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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.
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