge as a viable alternative to the U.S. Dollar, this was effectively something many in the so-called “crypto start-up community” believed.

In an interview last year, Jackson pointed at an article on the history of crypto currencies, which recalled that the first crypto currency, called “E-Cash”, had been developed in 1991 and that no big developments had really taken place between the development of “S/Key Unix login” in 1994 and bitcoin in 2009. This, according to Jackson is because “E-gold exposed the disutility of crypto-based monetary schemes and as long as E-gold was active, none of them could get a foothold.”

The official launch of bitcoin in January 2009 noted that it was a “decentralised”digital currency, “without the need for a trusted third party”, according to the bitcoin white paper, a technical manifesto published by Satoshi Nakamoto, the pseudonym of the inventor of bitcoin.

Looking back on this in 2012, Jon Matonis, who then served as the Chair of the Bitcoin Foundation, wrote:

“The timing of Bitcoin’s appearance, and subsequent growth, is no accident either…An alternative money provider that was centralized would probably not survive long in any jurisdiction. The emergence of Bitcoin was baked into the cake already. We can see from the case against digital money provider e-gold that an efficient challenger to the provision of a stable monetary unit will not be permitted… really.”

E-gold founder Douglas Jackson refers to this quote to back up his case that E-Gold delivered for a while what bitcoin ultimately was created for.