Dr. Douglas Jackson made history as one of the early pioneers in the digital currency space when he founded e-gold, a digital currency backed by gold, in 1996. The company was a leader in financial technologies before FinTech was a thing. Now, almost 25 years later he is about to return to this space. In our conversation, Dr. Douglas reminisces on the early era of digital currencies, and the challenges he and his company had to face while onboarding millions of customers and competing with companies such as Paypal or Goldmoney. He shares his somewhat critical views on the Cypherpunks movement as well as Bitcoin, and lays out his future plans. You can follow Dr. Jackson on LinkedIn.
Could you tell briefly what E-gold was and what was its goal?
e-gold® was a system that mobilized the value of gold, as money, for payments over the internet. There were two major elements, the money, and the payment mechanism, which, while integrated, also had their own distinctive rationales.
My monetary goal was to provide money which, unlike bank deposits or liabilities backed by such deposits, would afford perfect freedom from default risk. The payments imperative was to enable anyone in the world, regardless of whether they had access to banks or established credit, to receive and make payments that would settle immediately, with finality, at extremely low cost.
You launched E-gold in 1996, one of the first payment systems that permitted users to execute global financial transactions outside of the regulated banking system. Which was a historical event in the world of online payments, But you were an oncologist by training — what was your motivation to switch to the field of electronic currencies?
My motives fell into two categories: concerns regarding conventional government-issued moneys, and, the unprecedented needs and opportunity arising from the emergence of the internet as a global commercial venue.
Regarding money, I perceived all contemporary and historically antecedent monetary regimes as subject to a ratcheting mechanism — engines of debt accumulation inevitably reaching the point of unsustainability. Relatedly, it was clear that no state monetary authority could ever be capable of being effectively bound long term to contractually explicit rules defining the nature of their money.
The most well-intentioned and seemingly airtight safeguards could always be abrogated by a successor regime. Only a private sector actor could be effectively bound by contract and truly subject to the rule of law.
As for the internet, its emergence was significant to me in two ways.
Firstly, the commercialization of the internet was an extraordinary market event. For the first time, anyone could offer their goods and services to a global market. The problem though, was that there was no good way of being paid. Relatively few could qualify for a merchant credit card account and for those that did, payments were expensive, subject to payment repudiation (chargeback risk) and often with a significant delay in access to the value received.
For small companies or individuals, especially in lesser developed economies, it was a financial inclusion issue. But even large entities such as Amazon, operating with razor-thin margins, stood to double their bottom-line profitability if they could slash the fees they were being assessed to receive payments.
Similarly, for entities selling big-ticket items, such as airline tickets, the direct cost of receiving payment in e-gold was less than one-tenth of the cost of a credit card payment.
Secondly, there was the technical significance of a global communication network. The internet provided a previously missing third element making it practicable, for the first time in history, for a private sector entity, even with modest resources, to implement a global alternative to banks and government-issued money.
Two critical elements had already emerged; low-cost computing devices and data storage capabilities enabled the massive computation and record-keeping required for the book-entry accounting of transactions and balances. Prior to computers, the clerical aspects and data persistence requirements would have required the resources of a state-level or large corporate actor.
The missing bit was secure communications as needed for transmission of payment instructions and notifications. That changed in 1996 when Netscape implemented SSL 3.0 (secure sockets layer), enabling a web browser to serve as the client software for secure client-server communications.
Rather than trying to persuade others regarding what I perceived as such massive need and opportunity, I felt a duty to realize it myself.
In the years that followed, some other gold-backed digital currencies emerged, how was E-gold different compared to them?
I propose there is an implicit assumption in the question, that e-gold was in a category defined by the gold aspect. But that wasn’t the case. We were the pioneer of privately issued money and P2P payments that did not require an obligatory financial intermediary.
By 2000–2001 we had refined the concept of an alternative global currency (where “currency” means ‘brand of money’, involving its own native unit of account) to a level that has never been matched. One of many subtleties attendant to that concept was our “decoupling of the numeraire”, implemented right out of the gate in November 1996.
Before getting into the various gold-backed variants, which were all quite minor league, I think it is important to consider the broader cohort of alternative payments and monetary schemes that cropped up in the 90s and during the dot-com bubble.
It is noteworthy that e-gold was launched with very little capital, less than 1 million initially. In fact, cumulatively it only raised 3.5 million dollars though, I’m sad to say, at least 1.5 million of that was wasted on what ultimately amounted to frolics and detours. In contrast, preceding or concurrent with e-gold, a host of would-be alternative monetary and payment schemes — Beenz, Flooz, Cybercash/Cybercoin, Digicash/eCash, Peppercoin, Mondex, etc.… and not counting Citibank’s C2IT or eBay’s own Billpoint — collectively raised over 300 million.
But, as early as July 1999, the Financial Times correctly observed that “e-gold is the only electronic currency that has achieved critical mass on the web”. And by November 2000, e-gold was processing a greater volume/value of payments every month than all of those would-be competitors combined and cumulatively, before they went bust.
Several of them, quite properly, focused on addressing the problems faced by a recipient, especially a commercial recipient, of payments. But, if such a scheme was dealing in monetary liabilities backed by money in bank accounts, and denominated in conventional national currencies, who would have had the wherewithal to make such payments?
That is, why would potential payers have bothered to exchange their existing bank account money, protected by deposit insurance, to obtain and hold a balance of liabilities one step more derivative? Compounding the issue, exchanging one’s, let’s say, Citicorp dollars for someone’s eDollars, entailed transaction costs. Normally the costs of providing such a de facto exchange would be met by the provider assessing an exchange rate spread. But why would anyone pay a premium to exchange their Citicorp dollars for eDollars?
e-gold was different in that normal people, all around the world, manifested demand for it and obtained/held balances they were itching to spend. Sometimes they’d go so far as to buy stuff they didn’t even particularly want because it was fun and easy and they wanted to show their friends (and get them to sign up as well).
We never had to give money away just to get people to try our system, unlike Paypal which, per Elon Musk, gave away more than $60 million. Moreover, since e-gold was quite obviously a foreign currency, albeit without nationality, a worldwide network of independent providers of exchange services between e-gold and a host of conventional currencies cropped up to compete for market share and garner exchange rate spread income.
With respect to the various gold-backed competitors, e-gold, unlike all of its would-be imitators or successors, was never about gold. It was fundamentally focused on payments and settlement.
As noted, one of our imperatives was to provide a medium of settlement affording perfect freedom from default risk. Gold, thanks to already existing, highly evolved institutions and infrastructure in support of good delivery standards, was by far the most expedient reserve asset.
But all of the other gold-backed digital currencies, at the time and since, have consciously or unconsciously organized their institutional arrangements and business models in accordance with what I call the “goldmonger” mindset.
Like Bitcoin and the myriad unbacked cryptocurrencies, their media are marketed more or less as investments. Often their revenue models depend on selling their tokens at a markup.
By 2006, the e-gold system was executing over 3 billion (USD-equiv.) worth of P2P payments per annum. In contrast, none of the others (i.e. the gold-related ones) have ever attracted any usage as payment systems (for example).
Instead, they find themselves in competition with more successful and established providers of gold products such as Bullion Vault or Kitco. Selling gold to gold bugs is crowded, and from my perspective, an intensely uninteresting business to be in.
How was the environment in which this was happening different compared to the digital currency landscape of today?
In terms of similarities, the main one is a high noise-to-signal ratio coming primarily from Cypherpunks and their “fintech” successors. Then, as now, their premise is that what the world needs is whatever technical gimmickry they are currently fixated on.
It starts with a clever techie solution and then backfills to come up with some market rationale. Back then it was anonymous digital cash. You’d see David Chaum on the cover of US News and World Report, or with his name mentioned over 50 times in a single Wired article. The current iteration, what I refer to as “the Cool Kids’ New Clothes” is of course on a massively larger scale.
The big difference now is that, as an adverse consequence of this past decade of unprecedented malinvestment and rampant criminality engendered by the blockchain frenzy, regulators in many countries — who previously were content to ignore unobjectionable innovations — have rushed to promulgate new regulations which often fail to distinguish baby from the bathwater.
In some jurisdictions, no distinction is made between privately issued money affording a high degree of safety and soundness vs. unbacked tokens designed to provide strong anonymity.
I am also concerned by the prospect of so-called “CBDCs” (Central Bank Digital Currencies) which are increasingly likely to be deployed as means of coercively imposing negative interest rates and other unconventional monetary policies.
Ironically, the Libra project, which I regard as almost as ill-conceived as Facebook’s previous “Facebook Credits” debacle, seems to have added to the impetus toward a supra-national “Synthetic Hegemonic Currency”. Were this done in a setting of the renewed financial crisis, it is not hard to imagine it being implemented in a way that effectively outlawed privately issued money, regardless of its safety and soundness.
Back then, the e-commerce space, as well as the web, were quite different, what were your biggest challenges when launching E-gold?
The biggest challenges stemmed from my lack of business knowledge and experience amplified by my unawareness of my own ignorance. I was a physician with a very successful private practice and therefore (mistakenly) regarded myself as an accomplished entrepreneur.
On the plus side, this meant I could fund the initial phase of the project myself, augmented by capital contributions from a close friend who became my business partner. The downside was that I never worked out any realistic sort of business plan, causing me to underestimate costs and ultimately resulting in being undercapitalized for most of the company’s existence.
One glaring result was our lack of a marketing plan. e-gold was the epitome of the “build it and they will come” mentality. I didn’t know how to get the word out that we even existed. This was before social media; the closest thing was email mailing lists that served as topical forums. In 1997 we spent perhaps 50k on print ads, which I wrote and which were probably the worst ads ever published.
Amazingly though, people did come. Customers recruited other customers, partly to take advantage of referral incentives but more often to engage their existing transactional counterparties, whether on their income side or their outbound expenditures.
Moreover, while we had not thought much about use cases other than e-commerce, our user community avidly and spontaneously embraced e-gold for international remittances, taking advantage of the fact that an e-gold Spend Fee was about one tenth the transaction cost of a traditional remittance provider.
The biggest challenge though, what turned out to be our fatal flaw, was my failure to marshal the resources to implement rigorous customer identity verification and due diligence as prerequisites to granting system privileges.
Although we developed the most powerful capabilities of any payment system then or since to track down bad guys who had used the system for illicit purposes, that wasn’t sufficient. A more effective AML program would have largely prevented such misuse and made us much less vulnerable to the incessant reputation attacks we were subjected to.
Even though GoldMoney came to the market a few years later after e-gold launch, they filed a civil case against you for patent infringement — could you elaborate a bit on the background of this case?
With respect to the patent matter, James Turk had obtained a patent in the 1990s for a gold scheme that I regarded as incoherent and unworkable — fatally flawed. I learned of it in 1997, the year after we launched. It bore no resemblance to the e-gold’s business model/protocol. For that matter, when Turk launched Goldmoney in 2001, he copied various of the essentials of our fiduciary arrangements rather than any embodiment of his own patent(s).
Over time he filed a succession of patents, trying to migrate the logic to resemble what we had been doing all along.
The infringement case was intended to run us out of money since he had learned we had little working capital to spare. Defending something like that, even if without merit, is expensive. The case was dismissed for lack of merit, with the judge expressing in no uncertain terms his disgust with their tactics.
Later, in 2011, we petitioned the USPTO for an Inter Partes re-examination of his most pertinent version, 7,206,763, pointing out its incoherency and unworkability. The patent was overturned with all its claims denied.
There is a lot more color that could be supplied — such as the role of Turk’s unscrupulous South African investor in the matter or the corporate espionage that had resulted in him learning we didn’t have much money to spend on lawyers. But that would be hard to relate in a few words and besides, it is all likely to come out in Carl Mullan’s upcoming book.
The first digital currency Digicash, launched in 1990, was a big deal too. Did you follow the project?
Digicash, at the time, was the holiest of grails for the Cypherpunks and they managed to get a lot of media coverage. The unbacked play money version, Cyberbucks, was framed as a successful proof of concept. So yes, hype-wise, it could be regarded as a big deal. But in terms of commercial value/utility/success, it was an abject bust that burned through more than 20 million bucks of other People’s Money.
In 1999, Frank Trotter of Mark Twain Bank — the only US bank that actually offered Digicash to its customers — told me that during the year or two the real money version was online there had been a grand total of two Digicash transactions for an actual commercial purpose, both of them for registration for the 1998 Financial Cryptography Conference.
Did you take part in the Cypherpunks mailing list? What’s your view on the movement?
My view of the Cypherpunk movement is that, as a general rule (excluding real heroes such as Phil Zimmerman), rarely have so few done so much financial damage (and even ecological devastation) to so many.
I was subscribed to Cypherpunks and a number of related lists, most of the latter organized by Robert Hettinga. I didn’t post a lot, especially after April 1997 when I had posted “Debunking ecash”.
The gist of that post (which I’ve lost — I only have fragments of the response thread) was that the 1996 roll-out of SSL had largely invalidated any rationale for installing a complicated, non-user-friendly client/wallet program such as required to use Digicash’s Cash.
I was arguing that the emergence of SSL-enabled browsers made it possible to offer an adequately secure and much more appealing service using a simple server-based book-entry protocol.
This assertion was met with much gnashing of Cypherpunk teeth, their characteristic “you just don’t get it” sort of vitriol. So, although I attended and was one of the sponsors of the 1999 Financial Cryptography Conference in Anguilla, I felt it was mostly pointless to engage in further polemic disputation with them.
[the surviving quote from the April 1997 “Debunking ecash” thread]
“The way I see it, SSL has rained on the Digicash parade. SSL is the reason we at G&SR didn’t shell out big bucks to Digicash (or license the RSA algorithm ourselves). It’s got the same session key RSA blah-blah whatever, but folks get SSL-capable browsers for free and a secure server is dirt cheap. And fairly big bucks people are keeping it all up to date so you don’t need to bother with expensive proprietary crypto.”
Were you aware of the proposals such as Bitgold, B-money or RPOW that emerged around the 2000s?
Yes, and there is a very important point to be made, or so I will assert. The emergence of e-gold had been the final nail in Digicash’s coffin. Then, for the decade during which e-gold was operational, though there was a continuous succession of one crypto scheme after another, nobody cared.
That is to say, there was zero public interest, uptake, demand for such schemes. Even with the Cypherpunks, whereas close to a hundred of them had e-gold accounts, hardly any of them could be bothered to rally behind any of the schemes of their perceived rivals.
Consider this observation from an otherwise insightful “Short History of the Blockchain” reported on Moneylab. After discussion of Chaum and eCash it continues:
“Interestingly enough, it gets very silent after 1995, states Eduard de Jong. Money is somehow out of fashion. It takes more than ten years before Bitcoin is introduced by Satoshi Nakamoto, who brings us back to the blockchain”.
I respectfully disagree with the ‘money out of fashion’ bit. I propose instead that e-gold exposed the disutility of crypto-based monetary schemes and as long as e-gold was active, none of them could get a foothold.
Jon Matonis, at that time Chair of the Bitcoin Foundation, made a similar point in his 2012 Forbes article, “Bitcoin prevents monetary tyranny”.
“The timing of Bitcoin’s appearance, and subsequent growth, is no accident either…An alternative money provider that was centralized would probably not survive long in any jurisdiction. The emergence of Bitcoin was baked into the cake already. We can see from the case against digital money provider e-gold that an efficient challenger to the provision of a stable monetary unit will not be permitted… really.”
Craig Wright also correctly connected e-gold’s exit from the market with the opportunity for crypto to finally take center stage, though, like Matonis, his explanation of why e-gold was attacked is the self-serving fiction than comprises the foundational myth of Bitcoin.
From the 2015 Sydney Morning Herald article:
‘Also of note is an old blog post of Dr. Wright — published hours before the initial launch of bitcoin in 2009 — which has since been scrubbed from the internet.
‘Well.. e-gold is down the toilet. Good idea, but again central authority’, the blog reads. “The beta of Bitcoin is live tomorrow. This is decentralized… We try until it works.”
My thesis is that Bitcoin’s foundational myth was based on either self-deluded or purposeful misconstrual of what happened in the e-gold case. They like to believe that:
- the US government attacked e-gold because it did not want competition with the US dollar,
- e-gold’s fatal flaw was it was “centralized” and/or held real-world assets, making it vulnerable to such attack and, therefore,
- alternative money can and must be designed as invulnerable to government attack.
And all three are incorrect.
After 2006 many of the digital currency companies were persecuted — do you consider that to be an appropriate response from the US authorities?
I am aware of four prosecutions around the time, each of them involving distinct issues and with zero basis for suggesting a common theme such as some sort of pushback from a government intent on protecting the US dollar from upstart competition.
I’m most familiar of course with the e-gold case, having lived it, and can say with absolute certainty that there was no such agenda. There is a much stronger case to be made that the attack on e-gold was an almost serendipitous convergence of a private cabal (one of them a very high profile Cypherpunk) — driven by personal malice, financed by money embezzled from me, operating at the behest of would-be competitors, and hoping for informant rewards — who happened upon an effectively rogue law enforcement agency at the peak of a crisis of dysfunction and a desperate scrabble for resources.
Carl Mullan is working on a book that exposes aspects of prosecutorial misconduct in the e-gold case that only came to light in 2017 as the result of a FOIA campaign.
The comments of the judge, as well as the plea agreement and even the sentence handed down, tell a quite different story about the issues and outcome of the e-gold case.
The Federal Sentencing Guidelines for the charges to which I pled guilty called for over a decade of incarceration along with multi-million-dollar fines. Judge Collyer instead returned a sentence which entailed no incarceration and no fine. In order to document her rationale for such a marked deviation from Federal Sentencing Guidelines, Judge Collyer issued a Sentencing Memorandum.
In effect, her sentence commissioned me to remain in charge of the companies in order to implement the requirements specified in the Plea Agreement which were designed as a sort of blueprint providing for the companies to continue in business as licensed financial institutions.
Having already stated “the [e-gold] system conceptually, is not illegal”, she specified:
“Now that legal issues are resolved, he [Douglas Jackson] has committed e-gold and G&SR to a vigorous compliance and oversight program which could only succeed if he were there to head the companies. Since there is no reason to shut down e-gold and G&SR, and every reason to have them come into legal compliance, a sentence of incarceration for Dr. Jackson would be counterproductive”.
This was a remarkable statement. Commonly, when a defendant is convicted of a financial crime, the individual may be barred from working in the financial industry for a period of years or perhaps for life. I am unaware of any precedent for a defendant receiving a judicial mandate to continue running a company and overseeing its implementation of a vigorous compliance and oversight program.
Subsequent developments, which resulted in our decision to suspend operations, are beyond the scope of this already overlength intro.
In two cases, eBullion and Liberty Reserve, I feel there was strong evidence of criminal activity and intent. The rise of Liberty Reserve paralleled e-gold’s increasing success in detecting, interdicting and systematically eliminating categories of suspicious or illicit abuses of our system. In contrast, Liberty Reserve’s business model appeared to depend on welcoming bad actors such as those we had identified and expelled.
The e-Bullion case ended up as lurid as a film noir potboiler, though it is worth noting that two or more of the cabal members that conspired against e-gold were, at least for a period of months in 2000, in active collaboration with James Fayed, its principal, now on death row in a California prison.
The Liberty Dollar thing, which had previously been known as NORFED (“National Organization for the Repeal of the Federal Reserve and the Internal Revenue Code”), was more or less a stunt of no economic significance. But someone at the US Mint went on a crusade to frame it as some sort of counterfeiting scheme.
Apparently, one cranky jury member went all in to throw the book at its founder, possibly out of antipathy for his former activism for legalization of pot back in the 80s-90s. I think the judge ended up doing somersaults to avoid sending its harmless and colorful elderly hippie founder to serve hard time.
How do you evaluate today’s cryptocurrency landscape?
As a pointless wasteland, analogous to pre-creation earth — “without form, and void; and darkness was upon the face of the deep” — as rendered in the KJV ‘genesis’ event.
Have you been involved in the post-Bitcoin cryptocurrency space? Do you follow any projects?
My focus is on Global Standard, the successor to e-gold that embodies two decades of lessons learned. It conserves the proven good parts of e-gold and integrates them with best in class AML/CFT capabilities and other safeguards enabling compliance with the most rigorous jurisdictional licensing and other regulatory requirements.
In addition to the direct provision of P2P payments affording immediate settlement with finality, it will also integrate an automated clearinghouse enabling intermediated (i.e. between banks, mobile money or conventional remittance providers) cross-currency payments with no need for correspondents or actual FX.
Global Standard will provide for the Issuance, Distribution, circulation (P2P and intermediated), Redemption and De-Issuance of Digital base Money, each backed by a 100% reserve of a suitable risk-free asset (good delivery gold bullion, official SDRs, or deposits at a government central bank).
As with e-gold, the goal is to enable the emergence of an alternative global currency: a medium for general use that circulates alongside domestic legal tender currencies but also plays the complementary role no national currency can properly fulfill — as an international reserve asset and medium of settlement, suitable for banks worldwide to hold on their balance sheets.
There are quite a few gold-backed cryptocurrencies today on the market, do you follow them? What is your take?
I look from time to time. None of them appear likely to ever gain any traction as payment systems or even become cash flow positive from operations. As with the numerous would-be competitors to e-gold in the late 90’s, their principals seem better at raising money than making money.
Does Bitcoin make your vision from E-gold come closer to reality?
In my view Bitcoin and the thousands of the me-too coins it gave rise to stopped the clock for a decade such that, amazingly, when Global Standard marshals the resources required to become operational there is likely to be as little effective competition as there was in the late 90’s.
Which trends or projects do you consider to be the most exciting in crypto today?
The desperate technical scramble to move away from actual blockchain while still seeking to capitalize on residual investor enthusiasm for blockchain. Sort of fun to watch.
What do you think will be the role of Bitcoin in 10 years from now?
That of tulips, minus the decorative and commercial value of tulips, with a lot of blockchain engineers, consultants, attorneys, pundits and VCs seeking to find euphemisms to move that part of their resume into the memory hole.
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