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.
