By Marcelo Ballve
17 June 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 email 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 currencies tracked 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.