e-gold

Douglas Jackson, a co-founder of e-gold, was an oncologist from FloridaFloridaFlorida is a U.S. state occupying mainly the Florida peninsula, with its capital at Tallahassee; its most populous city is Jacksonville. It entered the Union on March 3, 1845, as the 27th state, and had a population of 21,538,187 in the 2020 census (April 1, 2020).Open the full entry who had never taken an economics course before he started e-gold. In 1994 he came across a Thomas Sowell article in ForbesForbesForbes is an American business media brand that began with Forbes magazine, founded by B.C. Forbes in 1917. It is known for rankings such as the Forbes 400, the World’s Billionaires list and 30 Under 30, and operates Forbes.com, ForbesLive events and licensed editions in 81 countries. Since 2014 a majority stake has been held by the Hong Kong investment group Integrated Whale Media; a 2021 plan to list on the New York Stock Exchange through a special purpose acquisition company was terminated in 2022. It is headquartered in Jersey City, New Jersey.Open the full entry marking the 50th anniversary of Friedrich Hayek’s The Road to Serfdom; his interest in Hayek then led him to a Laissez Faire Books catalogue, and he set himself the goal of a universally usable, cheap and easy way to exchange value across the globe.⁠[1][2]

e-gold began offering its digital currency in 1996. The indictment names Douglas L. Jackson and Barry K. Downey as co-founders of E-Gold, Ltd. and Gold & Silver Reserve, Inc. (GSR); E-Gold, Ltd., the issuer of e-gold, was incorporated in St. Kitts and Nevis, and GSR operated e-gold and offered an exchange service called OmniPay.⁠[2]

A user opened an account, converted national currency into e-gold through a digital currency exchanger, used the e-gold to buy goods, pay for services or transfer funds, and could later exchange it back into national currency; e-gold charged a fee on each transfer between accounts and a monthly storage fee for the gold bullion and other precious metals said to back e-gold and to be stored in Europe. Opening an account required only an email address.⁠[3][2]

Users of e-gold transferred ownership of digital tokens backed in full by physical gold. The gold was either received from customers in bailment or bought by Jackson on the gold market; it was first kept in his office and later held as bars in vaults in London and Dubai. Fees began at a flat 1 percent; for a time, Jackson says, they were capped at the equivalent of 50 cents, and they later moved to a sliding scale whose maximum, for transactions above about $200, was a gold equivalent of about $2 at the time; a referral program paid 10 percent of the company’s transaction fee for each new customer brought in.⁠[1]

e-gold began to attract media attention around 1999. Jackson recalled that by February 2000 e-gold had processed only 50,000 payments, that the number doubled two months later and that it passed one million by October; he said that “2000 was the breakout year, when exponential growth was clearly evident.”⁠[1]

In 2000 the e-gold project split its functions between two companies: e-gold ran the accounts and earned income only from user fees, and Gold & Silver Reserve exchanged national currency for e-gold and could expand or contract the supply of e-gold.⁠[1]

The indictment states that on November 25, 2005, the e-gold website listed 2,500,942 then-existing e-gold accounts and showed, for the preceding 24 hours, 2,932 new accounts, 33,179 users accessing their accounts, 38,843 spends and $6,362,572.88 in velocity.⁠[2]

In December 2005 the United States Secret Service and the Federal Bureau of InvestigationFederal Bureau of InvestigationThe Federal Bureau of Investigation (FBI) is the federal investigative agency of the U.S. Department of Justice. It grew out of a force of special agents organized by Attorney General Charles J. Bonaparte in 1908, has used its present name since 1935 and is headquartered in Washington, D.C.Open the full entry (FBI) raided Jackson’s home and offices and froze the company’s bank accounts; by then the gold had been bailed overseas and was held in trust.⁠[1]

Jackson later accused the Secret Service of misleading a federal magistrate judge in December 2005 in order to obtain search warrants. Reason wrote that Judge John M. Facciola, who signed the initial warrants, complained at a later hearing that he had been misled into believing he was granting warrants to break up some sort of child pornography ring.⁠[4][1]

Jackson objected to blog posts by the Dark Reading writer Larry Greenemeier that, from January 2006, linked e-gold to the hacker economy: he said that e-gold “in no manner condones persons or organizations attempting to use e-gold to support criminal acts,” that it restricted suspect accounts and that it had “a long history of cooperation” with law enforcement agencies; on February 8, 2007, he said that e-gold had “broke the back of two communities (CP and carders) that had infested e-gold.”⁠[5]

On April 24, 2007, a federal grand jury of the United States District Court for the District of Columbia indicted E-Gold, Ltd., Gold & Silver Reserve, Inc. and their owners Douglas L. Jackson (of Satellite Beach, Florida), Reid A. Jackson (of Melbourne, Florida) and Barry K. Downey (of Woodbine, MarylandMarylandMaryland is a Middle Atlantic state of the United States, deeply indented by Chesapeake Bay and bordered by Pennsylvania, Delaware, Virginia, the District of Columbia and West Virginia; its capital is Annapolis and its largest city is Baltimore. One of the original 13 states, it ratified the U.S. Constitution on April 28, 1788, as the seventh state to do so, and had a population of 6,177,224 in the 2020 census (April 1, 2020).Open the full entry). Each defendant was charged with four counts: conspiracy to launder monetary instruments, conspiracy to operate an unlicensed money transmitting business, operating an unlicensed money transmitting business under federal law, and money transmission without a license under District of Columbia law; the money laundering conspiracy carried a maximum of 20 years in prison and each of the other counts a maximum of five years.⁠[6][2]

The indictment alleged that an e-gold account could be opened with only an email address, that e-gold was widely used by investment scammers, identity thieves and sellers of online child pornography, and that the defendants processed transfers knowing the funds were criminal proceeds, in conduct running from 1999 through December 2005. It also alleged that the e-gold operation was located entirely in Melbourne, Florida, with all account information kept there, but routed law enforcement requests to a Bermuda law firm so that it appeared to be offshore, and that about $145,535,374.26 in e-gold moved into and out of the listed accounts.⁠[6][2]

Before the indictment the Justice Department obtained a restraining order against the defendants to prevent the dissipation of assets and 24 seizure warrants covering more than 58 accounts; the order did not prevent the e-gold operation, once approval had been received, from using existing funds or selling precious metals to meet requests from customers of accounts that had not been seized to exchange e-gold into national currency. The indictment’s forfeiture notice covered all precious metals, including gold, silver, platinum and palladium, that backed e-gold, wherever located. The Secret Service led the two-and-a-half-year investigation with help from the Internal Revenue Service and the FBI; the Justice Department said the indictment followed an investigation by the Secret Service’s Orlando Field Office. The case was prosecuted by the U.S. Attorney’s Office for the District of Columbia and the Computer Crime and Intellectual Property Section of the Justice Department’s Criminal Division, with assistance from the Criminal Division’s Child Exploitation and Obscenity Section and Asset Forfeiture and Money Laundering Section.⁠[6][2][4][5]

e-gold denied all the charges and accused prosecutors of fabricating testimony. In a 1,900-word open letter published online, Douglas Jackson accused the Secret Service of seriously bungling the case and wrote that “the government knows full well that their allegations are false”; he said that on child pornography payments e-gold was “the most effective of all online payment systems in detecting and interdicting abuse,” that the Secret Service had “made a horrible mistake in its attack on the e-gold system,” and that the Secret Service had repeatedly made defamatory claims in the media that e-gold was “anonymous, untraceable, and inaccessible to US law enforcement.”⁠[4]

Jeffrey A. Taylor, U.S. Attorney for the District of Columbia, and others filed a civil action in rem for forfeiture in the district court (the complaint’s verification is dated July 2007) against the e-gold held in three accounts that the e-gold system recorded as opened by Legisi Holdings LLC. The complaint states that the seizure warrants were served at GSR’s offices on or about April 26 and May 4, 2007, that GSR said it had to sell gold bullion reserves to convert the e-gold, and that the converted value, $1,769,264.19, was held by the U.S. Department of the Treasury. It also states that neither E-Gold, Ltd., Gold & Silver Reserve, Inc. nor OmniPay had a license to operate a money transmitting business; OmniPay was the operation’s own exchanger, offering InExchange, M2M and OutExchange services.⁠[7]

The defendants moved to dismiss Count Two (conspiracy to operate an unlicensed money transmitting business), Count Three (operating an unlicensed money transmitting business under 18 U.S.C. § 1960) and Count Four (D.C. Code § 26-1002), arguing that Section 1960 applies only to money transmitting businesses that engage in cash transactions, whereas the indictment alleged only that e-gold transferred e-gold between accounts and that GSR dealt in wires; they also argued that Section 1960 was vague or ambiguous so that the rule of lenity applied. They did not move to dismiss Count One, the money laundering conspiracy.⁠[3]

On May 8, 2008, U.S. District Judge Rosemary M. Collyer denied the motions in a memorandum opinion: the court held that Section 1960 “is not limited to cash transactions” and that transferring funds on behalf of the public by wire made the defendants a money transmitting business; it wrote that “The words of the statute are clear” and that “The Court imposes no novel construction upon Defendants.”⁠[3]

In June 2008 the National Drug Intelligence Center of the U.S. Department of Justice published the report “Money Laundering in Digital Currencies,” which listed the e-gold indictment among its law enforcement case examples. The report states that most digital currencies are denominated in internationally recognized weights of precious metals, that some issuers allow account balances to be redeemed in physical metal, which launderers could use to obtain metals without the paper trail of the commodities market, and that many such programs in the United States consider themselves not subject to any existing federal or state regulatory structure.⁠[8]

On July 21, 2008, the Justice Department announced that E-Gold, Ltd. and Gold & Silver Reserve, Inc. had each pleaded guilty to conspiracy to commit money laundering and conspiracy to operate an unlicensed money transmitting business, facing a maximum fine of $3.7 million, and had agreed to a $1.75 million forfeiture money judgment for which they were jointly and severally liable. Douglas Jackson, 51, of Melbourne, Florida, e-gold’s principal director and GSR’s chief executive, pleaded guilty to money laundering conspiracy and to operating an unlicensed money transmitting business, carrying maximum penalties of 20 years and a $500,000 fine and of five years and a $250,000 fine respectively; Barry Downey, 48, of Baltimore, and Reid Jackson, 45, of Melbourne, each pleaded guilty to a felony violation of District of Columbia law for operating a money transmitting business without a license, each facing up to five years in prison and a $25,000 fine. Sentencing was set for November 20, 2008.⁠[9][10]

Under the plea agreements the two companies agreed to register as money services businesses as federal and state law required, to set up a money laundering detection program with verified customer identification and suspicious activity reporting under the supervision of the Internal Revenue Service’s Bank Secrecy Act division, and to hire a compliance consultant and an auditor to verify the claim that all transactions were fully backed by gold bullion.⁠[9][10]

The Justice Department stated that the e-gold operation was neither registered federally nor licensed in the District of Columbia, that it opened accounts without verifying identity although it knew some accounts were used for crimes including child exploitation, investment scams, credit card fraud and identity theft, that it used inexperienced staff to monitor hundreds of thousands of accounts, that it let users move criminal proceeds between accounts, and that its user agreement did not prohibit criminal use. The Register wrote that the 2007 indictment alleged that e-gold had marketed itself as being outside the reach of U.S. law enforcement, had let customers open accounts under names such as “Mickey Mouse” and “No Name,” and that employees had on numerous occasions made notations such as “child porn,” “Scammer” and “CC fraud” in database records.⁠[9][11]

In the week of the pleas Douglas Jackson attributed the abuse, in a blog post, to “design flaws in the account creation and provisioning logic,” promised an overhaul including a temporary suspension of new accounts, and wrote: “We are confident that a regulated e-gold rebuilt to a more systematic specification will be less hospitable to criminals.” Dan Goodin of The Register wrote that this reversed the stance Jackson had taken after the charges, when he strongly denied all of them.⁠[11]

In November 2008 U.S. District Judge Rosemary Collyer sentenced the three directors without prison terms: each received three years’ probation and 300 hours of community service; Douglas Jackson was fined $200 (after his lawyer argued that he was nearly broke), Barry Downey and Reid Jackson were each fined $2,500, and all three had to obtain licences to run money transfer businesses in states that require them. e-gold and Gold & Silver Reserve were each fined $300,000, with an initial $10,000 payment and the remaining payments due to begin only the following May. The Register wrote that Collyer found the three men deserved leniency because they had not set out to serve criminals.⁠[12]

Reason wrote that Douglas Jackson was sentenced to 300 hours of community service plus a 36-month supervised release that included wearing an ankle bracelet, six months of it pure house arrest. Collyer wrote that there was “no doubt Dr. Jackson has respect for law” and that “there is no reason to shut down e-gold and G&SR, and every reason to have them come into legal compliance.”⁠[1]

Prosecutors called the libertarian philosophy behind e-gold irrelevant and argued that the directors must have known that criminals were using the service; during the prosecution, e-gold’s supporters argued that the government had targeted it because it allowed nearly anonymous transfers. At the time of sentencing e-gold had registered with FinCEN and was registering with state regulators; the service remained open but had stopped accepting new accounts while it developed a stricter registration process, and it had added a customer identification program requiring tax details, dates of birth, addresses and contact points.⁠[12]

In 2009 e-gold ceased operations, after losing over $4 million to fines and takings and with client holdings tied up in what would be years-long unfreezing negotiations with the federal government. Jackson later said: “We weren’t shut down, though we did eventually have to close down.”⁠[1]

Under its plea agreement E-Gold, Ltd. had to identify customer accounts holding funds traceable to criminal activity; E-Gold, Ltd. and the Secret Service identified 12,869 accounts holding funds from offenses including child pornography, credit card fraud, identity theft, investment fraud and the online sale of stolen or nonexistent goods. In 2011 the government filed a civil forfeiture action against the value of those accounts in the U.S. District Court for the District of Maryland and notified the 12,869 registered account holders of their right to contest it; only 22 did so. Some recipients of the notice said they were identity-theft victims with no connection to E-Gold, Ltd., and the true owners of those accounts remained unknown.⁠[13]

In December 2012 U.S. District Judge Ellen L. Hollander granted the forfeiture of over $10.8 million, the value of the 12,869 accounts, and ordered $12,287 returned to the 22 claimants whose claims the government did not contest. The forfeiture was announced by Rod J. Rosenstein, U.S. Attorney for the District of Maryland, and David Beach, Special Agent in Charge of the Secret Service; the release stated that the government would now begin returning the remaining e-gold account funds, estimated at tens of millions of dollars, to bona fide account holders who could verify their ownership.⁠[13]

In April 2014 Judge Hollander ordered the forfeiture of $45,816,817.84, the remainder of over $86.3 million in E-Gold, Ltd. accounts that the government had seized in 2011, bringing the total forfeited, with the 2012 order, to over $56.6 million. She also ordered $295,642 returned to bona fide account holders who had verified their ownership; the court had earlier ordered over $19,947,313.91 returned to identified account holders.⁠[14]

Jackson says that clients of the original e-gold who eventually got their money back out of the system received anywhere from 200 percent to 500 percent more dollar value than they had put in, thanks to the rise in the price of gold.⁠[1]

In 2020 former e-gold directors petitioned the federal court in the District of Columbia for a writ of coram nobis, asking it to correct the original judgment because of a fundamental error. They alleged that the federal government, so that it “could make an example” of e-gold, had concealed a 2006 review by Florida’s Office of Financial Regulation which concluded that e-gold was not a money transmitter under state law because its gold-based asset was closer to a commodity than to a fiat currency, and they argued that the judgment would have been substantially different had they had access to it. CoinDeskCoinDeskCoinDesk is a cryptocurrency media, events, index, and data company founded in 2013 and headquartered in New York. Its businesses include the CoinDesk news website, the annual crypto industry conference Consensus, and the CoinDesk Indices index business. In November 2023, the digital asset exchange Bullish acquired CoinDesk from Digital Currency Group, and CoinDesk has since operated as an independent subsidiary of Bullish.Open the full entry described the petition on July 3, 2020; Reason wrote that Jackson filed it in July 2020 and quoted the 2006 draft opinion as finding “no evidence that e-gold is money of the United States or of any other country which is designated as legal tender.” When Reason published its article in March 2021, no decision had been issued.⁠[15][1]

As of March 2021 Douglas Jackson and his partner Roger Bass, a former IntuitIntuitIntuit is an American financial software company founded in 1983 by Scott Cook and Tom Proulx. It began with the personal finance program Quicken and now offers TurboTax, Credit Karma, QuickBooks and Mailchimp, among other products. It is headquartered in Mountain View, California, and trades on Nasdaq as INTU. NVIDIA director Suzanne Nora Johnson was long a director and chair of its board.Open the full entry executive, were developing an “e-gold 2.0” company called Global Standard that, like its predecessor, would offer a digital currency backed by physical gold; Jackson said that, as matters stood, an e-gold successor with him as a control party was “effectively precluded from offering our services in the U.S. market.”⁠[1]

The court’s 2008 memorandum opinion sets out the superseding indictment’s allegations that Douglas L. Jackson was co-founder, chairman and chief executive of e-gold and GSR and majority owner of GSR; that Barry K. Downey was co-founder, secretary and director and owned 20 percent of GSR; that Reid A. Jackson was managing director of both companies and owned 3 percent of GSR; and that the companies had employees under the three men’s supervision. Reid Jackson and Douglas Jackson are brothers.⁠[3][12]

The Justice Department’s plea release lists the two websites used by the operation: e-gold.com and OmniPay.com.⁠[9]

Reason wrote that e-gold served over half a million customers and did billions of dollars’ worth of business over its run, and that at its zenith it was backed by 3.8 tons of physical gold. In a July 2020 online essay written for a public comment process of the Financial Stability Board, Jackson wrote that by 2006 e-gold served active customers in over a hundred countries, settled about $3 billion (U.S.-dollar equivalent) a year in peer-to-peer payments and had gold reserves larger than those then backing the Canadian dollar or the Mexican peso. CoinDesk wrote that at its peak e-gold held about $85 million in gold. The Register wrote in November 2008 that e-gold had an estimated three million users, about a quarter of whom actively used their accounts, and that at its peak about $5 million moved through the service in a single day.⁠[1][15][12]

Jackson volunteered information on suspected criminal users to federal agencies, most notably the U.S. Postal Service; Reason quoted Wired as saying that e-gold had become “one of law enforcement’s most productive honey pots,” providing information that helped lead to the arrest and conviction of some of the web’s most wanted credit card thieves and hackers.⁠[1]

e-gold predates BitcoinBitcoinBitcoin (common symbol BTC) is an open peer-to-peer electronic cash protocol, network, and native digital asset. Full nodes independently verify transactions and blocks according to the consensus rules; transactions are recorded as UTXOs, and blocks are organized into a public ledger through proof of work. Bitcoin is not issued or managed by any single institution, but using, holding in custody, and trading it still involve key, privacy, market, and legal risks.Open the full entry by more than a decade; Reason called it “the world’s first truly successful digital currency.” The 2021 article carried the subtitle “Before the feds feared bitcoin, they feared e-gold.” Douglas Jackson argued: “Our exit afforded the foundational myth bitcoin started with, that ‘look what happened to e-gold!’” He also argued that Bitcoin is too slow and too expensive, essentially unbacked, and consumes too many resources.⁠[1]

CoinDesk wrote that the e-gold case effectively extended the U.S. definition of “money transmitter” to any system that stored and transferred value, so that many crypto businesses have had to be regulated as money transmitters at the state level to operate legally in the United States.⁠[15]

On July 24, 2020, the U.S. District Court for the District of Columbia denied the motion to dismiss the indictment in United States v. Harmon, the case against Larry Dean Harmon, operator of the Bitcoin tumbler Helix, holding that “bitcoin qualifies as money under the MTA,” the District of Columbia’s Money Transmitters Act. The court’s April 16, 2021 opinion in the same case states that six weeks after that denial the government provided notice of an exhibit to a post-conviction petition for a writ of error coram nobis filed in United States v. e-Gold Ltd., Criminal Action No. 07-cr-00109.⁠[16][17]