Article: Non-bank digital currency systems: regulation and growth. By Mark Herpel, Editor of DRC Magazine. E-Finance & Payments Law & Policy, July 2010.

Excerpts

The beginning of the article sketches the historical evolution. The rest of the article analyses how digital currencies backed by gold can no longer go unregulated and undetected.

Mark Herpel:

"Digital currency is often described as money or value that circulates online but does not circulate through a bank or recognized financial institution.Many digital currency companies emerged in the mid to late 1990s with names such as DigiCash, CyberCash, eCash and e-gold. During the 1990s, these privately issued digital tokens representing value were not recognized as government issued ‘money’. Consequently, the creation and transfer of the units was not considered a regulated banking operation. This was true for almost a decade.

The ‘digital currency’ unit of the 1990s was an anonymous digital token which could be transferred from one account to another within a closed system. These systems could be described as large accounting programs where one account is debited and another account receives the credit.What makes these systems so special is that from the early 1990s, digital currency granted anyone, in any country, instant and easy access to the world of online commerce. In its early days, this industry operated in a brand new unlicensed and unregulated environment.While about a dozen or so companies online today still live in that bubble, the largest companies and the industry leaders have all gone through a period of growing pains and evolved into more modern systems.

However, several popular digital currency companies were intentionally domiciled or redomiciled in under-regulated or obscure jurisdictions lacking sophisticated regulation and internet oversight. These companies presently transferring funds around the globe each day for thousands of anonymous customers are quite simply flying below the radar.While freedom lovers call it ‘privacy’, international law enforcement does not always hold that view. No matter what your perspective on the situation, this is definitely not conventional online banking.

To open and operate a digital currency account in the late 1990s, all you needed was a computer and an internet connection. Almost all of the early systems operated using a similar type of model. Some companies changed over the years and grew out of that first structure, many have not. Since the mid- 1990s, very few have retained all of their original features. Unlike an online bank account, ‘digital currency’ is defined by these features.

During the past decade, some of these features were popular but have evolved while other features are still widely used:

Digital currency accounts can be

opened and used instantly.

There were no distinctions

between a personal account or a ‘merchant account’. All digital currency accounts were identical whether personal or ‘merchant’.

All transactions clear instantly,

there are never any delays.

All digital currency transactions

are final, there are never any charge backs or reversal of funds.

To open and use a digital

currency account the currency issuer/operator did not require identification, credit check or verification of identity. (GoldMoney was an exception with a CAP.Webmoney accounts(passports) require ID for anything more than a basic act.)

There were no age limits - a tenyear

old could operate an account with no questions.

There were no jurisdictional

restrictions. Residents of Iran, Cuba, India, South Africa or China were all free to use digital currency.

Unlike a bank account, there are

no minimum deposits required to open and maintain that account. Digital currency accounts can be opened with no deposit and remain open without issue or fee.

There were no business

restrictions. Gambling, online pharmacies, pornography,MLMs, investments, pyramid/ponzi schemes and many others were permitted using digital currency (exceptions: GoldMoney & Webmoney have restrictions).

Account holders were always

adding/withdrawing funds (national currency) through third party independent agents, not the digital currency issuer/operator.

Because funds could not be

reversed, there are never withholdings or reserve funds. One hundred percent of each transaction clears and is immediately available.

Digital currency transaction fees

were and still are extremely low. Compared to credit card processing fees, digital currency transaction fees are often less than 1/5 of the cost.

Digital currency differences For more than a decade, digital currency units denominated in dollars, euros and rubles, or backed by precious metal were technically not government issued money. As units moved over the internet and not through a bank, it was believed digital currency circulated beyond the reach of existing bank regulations.

Today, however, this loose concept has evolved and several of the larger countries like Australia, Canada and the US have encircled the issuers and exchange agents with challenging new regulations along with clarifications of the existing bank laws.

In contrast to online bank accounts, digital currency has more anonymous cash like features. A banker would say that the accounts lack oversight. These digital currency units are issued by a private company and quietly move around the globe with just a few keystrokes. No strict bank regulators or sophisticated AML software is monitoring this account activity. This was true in the 1990s and is generally still true today.

In a recent interview for DGCmagazine with the operator of gBullion, a brand new digital gold currency domiciled in the United Arab Emirates, I asked, “If I am transferring €1 million a week through my gBullion account, month after month, do you ever ask the account holder for a source of funds on where that money came from and is that information reported to any government organization or tax authority?” The answer was “If identification is confirmed and we ‘know our client’, they can buy or sell gold daily up to amounts of €1 million, €2 million or even €10 million per day. This is their right.” Here is a new online financial business which would permit deposits or withdrawals of €2 million to €10 million per day, but never question where the funds originated. Is this freedom and privacy or simply ignorance?"

Non-Bank Digital Currency Systems

Excerpts

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