’96 | Oncologist + Gold = Revolution?
During the impending route up Mount Blockchain we will get to know a rather unsuspected character along the way, who played a big role in bringing digital currencies to the masses. This will be a fascinating story about one man’s revolutionary dream, Eastern European hackers, the Secret Service and a lot of gold. Oh, and we will talk about some fundamental economic paradigms and financial Jihad as well.
Are you ready to get started?
This article is part three of our journey. If you’re new here and want to understand what’s going on, just click here.
- 3000 BC | Hiking Up Mount Blockchain
- ’82 | The Birth Of Digital Cash
- ’96 | Oncologist + Gold = Revolution? (This article)
- ’97 | Anybody interested in some hash(cash)?
- ’98 | Wei Dai — Who dat?
- ’98 | Make It Rain (Bit) Gold!
- ’03 | It’s Karma
- ’04 | Use me baby, one more time
- ’08 | Bit what? Bitcoin! — Hello world.
- ’13 | Ethereum — The World Computer
If you’re curious to explore more blockchain aspects, including the technology behind it, fascinating use cases and great resources to learn more about this mind boggling new paradigm, click right here.
The story we will explore today is truly a mesmerizing one. At least that’s how I feel, after having spent what feels like weeks to discover and retell this fascinating piece of history. And what a piece of history it is.
Let me introduce to you a fella whose name is Douglas Jackson. Back in the early 90s he was an oncologist in Melbourne, Florida, treating patients with cancer. What you need to know about Jackson is that he is an avid lover and autodidact of economics. He also had a dream. A dream so powerful and grand, that he couldn’t wait any longer and had to try to make it a reality. If realized, his dream would be
“an epochal change in human destiny” and “probably the greatest benefit to humanity that’s ever been thought of.” — Douglas Jackson
His dream was to create a digital currency backed in its entirety by physical gold. Hmm. Ok. That doesn’t sound too mindblowing for the moment, does it?
Before we continue our story about Douglas Jackson, let’s pause here for a moment and talk about gold for a bit.
We have no exact knowledge about the origins of our species’s fascination with this precious metal but our relation with gold is as old as recorded history.
Scientists have found flakes of gold dating back as far as 40.000 B.C in Paleolithic caves and the first time we can firmly say that we have evidence for human interaction with gold dates back to 3000 B.C. in Egypt. So it’s safe to say that gold had always played an important role in our societies and our history.
Things really got rolling in the highly globalized late victorian era, when gold was suddenly the most efficient way of transferring value from one end of the “civilized” world to the other.
It evolved as a sort of international money, happily accepted by most of the people running the show at the time.
Let’s skip forward a couple of centuries. There is a place where a really important event took place in 1944 that set the stage for the way in which our world is structured today — a small town named Bretton Woods. If you have an economics background this isn’t anything new, but for everyone else it is of utmost importance to understand what happened there.
The financial masterminds of the, predominantly, rich world convened in that lovely picturesque town and laid out their vision of the financial framework for the decades to come.
One of the key points that they agreed upon was to peg the US dollar to the price of gold, at exactly 35$ per ounce. This was supposed to introduce an element of stability into the worldwide currency system, since all the other major currencies where then in turn pegged to the US-Dollar.
So far so good.
It is very interesting and important to keep in mind, that one (many argue the most) influential economist of the 20th century, John Maynard Keynes, saw a fundamental flaw with the believe that a currency pegged to gold would ensure stability.
His main argument was that this mandated relationship with gold severely limited a government’s ability to respond in a flexible way to problematic situations (since they couldn’t simply print more money).
In 1971, the US eventually dropped the so-called gold standard in a move that is known as the Nixon shock .
But enough about the history of gold and the importance for the monetary system. Let’s get back to Douglas Jackson and his dream of changing the global currency system.
Jackson followed a libertarian school of thought, that sees free markets, with as little state involvement as possible, as the best vision for an economy. Through his self-taught knowledge about the history of money and central banks he deduced that letting go of the gold standard was a terrible and dangerous decision. He wanted to create something genuine in a world ruled by fiction, stories and cheats. In short, he wanted to fix and perfect capitalism.
Treating cancer patients during the day and coding (self taught of course) during the night, Jackson created his company e-gold in 1996. Founded two years before PayPal, he designed a working online payment system backed entirely by gold. In order to understand the pure madness that people at the time attested him, check our this quote:
“Encountering 141 solid bars’ worth of gold-backed currency circulating on the Internet, therefore, is a little like hauling a wriggling, gasping coelacanth up from the bottom of the sea: It’s a financial fossil come to life, calmly going about its existence despite decades of expert consensus that it couldn’t be anything but dead.” — Julian Dibbell
But let’s step back, zoom out and take a look at the idea that he actually came up with.
Jackson wanted to create a private international currency, independent of governmental control that was functioning completely outside of the legacy banking system.
The way e-gold worked was as follows:
- One would go to an independant exchange market maker (fancy word, basically simply an intermediary who buys something on behalf of you) and buy a certain amount of gold, let’s say for 1000$.
- This online exchange then buys some gold for you — but they keep in e-gold’s vaults. (This is very important!)
- You now get the equivalent of the physical gold you bought in electronic gold, aka e-gold.
This e-gold can now be easily transferred and sent across the digital highways, to wherever you want it to go, without any national borders in your way. Instead of transferring the actual amount of gold to someone, you simply transfer ownership of it (just like on this tiny island with human sized money).
This approach had a lot of advantages, since all the middlemen and intermediaries who normally want their cut of the cake (in the form of fees, commissions, etc.) are suddenly gone.
If you happened to be participating in the e-gold system, you could also easily sell your ownership rights to the electronic gold and get some good old “paper” money for it. The ease of transferring value, combined with the perceived anonymity of e-gold (users could create accounts using aliases), eventually would have some pretty nasty consequences. But we will come back to this later.
For a through exlanation of how e-gold worked, just click here (and be ready to go back about two decades of internet design).
Jackson’s company grew quickly throughout the early 2000s and eventually had over 3.5 million accounts in 165 countries. At the height of their revolutionary endeavour, e-gold was backed by over 3.8 metric tons of gold, worth a staggering 85 million dollars at the time. Back then, they were only second to PayPal in the online payment industry.
A key aspect that was beloved by the customers of e-gold was their approach to governance and transparency. Real-time data on the total amount of transactions performed, Gold stored, etc., was provided to anyone interested and explained to the users. Ironically, it was criminal and illegal activity that doomed the company and eventually led to its downfall.
Remember the Eastern European hackers and the secret service I mentioned in the beginning?
Well, this part of the story revolves around the early shady elements of the world wide web. More precisely, this story is about credit card fraud, so called carding.
Carding is the name of a scheme that involves stealing credit card data, the corresponding contact details (name, address, phone number, etc.) and then selling it online to interested buyers (one of the most famous places to do this was calles iaaca.com — an acronym for International Association for the Advancement of Criminal Activity).
These buyers then copy that data on an empty credit card and recreate the original one. With these credit cards it was then possible to either buy expensive stuff and resell it, or to go to an ATM and get as much money as possible. This article by the New York Times gives a great in-depth story about this shadowy world.
In 2003 the secret service launched a sting operation on one of the most important websites, called Shadowcrew, for stolen credit card data. Shadowcrew was an infamous forum where, mainly, Eastern European Hackers sold credit card numbers in the millions. It turned out that e-gold was the preferred payment method for these illegal activities.
After this revelation, the secret service honed in on e-gold’s operations and it was revealed that it served as the go to solution for money laundering and the transfer of illegally acquired funds.
This wasn’t the first time e-gold experienced some problems with Eastern European hackers though, as in 2001 it was the goal of the first know phishing attack against a financial institution.
There is a fascinating piece by Wired that shines a light on a town in Romania that became known as “Hackerville” — if you have some spare time I can highly recommend it!
Jackson cooperated closely with the authorities though and through a careful analysis of the transactions, he was able to identify big rings of money laundering that were going on using e-gold. It turned out, e-gold wasn’t as anonymous as the cyber crooks believed it to be. While it was possible to register with an anonymous account on the website itself, the online exchanges where e-gold was exchanged to another currency kept meticulous records about their customers.
In the end, multiple lawsuits by the Federal Government against e-gold brought its operations to a complete halt and in the end of 2013 the company found its ultimate liquidation.
We’ve covered a lot of ground today, spanning from the introduction of the oncologist Douglas Jackson, to a short history of gold, a quick excursion into economics, a digital currency system backed by gold, Eastern European hackers and the Secret Service.
Yet, there is one super interesting aspect that warrants some more of your precious attention.
Actually, e-gold wasn’t the only digital currency created by Jackson. There was also e-silver, e-palladium and … e-dinar!
This is a story almost to far out there to believe, but it happened and it’s true.
Let me introduce to you a Scottish man who was brought up by the name of Ian Dallas. At some point in his life he converted to Islam, eventually founding his own islamic sect known as Murabitun World Movement. This religious movement has a couple thousand members worldwide and is most likely the only religious sect in history that bases its defining articles of faith on a financial theory.
Their ultimate goal was an islamic cleansing of the global financial system, since Ian Dallas, now known as Sheik Abdalqadir and his followers found the financial system to be haram. According to their convictions, only a type of currency made entirely out of gold and silver were allowed to be used. You start to see the connection?
They approached Jackson and he happily cooperated with them, creating e-dinar. If you want to get a through look into this fascinating story, look no further.
“Look, we are against terrorism more than Bush is. You want to be radical? You don’t need to blow up the bank, just burn your bank account. And for that you are going to need an alternative. What is the alternative? E-dinar.” — Umar Ibrahim Vadillo, spanish president of e-dinar
It’s a curious twist of history that e-gold wanted to fix capitalism and e-dinar wanted to abolish it — yet they were natural partners, since they both wanted to tie their respective currency to something “real”. Both saw in gold a purity that transcends the machinations of the merely mortal.
A curious and random fact is that Cat Stevens, the famous singer who later converted to Islam, first got into contact with Islam when he met Ian Dallas!
We’re approaching the end of today’s story, you almost made it!
E-gold gained an iconic status as a controversial alternative currency system loved by cypherpunks and libertarians. While being a centralized system, it was crucial in mass adoption and usage of digital currency, it gained real traction and adoption among users and merchants.
We’ll finish with some words by James Ray, a so called “lead evangelist” for e-gold:
“[Gold is] the most emotional spot on the periodic table — never mind plutonium.”
I hope you enjoyed today’s story and stay tuned for the captivating tidbits of technological history laying ahead of us.
As always, please feel free to speak your mind how you found this post and let me know if you have any questions!
All the best and yours truly
PS: if you’re looking for helpful and great resources to learn more about blockchain’s paradigm shifting technological potential, check out these awesome resources.
If you’re interested to dig deeper, these are some fascinating links to follow up on: