e-gold Blog

e-gold update: U.S. State Licensing and Customer Identification

e-gold Ltd. is continuing to develop and deploy urgently needed system enhancements in order to achieve compliance with applicable U.S. laws and regulatory requirements. e-gold has registered with FinCEN as a money transmitting business, and is working with various U.S. state authorities to obtain licensing as a money transmitting business where required.

Licensing requirements vary from state to state and country by country. As e-gold completes this process, it is possible that Users residing in some jurisdictions may experience service disruption. We ask for your patience, and assure you we are working diligently to complete this sometimes complex process of licensing as soon as possible.

Another major focus of our efforts is a robust Customer Identification Program (CIP).

As a step towards improved customer identification, e-gold is requiring all Users to update their Point of Contact Information to a consistent format, in addition to providing their Date-of-Birth and Personal Tax Identification number. This improved quality of identifying information is being obtained in preparation for the next-stage CIP, which will include the collection of electronic images of documents to verify identity and residential address. This enhanced capability, supporting both documentary and non-documentary mechanisms of identity verification, will be implemented in the very near future.

e-gold Ltd. remains highly committed to offering a cost effective Internet payment system affording instantaneous settlement, free of chargeback risk, to customers around the world. We continue to be confident that a regulated e-gold rebuilt to a more systematic specification will be less hospitable to criminals, and more attractive to mainstream business use without being less accessible to those disregarded by legacy payment systems.

Enhancements to e-gold's Customer Identification Program

As I noted in my post to this blog on July 21, 2008, e-gold Ltd. is working diligently to reach compliance with U.S. law and regulation as quickly as possible. As a major step towards implementing a more robust Customer Identification Program, effective September 18, 2008, e-gold account Users are now required to include a Personal Tax Identification Number (PTID) for the point of contact for any e-gold account they control in order to make outgoing Spends.  For United States residents the PTID must be either their Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).  Residents of other countries will need to provide their tax identifying number applicable to their country.

e-gold Ltd. remains highly committed to continuing to offer a cost effective Internet payment system making instantaneous settlement, free of chargeback risk, available to customers around the world.  We continue to be confident that a regulated e-gold rebuilt to a more systematic specification will be less hospitable to criminals, and more attractive to mainstream business use without being less accessible to those disregarded by legacy payment systems.

A New Beginning

November 2008 will mark the 12th anniversary of e-gold's debut as an alternative global payment system enabling Users - individuals or businesses - to receive payment in gold at extremely low cost and without risk of the sort of payment reversals that characterize all credit based systems.

e-gold has been a pioneer in numerous areas and I am proud of its innovative accomplishments. Since 1996, the Internet has witnessed multiple online payment initiatives, several of them funded with $20-90 million of start-up capital, with distinguished founders and executive cadre, high profile brand name strategic allies, and favorable reception in the business press. But whereas Digicash, Cybercash, Beenz, Flooz, Peppercoin and a host of others each was promoted as the next big thing, all of them combined cumulatively [in their original incarnations - some have been restructured into other business models] executed less transaction volume than e-gold did in a typical single quarter.

But this note is not about success. It is about e-gold's failure to date to emerge, its failure to transition from a marginal player for early adopters to a respected institution integrated into the global financial mainstream. I am talking about a vision that has not yet been realized… and a determination to fix what needs to be improved.

e-gold's failure to emerge so far is a result of many factors but the root causes were design flaws in the account creation and provisioning logic that led to the unfortunate consequence of vulnerability to criminal abuse. Criminal abuse of the e-gold system, in turn, led to a self-reinforcing negative reputation.

Ultimately, criminal abuse of e-gold reached the point where the US Department of Justice intervened, bringing criminal charges against e-gold Ltd., Gold & Silver Reserve., Inc., (the Operator of e-gold and also of the online exchange service OmniPay), myself, and the other directors for violations of 18 USC 1960 [Operation of an unlicensed Money Transmitting Business] and 18 USC 1956 [Conspiracy to Commit Money Laundering]. The criminal case has been resolved. The resolution of the criminal case however provides for a second chance, an opportunity to address the flaws embedded in the e-gold system and to transform the "e-gold Operation" into the institutions I, the other directors, and our longsuffering employees and contractors have always envisioned, one that serves to advance the material welfare of mankind.

In harmony with this transformation, we acknowledge that e-gold is indeed a Financial Institution or Agency as defined in US law and should be regulated as a Financial Institution. E-gold Ltd. has submitted an application to FinCEN to be registered as a Money Services Business and will be seeking licensure in all states that require it. Most importantly, working in conjunction with US government agencies, we will be exerting every effort to bring e-gold into compliance with US law and regulation as quickly as possible.

I am going to briefly describe the systemic problems we are undertaking to rectify and a roadmap of where the system is heading. Going from where we are now to where we need to be is going to be a bumpy road, especially at first. Many legitimate e-gold Users have already suffered loss over the past year as the measures undertaken by the government to prevent dissipation of assets have severely impacted exchange markets with resulting illiquidity of a magnitude as to effectively make it impracticable to exchange e-gold for conventional money. There will be more disruption in the next few months but it will be temporary and will set the stage for powerful new features that enhance the usability and global reach of e-gold. If there is a silver lining, it is that the more illiquid e-gold has become, the more valuable it has become due to the (apparently ongoing) decline of the US dollar relative to gold and other non-financial assets.

e-gold User Agreement Changes

Before proceeding, however, let me make something clear that should have been made more emphatically clear long ago. Use of the e-gold system for criminal activity will not be tolerated. Memorializing this resolve, the following provisions are being added to the e-gold Account User Agreement:

2.3.  User agrees to not use e-gold in any manner that violates the laws of whatever jurisdiction to which the User is subject.

4.6.1.1.  If e-gold investigators reasonably suspect that the e-gold account of User is being used to launder the proceeds of crime or for any other criminal purpose, Issuer may freeze the e-gold account and any other e-gold accounts of User.   Additionally, at the sole discretion of Issuer, User will be subject to damages and other penalties, including criminal prosecution where available and the notification of the general public of User’s actions, at the sole discretion of Issuer.

Design flaws in legacy e-gold system

A systemic flaw in the e-gold design, present from the very beginning, made it vexingly difficult for e-gold to expel a User, in a truly effective way, for criminal abuse of the system. e-gold investigative staff might detect suspicious activity, block or freeze the offending account, and later discover the same perpetrator had created additional accounts.

One element was logic that allowed an e-gold account full privileges from the moment of creation and only revoked those privileges in the event of suspicion that the account holder was seeking to mask their identity or actually engage in illicit activity.

Compounding this weakness was an unrestricted ability for Users to create multiple accounts without any obligatory indicator that they were all under the control of one person.

The next generation of the e-gold application will undertake to enforce a "one-human being/one e-gold User" rule. Instead of the existing logic where a User logs directly into an account, a User in the next generation system logs in as a User. Only validated Users are empowered with the ability to create multiple accounts.

The advantage from the cybercrime-thwarting standpoint will be an ever-stronger ability to blacklist a person who has abused the e-gold system.

e-gold is intensively working on this next generation User-based log-in system but it is likely to be another 6-9  months to deployment. Meanwhile, emergency surgery is required NOW.

Shock Therapy phase [may it be brief!]

1)  Effective immediately, new e-gold account creation is suspended until a compliant interim solution for Customer Identification can be ensured.

2)  We are requesting that autoexchangers - even though the technical beauty of the autoexchanger concept is sublime – cease supporting exchanges to or from e-gold for the time being. The problem with the autoexchanger concept is that although the autoexchangers themselves may be perfectly compliant with requirements [promulgated by Webmoney and e-gold] to automatically put tracking data in their memo fields, and despite the fact that Webmoney is also committed to aiding in the suppression of cybercrime, the fact is that a substantial proportion of the cybercriminals that abuse e-gold have evolved into a modus operandi that involves autoexchanging possible proceeds of crime into Webmoney, sometimes within minutes of receiving the value, thus making interdiction a matter of catch-up or closing the barn door after the horse is gone.

Looking Forward

We are confident that a regulated e-gold rebuilt to a more systematic specification will be less hospitable to criminals, and more attractive to mainstream business use without being less accessible to those disregarded by legacy payment systems.

Please accept our apologies for the occasional turbulence you may experience on this journey. And, as always...

Thank you for using e-gold.

Fraudulent "Press Release" and accompanying DDoS attacks

Beginning July 7, 2008 a fraudulent press release was sent to multiple online publication services claiming that e-gold Ltd. and Gold & Silver Reserve, Inc. had filed for bankruptcy. The announcement was a fraud and did not come from either company or anyone associated with either company. Concurrent with the fraudulent press release there have also been intermittent denial-of-service attacks against the e-gold.com website, probably originating from the same perpetrator. An investigation is underway seeking to discover the source of both this malicious misinformation and the denial of service attacks.

Set It and Forget It - Harnessing Collective Wisdom to Achieve Monetary Stability

Ben Bernanke, Chairman of the Federal Reserve, in his keynote address this week at the Cato Institute 25th Annual Monetary Conference further elaborated his intention to increase the transparency and collegiality of the analytical processes that inform Fed monetary policy. One element of the new transparency will be to publish the forecasts of individual FOMC members in a fashion that enables the public to better observe the range, diversity and provisional nature of forecast projections.

The Fed move, in my view, indirectly acknowledges that collective wisdom can be harnessed in a way that generates predictions of greater accuracy and validity than any individual, regardless of expertise. As noted, however, by William Niskanen, Chairman of the Cato Institute, all of this systematic transparency goes out the window - suspended when a macroeconomic shock threatens an untimely recession. Abrupt ad hoc seat-of-the-pants mode comes into play whenever an asset bubble (likely induced by previous Fed reactions) starts to collapse.

Recent literature examines how, in certain properly conceived settings, collective wisdom, instead of manifesting a dysfunctional madness-of-crowds trajectory, may be the optimum predictive or analytical paradigm. James Surowiecki relates that an average calculated from a large number of guesses - such as the number of pennies in a large jar - tends to be more accurate than any individual estimate. Oddsmaking, pricing of futures contracts, perhaps even maintenance of factual content neutrality on Wikipedia further illustrate the phenomenon.

This note contrasts two qualitatively different institutional arrangements for systematic metering of a money supply; a conventional government central bank, using the Fed as example, vs. e-gold.

The Fed reality is discretionary and given to politically pressured interventions to overrule itself. The e-gold model is automatic and immune to override.

It is necessary to contrast:

1. the processes by which information is channeled and assimilated into protocols that lead to monetary policy implementations, and,
2. the levers by which adjustments are effected.

Both systems have two sets of levers:

1. Procedures by which M0, the aggregate quantity of base money, may increase or decrease.
2. Mechanisms that influence broad money supply (M1-2) by affecting the terms by which base money is made available to the banking system.

With the Fed:

1. M0 is modulated by open market operations with primary dealers.
2. M1-2 is influenced mostly by setting and maintenance of the Fed Funds rate and to a lesser degree by the discount rate. There is a bidding process whereby banks compete with each other for the deposits of the public but the choice is limited to which bank or financial intermediary to lend to rather than whether to lend money to the financial system at all.

In the case of the Fed and every other government central bank, both sets of procedures entail discretion. The Fed itself initiates the buy or sell orders that implement open market ops. The Fed funds target rate is obviously determined/ announced and, to some extent, made effective, by the Fed.

In contrast, once banks have embraced e-gold and an e-gold broad money supply, i.e., AUG denominated deposits, payable in e-gold, has emerged...

With e-gold:

1. M0 is modulated by open market operations with primary dealers.
2. M1-2 is influenced entirely by the aggregated individual decisions of Users of AUG.

M0 (and other monetary aggregates), open market operations, and primary dealers in the AUG economy all have similar meanings, but also have key differences...

Unlike the Fed, e-gold Ltd, the core e-gold institution performing e-gold (M0 in the AUG economy) issuance and settlement, is unable to make open market operation decisions.  e-gold Ltd is neither itself a financial institution, nor is it exposed to financial institutions to the extent that it has no bank accounts, and thus no way to receive, emit or order the emission of a conventional money payment. 

As a result it is not able to buy gold and bail it into e-gold reserves for the purpose of issuing additional e-gold liabilities, nor (for the same reason) is it able to redeem e-gold –allowing a quantity of liabilities to be extinguished and freeing up physical reserves to be removed/delivered/sold.  Additionally, lacking bank accounts, e-gold Ltd itself also has no ability to own or hold gold, as it has no ability to buy or sell physical gold. 

Bailment and redemption decisions are driven by the trading balance requirements of Primary Dealers.  Bailments increase the assets held by the e-gold Bullion Reserve Special Purpose Trust (which exists to back e-gold in circulation for the benefit of all e-gold Users collectively), and correspondingly cause new e-gold to be minted.  Redemptions decrease the assets held by the e-gold Bullion Reserve Special Purpose Trust, and correspondingly cause existing e-gold to be extinguished (removed from circulation).

The trading balance requirements of Primary Dealers in the AUG economy are dictated by the aggregate individual decisions of all e-gold Users rather than by a central authority; therefore, the circulating amount of AUG M0 (e-gold) derives from collective wisdom rather than centrally controlled, politically influenced, monetary policy.

The unprecedented attribute of e-gold is that the real-time gross settlement system for base money (the portion of AUG consisting of direct liabilities of e-gold Ltd) is available to the general public, allowing each individual the ability to decrease or eliminate their exposure to the banking system or any other financial intermediary. Each and every e-gold user (in addition to deciding the quantity of AUG M0), directly determines, minute by minute, 24/7, how much base money (e-gold) is made available to the banking system for use as reserves (AUG denominated liabilities - i.e. AUG M1-2), and the interest rates at which she is willing to lend to the banks or other financial intermediaries across the full spectrum of maturities.

But what about crises?

Since e-gold has no ability to override the automated mechanisms that govern base money and broad money supply – what could be done in the event of a shock? The responsive assertion is that:

1. The exquisite sensitivity of a huge cohort of individual e-gold users voting with their feet, with zero-latency of their feedback, and,
2. The elimination of moral hazard,
   

is likely to attenuate the amplitude of swings in aggregate demand and forestall shocks of a bubble forming/bursting nature.

Vera Smith, in her landmark 1936 essay "The Rationale of Central Banking" concluded; "How to discover a banking system which will not be the cause of catastrophic disturbances, which is least likely itself to introduce oscillations and most likely to make the correct adjustment... is the most acute unsettled economic problem of our day".

This monetary holy grail - an automatically self-correcting mechanism for metering money supply and credit is why we created e-gold.

[set it and forget it!]

In another note, however, I will need to address transitional effects. To preview - in the long run e-gold is the ultimate leveler of playing fields. Getting there however will tend to temporarily create winners, losers... and whipsaw effects on exchange rates. The prudent course for early adopting banks will be to reserve their AUG deposits heavily at first, biding their time until exchange rates stabilize before becoming fully loaned up.

SSNs In The Private Sector - Comment, Project No. P075414

In response to the Federal Trade Commission's solicitation for comments on the uses of Social Security Numbers in the Private Sector with the goal of reducing identity theft, e-gold submitted these comments on 5 September 2007.

deconstructing money, part 2

In Part 1 of this post I suggested that there is not an obligatory connection between strategies for maintaining price stability and the exchange value of the money used as a settlement medium. I insisted on using the term settlement balance, which sounds like (and is) bank jargon, as an alternative to other terms used to refer to a money balance.  My reason for using bank terminology is that I want to use the treasury operations of banks as a model of how businesses and individuals manage their balance sheet.

A bank may be defined as an institution allowed to borrow from the public (accept/create/raise deposits) without prospectus in order to fund its own asset portfolio. The bank generates the bulk of its revenue through treasury operations, seeking a net rate of return from its investment portfolio (loans, securities) that is higher than its cost of borrowing (the interest it pays to attract deposits). The bank maximizes revenue by being as fully invested as possible, maintaining only enough money (vault cash, deposits at its correspondent bank or the central bank) to support the anticipated liquidity demands of withdrawals or (especially) participation in payment systems. The money, the non-interest bearing fraction of assets held against immediate demands for liquidity, is what I am referring to as a settlement balance (see BIS usage of the term in the context of large-value payment systems).

This term settlement balance refers to the fact that all day long the bank sustains inbound and outbound flows as its depositors order payments to people who bank at other institutions but also receive payments.  The inbound and outbound payment system related flows cancel each other out to a large extent so that at the end of the daily payment cycle the bank might make or receive a single net payment that serves to settle (extinguish, with finality) any residual payment related liabilities.

It is in the interest of banks to economize on reserves - to hold the least possible amount of money as settlement balances - in order to be as fully invested as possible. [I'll return to this thought below when I describe the benefit of settlement efficiencies.]

Non-financial businesses and regular people/households do this exact same thing.

With non-financial companies the term settlement balance is not commonly used to refer to their uninvested money. Instead, the rather sloppy term "cash" is used, as in "sitting on a mountain of cash". Cash is one of those unfortunate words with multiple semantic usages. Sometimes the word is used to emphasize the anonymity of bearer media such as Federal Reserve Notes. For this discussion though I am pointing out that cash is often used as a label not only for uninvested money, but also for financial instruments of very short maturity such as the overnight sweep accounts that are the mainstay of so-called cash management. A vanishingly small proportion of any major company's assets are held in the form of money-as-distinguished-from-investment and the rest is in fact invested in a way that takes into account the possibility of drift in the value of the unit of account. The actual money part, the settlement balances, as with banks, are held only to meet immediate, essentially same-day, requirements such as stocking cash register drawers and making sure there is cover for outbound payments through the banking system.

Operating in a multi-currency environment complicates things, but only a little... provided we are talking about adding e-gold as an additional alternative payment option. If there are inbound and outbound e-gold payments (with payment amounts specified in the units the company normally uses for its bookkeeping) the average settlement balance held in the e-gold account is continually and automatically being marked to market as it is drawn down and replenished.

Not to belabor it but people and households (in advanced economies) economize on reserves too.

The major factor that enables a diminishing role for money is efficiencies in payment systems. The Clearing House Interbank Payments System (CHIPS) processes over 350,000 (large value) payments a day with a gross value of $2 trillion, 96% of it settled intra-day, achieving a 500/1 ratio of payment throughput / money used to prime the process.

To briefly recap, in advanced economies, thanks to sophisticated payments infrastructure, the role of money is diminishing. Banks, non-financial companies and households can hold a higher proportion of their wealth in investments that, in normal market conditions, can offset changes in the purchasing power and relative exchange value of whatever medium of payment they happen to use.

The majority of people in the world though - people who live in developing countries (or lower economic strata in advanced countries) - remain excluded from these efficiencies. They are mired in the cash economy. Remote payments under the constraints that exist in less developed economies require the use of expensive and inflexible intermediaries.

The emergence of e-gold, which enables direct end user access to a highly efficient settlement platform without the costs and delays introduced by an obligatory financial intermediary, will change all that. Just as cell phones enabled people worldwide to skip a generation - bypassing the queue for a landline - e-gold enables payment efficiencies that eliminate the need for banks to build a branch (or even an ATM) in every village.

To tell this story requires further elaboration of the role of settlement. The same efficiencies that e-gold affords to poor villagers, enabling secure and low cost access to world markets, will enable banks or other financial intermediaries to extend innovations in domestic payment systems to a global multi-currency environment.

Please bear with me. It is a difficult tale to relate linearly. It will be easier to see the whole picture when the components can all be joined by hyperlinks.

deconstructing money, part 1

In my recent Better Money post I proposed that money that did not lose its exchange value over time... would generally be better than money that did. In response, Sameer Parekh asserted the benefit of stable value and pointed out the important distinction between a money balance and an investment.

In this post I am going to agree with Sameer, to a point, but argue that stability of purchasing power is not of primary importance in evaluating options (i.e., the medium and/or platform) for settlement.

Price stability is good but instability is not necessarily all that bad. Lets compare two cases, goods and services sold outright, vs. debt instruments. Fluctuations in the value of the unit of account used to price goods and services - lets call it the invoicing unit - have always been dealt with by price changes. A Sunday newspaper or a Big Mac costs more USD now than twenty years ago, reflecting the decreased purchasing power of the dollar. Markets are pretty good at providing information to guide pricing, with the traditional exception of the "sticky downward" thing with wages (and house prices?). Excessively large and/or rapid changes in the purchasing power of a particular unit exact a higher economic cost but more gradual or less severe fluctuations can be taken in stride by the market. Part of the process by which economic actors insulate themselves from fluctuations in the value of money is to hold a proportion of their wealth in investments instead of money balances. I will expand on the money vs. investment thread below.

Debts are trickier because of the time element. Poorly predictable fluctuation of the purchasing power and/or relative exchange value of the units used in specifying debt contracts tends to create winners and losers and is economically costly. In an extreme case, where the borrower and the lender remain in the debt contract until maturity,  a(n unexpected) decline in value of the unit of specification favors the borrower since debt service and repayment of principal are done with cheaper money than what was originally calculated/borrowed. In the more general case, whenever an investor/lender holds a debt security for any interval, or some entity carries debt, anticipated fluctuation of the value of the pricing unit is just one of a multitude of factors that must be estimated in order to decide whether to make a portfolio adjustment or change in financing structure respectively.

An elegant solution is to specify debts using either a unit that is adjusted to such fluctuations or a unit designed to represent stable value. An example of the first strategy is Treasury-Inflation Protected Securities, also known as TIPS, where the debt is specified in US dollars, with the principal adjusted every six months using the Consumer Price Index (CPI). The other approach that has been advocated is to price goods, services and debts using a synthetic unit of account (numeraire) representing a different (than the CPI) adroitly weighted bundle of commodities (and/or existing currencies, and/or services).

Here is where e-gold comes in. With e-gold, it is convenient to deconstruct the money abstraction, enabling the use of whatever invoicing unit is convenient while taking advantage of settlement efficiencies obtainable with a medium that happens to be denominated in a different unit of account.

The de facto reality that emerged early on with e-gold was that most Spends were (and continue to be) specified in conventional legacy units such s "Pay account xxx $20 worth of e-gold". For the first time, actual practice supports the idea that advocates of basket units etc. have been describing for decades - price goods, services and debts in their idealized unit but pay/settle with some actual suitable medium.

But isn't it true that the exchange value of the e-gold one receives continually fluctuates relative to all other currencies? Uhh, yeah, all currencies (brands of money) continually fluctuate relative to all other currencies  (except for the minor ones that are hard pegged to specified major reserve currencies). So, (our hypothetical interlocutor continues) wouldn't the e-gold User lose the benefit of the stable invoicing unit thing and find themselves again adrift in the sea of potentially volatile exchange rate exposure?

Yes, but.. this exposure only affects the limited quantity of e-gold the e-gold User happens to be holding, a sum I will refer to as a settlement balance. In the next installment of this post I will delve into the money vs. investment distinction and describe the diminishing role for money. To preview - individuals, like businesses and banks, don't hoard money. They keep enough on hand to meet liquidity demands (anticipated outbound payments mostly) and invest (or spend) the rest.

The buck starts here. (So does e-gold.)

In an earlier post I made reference to the role of liability as it relates to monetary issuance. In this post I want to explain all that. To preview: money that is someone's liability - (potentially) good. Money that is no one's liability - not so good.

It is certainly possible for a monetary system to circulate money that is no one's liability. Under the late 19th century classical gold standard, for instance, some (eensy weensy) proportion of the money stock that actually circulated was gold coins. Simplifying a lot, one could say that these gold coins had 'intrinsic value' because the stuff they were made out of was valuable and the value didn't ultimately depend on the strength of anyone's balance sheet. They could be melted down and their market value as a commodity closely approximated their notional value. The value of gold coins therefore had hardly anything to do with liability, except liability as in a  warranty sense, where the imprimatur of the State (Caesar's image and inscription, if you will) afforded confidence that the gold was genuine.

Good riddance. A major point I want to make in this post is that lumps of gold were and are pretty pathetic when it comes to service as a transaction medium. On the other hand, liabilities that can be redeemed for lumps of gold are greatly superior.

How so?

Lets focus on what I will call monetization. Monetization is the conversion of assets that are a good store of value, but not adequately money-like... into money. I propose that monetization ideally entails passing the value of an asset portfolio across a balance sheet so that it can be rendered as numerically expressed liabilities.

How can this be good? Transmuting assets into liabilities introduces the taint of possible non-performance, of default, doesn't it? For purposes of the present discussion I'm going to gloss over the topic of default risk, saving it for detailed discussion in later posts, and concentrate instead on the benefits of monetization.

Consider US dollars. All US dollars are someone's liability. They all belong to someone (for whom they constitute assets) but they also assuredly live on the liability side of someone else's balance sheet. All of these dollar-denominated liabilities derive their value from the assets that are on the other side of the respective balance sheet. For now let's concentrate on those US dollars that constitute direct liabilities of the Federal Reserve, the base money of the US dollar. [In a later post I will explain base money, contrasting it to broad money].

The Fed holds a lovely portfolio of assets.  Valuable? You betcha! Money-like? Well...

The bulk of the assets held by the Fed are Treasury securities - currently about $790 billion of notes, bills and bonds, with another 24 billion of repos collateralized by treasury securities. Other major classes of assets held by the Fed include: gold (certificates) - $11 billion (carried on the balance sheet at $42/ oz.. Marked to market the gold would be valued at $176 billion, and ~ $39 billion of "other assets" mostly consisting of foreign currency and securities. [Note that to even describe the value of these various assets it is expedient to use the standardized unit, US dollars, that derives its value from them].

It would be hard to buy a a pizza with a treasury bond.

Treasury bonds, bills and notes come in a range of coupon rates and maturity dates, both of which parameters affect their market value from moment to moment. They also come in large chunks, never smaller than $1000 face value. Lets say you want a large pizza with pepperoni and banana peppers, hand tossed. You also plan on tipping the delivery guy 10% (cheapskate!). Suppose the pizza place elects to price a large, hand-tossed, two-topping pizza at 0.01 of a treasury bond so your total payment will add up to 0.011. This simply wouldn't work. Which bond, the 13% of 2012 or the 5.5% maturing in 2008? And how would the delivery guy make change?

The problem with a diverse asset portfolio such as that held by the Fed is that the assets are not sufficiently fungible or divisible for direct use as money. The passage though, by accounting means, across the balance sheet to the liability side enables the value to be rendered as pure numbers. One person's 12.748 is identical to someone else's 12.748 and with either version of 12.748 one could subtract  4.32 and consistently come up with a remainder of 8.428. Perform this math with credits and debits of account records on a database and you also achieve very efficient transferability.

Just as one Treasury security in the Fed's portfolio may differ from another in terms of market value, gold coins vary as well. Two may be of the same design and nominal weight but one of them may be old, worn and lighter than the less circulated one. One may be a fake - cleverly fashioned lead with gold plating. Some coins may have numismatic value higher than their melt value. Likewise, making change in a protocol where gold coins are the standard of value invariably entails the introduction of distortion and/or liability. "Your purchase totaled 0.743 of the value of the gold coin you gave me. Here are a combination of silver and copper coins that are accepted as constituting a value equal to the remainder of 0.257 of a gold coin". How can this combo of silver and copper coins always happen to be worth 0.257 of the standard gold coin? Uhh, because some financial institution somewhere takes on the liability of assuring that specified combinations of the silver and copper coins can always be traded in for the standard gold coins, even if the melt value of the silver etc. is less than the gold.

A remarkable monetary event of the 20th century was the nationalization of gold that Americans had deposited into the banking system. My point in referring to this is not to criticize that act but to highlight a truth that I will use later as I undertake to contrast e-gold with the gold standard. The reason most gold coins were sitting in bank vaults (and therefore vulnerable to confiscation) was because they were more useful monetarily as reserve assets backing bank deposits (liabilities) than as hand-to-hand money. Quite frankly the gold seized in the 1930's continues to serve very efficiently - the metal stays put in Ft. Knox  (conspiracy theories aside) but the liabilities partially/indirectly backed by it change hands with a velocity that is the very substance of GDP.

As we proceed, I hope to effectively articulate that the very best place for gold to serve a monetary role is in the vaults where it is held in allocated storage backing e-gold.

Better Money

The trademarked slogan "Better Money" is displayed on the homepage of the e-gold site. As best I recall, I came up with that one myself.  In making this claim my intent was (and is) to stimulate thinking and discourse along the lines of "In what way(s) can one brand of money be better than another?"

Thinking back, the logic for what I'm going to say next derived from an essay I read in '97 or '98 by Antal Fekete. I just now tracked it down again and it is still online. I haven't re-read it again in detail so I don't want to imply I agree with everything it says though on a quick scan it still looks pretty worthwhile.

Fekete described money as "a transmitter of value through space and time…with the least possible loss".  Transmission of value through time correlates to money's role as a store of value. Transmission through space is a reference to money's usefulness as a medium of indirect exchange, that is, a means of effecting payment. It looks to me like he meant or was emphasizing physical space, distance.

I prefer to think of the space part as transaction space, where value is conveyed from a payer to the recipient of payment, a change of ownership or entitlement.

So how can one brand of money be better than another?

Money that does not lose its exchange value over time - relative to goods and services, relative to other brands of money - would generally be better than money that did. I say generally because, as with most propositions, there are exceptions -circumstances where some participants in a money economy stand to gain from a decline in exchange value. There are also circumstances where an increase in exchange value can be disruptive, creating winners and losers. At some point I hope to expand on this. It ties into (among other topics) discussions on balance of payments, an area where e-gold or any globally oriented and designed currency can alter or invalidate existing paradigms in an interesting way.

e-gold's performance as a store of value perfectly mirrors physical gold since it is backed at all times by a 100% reserve. For present discussion purposes, suffice it to say that gold has a long track record of being ascribed exchange value and is unlikely to become worthless pending very significant advances in physics. [There is, by the way, a provision in the e-gold Account User Agreement that could be triggered in a circumstance where gold is no longer scarce in an economically meaningful way.]

How about the other dimension - preservation of value across transaction space?

In the long run, which I define as the post-transitional phase after e-gold has been embraced by mainstream institutions and is fully integrated into banking/payments/financial arrangements, many payment mechanisms will be unaffected. A credit card transaction will be a credit card transaction regardless of whether the payables or receivables are due in GBP, USD or AUG.

There are two payment scenarios though where e-gold can offer unique advantages, something better,  than what is possible with legacy brands or money.

The first case is direct acceptance of e-gold, as it currently exists, for payments over the Internet.There is not a single entity that currently accepts payment online who would not stand to reduce their costs and extend their market reach by adding e-gold as an alternative, additional option. e-gold is the only truly global payment platform. An online retail merchant can accept e-gold from anyone anywhere at extreme low direct cost, with immediate settlement and no risk of payment reversal (chargeback) even if the payer has no plastic, no credit history, even if they are unbanked altogether.

The direct cost issue is significant. Imagine a large retailer selling computers online and accepting plastic. The fee for accepting a credit card payment for a $2,000 computer may be higher than $20. The fee for receiving the same value in e-gold would be e-gold's maximum Spend fee - 5 gold cents, that is, 5 cg of e-gold, equivalent at current exchange rates to less than $1.20.

For the recipient of payments using a credit card intermediary such as PayPal or Neteller, the differential is even wider. The payment processing fees for these services must incorporate the full credit card fee (since that is how a payment is usually "funded") and add a further markup to cover their costs of adjudicating disputes such as when (as is not uncommon) they suck payments back from recipients. For every $1 million of payments processed via PayPal [eBay/PayPal uses the term Total Payment Volume or "TPV"], PayPal extracts over $38,000 in revenue. PayPal's revenue, of course, constitutes the expense of their users. With e-gold, in contrast, for every $1 million worth of velocity, the system deducts Spend fees totaling about $2,000 worth - one nineteenth as much. Both of these pale, though, compared to the vig that Neteller extracts,  $138,000 per every $1 million "receipted", more than 65 times the fees e-gold charges. Youch!

The second case where e-gold can afford benefits unachievable with any other currency relates to its function as a settlement platform. The truly unique and unprecedented characteristic of e-gold is not that it is digital, or tied to gold, or online. It is the fact that end users can directly access the settlement platform... without going through any financial intermediary. To tell this story though requires a clear understanding of the role of liability in monetary arrangements.