Thread: E-gold article. Good read for newbee'z

Gold Rush
Online payment systems like e-gold Ltd. are becoming the currency of choice for cybercrooks

Crime courses through the internet in ever-expanding variety. Hackers brazenly hawk stolen bank and credit-card information. Pornographers peddle pictures of little boys and girls. Money launderers make illicit cash disappear in a maze of online accounts. Diverse as they are, many of these cybercriminals have something important in common: e-gold Ltd.
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E-gold is a "digital currency." Opening an account at e-gold... Internet payments, 100% backed by gold takes only a few clicks of a mouse. Customers can use a false name if they like because no one checks. With a credit card or wire transfer, a user buys units of e-gold. Those units can then be transferred with a few more clicks to anyone else with an e-gold account. For the recipient, cashing out -- changing e-gold back to regular money -- is just as convenient and often just as anonymous.

E-gold appeals to "gold bugs": people who invest in the precious metal and believe money ought to be anchored to it. E-gold boasts that its digital currency is backed by a stash of gold bars stored in London and Dubai. But e-gold also appeals to savvy online crooks who want to move money quickly and without detection. American banks and conventional cash transmitters like Western Union are legally required to monitor customers and report suspicious transactions to the government. E-gold seems to go out of its way to avoid such obligations. Its operations are in Florida, but in 2000, its principals registered the company in the lightly regulated Caribbean haven of Nevis.

Law enforcement officials worry that the little-known digital currency industry is becoming the money laundering machine of choice for cybercriminals. On the evening of Dec. 19, agents with the Federal Bureau of Investigation and Secret Service raided the Melbourne (Fla.) office of e-gold's parent company, Gold & Silver Reserve Inc., and the nearby home of its founder, Douglas L. Jackson. Agents copied documents and computer files, but so far no charges have been brought. The Secret Service and the FBI declined to comment on the raid. Jackson has denied any wrongdoing, though the raid isn't the first indication that federal investigators view e-gold as a magnet for online misdeeds. The FBI separately is pursuing about a dozen probes in which e-gold appears as a "common denominator," a senior agent says.

The potential danger goes beyond e-gold. Investigators say other digital currencies are similarly used for corrupt purposes. All told, there are at least a dozen such services worldwide, based in places like Russia and Panama. Eight of them, including e-gold, claim to be backed by actual bullion. As a group, these firms do billions of dollars a year in transactions, according to Jim Davidson, a spokesman for the Global Digital Currency Assn. in New York. E-gold and its rivals make money by charging small percentage fees on those transactions.

Most of the law enforcement interest in e-gold involves alleged fraud and money laundering by its users. A tour of some outlaw corners of the Internet illustrates why. One Web site called CC-cards -- where cyberthieves sell pilfered bank account and credit-card information -- often asks for payment via e-gold. Some sites pushing child pornography have dropped Visa and MasterCard recently in favor of e-gold, according to the National Center for Missing & Exploited Children, which tracks underage porn.

But U.S. officials have another concern: that e-gold and rival digital currencies could be used to finance terrorism. It's a notion the companies all reject.

SUBPOENA CENTRAL
The man behinD e-gold, Doug Jackson, is a tall, powerfully built former oncologist. A fan of the gold standard, Jackson, 49, became a pioneer in digital currency when he set out a decade ago to create what he describes as a private gold-based monetary system. He envisioned e-gold as a currency that would be accepted at Wal-Mart (WMT ) while also permitting peasants from China to Peru to offer products at stable prices. "I thought there would be this flock of e-gold users, and I would be their messiah," he says. "It just didn't happen."

What did happen, according to law enforcement officials, was that a pack of felons flocked to Jackson's brainchild. Sitting in an undecorated conference room in the Melbourne office three months before the federal raid, he acknowledged that he had a "six-inch pile" of subpoenas from such agencies as the FBI, the Securities & Exchange Commission, and the U.S. Postal Inspection Service -- all seeking information about some of his more suspect customers. Investigators say Jackson may have begun his quirky business with innocent intentions. But in recent years he has turned a blind eye, the officials say, to mounting evidence that e-gold has attracted a seamy clientele. The federal raid suggests that agents are intensifying their focus on e-gold and its potential criminal liability.

Jackson didn't respond to messages after the raid. But earlier, he denied vehemently that he has looked away from crime. He said he responds as quickly as possible to official inquiries. He acknowledged, though, that his staff of 15 includes only one in-house investigator who struggles to keep up with all those subpoenas. E-gold has about 1.2 million funded accounts through which transactions worth $1.5 billion were conducted in 2005, he says. As for the idea that he should systematically monitor customer identities and money flows, he argues that's not his job: "We don't validate because we're unlike any other system."

Federal officials reluctantly confirm this loophole: E-gold and other digital currencies don't neatly fit the definition of financial institutions covered by existing self-monitoring rules established under the Bank Secrecy Act and USA Patriot Act. "It's not like it's regulated by someone else; it's not regulated," says Mark Rasch, senior vice-president of the Internet security firm Solutionary Inc. and former head of the Justice Dept.'s computer crime unit. The Treasury Dept.'s Financial Crimes Enforcement Network (FinCEN) is studying ways to close the regulatory gap. Meanwhile, U.S. officials say e-gold and similar companies should voluntarily do more to deter crime.

Started in 1996, e-gold was part of an early wave of Internet payment systems that converted conventional money into a Web currency. Most of those pioneers soon flopped, because consumers resisted paying fees to get Web cash. Others, such as PayPal, now a unit of online auction giant eBay Inc. (EBAY ), evolved into credit-card processing services.

E-gold and a handful of rivals, including one called GoldMoney, were different. Their founders believed that tying monetary exchange to a strict gold standard would achieve greater economic stability. The Internet provided a ready venue for gold bugs the same way that it offered a soapbox to adherents of every other strain of thought. Jackson, an Army veteran and a graduate of Pennsylvania State University's medical school, was practicing oncology in Melbourne in the mid-1990s when he began reading about libertarianism and monetary theory. The married father of two adopted boys began to change his thinking. He scoured the works of libertarian novelist and philosopher Ayn Rand and was impressed by economist Friedrich A. Hayek's The Road to Serfdom, an influential 1944 condemnation of government control of the economy. "It looked like a lot of the suffering of recent centuries -- some of the scale of wars, some of the economic dislocations -- could be traced back to credit cycles. And credit cycles could be traced back to monetary manipulation" by governments, Jackson says. "I was very moved by it."

INTELLECTUAL CONVERSION
Gold, he concluded, was the cure. The U.S. stopped tying the dollar to a fixed amount of gold in 1971. But Jackson and a friend, attorney Barry K. Downey, decided to start what amounted to their own gold-backed currency. Jackson liquidated retirement accounts and sold his medical practice to help raise an initial $900,000. A former colleague noticed him working on computer code around the clock at his stand-up doctor's desk. He often forgot to eat and lost weight. Along the way, he stopped attending church. Jackson confirms all this but stresses that he continued to provide excellent care for his patients until he bowed out of medicine completely in 1998.

In a series of interviews with Jackson, his statements about e-gold swing from grandiose to resigned. "We want e-gold to be recognized as a privately issued currency and to be treated as a foreign currency" by the U.S. and other governments, he says at one point. But e-gold's offices don't conjure up images of a grand central bank. Jackson, who during one interview wore neatly pressed slacks and a yellow-striped shirt, runs his currency from a Spartan suite on the third floor of a Bank of America (BAC ) building.

Online currencies are patronized by software companies and other small businesses. Jackson says that the fees he charges customers -- for converting real money to e-gold, administering accounts, and doing transfers -- generated about $2 million in revenue in 2005 for e-gold's parent company, Gold & Silver Reserve, which he also controls. The operation turns a profit, he adds, but he won't say how much.

Mark Jeftovic considers himself a big fan of digital currencies -- but one now skeptical about e-gold. The founder of easyDNS Technologies Inc., an Internet domain name registrar in Toronto, he started accepting e-gold as payment in 2003. Jeftovic believes that digital currencies will minimize the harm of government-induced inflation. But in early 2005, investigators from the Royal Canadian Mounted Police visited easyDNS seeking information about cybercriminals allegedly using the registrar's services. It turned out that some of the suspects had paid Jeftovic's company via e-gold, he says. Angered by the police scrutiny, Jeftovic now plans to offer rival digital currency GoldMoney in addition to e-gold. "I like the digital currency and e-gold economy, and I want to support it," he says. "But you have to run a cleaner shop than this."

The RCMP didn't respond to requests for comment. Jackson says he wasn't aware of Jeftovic's concerns or the RCMP investigation. He says that e-gold responds as quickly as possible to inquiries from law enforcement agencies and readily provides them with user names, account numbers, and transaction histories.

A number of gold buffs and some law enforcement officials see GoldMoney as a reputable alternative in the digital currency field. Based in the British Channel island of Jersey, GoldMoney is run by James Turk, a precious metals trader and former Chase Manhattan banker. He says that his company requires new customers to mail in copies of identity documents and then checks the data against lists of suspected terrorists and money launderers. The accounting giant Deloitte & Touche annually audits its gold holdings and security measures.

E-gold's Jackson says those steps are expensive and unnecessary. OmniPay, an affiliate of e-gold, is one of more than a dozen "digital currency exchange agents" that handle the conversion of conventional currency into e-gold. Jackson says that to authenticate users' identities, OmniPay sends them a special code via e-mail and conventional mail. But users aren't required to prove their identity, so it isn't clear what this accomplishes. Jackson says that his lone in-house investigator looks for obvious fraud, such as a customer using "China" as his only address.

Some of e-gold's customers have been unsavory. Omar Dhanani used e-gold to launder money for the ShadowCrew, a cybercrime gang with 4,000 members worldwide, according to an October, 2004, affidavit by a Secret Service agent. Based in a stucco house in Fountain Valley, Calif., Dhanani used his PC to hide the money trail from the sale of thousands of stolen identities, bank accounts, and credit-card numbers, the government said. Accomplices sent him Western Union (FDC ) money orders, which, for a fee, he filtered through e-gold accounts. On Oct. 4, 2004, Dhanani, 22, who used the nickname Voleur -- French for thief -- boasted in a chat room that he moved between $40,000 and $100,000 a week. He pled guilty in November to conspiracy to commit fraud and faces up to five years in prison.

"GOOD FENCES"
E-gold's Jackson says the company was never contacted by the Secret Service regarding Dhanani and had no duty to sniff him out. E-gold's outside attorney, Mitchell S. Fuerst, calls statements in the Secret Service affidavit alleging that e-gold was used to facilitate illegal activity "nonsense." Fuerst argues that the responsibility for policing the identity and activities of e-gold account holders lies with the banks and other regulated institutions from which money is transferred into e-gold's system. Jackson goes further, insisting it's impossible to launder money through e-gold -- a contention that law enforcers say is contradicted by the Dhanani case and others.

Jackson has made no secret of his desire to avoid U.S. government scrutiny. In 2000, he and his partner Downey registered e-gold Ltd. in Nevis, hoping the maneuver would add another layer of insulation from U.S. regulation. Jackson concedes that e-gold has existed in Nevis only as "a piece of paper." Its parent administers e-gold services from the Melbourne office; the operation's computer servers are in Orlando. Jackson says he chose the tiny island because registration there is inexpensive, and the government follows well-established British commercial law. Nevis is also known for lax financial regulation. Referring to his desire to create legal distance from U.S. officials, Jackson says: "There's an element of good fences make good neighbors."

On Dec. 5, two weeks before the federal raid in Melbourne, the Nevis Financial Services Regulation & Supervision Dept. posted a notice on its Web site that e-gold had disseminated "misleading information" about its legal status. Nevis officials say that the company was removed from the island's corporate registry in July, 2003, for failure to pay the annual registration fee of $220. Jackson didn't respond to questions about this.

Back in the U.S., e-gold has tried to shield itself semantically, avoiding basic banking terms such as "deposit" and "withdrawal" that could increase its risk of being categorized as a regulated financial institution. E-gold calls such transactions "in-exchange" and "out-exchange." Jackson says: "It's not a desire to be tricky. It's a desire to be accurate. It's important not to be misconstrued as a bank."

Whatever its legal status, e-gold's usefulness to scam artists was colorfully illustrated by E-Biz Ventures, which allegedly portrayed itself as a Christian-influenced organization that offered investors returns as high as 100%. E-Biz' proprietor, Donald A. English of Midwest City, Okla., allegedly highlighted his reliance on e-gold to appeal to victims' fear of the federal government and their desire for anonymity. E-Biz investors opened e-gold accounts and transferred funds to accounts controlled by English. He shifted e-gold among more than 25,000 accounts, using new investors' money to pay off some older ones. The scam took in $50 million before the SEC shut it down in 2001. Investors lost $8.8 million. Later prosecuted in federal court in Oklahoma City, English pled guilty to wire fraud and last May was sentenced to five years in prison.

Jackson says that when subpoenaed by the SEC in the civil part of the E-Biz case, e-gold supplied transaction data. A Jackson aide worked closely with investigators in the civil case. "They responded timely to every request for assistance," says Chris Condren, E-Biz' court-appointed receiver.

Evidence of e-gold's suspect following is found on numerous Web sites. A contributor to Cannabis Edge, a site for marijuana growers, has provided advice on how to employ e-gold and two other digital currencies -- WebMoney and NetPay -- to hide illicit proceeds "beyond the reach of U.S. pigs." E-gold in particular "has strong security," is "easy to use, and is anonymous," said the writer, who used the name Bill Shakespeare. (Moscow-based WebMoney and NetPay, which is based in Panama City, Panama, both deny any wrongdoing.)

In addition to its abundant offerings of stolen financial data -- with payment frequently sought via e-gold -- the site CC-cards carried a message in November from a hacker using the name HellStorm. He advertised that for a 5% fee, he would set up and fund e-gold accounts for those who are in a hurry to do business and want to shield their identity. Users of CC-cards can make donations for the upkeep of the site by clicking on a link that connects to an e-gold account. (E-mails seeking comment from CC-cards and Cannabis Edge weren't answered.)

Jackson says that he wasn't aware that e-gold was being recommended or used on outlaw Web sites until he was so informed by BusinessWeek. The company has since blocked the CC-cards donation account, he says. There is little the company can do about such situations, Jackson contends, unless law enforcement brings them to e-gold's attention. Once informed, "we can set a value limit to prevent an account from receiving further payments," he says. "We can identify if there is a constellation of accounts controlled by the same miscreant." Jackson adds: "If we get an appropriate court order, we can monitor and assist in a sting that freezes value."

The danger of Web sites like CC-cards that are fueled in part by e-gold became very apparent to Kimberly S. Troyer. Her identity went up for sale there last September. Among the 22 items CC-cards put on the block: her checking account number at Bank One (JPM ), driver's license number, Social Security number, birth date, and mother's maiden name. The price for all that: $30 of e-gold. Informed of the offer by BusinessWeek in December, Troyer, a 33-year-old accounting student at Davenport College in South Bend, Ind., is changing all of her identity documents. She believes she escaped without losing any money. But someone hijacked her e-Bay account and changed the address to one in China so that it could receive payments from the sale of iPods Troyer didn't own. "It makes me sick to my stomach," she says. Jackson says e-gold can't do much about such cases until he's formally alerted by the government.

There is one crime, however, to which Jackson has reacted more aggressively: child pornography. In August, he attended a conference in Alexandria, Va., organized by the National Center for Missing & Exploited Children. The center is trying to enlist banks and credit-card companies in a crackdown on payment schemes used by child porn Web sites. "There are fewer and fewer sites with Visa -- and more and more with e-gold," says the center's chief executive, Ernest E. Allen. The center has a policy of not publicly identifying child porn sites it tracks. Jackson says he was appalled to find e-gold on the list of institutions used by the porn sites. He provided the center with instructions on how to seek e-gold records, and the group says it is pleased with e-gold's cooperation.

Daniel J. Larkin, head of the FBI's Internet Crime Complaint Center, says that in recent years, e-gold has hidden behind "a plausible-deniability fog." Now the fog may be lifting as the subpoenas pile up and federal agents begin to examine what they confiscated in their Dec. 19 raid. The Internal Revenue Service is separately auditing e-gold's parent, and Jackson says e-gold has voluntarily agreed to cooperate with an IRS review of its procedures for preventing money laundering. The IRS declined to comment.

TERROR TOOL?
Before the recent raid, Jackson said that responding to subpoenas and other government inquiries has been distracting and expensive. Although he emphasized that e-gold isn't obliged to monitor its clientele, he said that he could have paid more attention to vetting account holders were it not for the outside interruptions. He added that he plans to switch from an account-based log-in system to a user-based one to monitor customers more closely.

The worst-case scenario, so far undetected by officials, would be the use of e-gold by financiers of terrorism. Experts on terrorism funding note that digital currencies resemble the money-changing system known as hawala, which Middle Eastern terrorists have used. A customer gives money to a hawala service, which then telephones a similar service in another city or country that doles out money to a designated recipient. Many hawala outfits have been shut down since September 11, making digital currencies a logical next step, says Phil Williams, a professor of international affairs at the University of Pittsburgh and consultant to the United Nations on terrorism financing. "At some point, this is going to be used" by terrorists, Williams says.

Jackson scoffs at this notion. "We are not bad guys, and the e-gold system simply does not pose an undue risk for usage for terrorist purposes," he wrote in an e-mail on Jan. 20, 2005, to AUSTRAC, Australia's anti-money-laundering regulator, which was looking generally into potential terrorist use of digital currency.

But e-gold attorney Fuerst said in early December that the company quickly complied with requests in 2005 from Russian law enforcement and the FBI for records connected to a would-be terrorist in Russia. This person allegedly threatened to "blow something up," Fuerst said, unless a ransom was paid into his e-gold account. The FBI and the Russian Interior Ministry declined to comment.

This month's raid could signal serious trouble for e-gold. But cybercrime experts predict that if the company falters, nefarious business will simply transfer to other digital currencies, especially ones based in countries that have lax law enforcement. Amir Orad, executive vice-president of cybersecurity firm Cyota, says that putting e-gold out of business "would not stop anything."

Article taken from link: Gold Rush

In Gold We Trust

From gun-wielding libertarians to radical Muslims, an unlikely global cabal is plotting financial revolution. And they're putting their money where the Web is.
By Julian Dibbell


Thirty miles south of Florida's Cape Canaveral lies the town of Melbourne, home to the Action Gun pistol range, where, on a balmy Thursday afternoon, James Ray stands calmly firing round after Glock 9-mm round at a photocopied image of Adolf Hitler. Ray supplied the target himself. He purchased it on the Web site of one of his favorite nonprofit organizations (Jews for the Preservation of Firearms Ownership), and its ideological content is not what you'd call subtle: Against the background of a standard ring target, the Führer stands in full Sieg heil mode, his arm up high and his sternum right in the bull's-eye, above a caption that reads ALL IN FAVOR OF GUN CONTROL RAISE YOUR RIGHT HAND. By the time Ray has had enough of the Glock, the target is nicely perforated. Then he picks up his .44 Magnum hand cannon and blows Adolf pretty much to bits.
Yes, Jim Ray is a gun freak. But as it happens, the purpose of today's visit to the pistol range is not to huff powder fumes or celebrate the Second Amendment. He's here to show that there's a type of money you can believe in without also having to believe in the authority of the state. He's here to offer a glimpse of a world in which wealth resides ultimately not in flimsy pieces of government-issue paper but in rock-solid slabs of $279-an-ounce metal. He's here, in short, to demonstrate the vanguard of monetary technology: a 5,000-year-old form of cash called gold.
Or in this case, e-gold, the world's first 100 percent precious metal-backed Internet currency, with which Ray pays for his outings at the gun range and a lot more besides. The private currency was launched five years ago and is now operated by two separate but tightly linked companies: e-gold Ltd., incorporated in the Caribbean island state of Nevis as a holding company for the system's assets, and Gold & Silver Reserve, headquartered in Melbourne, which takes care of everything else. Both are closely held and managed by e-gold chair Douglas Jackson. In addition, Jackson has forged a partnership with Islamic entrepreneurs to launch e-dinar, which is foreign owned.


Jim Ray works for G&SR as "lead evangelist." He draws his monthly salary in e-gold; each gram sitting in his Web-based account gives him title to a gram of real gold held in vaults in London and the United Arab Emirates. Sometimes he trades his e-gold for e-silver, e-platinum, or e-palladium - the other, far less popular, metal-backed currencies offered in the e-gold system. More often, he trades it for US dollars through G&SR's OmniPay exchange service or one of the couple dozen independent exchange providers who make their living selling e-gold for dollars, marks, yen, and other national currencies at the standard 4 to 6 percent markup over the spot price of gold. But otherwise, he spends the stuff like cash, giving it straight to whoever will take it.
And people do. Ray's .44, his Hitler target, the bullets in his Glock - all were paid for with instant, online transfers to the sellers' e-gold accounts. And when he settles up today at the Action Gun cash register, he'll have this afternoon's $18 shooting fee charged to his tab, which he'll pay in e-gold when he gets back to his desktop. He'll point, he'll click, he'll type in some account numbers and a password and, in the blink of a clock cycle, approximately 2 of the 1.7 million grams of solid gold in the system's reserves - a gleaming hoard of 141 brick-sized ingots - will change owners.


"It's the only foreign currency without a nationality," says e-gold's Jackson. On an average day, his company's clients make 8,600 transactions, trading roughly $1.6 million worth of e-gold for goods, services, and cash worldwide. Those numbers are more than double what they were 18 months ago, and so are most other statistics. As of November, there were 287,965 accounts in the system, up from 134,150 at the beginning of 2001, and the amount of emetal in those accounts, worth more than $16 million, was close to twice what it had been the previous November. In a sector littered with the corpses of failed online currencies and other exotic emoney systems - Beenz, Flooz, DigiCash, CyberCash, CyberCent - e-gold is quietly thriving.


Ray calls it "the little payment system that could" - the operative word, of course, being little. The company's financials ($5.47 million in revenue; 114,000 funded accounts) are Popsicle-stand caliber compared with the figures posted by emoney media darling PayPal, with its $80 million to $100 million in revenue and its 10 million customers. But with fewer than two dozen employees and a marketing budget close to zero, Jackson's corporate structure runs lean and, as of the summer of 2000, profitable. The company finally got its first competitors in 2001 - GoldMoney, E-Bullion, 3PGold, OSGold - attracted to the gold-backed digital currency space by low barriers to entry and the smell of black ink.


The product's appeal? "Fundamentals," says Ray. For online consumers, especially those making international purchases, e-gold offers an ease of use and a degree of anonymity that credit cards can't match. And for some merchants, of course, the only selling point e-gold needs is that there are people who want to spend it. After a German customer inquired about e-gold, Vince Lee, president of TealPoint Software, added the payment option. "It's not a big part of our business," admits Lee, whose company is probably the largest of the couple hundred mostly mom-and-pop operations that take e-gold online. "But in this climate, you can't really afford to turn any customers away."


taken from Wired 10.01: In Gold We Trust
(older article from 2002).

E-gold

Wikipedia, the free encyclopedia - Cite This Source

e-gold is a digital gold currency operated by Gold & Silver Reserve Inc. under e-gold Ltd., and is a system which allows the instant transfer of gold ownership between users. e-gold Ltd. is incorporated in Nevis, Lesser Antilles.
According to the company's website, as of September 2006, e-gold had 111,779 oz (3,465,149 grams) of gold and 138,567 oz (4,295,577 grams) of silver in storage, which is worth approximately US$86 million There are typically 66,000 e-gold spends each day totalling 15,000 oz (460 kilograms), which is about US$10.5 million. There are over three million e-gold accounts of which about one quarter are active
History

e-gold was founded in 1996 by Dr. Douglas Jackson and Barry K. Downey Transactions using e-gold have grown dramatically since 2005. The total amount of gold bars (over three tonnes) in the e-gold system is approaching the size of the national reserves of smaller countries. e-gold now generates a substantial income from spend and storage fees — it costs a few cents to make each e-gold "spend" and e-gold itself now earns well over a million USD per year from fees. The number of e-gold accounts (as claimed by e-gold) grew from 1 million in November 2003 to 3 million on 22 April 2006. That represents a compound growth rate of approximately 55% per annum. This high growth rate has been sustained by e-gold almost since inception.
Role in global commerce

Many small businesses in the U.S., Europe and Asia, each with full-time staff now operate as "digital currency exchangers," doing nothing other than buying and selling digital gold currency for "fiat currencies," as gold bugs term the euro, pound, yen and U.S. dollar. e-gold transactions — a "spend" — are completed electronically, usually using the web interface, and they always settle by weight of the metal even if denominated in some other way. A user may send (or "spend") a tiny amount of gold (a fraction of a gram, ounce or kilogram) to another user account instantly, anywhere in the world.
Even though e-gold is careful to not advocate any particular political agenda, as the Liberty Dollar does for example, e-gold could be viewed as a libertarian form of private currency
Features

Asset protection

Unlike fractional-reserve banking, e-gold holds 100% of clients' funds in reserves with a store of value. Proponents of the e-gold system contend that e-gold deposits are protected against inflation, devaluation and other possible economic risks inherent in fiat currencies. These risks include the monetary policy of countries or territories, which are perceived by proponents to be harmful to the value of paper currency.
The repository of the actual bullion bars with serial numbers and other data can be seen using the live "Examiner" function on the e-gold web site. Bullion is held in allocated storage with Brink's Global Services (part of The Brink's Company), Transguard Security Services (part of The Emirates Group) or MAT Securitas Express AG (part of the VIA MAT Group) Clients hold an unallocated share of this allocated bullion.
The user may take physical delivery of the precious metal upon payment of an additional fee, and provided the user has an available balance of at least the weight of the smallest individual item displayed in the Examiner. This is currently a 32 troy ounce gold bar, which is worth approximately $20,000. However in practice, most users permit the company to store the metal for them.
Bullion investing

e-gold is a form of commodity money, so it is subject to the price fluctuations of that commodity. If the price of gold drops versus your national currency, the value of your e-gold drops in that currency. The account balance, which is denominated in gold grams, does not change, but its purchasing power will change in relation to the gold price. This can, of course, work both ways. Proponents of the e-gold system would argue that the risk of significant price fluctuation is small compared to the risk of value fluctuations among fiat currencies. The opposite argument is that a typical user is more affected by changes in the price of e-gold than of fiat currencies; this is because most people are paid in and spend their local currency, while the use of e-gold will typically involve a foreign exchange transaction each time. In both cases, long-term shifts in the price of a currency or e-gold affect its owner, but anyone who frequently buys and sells e-gold will be exposed to short-term fluctuations as well. The price of gold has happened to increase over the past five years , so this factor has worked out to the advantage of anyone holding e-gold over that period.
As well as digital gold, e-gold also offers e-silver, e-palladium and e-platinum. Funds can be switched between e-metals using their sister company OmniPay. Metal-to-metal (or M2M) exchanges are completed at spot price with no bid/offer spread.
Exchanging for currency

e-gold does not sell its e-metal directly to users. Instead numerous digital currency exchangers, such as OmniPay (a sister company of e-gold), and some independent companies such as IceGold and GoldNow act as market makers selling e-metal in exchange for other currencies and a transaction fee. Conversely, these exchange providers will buy e-metal with other currencies, again taking a transaction fee. In this manner e-metals can be converted back and forth to a variety of national currencies. The amount of a particular currency or e-metal necessary to complete a transaction is determined by the spot price of the metal in relation to the value of the currency. e-gold is known as private currency as it is not issued by governments. Compared to other systems like PayPal, the process of buying e-gold can be confusing to a person unfamiliar with the e-gold system. e-gold, unlike e-Bullion for instance, does not sell digital currency directly to the user. According to their website the reason e-gold does not provide an in-house exchange service is so there can be no debt or contingent liabilities associated with the business, making e-gold Ltd. absolutely free of any financial risk. They claim e-gold Ltd. does not possess currency of any nation or even have a bank account.
Fees

e-gold charge an account fee (or Agio Fee) of 1% per annum (deducted in monthly payments) on all e-metal stored. Spending e-gold is free, with transaction fees (or Spend Fees) deducted from the recipient. As of 2006 these spend fees vary on a sliding scale from 55% for very small amounts (0.0004 grams of gold, worth about 1 cent) to 5% for amounts on the order of 0.1 gram (about $2) to 1% for amounts of over 1 gram (about $20), with a maximum fee of .05 grams (about $1).
e-gold spends clear instantly, in contrast to cheques or credit card transactions. Unlike other online payment systems such as PayPal, there are no distinctions between merchant and non-merchant e-gold accounts. Anyone can instantly create a "merchant account" (there is only one type of account). All e-gold accounts carry the same fees and have the same capacity to receive and transmit e-gold account holdings.
Universal currency

Proponents claim that e-gold offered the first truly borderless global currency system which was independent of exchange rate variations. Gold, silver, platinum and palladium each have recognised international currency codes under ISO 4217. Incentive program

e-gold clients can place a referral link on a website to generate a few cents in referral income. If a new client sets up an e-gold account from someone else's referral link, it is harmless and does not cost the new client any money when performing future e-gold transactions Crime and fraud

e-gold has been percieved as the medium of choice for many online con-artists, with pyramid schemes and HYIPs ("High Yield Investment Programs") commonplace. This has been blamed on e-gold's policy of irreversible transactions. However, e-gold are now blocking accounts where fraud is proven or suspected e-gold and OmniPay have also been accused of being a medium for money laundering, although this is questionable given that there were only 24 customer accounts holding over 10kg of gold (approximate value $200,000) by April 2006 As digital gold currency providers are not banks, they are not legally required to perform various sorts of "know your customer" background checks. However, many legitimate e-gold exchange providers, for example GoldNow, may require a higher level of identification, generally more intrusive than a bank, for security purposes.

Opening an account at e-gold... Internet payments, 100% backed by gold takes only a few clicks of a mouse. Customers can use a false name if they like because no one checks. With a credit card or wire transfer, a user buys units of e-gold. Those units can then be transferred with a few more clicks to anyone else with an e-gold account. For the recipient, cashing out — changing e-gold back to regular money — is just as convenient and often just as anonymous.

In January 2006, BusinessWeek reported on the use of the e-gold system by ShadowCrew, an 4000-strong international crime syndicate involved in massive identity theft and fraud Omar Dhanani of Fountain Valley, California, connected to the ShadowCrew, is an e-gold customer and is reported to have moved amounts ranging from $40,000 to $100,000 a week from proceeds of crime through e-gold
In response, Chairman and founder, Dr. Douglas Jackson published a letter which stated that "e-gold operates legally and does not condone persons attempting to use e-gold for criminal activity. e-gold has a long history of cooperation with law enforcement agencies in the US and worldwide, providing data and investigative assistance in response to lawful requests." He further noted that "Our staff has participated in hundreds of investigations supporting the FBI, FTC, IRS, DEA, SEC, USPS, and others."

In August 2006, WORLDLawDirect lawyers announced e-gold Ltd. officials and their legal counsel to be the subject of a U.S. Federal Court subpoena. They believe e-gold Ltd. is subject to U.S. Federal Court jurisdiction and may be held liable for some or all of the investors' losses (and potential triple damages) in the Solid Investment (Solidinvestment.com) large scale HYIP scam
Criticisms

Non-reversible transactions

Unlike credit cards, there is no way of having transactions reversed, even in case of a legitimate error or an unauthorized expenditure. e-gold's Terms of Use stipulate that all transactions are final and e-gold cannot be held responsible for any spend. In this respect, an e-gold spend is more akin to a cash transaction (except for the fact that there is a fee levied) while PayPal transfers, for example, could be considered more similar to credit card transactions. Security

As with any online payment system, e-gold is vulnerable to various threats, notably phishing (for example, forged emails asking for login details) and malware (such as keystroke logging spyware). e-gold offers no protection whatsoever if an attacker succeeds in obtaining:

• the user's e-gold account number
• the user's e-gold password
• access to the user's registered email account (web-based email accounts without a secure login are especially vulnerable)

as the e-gold account will then be completely open for malicious use.
All three pieces of information can be gathered with a trojan keylogger which monitors accesses to the e-gold web-site. All online services are affected by this security issue, but what makes e-gold especially vulnerable is that any losses resulting from a security breach cannot be undone since transfers are non-reversible and, unlike online banking, e-gold do not provide any insurance against such abuse. Also if funds are stolen, e-gold will not block a recipient's account without being issued with a court order. Since there is a lag time in obtaining a court order, the stolen funds can easily be withdrawn from the offending account and e-gold, rendering the recovery of any funds virtually impossible. This is not clearly stated in e-gold's user agreement, but an abused user will receive the following explanation from the company:

Unfortunately we will not be able to refund your money because all e-gold spends are final and not reversible as stated in the e-gold account user agreement. e-gold is also contractually prohibited from freezing e-gold accounts or releasing e-gold account information in the absence of a court order or subpoena. You might want to consider obtaining some combination of help from a legal professional or law enforcement to obtain a court order, if the size of your loss warrants expenditure of your resources (time and money) to resolve.

In 2005, the Los Angeles Times reported on a specially created trojan horse that compromised "dozens" to "the low hundreds" of e-gold accounts . While trojans usually silently record the login details of the unsuspecting user, the trojan in question (Win32.Grams) emptied the accounts themselves by transferring the contents to the attacker's accounts.
To partly counter the threat from keystroke logging it is imperative that users never enter their password via a keyboard when logging-in, or authorising spends, if the computer they are using is potentially infected. Instead users should always use a mouse and the popup window provided (SRK Passphrase Entry). However this is not a panacea as advanced spyware can take a screen shot and read the mouse clicks. Other security recommendations from e-gold include restricting access to a single IP address or browser (Account Sentinel) plus using Mozilla Firefox, a firewall and antivirus software Even these methods may be susceptible to compromise from a specifically written trojan horse.
Some competing DGCs offer similar features to combat typical, simple, "mass" phishing attacks and keystroke loggers. e-Bullion utilizes a two-factor authentication security token from CRYPTOCard, an alternative to RSA's SecurID. Pecunix has an extremely secure, somewhat complicated, log-in procedure. 1mdc has a simple PIN-pad addition. GoldMoney allow user certificates to be used. Most systems also include an optional or compulsory "email confirmation" type of process when logging-in or authorising spends.
Regulatory challenges and shortcomings

e-gold Ltd. was registered in Nevis, Lesser Antilles in 1999, but was temporarily removed from the register. e-gold cleared an administrative issue and as of July 14, 2006, it is properly registered in Nevis. In September 2004, several Australian based e-gold currency exchangers ceased operation as they did not hold an Australian Financial Services licence (AFSL) Australian based digital currency exchangers that closed down voluntarily, due to the Australian Securities and Investments Commission (ASIC) licencing requirements, included:

• goldex.net
• sydneygoldsales.com
• ozzigold.com

Whilst exchange providers can still operate in Australia, many have found it impractical to do so due to licencing or proxy issues. Australian residents can exchange e-gold via exchangers in the U.S., Europe or other countries. There appears to be no issues about New Zealand citizens buying e-gold in NZ, and a number of AU citizens have opened NZ bank accounts, specifically to purchase e-gold from NZ based exchangers (even though e-gold doesn't denominate e-gold in NZD).
On 24 November 2006, e-gold suspended all accounts held by customers located in Iran.
Bullion storage

As of November 2005, it is unclear if e-gold has an independent auditor of the physical bars, so there is no way of knowing if e-gold Ltd. really has the reserves to back the currency in the e-gold system. e-gold does maintain an "Examiner", a web page with updated statistics on outstanding liabilities and the total amount of each precious metal in its holding While proponents generally consider this assuring enough, critics remain skeptical as there is no way of determining if the web page's portrayal is accurate. Limited use

Beginning January 2006, eBay has restricted buyers and sellers from using many online payment systems and encouraged them to use Paypal, which is wholly owned by eBay. eBay specifically named e-gold as one of the online payment systems that will result in them cancelling a seller's account if used e-gold runs a non-reversible transaction policy, meaning that there is no protection for purchasers if vendors fail to supply goods. See also

• Digital gold currency
• Digital currency exchanger
• 1mdc
• Full-reserve banking
• Gold as an investment
• Gold standard
• GoldMoney
• WebMoney
• PayPal
• Private currency
• Silver as an investment

References


Reference.com/Encyclopedia/E-gold