Stop the BITCOIN techno-hype but consider the possibilities by studying the past.
Hardly a day goes by without a media article either extolling the borderless nature of virtual currencies or demonizing them as a tool of cyber criminals, money launderers and terrorists. And, while the US government is desperately trying to find a way to regulate the use of this new form of payment, most experts tend to agree that the truth lies somewhere in the middle. Unfortunately, there are too many misconceptions, misunderstandings or reporting voodoo regarding the technology and before we examine the issues, I think we need to correctly define exactly what virtual currencies are. When dealing with a new technology that is rarely even defined correctly, the only voices heard are the rabid supporters or detractors so let’s bring some sanity to the conversation.
For starters, there are 2 different types of online currencies that are commonly confused for each other by the media, government reporting and others who don’t bother to learn about an issue before speaking.
The accepted definition of Virtual Currency is an unregulated online currency that is not legal tender, is generally only accepted within specific communities, can’t be used to buy physical goods, and has no connection to a real economy. An example of this type of currency includes World of Warcraft (WoW) online money and Linden Dollars, which is the currency used in Linden Lab’s “Second Life” virtual world. (“Second Life — for when your first one is sucks!”) Digital Currency, on the other hand, is an electronically created and stored currency that can be used to buy physical goods and services and may be regulated by entities other than governments. Examples of digital currency would include Webmoney, Liberty Reserve Dollars, Perfect money, E-Gold and, the most talked digital currency right now, Bitcoin, which is a digital crypto-currency to be very specific. This article will examine Digital Currency and leave the make believe world for 30 year old guys living in their parent’s basement to argue about.
Although the technology world and the media is awash with “Bitcoin” mania and predictions about how Bitcoin will become the worldwide medium of exchange, the reality is that Bitcoins are self limited and are not even close to being the most recognized or utilized digital currency. I won’t re-hash some of the other quality Bitcoin articles here on Medium but many experts agree that, other than speculators and rabid technology supporters, most individuals seeking a form of digital currency with real world applications do not gravitate to Bitcoin due to the designed production limits, speculation driven volatility, and lack of real world uses that may doom Bitcoin to the annals of history.
The truth is that the heavyweights of digital currencies have, so far, been widely adopted by the criminal underworld as a method to launder illicit gains. The first, which set the standard for digital currencies, was E-Gold, owned and operated by former Florida oncologist Doug Jackson. In 1995, Jackson developed E-Gold as a digital currency backed by gold bullion and outside of any government regulation. E-Gold quickly grew to rank second to only PayPal as an online medium of exchange. Unfortunately for Dr. Jackson, operating within the US requires adherence to US law, and reports indicate that Dr. Jackson definitely did not follow US government “know your customer” banking regulations. Even worse, as uncovered by a US Secret Service (USSS) investigation of the “ShadowCrew” online criminal forum, the world of cyber criminals, hackers and drug cartels had realized that E-Gold did not require any proof of identity and was the perfect way to pay each other for criminals acts and launder proceeds. In Mid-December 2005, Jackson was arrested and Egold was shuttered for violating US banking laws and operating as an unlicensed money remitter.
But Pandora’s box had been opened and other digital currencies quickly sprang up to fill the void in anonymous financial dealings required by international crime groups. Proving that cyber criminals are quick to pick up on the nuances of international law enforcement operations, shortly after E-Gold was seized, they flocked to WebMoney (WM). WM is based far outside of the reach of US law enforcement in Moscow, reportedly has over 25 million registered users, and will not accept US based clients. Hmmm, wonder why. WM, with no identity verification, a large web of “exchangers” located throughout Eastern Europe to convert various currencies into “WMs”, and a serious lack of Russian government interference, is easily the most widely used digital currency for online crime groups at this time.
Every so often, someone thinks they are the sharpest tool in the shed and have figured out how to game the game — and who wants to live in cold and dark Russia when you can live a life of luxury in sunny and warm Costa Rica? In 2006, Russian Arthur Budovsky and a few cohorts opened Liberty Reserve (LR), which billed itself as the “world’s largest payment processor and money transfer system”. As a cheaper alternative to WM (LR charged less transactional fees) which also couldn’t care less who its clients were and what they were involved in, the criminal underworld flocked to LR in droves. Unfortunately, LR did not realize that the Costa Rican government may not relish being used as the world’s new money laundering and criminal payment platform and, in 2013, Arthur Budovky and his pals were turned over to agents from the USSS, HSI-ICE and the IRS for violating a trove of US laws. At the time of its seizure, conservative estimates report that LR was used to launder over $6 billion in illicit funds, and facilitated 55 million transactions by over 1 million users — almost all of them exclusively criminal in nature.
So, the question remains, will a digital currency ever develop widespread, legitimate acceptance and operate in such a way as to not expose its users to prosecution? I think it will because the dye has been cast. Consider that the criminal underworld accepted the totally anonymous, irreversible transactional nature of E-Gold, WM and LR, none of which were backed by any recognized national currency. If individuals, who acknowledge that they are dealing with other criminals, can learn to trust each other and agree to accept the digital currency as legal tender, I feel confident that the younger, more technologically accepting segment of our society will someday also.
The final fly in the ointment is the US government’s desire to regulate digital currencies — a stance which indicates the lack of understanding our politicians possess regarding this issue. Following my December 2013 Senate testimony regarding digital currencies, I was asked by a senior member what laws he could author which would give the US government the ability to regulate and properly tax digital currency transactions. Suffice it to say, he was nonplussed when I answered that he was missing the point regarding digital currencies. When he asked what I meant, I told him that the digital currencies deny governmental control by design and that no government could hope to control their use. In effect, they exist specifically to not be taxed or monitored by any government. I explained that, if enough people agree to accept a “widget” or seashell as money, there was nothing he could do about it. Only time will tell if I am mistaken but technology has changed a lot of things in a few short years– why not our money?
