June 23, 2008 - As the inventor of digital gold currency (DGC), I am compelled to respond to the spate of recent articles that focused upon the dark-side of my invention. The initial article appeared last month in Canada's Globe & Mail, which in turn sparked a mini-frenzy on the Internet. Now that this frenzy has passed, an objective and unemotional look at DGC makes sense to set the stage right.
To begin, there is one basic point to keep in mind. DGC is a tool, and like all tools, it can be used for good or bad purposes. So if an article focuses on DGC's potential for misuse, it is misleading at best, and deceptive at worst. One therefore must consider whether the article was planted for a specific purpose. That is a reasonable supposition given that gold is the essential ingredient of DGC. Gold is what makes DGC valuable, unique and so useful, but more to the point, gold is the prime target for apologists of fiat currency. Their anti-gold propaganda takes many forms, so read between the lines of those articles reporting that "criminals may be exploiting Internet-based companies that convert cash into electronic gold".
Note the "may be" in the above quote. Ambiguous language like that is clearly aimed to appeal to one's imagination rather than provide hard facts.
First and foremost, DGC is a technological advancement, as evidenced by the several US patents that have been awarded to me for this invention. DGC is a new type of currency, and in legal-speak advances the 'prior art'. In other words, when an invention builds upon the existing body of knowledge in order to create a more useful, advantageous product, it is patentable.
DGC's principal achievement is the elimination of payment risk. Making a payment with gold is different than making a payment with national currency. Gold is money, but national currencies are just a money substitute. There is an important difference between them. For an exchange in the marketplace to be "extinguished", assets have to be exchanged for assets. So if one uses gold to buy a car, for example, an asset (gold) is being exchanged for an asset (the car), and the instant the assets change hands, the exchange is extinguished. There are no lingering obligations. But consider this transaction if one uses a national currency, i.e., a money substitute.
The national currency is not a tangible asset; it is a deposit liability of a bank. Therefore, the buyer in this exchange walks off with the car (an asset) and the seller walks off with a money substitute (a bank's liability), so the exchange is not extinguished. There is a lingering obligation until the seller successfully exchanges the national-currency money-substitute for a good or service.
Thus, money substitutes introduce a risk into the transaction that does not exist when using gold. It is payment risk, and it exists because the recipient may not be able to purchase a good or service with the money substitute received in a transaction. Payment risk means that the money substitute may lose all or some of its value before it can be exchanged for items of value.
For more than 300 years, we have been using money substitutes in commerce. Their problems are obvious. Paper currencies often become worthless if banks fail, or when central banks pursue reckless policies that erode - and in some cases destroy - the value of the currency.
Furthermore, money substitutes are expensive. They are based upon credit, and it is costly to monitor creditworthiness. Also, money substitutes do not circulate efficiently in online commerce. There are significant costs when converting one currency to another, and more importantly, with national currencies it is not possible to make instantaneous and non-repudiable 24/7 payments, which have become important requirements for global online commerce. In short, while money substitutes have more or less met the needs of the marketplace up to now, they have become inadequate.
Fortunately, modern computer and communications technologies make possible new forms of currency, even private free-market digital gold currency like that issued by my company, GoldMoney. Like all companies, we are driven by bottom-line goals. Our objective is to earn a profit, in contrast to the often capricious and harmful political aims under which central bankers operate. In this regard, the words of Nobel Laureate F.A. Hayek speak volumes: "Does anyone really believe that in the industrial countries of the West, after the experience of the last half-century, anybody trusts the value of government-sponsored money more than he would trust money issued by a private agency whose business was understood to depend wholly on its issuing good money?"
Currency evolves with new technology. For example, coin was largely supplanted by paper, which in turn was largely supplanted by checks, which has now been largely supplanted by plastic cards. Currency is still evolving, and global online commerce creates new demands. What's more, the high cost of operating our present currency system of money substitutes is a burden, particularly when considering that the technology exists today to significantly lower these costs. Here's what Alan Greenspan had to say about the importance of new technologies in April 2000: "The Federal Reserve also clearly recognizes the need to foster innovation in the private sector and to help remove barriers to the development and adoption of new payment services for electronic and traditional commerce… If we wish to foster financial innovation, we must first be careful not to impose rules that inhibit it, and we must be especially watchful that we not unduly impede our increasingly broad electronic payments system."
This potential exists today for the Internet to fundamentally and forever change bank payment systems. As a consequence, look for new companies to exploit these new technologies, and in the process, create - as GoldMoney has already created - a technologically advanced currency that once again is money, and not a money substitute.
In order to achieve this vision, GoldMoney has done everything possible to mitigate the risks alluded to in the Globe & Mail article. We operate in the Channel Islands, a sovereign country that is one of the world's major financial centers and where all customer data is kept safe and secure. In order to help make sure a criminal element is not attracted to GoldMoney, we follow the same know-your-customer and anti-money laundering rules that have been adopted by financial institutions worldwide. The Channel Islands are considered to be one of the best jurisdictions in this regard, so companies that operate there and follow the letter of the law - like we do - are not a target for hostile government action.
Lastly, it is unfortunately true that there are some rogue operators out there. Governments no doubt will target those companies. Regardless, I expect that the few rogue operators remaining will fall by the wayside soon enough. Maybe then DGC will be recognized for what it really is - an important technological breakthrough that that offers many benefits by enabling gold to circulate once again as currency.
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