Digital Gold - Good, Bad or Dead?

[Dinero]

Hello fellow PM Bugs.

I would like to get some feedback from you about what you think of the idea of digital gold/silver and its future?

History

e-gold.com started in 1996 as a website to let people open precious metals accounts and transfer amounts to other people. By 2006 e-gold had 2 million user accounts, and was trading $2 billion per year worth of precious metal transactions on about $20 million worth of metal reserve. That means the metal was turning over at 80-100 times per year.

e-gold unfortunately developed a problem with abuse of the system by various types of crooks, and was eventually shut down by the Treasury Department for not having a money transmitter license.

Goldmoney.com was started by James Turk in 2001, and 12 years later they have about $1 billion worth of bullion in their accounts. However, they were forced to turn off the P2P transfer ability because FINCEN threatened to regulate them as a money transmitter. According to Goldmoney, users were not using the system for transfers anyway. It was primarily being used for storage.

The reason Goldmoney users did not use it for payments is probably because Goldmoney prohibited the use of the platform by 3rd party exchange agents to provide liquidity and other services into currencies and countries around the world.

My Questions for the Users of this forum:

1. Is the ability to trade gold and silver electronically something that you want?
2. Do you feel that the US Treasury and FINCEN have taken away your freedom to trade in bullion by their policies toward e-gold and goldmoney.com?
3. Do you believe that an alternative precious metals transfer system might help prevent or save the world from TEOTWAWKI when the current system finally melts down?

Thank you for your feedback!

 

[Potemkin]

Digital gold?

Helloooooo!

"Paper money"? "Paper gold" (ETF)?

Real gold rocks and everything else is a joke.

 

[mike]

Hello spambot!

 

[pmbug]

Hi Dinero, welcome to the forum.

You asked some pretty good questions. Certainly worth exploring.

1. Not at the present time. Gresham's Law will continue to dictate gold and silver should be saved while paper and base metal coins function as currency. Now if we could get Congress to enact a Free Competition in Currencies Act, eliminating capital gains and sales taxes on the conversion of gold/silver to existing legal tender, then payment systems dedicated to gold/silver accounts would be a natural and highly desirable service.

2. Not really. They make it difficult (ie. unprofitable), but not completely impossible. e-gold could have obtained a money transmitter license and all the overhead costs, regulation and red tape that entails if they wanted. Treasury and FINCEN are just the enforcers. The real problem is Congress enacting protections for the Federal Reserve (ie. the legal framework).

3. I believe that we are definitely going to see some economic chaos in the years ahead. I don't know for sure that it will devolve into a complete TEOTWAWKI situation, but if it does, one of the first pillars that must be erected to salvage civilization as we know it is a robust payment system for commerce. Otherwise, we may be stuck in a dark ages barter system. I do believe that building an alternative payment system (or two or three) right now should be a political imperative as insurance against a "Full Lehman" that breaks the current financial system.

 

[ancona]

Paper wraps rock. Rock discusses the situation with scissors. Rock and scissors collude to steal a book of matches. Paper is set on fire and now, ceases to exist as a result of rapid exothermic decomposition.

Rock always wins. Therefore, paper gold must exist only to absorb excess incoming demand for a supply of physical metal that cannot possibly fulfill existing demand for actual existential product.

 

[BigJim]

I recommend digital gold.
The kind I can hold in my 10 digits....

 

[DoChenRollingBearing]

...

I have seen a fair number of similar gold ideas/schemes through time. None seem to have passed the test of being truly safe.

Yes, doing anything financial (or just doing ANYTHING) via the Internet can be tracked. So, I am not interested in any of these e-gold, etc. schemes.

Until I see something that really DOES look secure (in all senses of that word), it looks like to the Bearing Guy that just buying physical gold, then hiding it well, looks like the best way to go.

Second best choice: buying physical precious Korean bearings!

 

[Aubuy]

It all boils down to trust. If people trust it, they'll use it as a way of exchange or to store value. Right now people trust all kinds of electronic things (like credit cards). Some people trusted Bernie Madoff (and P.T. Barnum). Seems like they could just as easily trust electronic metals. It all depends on your confidence level that central banks and governments can keep the fiat pyramid going (roll em, roll em, roll em, rawhide), and if it it does collapse, what is your "plan B"? There appear to be a large group of Plan B people on this site so there might be some minor mis-trust of electronic metals. Probably even be a few Plan C folks around here.

 

[Penn]

cash and carry- physical in hand.

 

[pmbug]

... There appear to be a large group of Plan B people on this site ... Probably even be a few Plan C folks around here.

Pretty sure I'm Plan 9 From Outer Space.

 

[ancona]

Physical silver, stored food, ammunition stores, rugged outdoor work clothing, rechargeable batteries, butane lighters, small propane cylinders for camp stoves, squeeze style dynamo lights, some solar panels to trickle charge a battery and a hundred other tradeables that I have stashed away. Tradeables will be just like money, if not better, when the time comes to use an alternative to a decimated paper money that has lost the faith and trust of the people forced to utilize it in trade.

 

[Dinero]

Thank you

Gentlemen, I appreciate your feedback. Thank you!

I get the feeling that there are two camps on this subject:

A. Survivalist/preppers who expect the entire civilization to collapse so only coin in hand is worth anything.

B. Hard money fans who realize that civilization needs the ability to transact commerce at distance, which in turn requires some form of transaction system enabling "claims" on money (gold/silver) to be transferred from one party to another.

My company is working on a solution for "B", that takes a lesson or two from the problems encountered by e-gold and GoldMoney and the others in that space who tried and failed for various reasons.

Instead of one big centralized gold system like Goldmoney.com, it will enable thousands of decentralized micro-issuers of PM money. So any bullion dealer could theoretically issue a gold or silver contract, say for 10 toz of gold stored in their vault, which can be traded electronically amongst others (in small amounts) and redeemed at his shop for specie. This would allow the gold to be divisible into very small units (milligrams) but allow redemption at your local coin shop, or your preferred mail order bullion dealer.

Obviously such a system requires a means for rating the creditworthiness of any particular Issuer, and a way of bonding them to cover one that fails.

But we think that a decentralized system like this is less likely to be "captured" by insider theft or government collusion.

Think of the old Colonial days before the US Constitution when private mints all over the colonies minted their own gold and silver specie using standard weights and sizes. That system worked very well.

 

[pmbug]

That sounds like an interesting concept. While the damage from failure of a participating merchant would be limited in such a scenario, there would still be a concern about the exchange provider itself (ie. your company) keeping the lights on.

 

[Aubuy]

I think this concept has potential. I like the idea of a large network of dealers that could trade PM's in smaller amounts. There are a lot of people who don't have the financial ability to buy and sell ounces of gold. Smaller amounts could potentially bring more people into the market and it would be good alternative to banks and paycheck cashing services for lower income folks. Having lots of places where you could just walk into a store anywhere and convert into metal and then back to cash would be very convenient. This could have a positive effect on those people who are stacking because it could increase PM demand. If it works you might draw some regulatory attention which could squash it like a bug on a windshield, but no risk and no reward. I will watch with interest if you can get this to "fly".

 

[Dinero]

Federated Bullion Issuer/Dealers

In the USA bullion dealers already have an informal system a bit like this. It is common place for mail order dealers to take an order from the customer, and then have another dealer deliver the specie.

We are building & testing this in Kenya for several reasons.

Electrical power is extremely unreliable here. So if our system is robust enough to work reliably in a country with unreliable power and unreliable people over a 2G phone network, then it should theoretically be able to work anywhere.

Kenya is also the most corrupt country in the world. We are building a way for users to rate or guarantee each other for limited amounts of risk. If we can make it work in Kenya, it will work anywhere.

There are several ways to mitigate the risk of an individual dealer/issuer failing:

- Require a bond. So if a dealer wants to issue 100 toz of gold, he has to put up 10 toz bond in a fund reserved for insuring the system. This means the entire system is over-reserved by 10%.

- Enable users to rate and guarantee the issuers. This is a way of getting information on the financial health of any given issuer.

- Keep it distributed - you don't want any given issuer to be greater than 5% of the total system. This limits the damage if/when one fails.

There would be a transaction fee in the range of 1/2% to pay for running the system.

If the central exchange server were to fail, users can still make payments to each other using the same gold issuer. The issuers each have their own server, so the system can keep running even if the people who created the system get knocked out for some reason.

 

[Dinero]

Also, the bullion dealers themselves would act as the exchange providers between fiat and digital, as well as redemption of digital for specie.

Our trading platform would allow conversion of the digital from one dealer's contract to another.

So for example:

Alice opens an account at the dealer GoldCo and buys 100 toz.

Bob has an account in a different state with GoldChanger.

Bob sells Alice his car for 10 toz, so she sends 10 toz digital to him, which gets converted from GoldCo to GoldChanger.

Bob can then go to GoldChanger and withdraw as cash, or as gold specie.

 

[benjamen]

What is to prevent hacking?
What is to prevent the platform owner from closing up shop, leaving the country, and taking all the gold with them?
What is to prevent the local government from wanting a piece of the action though regulation and/or taxation?

 

[pmbug]

It's an interesting idea. I will be watching to see you can get it launched and working.

 

[Dinero]

1. What is to prevent hacking?

This is a system that uses strong financial cryptography, developed by Ian Grigg. http://systemics.com http://financialcryptography.com

The software resides on the Android phone/tablet, which is not vulnerable to the same type of attacks you see in web browsers. The main weakness is if someone steals the phone physically, they can attempt to brute force your password. However, this is always a risk. You cannot eliminate risk, you just minimize and mitigate them. People use Bank of America online banking even though it has crappy security. Our product has excellent security. But nobody has perfect security, in this life.

2. What is to prevent the platform owner from closing up shop, leaving the country, and taking all the gold with them?

The gold is entirely held by the bullion dealers. I suppose that any bullion dealer at any time could just take the day's orders and walk away without fulfilling them. But the bullion dealer is in business to sell bullion, and would be giving up all future profit by doing that. The same incentives would apply. I assume you probably use a mail order bullion dealer now. Why do you trust the dealer to fulfill your order when you wire the funds up front? Because he has to have a high reputation in order to be a bullion dealer.

If a bullion dealer did default, this is why there would be a 10% bond for all Issuers. If they default, the bond fund would be used to make the account holders whole. It would be a form of insurance against the risk of default by one dealer/issuer.

3. What is to prevent the local government from wanting a piece of the action though regulation and/or taxation?

All local governments do this. There is no way around it. However, bullion dealers manage to make a living today in spite of local government. They will continue to do so in the future.

One example is in America, many mail order bullion dealers do not sell bullion to people in their own state. This enables their customers to avoid punitive sales taxes. This system is merely digitizing what people are already doing.

Our project is NOT incorporated in Kenya. We are simply using Kenya as a test market, where the regulatory barriers are low. It's a great place to find the weaknesses in the system and strengthen or fix them.

 

[jmag]

Dinero,

This is a very interesting idea. How far away from launching the service are you?