GoldMoney Is the Answer To “Nonphysical Currency” Ambitions
May 22, 2014
(This item originally appeared at Forbes.com on May 22, 2014.)
For some reason, the idea of a “nonphysical currency,” without banknotes and coins where one makes payments via some sort of digital means, attracts a lot of people. Perhaps they have been overly influenced by those who want an electronic record of every transaction. Paper cash has its advantages.
But, banknotes can also be problematic for the issuer, particularly due to counterfeiting. In any case, a “nonphysical currency” can be a good format for a smaller private entity that wishes to introduce an alternative gold-based currency, in a simple and secure way.
Even better, a “nonphysical currency” based on gold — the most traditional of monetary systems, and one with centuries of proven success.
We’ve had such things for quite a while already. E-Gold was founded by Gold and Silver Reserve Inc in 1996, and by 2008 it was processing more than USD $2 billion worth of transactions per month. Unfortunately, it had become a haven for criminal activity, and was shut down in 2009.
GoldMoney (goldmoney.com) was founded by the extraordinary James Turk in 2001, in part as a respectable alternative to E-Gold, and soon became much larger in terms of gold holdings. (Turk was previously a banker in Hong Kong, where private banks already issue their own currencies.) GoldMoney originally allowed user-to-user payments, much like a checking account or a PayPal account. Also, this currency (it is effectively identical to central bank deposits, a component of base money) had 100% gold bullion reserves and no other assets on the balance sheet, unlike banknote-issuing banks in the past. This provides the ultimate in safety and security for all currency users.
GoldMoney remains very popular as an investment vehicle, but its user-to-user payment system turned out to be problematic. Without knowing all the details, my understanding is that GoldMoney came under quite a lot of scrutiny and investigation related to the potential for using the system for various tax evasion, money laundering and criminal activity schemes, as was the case for E-Gold. Also, every transaction with GoldMoney would be exposed to the regulatory and tax requirements of the user’s home jurisdiction (for example, capital gains taxes for U.S. users), with the added complication that GoldMoney is domiciled in Jersey, which is an offshore entity for most everyone.
In 2012, due to the excessive regulatory complications, GoldMoney deactivated its user-to-user payment system.
GoldMoney demonstrates that it is quite easy to have a “nonphysical currency” which is in fact very much like the system that Federal Reserve member banks use to make payments to each other (it is how your bank checking account actually works), and also similar to PayPal or other such digital payment systems today.
Knowing what we know now, how could this proven and effective system be best deployed?
I think that the first key element is: official government sanction. In other words, the government actively promotes and supports these privately owned-and-operated systems. This could take the form of a friendly regulatory environment, such as that now in force in Utah, where transactions in gold and gold-based currencies are free of all state-level fees and taxes. In other words, it would be treated as a currency just like today’s fiat currencies.
This might seem like a difficult hurdle. The United States Federal government unquestionably attempts to suppress all viable gold-based currency alternatives, via regulations and taxes, or outright attacks such as on Bernard Von NotHaus’ Liberty Dollar.
However, other governments in the world might find it quite to their liking to have a viable gold-based currency alternative. I’m thinking of places like Panama, Turkey, Iran, Hong Kong, South Korea and Serbia.
These governments might enthusiastically endeavor to make the tax and regulatory environments friendly towards private issuers of gold-based currency systems. Does this sound unlikely? It was the policy of the United States government in 1789, where Federal and State governments were expressly prohibited from currency issuance. Only private issuers (in practice, private commercial banks) could issue currency, with the requirement that it must be in standardized dollar-unit denominations. The Coinage Act of 1792 defined this “dollar unit” as 24.75 troy grains of gold, or the equivalent in silver (371.25 troy grains) under the bimetallic arrangement of that time.
Instead of an offshore entity, used by both E-Gold and GoldMoney, the currency issuer could be domestically-oriented. For example, a GoldMoney-like entity in Turkey could aim to serve primarily the people in Turkey itself (76 million), with the support and encouragement of the government of Turkey. This would eliminate all of the issues users may have regarding transactions via offshore entities. It would insulate the currency issuer from attacks from other governments unfriendly to gold (like the United States today), who don’t want their citizens to be using a gold-based currency alternative.
The gold parity ratio from the Coinage Act of 1792 produced a “dollar unit” worth about 1/20th of an ounce of gold — a value it maintained until 1933. Since there are 31.1 grams in a troy ounce, GoldMoney’s “goldgram” unit actually has just about the same value as that original dollar.
The GoldMoney framework is fine — and would be even better when an easy e-payment front-end like PayPal is perfected. Maybe GoldMoney would even sell you the user-to-user payment software. It just needs the right regulatory environment to prosper. The United States government is very unfriendly to such ideas today, although the country was actually founded on these principles.
However, another government might see that the establishment of a large-scale gold-based alternative currency, perhaps of the “nonphysical” sort like GoldMoney, is very much within its long-term interests. It worked for the United States, which became the most successful country of the 19th and 20th centuries — in no small part because of its reliable gold-based dollar.
Once people understand how easy this is, that the concept and implementation have already been proven, and that it could bring great benefits both to private entrepreneurs and the governments that support them, it could begin to bloom around the world.