The past several years was been a time of transformation for the world of digital currency. In April of 2008, an interesting report on the industry surfaced. Unfortunately, the document was not published by Bryan Cave & Affiliates, Bloomberg or the American Banker. This report came from the U.S. Department of Justice report and it identified these popular digital currency dealers.

• GoldMoney, Mr. James Turk
• Pecunix, Simon Davis
• e-dinar, Dr. Habib (Zeno) Dahinden
• Liberty Reserve, Mr. Arthur Budovsky
• e-gold, Dr. Douglas Jackson
• e-bullion, Jim & Pamela Fayed
• 1MDC, Mr. J.P. May
• Phoenix Dollar, Mr. Gordon Hayes
• Liberty Dollar and e-Liberty dollar, Mr. Bernard von NotHaus

It has now been just over two years since that report was published and the global digital currency landscape is has been changing very rapidly. On one side of the industry, all of the the dealers which were identified in that report and were operating from the U.S. are now closed or have been rendered inactive. At the other end of the spectrum, those businesses which operated from foreign jurisdictions have all experienced dramatic growth. Here is a brief history of what occurred over the past 2-3 years along with a present day snapshot and some questions about what is ahead for the digital currency industry.

Money Transmitting

As far was we know, the operator of Phoenix Dollar, Mr. Gordon Hayes, voluntarily decided to close down his operation citing the hostile U.S. business environment. That closure occurred sometime in late 2007 or early 2008 and to the best of our knowledge Gordon has not encountered any legal issues. The other digital currency businesses which operated from the U.S. were not so lucky.

Not included in the DOJ list were another two popular U.S. digital currency providers, Crowne Gold and NetPay.tv. Both of these online payment systems were charged with operating as an unlicensed money transmitting business and eventually had to close.

In July 2008, the e-gold operators pleaded guilty to criminal charges relating to money laundering and the operation of an illegal money transmitting business. Millions of dollars were seized by the government during the criminal action plus the owners of the company were hit with a $300,000 fine at sentencing (no jail). Additionally, in October of 2009 e-gold’s related company Gold & Silver Reserve, Inc. of Melbourne, FL was fined $2.95 million for OFAC violations relating to Iranian Transactions Regulations which occurred between September 2003 and December 2006. While e-gold is technically still in business today (the web site is online and operating, precious metal is still in the accounts), there are no transactions occurring while they continue to seek the proper government licensing. It is encouraging to see that e-gold is attempting to operate as a fully licensed, registered and regulated U.S. company.

In August 2008 James Fayed of e-bullion was arrested on felony charges of operating as an unlicensed money transmitting business. The e-bullion web site went offline permanently and more than $24 million in gold bullion and cash was seized. His wife Pamela Fayed, had been murdered in July of that year, just one month earlier and currently James is also facing a list of very serious charges relating to the “murder for hire” of his late wife. The money transmitting charge against him was dropped but remains on the books against his Goldfinger Coin & Bullion/e-bullion business.

In April of 2007, a US court order forced e-gold to liquidate a large number of accounts with a total balance in the millions. The cash proceeds were seized by the U.S. Government. In this action, all of 1MDC operational accounts backed by e-gold and held in pooled storage under the 1MDC operator’s control, were closed. With all of the business’s financial assets confiscated, 1MDC became insolvent and eventually closed.

In November of 2007, across multiple locations in different states, FBI agents raided offices of the Liberty Dollar. Agents seized more than 2 tons of copper coins, 500 pounds of silver coins, more 3 pounds of gold and several ounces of platinum. A federal grand jury brought an indictment against von NotHaus and three others in May 2009. Bernard von NotHaus was arrested on June 6, 2009 along with two others and has been charged with a list of felonies relating to the Liberty Dollar business. On July 28, 2009, von NotHaus entered a plea of not guilty. He was released on bail but in July 2010 was jailed again for violating the terms of the Appearance Bond. The web site is now offline. Both Bernard and another primary Liberty Dollar dealer Mr. Kevin Innes are jailed awaiting trail.

In 2006, Liberty Reserve creator and digital currency heavyweight, Mr. Arthur Budovsky along with his close associate Mr. Vladimir Kats were arrested their Brooklyn apartments and charged with allegedly violating Article 13-B of New York State Banking Law.  Article 13-B states that it is a felony to transfer money without a license if one knowingly transmits $250,000 or more in a year from a single client in a year; $25,000 or more in 30 days; and $10,000 or more in a single transaction. Eight subsidiary businesses operated by the defendants have also been indicted and approximately $2 million dollars was seized. The indictment charges that the defendants operated an illegal money transmittal business that received and transmitted $4 million between January 1, 2006 and June 30, 2006. Manhattan District Attorney’s office stated that at least $30 million was illegally transmitted to accounts worldwide since the start of the defendants’ illegal activities. However, Liberty Reserve which is domiciled in a foreign jurisdiction and has their operations located outside of the U.S. suffered no set backs and the 2006 arrests did not slow down that operation.

What does not destroy me, makes me stronger. ~Friedrich Nietzsche

The 4 popular digital currency businesses listed in the DOJ report, which were operating from foreign business centers, suffered no problems and have all recorded a sharp increase in business over the past two years. Particularly the Digital Gold Currency companies.

GoldMoney, which is now one of the world’s largest providers and holders of physical bullion for retail investors, now stores more than US$1 billion of financial assets on behalf of its customers. This company has achieved a growth of 112% in less than 18 months. GoldMoney’s operating company is Net Transactions Limited which is located in Jersey, Channel Islands UK.

Pecunix which is a Panama corporation also operating outside of the U.S. has nearly doubled their gold reserves over the past 4 years.

Popular Liberty Reserve, which is now headquartered in Costa Rica, has been opening around 4,000 new accounts each week.

Based in the United Arab Emirates, e-dinar and its corresponding bullion business have experienced growth of almost 100% in their gold and silver redemptions between 2008 and 2009. (650 kg of gold and almost 5 tons of silver in 2009) After the fall of Lehman Brothers, e-dinar’s gold production increased by 400% as compared to the period preceding that bankruptcy. In 2010, e-dinar’s operator, Dr. Zeno Dahinden, expects to see an increase in physical redemptions to a level of around 25 million U.S. dollars.

Global digital currency leader Webmoney Transfer has also shown exceptional growth. Webmoney purses are used by retail customers everyday in more than 43 countries around the world and the online payment system has more than 12 million customer accounts. The daily number of transactions and the size of the transactions along with the number of account registrations in the system all have grown by roughly ten fold in the last decade. The chart showing Webmoney’s annual activity looks like a graphic of Mt. Everest.

He that will not apply new remedies must expect new evils; for time is the greatest innovator. ~Francis Bacon

While becoming more mainstream the leading digital currency companies have been growing larger, more transparent and more regulated. As the industry matures these top participants should continue to evolve and gain market share.

New smaller emerging pockets of the digital currency world which have no intentions of ever being properly operated, are now emerging in jurisdictions far from America’s regulated shores. Unfortunately, these cash hungry operators also lived through the past several years and bore witness to the U.S. government’s prosecutorial carnage. These “shadow banking” paper companies with no trails leading back to the actual owner/operators are popping up like weeds. Here is a sample of home made digital currency companies that arrived on the scene shortly after the e-gold prosecution.

Digital Currency Dealers version 2.0

• Procurrex (2009) http://www.procurrex.com/ A paper company reportedly based in the British Virgin Islands. Attempting to describe the ease of cross border transactions offered by the company, their web site reads, ““Hi! I am Mr.Border!…I don’t fear of you, my name is PROCURREX.”.
• ECU Money (2008) http://ecumoney.com/ At one time claiming to be licensed as a New Zealand Bank, the web site now shows that ECUmoney Limited is a Republic of Nauru limited company.
• EuroGoldCash (2008) http://www.eurogoldcash.com/ Owned and operated by Big Brain International S.A., a Panamanian corporation. Descriptive text on the company’s web site reads, “No verifications, no questions – You can send a payment anonymously”, which seems to conflict with the boilerplate AML policy page listed on the web site.
• Global Digital Pay (2008) http://www.globaldigitalpay.com/ Owned by Digital Trade Network Ltd, a British Virgin Islands paper company and the trail ends there.
• Numox Ltd. (live in 2008) http://www.numox.com/ Another paper company registered in the Republic of Seychelles. Home made Numox boasts a “real-time global payment environment” direct from the hidden operator’s home town in southwestern Slovakia.
• Perfect Money (2007) http://perfectmoney.com/ Yet, another paper company, Perfect Money Finance Corp. is registered in the Republic of Panama. This company’s operators obviously have roots in Russia. Their business even boasts several exchange agents in the Islamic Republic of Iran.

None of these version 2.0 digital currency companies have any kind of useful KYC program or employ any type of database screening. None of the companies use any kind of AML software, have any reporting requirements for suspicious activity or provide any financial data to banking or tax authorities.

Are these companies and the dozens of others like them a new wave of “free trade advocates” tired of high banking fees? No, these are very dangerous fly by night paper companies which provide payment services to online scams, ponzi schemes, crooks and have the alarming potential to engage in financial transactions on behalf of some extremely bad people.

Much like experiencing a visit from the classic “Ghost of Christmas Yet To Come” our young digital currency industry has awoken from it’s slumber. A future, filled with these version 2.0 paper companies brings this quote to mind “I fear you more than any spectre I have seen.”

Source: http://www.e-comlaw.com

@2008 UK Silver Investment Summit