2019 was the year that Facebook introduced Libra, a blockchain-based payments network which will be the “internet of cash.”
This seems revolutionary, but Libra is really a revamped version of a way older payments model. In 1996, Douglas Jackson, an oncologist and fan of the gold standard, founded a payments system called e-gold. Backed one-to-one by reserves of the alpha-beta brass, the e-gold system allowed users all round the world to form instant private electronic payments.
Unfortunately, e-gold saw problems with regulators. In 2009, even as bitcoin was beginning, Jackson had to shut shop. It remains to be seen if Libra – e-gold 2.0 – are going to be ready to navigate the difficulties its predecessor floundered on a few years ago.
With cryptocurrencies having captured everyone’s imagination, we frequently forget that the digital gold boom of the 2000s was the primary digital currency revolution. Jackson’s initial success with e-gold encouraged a swarm of copycats: GoldMoney, eBullion, OSGold, INTGold, Pecunix, 1mdc, and more. These currencies were swapped on many digital gold exchanges located round the globe. The industry even had its own magazine, DGC Magazine, and trade association, the worldwide Digital Currency Association. At its peak in 2005, e-gold had around 1.2 million accounts with transactions totalling $1.5 billion. it had been almost as large as PayPal.
The heyday of the digital gold industry has long ago passed. But the similarities between Jackson’s e-gold and Facebook’s Libra are remarkable. E-gold relied on a singular supra-national unit of account, gold, because the base language for expressing values. Likewise, Libra will use its own artificial unit of account – the Libra – composed of a cocktail of national currencies.
Libra will establish a stable value for its Libra tokens by backing them 1:1 with underlying assets like bank deposits and government securities. E-gold operated on an equivalent principles. It kept a one hundred pc reserve of physical gold in vaults located in places like London and Dubai. These reserves were regularly audited and users could monitor their status by getting to e-gold’s website.
The way that users will interact with the Libra reserve comes straight from the e-gold playbook. An e-gold user could neither deposit gold to the e-gold reserve nor withdraw gold from it. Permission to “bail” physical bars into or out of the system was limited to a network of third-party exchange agents like The Bullion Exchange, IceGold, and therefore the Denver Gold Exchange. These wholesalers successively provided the general public with e-gold by offering to shop for or sell it at a selection.
The same goes for Libra. Users won’t be ready to directly interface with Libra reserves. Rather, a network of authorized resellers will withdraw or deposit large amounts of fiat in and out of the reserve. the general public are going to be ready to buy or sell Libras at third-party venues like cryptocurrency exchanges.
In addition to adopting supranational units and similar distribution models, the 2 networks are both “open” systems. In Libra’s case, “open access” means “anybody with an online connection” can participate. The protocol “does not link accounts to a real-world identity” which suggests users can use the network pseudonymously and make multiple accounts.
Likewise, anyone with an online connection could open an e-gold account. Users glided by bogus names like “Mickey Mouse,” “Donald Duck,” and “Anonymous Man” and will have as many accounts as they liked.
So what killed e-gold? and can this also cripple Libra? Many regulators worry that a separate Libra unit of account threatens national monetary sovereignty. But in e-gold’s case, it had been never gold-denominated money that attracted regulatory censure. Nor were regulators concerned with the distribution model or the adequacy of e-gold’s reserves.
Jackson had always assumed that e-gold was neither a bank nor a money services business. Thus he never bothered conforming to concealment rules began within the Bank Secrecy Act, including registering his business with the US Treasury’s Financial Crimes Enforcement Network (FinCEN). Unfortunately, by allowing pseudonymous access and omitting FinCEN-compliant concealment controls, e-gold became a haven for carders–criminals who traffic in stolen mastercard numbers.
This brought e-gold to the eye of the FBI. In 2007, Jackson and his fellow owners were indicted by the Department of Justice for conspiracy to work an unlicensed money transmitting business and other charges. As a condition of Jackson’s 2008 plea deal, he had to bring e-gold in line with regulations. This meant registering it with FinCEN and implementing an anti-money laundering plan. during a blog post, Jackson promised that e-gold would enforce a “one-human being/one e-gold User” rule. All third-party exchanges would need to be compliant too.
It wasn’t to be. As felons, Jackson and his colleagues were prohibited from applying for a money transmitter license, then e-gold had to shut itself down. the particular e-gold model, as began in Jackson’s plea deal, remains intact. It only has got to conform to best practices.
THE LESSON IS THAT EVEN WHEN REGULATIONS LACK CLARITY, THE ISSUER remains liable for COMPLIANCE.
Indeed, Jackson continues to plug the property for e-gold within the sort of Better Money.
The basic e-gold model could also be a sound one, but Libra doesn’t just want to require up where Jackson left off. Jackson’s plan was to pivot to a 1 human/one e-gold user rule. Libra, on the opposite hand, will allow users to carry multiple addresses not linked to their true identities.
David Marcus, the co-founder of Libra, intimates that this may be compensated for by the very fact that the blockchain transactions are public, thus allowing enforcement and regulators to conduct “their own analysis of on-chain activity.” Customer identification at third party onramps or offramps could also be ready to help enforcement fill within the dots and apprehend criminals.
It may be that Libra’s rendition of e-gold proves to be an efficient thanks to guard against carders and money launderers. And having one among the most important companies within the world behind it, Facebook, gives it the heft that e-gold never had. But the lesson learned from Jackson’s experience is that albeit regulations lack clarity, the issuer remains liable for compliance. Better to see in with the regulator before building a replacement payments system, not after. Libra is clearly cognizant of this, having approached regulators fairly early within the process.
It remains to be seen if regulators will buy Libra’s “open access” model. Back within the 2000s, publicly-viewable blockchains didn’t exist. they’ll be more receptive in 2019. If it’s allowed to travel ahead, the repercussions might be significant. Not only wouldn’t it create a replacement e-gold. Other large financial institutions would have an interest in shifting their payment models within the direction that Libra is taking.