First eBay added, and then removed, ‘Virtual Currency’ to its categories of items for sale.

But even more interestingly eBay appears to have produced a video about Bitcoin which they posted to their blog.  The post is titled What’s the Deal with Bitcoins anyway? And curiously is presented without a date, seems to be only accessible directly via the URL and with this disclaimer at the top, “*This video was created for informational and educational purposes.”

The video does present Bitcoin in an unbiased and educational fashion.

The post and the video asks “What do you think? Are bitcoins the real deal?” however, comments are not allowed. … What’s the deal with eBay and Bitcoin?

DATA, or the Digital Asset Transfer Authority’s founding members include the CEO’s of leading Bitcoin businesses such as BitInstant, BitPay, & BitStamp as well as the CEO’s of other digital currency businesses including Ripple’s OpenCoin and Ven.

However, the groups stated goals seem sure to heat up the regulation debate.

From DATA’s official announcement …

To reach this potential, to inspire confidence in the services we offer, and to ensure fair and responsible treatment of consumers and merchants, we believe our industry must evolve in compliance with law and regulation. We must work proactively with regulators and policymakers to adapt their requirements to our technologies and business models. We must develop and implement common risk management and compliance standards that address the public policy concerns associated with our businesses. And our firms must build risk management and compliance programs that meet those standards.

This would seem to suggest a willingness to alter software protocols to appease authorities. Many in the Bitcoin community, such as the Bitcoin 2 authors, have been fearing such proposals and the possibility that they will lead to Bitcoin being watered down and absorbed by the current financial establishment.

For example, an elimination of Bitcoin irreversibility which could transform it into simply a PayPay 2.0, or as the Bitcoin Foundation’s Jon Matonis put it “Govcoin”.  In a new post for American Banker, Don’t Let Bitcoin Morph into Govcoin, Jon expresses his concern with an over eagerness of industry organizations to appease regulators.

 Although SROs can be extremely beneficial in advancing an industry, clear political lines must be drawn to mitigate the risk that an SRO would be co-opted by government and this is where it gets tricky. To avoid more direct and onerous regulations, the government may ask the SRO for certain guidelines or rules to be incorporated among its membership. If such modifications are objectionable to the majority of industry participants, the SRO faces the dilemma of challenging the authorities and risking its relevance or being complicit in harmful and over-reaching backdoor legislation.

The path of complicity ultimately leads to an SRO that has strayed from its core constituency and could be absorbed by the government as a direct regulatory body. The SRO should periodically conduct a reality check by remembering Voltaire’s words: “To learn who rules over you, simply find out who you are not allowed to criticize.”

In the late 90’s and early 2000’s, e-gold was the industry leader.  As one of the world’s first successful online payment systems e-gold was a pioneer using many now standard practices such as SSL connections and API’s.  Brought down by a run in with regulators in 2008 the e-gold story is required reading for anyone involved in the digital currency world.

Sent in by Wikipedia editor Cadwallader, below is a thoroug review of the e-gold story.

e-gold (deliberately spelled with a lower-case ‘e’) was a digital gold currency operated by Gold & Silver Reserve Inc. under e-gold Ltd. that allowed users to open an account on their web site denominated in grams of gold (or other precious metals) and the ability to make instant transfers of value to other e-gold accounts. The company was founded in 1996 and had grown to five million users by 2009, when transfers were suspended due to legal issues. At its peak in 2008 e-gold was processing more than USD 2 billion worth of precious metals transactions per year ^[1], on a monetary base of only USD 20 million worth of gold (~2.54 metric tonnes) ^[2], indicating an extremely high monetary turnover (velocity) of about 100 times per year (similar to M-PESA). e-gold Ltd. was incorporated in Nevis, Saint Kitts and Nevis with operations conducted out of Florida, USA.

Beginnings

e-gold was founded by oncologist Douglass Jackson and attorney Barry Downey in 1996. The pair originally backed the services accounts with gold coins stored in a bank safety deposit box in Melbourne, Florida.

The company, which was launched two years before PayPal and had obtained over one million user accounts by 2002, and was the first successful digital currency system to gain a widespread user base and merchant adoption. It was also the first website or payment service to offer an Application Program Interface (API) enabling other services and e-commerce transactions to be built on top of it. ^[3] e-gold was used by both individuals and merchants for services ranging from metals trading, online auctions, to online casinos, and a donation platform. By 2001 several dozen companies and individuals began offering third party exchange services between national currencies and e-gold, allowing e-gold to become a company with an international user base.

e-gold, which allowed transactions as small as one ten-thousandth of a gram of gold, was also the world’s only successful micro-payment system. The company’s payment statistics were published live and showed hundreds of thousands of micro-transactions were being made daily by computer programs using the API.

Governance

e-gold was unique at the time in that they created the “e-gold Special Purpose Trust” which held title to the physical bullion on behalf of the users. ^[4] They also created a real-time statistical reports page ^[5] that showed the total holdings of each metal in the trust account, list of gold bars with serial numbers, the total number of accounts, as well as the total number and value of transactions in the previous 24 hours. This transparency enhanced e-gold’s reputation and popularity with their users, and also enabled many observations to be made about how e-gold was being used.

Imitators

e-gold’s market success by 2001 spawned a wave of imitators. These included Goldmoney.com, e-Bullion.com, CrowneGold.com, Pecunix.com, INTgold.com, and several others including a multi-million dollar Ponzi Scheme with no gold at all called OSgold.com. ^[6]

Crime Wave

e-gold’s early success also proved to be the cause of its demise. e-gold’s store of value and large user base made it an early target of financial malware and phishing scams by increasingly organized criminal syndicates in Eastern Europe. The first known phishing attack against a financial institution was made against members of the e-gold mailing list in June 2001. ^[7] The technique was refined with attacks against the digital gold systems like e-gold and later used to attack other financial institutions starting in 2003.

The Rise of the Romanian Hackers

With no effective means of verifying the identity of account holders, e-gold began to suffer from an increasing rate of criminal activity mainly perpetrated by Eastern European hackers against its users. In addition to phishing, the attackers made widespread use of flaws in the Microsoft operating systems and Internet Explorer web browser to collect account details from millions of computers to compromise e-gold accounts. ^[8]

Jackson’s theory was that e-gold is a book-entry system with account histories, making it simple to conduct an investigation to track down misappropriated funds after the fact. ^[9] However, the public perception, similar to that of Bitcoin today, was that e-gold accounts were anonymous. (That perception was erroneous, as is the similar belief that Bitcoin is anonymous.) e-gold accounts were “pseudonymous”, ^[10] allowing the creator of the account to use any name or label he wished to use. However, the account history was permanent, and e-gold could in most cases correlate a person’s real identity to an e-gold account when they funded or liquidated an account with G&SR, e-gold primary exchanger to US Dollars.

Unfortunately, e-gold users did not enjoy the same ability to determine the real identity of the owner of an e-gold account, and this is what facilitated the explosion in auction fraud and other types of identity fraud using e-gold accounts.

Fourteen Flavors of Fraud

Various fraud artists from Western countries were also able to take advantage of the e-gold system as a means of funding their schemes, enabling for the first time in history, international ponzi schemes, calling themselves “High Yield Investment Programs” or HYIPs. ^[11] DGC Magazine Editor Mark Herpel identified the probable source of e-gold’s mysterious micropayments as automated interest payments made by ponzi schemes to their tens of thousands of members. ^[12]

Perpetrators of auction fraud on e-bay who were based in Eastern Europe and would sell fake or non-existent items on the site. These criminal syndicates preferred their victims to pay in e-gold because it was the fastest and easiest way for them to move the funds overseas. ^[13]

The wave of online crime that engulfed e-gold led to a steady stream of complaints to government authorities by defrauded account holders, who often did not understand the difference between e-gold and the fraudulent person or company that encouraged them to open an e-gold account and wire money to fund it. ^[14]

The Systemic Problem

As an online transactions system with exchange agents worldwide, e-gold enabled criminals and hackers in Eastern Europe the ability to quickly and easily move money from victims in America back to the country from which the attacks were originating. Several of the cyber crime gangs that plagued and used e-gold were based in Râmnicu Vâlcea, Romania. ^[15]

e-gold was unknowingly part of a larger systemic problem with the banking system. The banking and credit system in the United states were not designed for a digital environment, and are therefore fundamentally insecure and highly vulnerable to identity theft and check fraud, as well as trust based attacks such as phishing. The willingness of credit card companies to allow people to apply for a card without being identified in person enabled the massive growth of identity theft. ^[16] (Ironically, not verifying the identities of account holders would be one of the main criticisms raised against e-gold.)

The Internet made it possible for organized crime networks outside the United States to used strategically placed members in financial institutions in the United States to perpetrate billions of dollars worth of financial crimes, primarily through identity theft. ^[17] The money from these crimes then needed to be laundered and transferred back to the headquarters of the perpetrators in Eastern Europe. This is normally done through bank wires from big american banks, such as Bank of America, ^[18] and traditional money transmitters like Western Union. ^[19] However, e-gold and other digital gold systems, with their low cost instant clearing payments and international network of exchange agents, provided a much faster and cheaper conduit for getting the already laundered money back home. Therefore, certain crime gangs started using the digital golds as the return conduit for part of their operations.

The Public Relations Problem

In 2001 Goldmoney.com was founded by James Turk and became a competitor to e-gold. Turk, who had filed patents on a digital gold payment system in 1993 but launched his system five years behind e-gold, took a two-pronged strategy to outmaneuver e-gold. First, he sued e-gold for patent infringement. ^[20] Though this action failed in court, Turk had successfully positioned himself in the market as the “inventor of digital gold” even though Jackson was the one who had taught himself how to program and written the first version of e-gold himself. (Turk sat on his patents for several years, and eventually hired a software company to build his “invention” because he is not a computer programmer.)

Second, Turk recognized the e-gold crime problem and began positioning Goldmoney as the “white glove” gold system that required identity verification to open accounts, versus e-gold as the irresponsible “wild west” operator riddled with crime. ^[21] This marketing strategy worked very effectively for Goldmoney as it drove e-gold founder Jackson to entrench himself in defense of his libertarian principle that the user is responsible for his behavior and the courts are the way for disputes involving allegations of fraud to be resolved. Ten years later, e-gold would be out of business, shut down by the US government, but Goldmoney would be sitting on USD 1 billion worth of gold and millions of users. ^{[22] [23]}

While Goldmoney succeeded in becoming the world’s largest gold storage system, and held four patents for a gold payment system, ^[24] they were never able to replicate e-gold’s success as a payment system, because they were so fearful of replicating e-gold’s success as a magnet for criminal activity. Goldmoney prohibited the development of independent exchange agents, which greatly limited their global reach. In January 2012 Goldmoney turned off the ability to make payments from one account to another citing “insignificant” demand for P2P metal transactions as not justifying the high cost of regulatory compliance. ^[25] It was e-gold’s usefulness and ease for payments combined with their international network of exchange agents that made it a magnet for crime.

There were early reports where e-gold had actively helped to catch and collar cyber criminals, such as the one who stole Cisco Systems’ firewall code and offered it for sale to be paid in e-gold. ^[26] And Jackson claimed to have “aided 300 investigations and reported 3,000 suspected kiddie porn buyers to the National Center for Missing and Exploited Children.” ^[27] However, Turk’s PR strategy was highly successful, as first Goldmoney, and then federal law enforcement agencies began to characterize e-gold as the payment system of choice for criminals, terrorists and child pornographers. ^[28] (In reality, the US Dollar is by far the most popular transaction medium for criminals of all types. ^[29] US Banks are the most popular institutions for money laundering, on the order of USD 500 Billion per year, dwarfing e-gold’s transaction volume by two orders of magnitude. ^[30] )

Criminal Prosecution

The Changing Definition of a Money Transmitter

The USA Patriot Act, passed in the wake of the 9/11 terrorist hijackings more than five years after e-gold had been launched, made it a federal crime to operate a money transmitter business without a state money transmitter license in any state that required such a license. At the time a “money transmitter” was in most states defined as a business that cashed checks or accepted cash remittances to send from one person to another person across international borders, such as Western Union or MoneyGram. For example, prior to 2010, California regulated money transmitters under the “Transmission of Money Abroad Law”. ^[31] One of e-gold’s competitors, the e-Bullion company, applied for a money transmitter license from the State of California in 2002, but was informed by the State of California that their business which dealt in gold accounts did not fall under the state’s definition of a money transmitter.

In 2004 G&SR (the parent company of e-gold) requested that the US Treasury Department conduct a compliance examination in order to clarify what regulations, if any, e-gold fell under. ^[32] The Treasury issued a report on January 11, 2006 confirming that e-gold accounts were excluded from the definition of “currency” under the USC and CFR definitions. The Treasury did not want e-gold to be acknowledged as money, which made it impossible to obtain a money transmitter license.

However, in its actions from 2006-2008 the U.S. Treasury Department in conjunction with the DOJ stretched the definition of money transmitter in the USA Patriot Act to include any system that allows transfer of any kind of value from one person to another, not merely national currency or cash. Using this new interpretation they then proceeded to prosecute the USA-based gold systems, e-gold (and later e-Bullion) under the USA Patriot Act for not having money transmitter licenses, even though these companies had previously been cooperating with regulatory authorities and told they did not fall under the definition of money transmitter. (Although the charge of not having a money transmitter license was eventually dropped against e-bullion.) Several years later FINCEN further expanded this definition to apply to foreign companies allowing US persons to open accounts, which forced Jersey based Goldmoney.com to suspend the ability to transfer value from one holder to another in December 2011. ^[33]

e-gold The Black Sheep

e-gold was in many ways the philosophical predecessor of Bitcoin. Unlike PayPal, which ran on top the USA banking system and therefore posed no competitive threat to the banking system, e-gold was a maverick outsider with no allies in the banking establishment, whose founders self-consciously viewed themselves as offering an alternative to the banking system. While banks suffer from the same problems with criminal activity, phishing, ponzi schemes and money laundering on a much larger scale ^[34], and some of the biggest banks have even knowingly participated in money laundering with apparent impunity ^[35], e-gold’s iconic status as a controversial alternative currency system loved by cypherpunks and libertarians made it an attractive target for US law enforcement agencies, with a big pile of assets to seize and few political allies.

While e-gold had begun implementing much stronger controls against abuse by users of the system by 2005, and was actively combating the use of its system for child pornography as a founding member of The Financial Coalition Against Child Pornography ^[36], the Justice Department had apparently made a high level policy decision to blame e-gold themselves for the malignant activities of a small minority of their users. ^[37] In 2007 the proprietors of the e-gold service were indicted by the United States Department of Justice on four counts of violating money laundering regulations and knowingly allowing a transaction to purchase child pornography. ^[38]

The government also claimed that e-gold was a ponzi scheme that did not have the gold to back the accounts. However, that claim was later shown to be false when judge rejected any charges of fraud regarding the e-gold user agreement and confirmed the veracity of the company’s gold reserve audit – showing that e-gold was fully reserved.

Resolution

The case against e-gold was brought under Title 18 USC section 1960 in UNITED STATES OF AMERICA v. E-GOLD, LTD, District of Columbia court. e-gold filed a motion to dismiss the case on the grounds that they did not fit the definition of a money transmitter. The court ruled against e-gold, stating that “a business can clearly engage in money transmitting without limiting its transactions to cash or currency and would commit a crime if it did so without being licensed.”^[39] This ruling enshrined in case law the Treasury Department’s expansion of the definition of a money transmitter to include any system by which stored value of any kind may be transferred from one person to another, even if the stored value is not cash, or national currency.

After vigorously contesting the charges for a year, in July 2008 the company and its three directors accepted a bargain with the prosecutors and plead guilty to one count of “conspiracy to engage in money laundering” and one count of the “operation of an unlicensed money transmitting business”, in exchange for the other charges against them (allowing a transaction to pay for child pornography) being dropped. ^[40] The company was ordered to pay fines of $3.7 million.

In November Gold & Silver Reserve CEO Douglas Jackson was sentenced to 300 hours of community service, a $200 fine, and three years of supervision, including six months of electronically monitored home detention.^[41] He had faced a maximum sentence of 20 years in prison and a $500,000 fine. Judge Rosemary Collyer said the men deserved lenient sentences because they did not intend to engage in illegal activity. Jackson’s lawyer claimed Jackson was spared the heavier fine because he is deeply in debt – the Judge said “Dr. Jackson has suffered, will continue to suffer, and may never be successful with E-Gold”. Reid Jackson, Douglas Jackson’s brother, and E-Gold director Barry Downey were each sentenced to three years of probation, 300 hours of community service, and ordered to pay a $2,500 fine and a $100 assessment.

Gold Seizure

Initially the US Attorney’s Office of the District of Columbia entered a motion to seize and liquidate the entire gold reserve of e-gold under asset forfeiture law. This would have allowed the law enforcement agency to add the proceeds of the sale to their operating budget. At the time e-gold held more gold in its vaults than the bottom third of the countries on the IMF list of central bank gold reserves, which would have made it one of the largest asset seizures in history, comparable to invading a small country and seizing its gold reserves. However, the federal judge in the case denied the motion and ordered the reserves to be held and liquidated for the e-gold account holders who could prove the origin of their funds.

e-gold was placed into receivership and the gold reserve was liquidated for USD 90 million. The court ordered “Rust Consulting”, a private company in Maryland, to organize refunds to account holders who could prove legitimate sources for the funds. The balance of unclaimed funds will be claimed by the US Attorney’s Office for the District of Columbia under the asset forfeiture law. A three month window has been set from June 3rd, 2013 to October 1, 2013 for e-gold account holders to submit a claim on their funds. ^[42]

Aftermath

After the e-gold and e-Bullion cases, California (2010) ^[43] and several other states amended their regulations to follow the federal precedent to define all digital value transfer systems as money transmitters. However, California’s new law is so broadly worded as to define a very wide range of Internet startup companies, such as the room booking service AirBnB, as “money transmitters”. ^[44] If the law were consistently applied many more Internet start-ups might be subjected to the same kind of prosecution that e-gold experienced.

After the resolution of the criminal case, the directors of e-gold Ltd vowed to continue operations following the new Federal KYC guidelines. They applied for a money transmitter license for the company, but it was denied because the directors are now convicted felons. Jackson and Downey have continued trying to find a way to sell the company to persons eligible for a money transmitter license in order to recoup some value from their once wildly successful internet payment system.

Conclusions

e-gold was one of the first, if not the very first pioneer of Internet payments. While e-gold received a lot of bad press due to the criminal case against them, it is important to recognize e-gold’s place in Internet history as the world’s first successful online payment system which pioneered many of the systems and techniques that e-commerce users now take for granted, including making payments over an SSL encrypted connection, and offering an API to enable other websites to build services using e-gold’s transaction system.

e-gold presaged Bitcoin as an alternative internet transaction system that operated completely outside of and independent of the legacy banking system. This proved that alternate financial systems were possible and that a significant number of people would enthusiastically use such a system.

Though e-gold was ultimately shut down by the US government, the federal judge on the case ruled that the founders of e-gold “had no intent to commit illegal activity.”

Founder Douglas Jackson failed to foresee the ways in which criminals and hackers could exploit an internet payment system by manipulating the appearance of identity (identity theft and fraud). Their payment model failed to include a web of trust that would enable users to have some degree of confidence of whom they were dealing with, and to eliminate bad actors. In retrospect e-gold’s tardiness in addressing the identity issues allowed the criminal syndicate to grow so large that the resulting crime wave ruined the company.

e-gold’s failure was ultimately due to the inability of their business model to provide a system of reliable user identification and the failure to provide a workable dispute resolution system to identify and cut off illegal and abusive activity in their user community. Other transaction systems such as Webmoney.ru ^[45] and Goldmoney.com ^[46] learned from e-gold’s mistakes and were able to successfully field similar systems with low rates of abuse by addressing these deficiencies. While PayPal has done a better job of addressing abuse than e-gold did, they now suffer from ^[47] and battle against the same crime wave that took down e-gold. ^[48] Financial cryptographer, Ian Grigg, has observed that Bitcoin has repeated the same fundamental errors that e-gold made and that despite its decentralized nature the cyber crime-wave may bring Bitcoin to a similar ending.^{[49] [50]}

]]> http://www.dgcmagazine.com/the-e-gold-story/feed/ 0 http://www.dgcmagazine.com/coding-in-my-sleep-dwolla-begins-paypal-style-account-suspensions/ http://www.dgcmagazine.com/coding-in-my-sleep-dwolla-begins-paypal-style-account-suspensions/#comments Fri, 25 Jan 2013 21:06:00 +0000 Julia Dixon http://www.dgcmagazine.com/?p=1127 Continue reading →]]> Dwolla is a popular method of moving funds between USD and Bitcoin largely because they “claimed zero chance of chargebacks and appeared to be a small business run by decent people who weren’t necessarily Bitcoin-friendly but at least didn’t seem to be Bitcoin hostile.”

However it seems that Dwolla is going the way of PayPal and has now begun suspending accounts do to ‘suspicious activity’,  especially the accounts of user who it suspects are acting as a virtual currency exchange, forbidden in it user agreement.  And it seems this move may be due to regulatory pressure.

“Since those early days, tension has built between Dwolla and Bitcoiners and may have just reached the point of no return: Dwolla has moved beyond closing the accounts of those it can prove are operating unlicensed exchanges and has begun closing the accounts of private individuals based on a mere affiliation.”

The posts author contacted Dwolla for comment to notify them of the article and for comment. Their responce…

“We appreciate the heads up, but I don’t know if I’ll be of much help.

It’s an odd, highly-regulated world that Dwolla has made the choice operate inside of. Where some scenarios appear black and white, rules and procedures can often add layers of grey. Of course, it’s on us to find new ways to balance convenience, safety, and privacy with these requirements and see through the grey, but it’s important to note that we’ll always err on the side of caution. We understand that being misunderstood by our own users sucks, but if it means protecting the network and the community, we’ll do it.”

Read the article in its entirety here.

The business’ founders, Chris Odom (Fellow Traveler) and Johann Gevers aim to make this ‘financial system 2.0’ possible by developing commercial versions of the Open Transactions digital finance library. This software will allow digital finance entrepreneurs to startup micropayment services, financial markets, community currencies, escrow services, and many others all without depending on the traditional banking or legal system.

Johann, Monetas’ CEO, recently shared with me his thoughts on finance, his belief in decentralized systems and his plans for Monetas.

“Monetas is a transaction system not just for financial transactions but for transactions in general. Financial transactions are a special case, a subset, of legal transactions. So Monetas is actually a legal transaction system which includes both legal and financial transactions.“

A transaction system like Monetas is designed to operate as an alternative to the current banking system. It works brilliantly with Bitcoin, however, the software is “agnostic” and allows you to use any asset type. “You can use fiat currencies, digital gold currencies, Bitcoin, basket currencies, or the most sophisticated derivatives. Our system works with any asset type, but it works particularly well with Bitcoin and solves very important problems in the Bitcoin economy, so it will help strengthen the Bitcoin ecosystem. But Bitcoin also allows our system to do things that it cannot do with other types of currency.”

The Monetas system is built using the open-source Open Transactions digital finance suite created by Monetas’ CTO, Chris Odom. To understand how Open Transactions works, it is helpful to compare it to the functioning of traditional transaction systems.

Traditional transaction systems use databases. A database is a centralized repository of information. A user’s transactions and account balances are recorded as numbers in the database. When a user conducts a transaction, the accounting software simply edits the numbers in the database. What’s important to note, is that the bank has the ability to edit the numbers in the database to whatever it wants to. So the user has to trust that the bank will not abuse this power, and that hackers will not break into the database.

The Monetas/ Open Transactions software doesn’t use a database. It uses digitally signed receipts, which operate in a decentralized way without any databases. The receipts have to be signed by all parties to be valid. This makes it literally impossible for the parties to cheat. The software uses advanced cryptographic protocols that create unforgeable transactions and balances.

A ‘bank’ using the Monetas/ Open Transactions software can provide all the normal banking services, accounts, checks, transaction receipts, etc. but without needing a centralized database. Instead of editing numbers in a database, The Monetas/ Open Transactions software works by digitally signing and transferring cryptographic data (such as receipts) and digital assets (such as Bitcoins). A Monetas/ Open Transactions ‘bank’, or server, cannot forge transactions or alter balances.

The brilliance of the system is that even if servers fail, or are hacked, the user’s assets are safe. Because there are no assets stored on any servers. The receipt is the asset. All the user needs to prove his asset balances is a copy of their last transaction receipt, which cannot be forged.

This means that users do not need to rely on trusted third parties. The technology itself guarantees the integrity of transactions. For details on how this works, go to the Open Transactions website.

Open Transactions can be used for a wide variety of transactions, such as to:

• Issue and manipulate digital assets.
• Create pseudonyms, issue currencies, and create asset accounts.
• Transfer digital assets securely between accounts.
• Operate “cash-only” (without accounts) for maximum privacy.
• Use a range of financial instruments, such as cheques, vouchers, and digital cash.
• Use higher-level, contract-based transactions such as payment plans and markets with trades.
• Create online markets that support market orders, limit orders, fill-or-kill orders, day orders, stop orders, and stop limits, just like trading on a real market.
• Use basket currencies.
• Provide proof of which transactions have cleared and which instruments are authorized, without having to store their entire transaction history, but instead by merely keeping the last signed receipt.
• Execute smart contracts.

Monetas’ commercial-grade version “will have a lot of additional features that are especially important to enterprises and big corporations. For example, it has to be scalable so that you can have millions of simultaneous users, and it has to be highly secure.” These of course are “not easy problems to solve,” and the current projection is that it will take another year before the commercial platform is ready.

Offering financial services on a global level is a legal nightmare and developing a good business model that addresses these concerns took months of legal research and brainstorming.  “What is really important to us is that everything we do is 100% legally compliant. At the same time we need to be profitable, plus we need to achieve our mission of providing access to next-generation financial and legal services to everyone worldwide.”

The solution was to not be a financial services operator. “We will never handle anyone’s assets. That is how Monetas is designed. It never, ever touches or has access to anyone’s assets or information. We are purely a software publisher. This puts us in the same category as book publishers, who are protected under international free speech conventions and laws.”

Monetas’ business model is to license its commercial software to consumers as a mobile app (available Q3 / 2013), and to businesses as an enterprise platform (available Q3 / 2014).

The mobile app will enable users, including the world’s 2.5 billion “unbanked”, to:

• Securely and privately store digital assets
• Buy and sell goods and services worldwide with no bank or credit card required
• Instantly send and receive money
• Execute legal contracts with any party anywhere in the world, without a lawyer.
• It will also have “convenience” features such as automating recurring transactions, storing transaction history, operating with multiple currencies, etc.

The Monetas enterprise platform will be licensed to businesses, including the millions of merchants who currently have no access to a merchant account, “who will use it to create amazing new products and services that weren’t possible before, as well as make existing transactions far cheaper, faster, more secure, more private.”

Imagine…

• Jose’s Easy Contracts “Powered by Monetas”
• Julia’s Bitcoin Bank “Powered by Monetas”
• Ragish’s Derivatives Exchange “Powered by Monetas”

Monetas’ aim is not to just add polish to existing systems, but to create a fundamentally different, less centralized, system. “The interesting thing is, if you look at the offerings out there, even the new startups, they are all centralized systems. And centralized systems are inherently fragile. They concentrate information, money, power, and technology in a single place—creating a single point of control, attack, and failure. Not surprisingly, centralized systems are failing all around us.”

Johann is passionate about decentralized systems, and decentralization is the theme not just in the Monetas software architecture, but also in Monetas’ organizational structure and processes. “The problem if you look at the world right now, the financial crisis and economic and political crises, it is precisely because of centralization that we have these issues.”

“Existing financial transaction systems—even those that use the ‘peer-to-peer’ buzzword—are centralized. For example, in the case of PayPal, it appears on the surface to be a ‘peer-to-peer’ payment system, because when one customer sends money to another customer, it seems that the money is transferred directly between them via email. But what actually happens behind-the-scenes is that customer A sends a message to PayPal, then PayPal transfers the money from customer A’s PayPal account to customer B’s PayPal account. So PayPal is the intermediary, the middleman, the third party that controls both customers’ assets and information. And as we know, PayPal often abuses this privilege. It freezes customer’s assets. It charges high fees. It takes days, even weeks, to complete transactions such as bank withdrawals. It refuses to open merchant accounts for merchants that do not meet its criteria. And so on.”

“These kinds of problems and abuses are predictable when you have to deal with a centralized entity that has, in effect, a monopoly position. And if a hacker breaks into PayPal, your information is at risk. This happens all the time, we see it in the newspapers every day. Another database hacked, another million credit cards stolen. And of course centralized systems are also vulnerable to government control which is exactly what has happened with PayPal and all other large, centralized entities, including ‘the Big Four’ data companies—Facebook, Amazon, Apple, and Google—the large telcos such as AT&T and Verizon, and financial institutions worldwide.”

“So that’s the problem when users’ assets and information are controlled by a centralized provider—the old provider-centric paradigm. Monetas is a complete system for financial and legal transactions that operates as a decentralized, self-organizing, peer-to-peer network. No person or entity controls the system—it presents no single point of control, attack, or failure—like the internet. The user—and only the user—controls their assets and information. Users enjoy autonomy and provider independence—the new user-centric paradigm. This design is inherently more reliable, secure, and private.”

“If two parties want to transact using our system they do not need a middle man such as a bank or lawyer or other agent to ensure the integrity of the transaction. The software itself prevents cheating and guarantees the integrity of the transaction. So the parties can transact directly with each other. They don’t need to entrust their assets or information to a third party. This is what true ‘peer-to-peer’ means.”

In keeping with their belief in decentralization, Monetas is working to integrate their system with Ripple.  “Ripple is a system for exchanging value in your friends network, so this allows decentralized exchanges instead of the centralized exchanges we have to rely on today, that are being targeted by governments.“

Monetas works particularly well with Bitcoin, but at the moment, transacting in Bitcoin usually requires using a centralized exchange. The exchanges are the most vulnerable point in the Bitcoin economy as they have to interface with the traditional banking system. “And so that is where governments are applying pressure. They are requiring exchangers to be licensed as money services businesses, and they are requiring them to collect information on the people that use their services.” The Ripple integration is intended to reduce customers’ need to interact with the traditional banking system and centralized exchanges.

The world’s “unbanked” population is estimated to be around 2.5 billion in Africa, Asia, and South America. The services Monetas offers are aimed in large part at the unbanked as Monetas provides global access via mobile phones, at prices that are affordable even to the poorest people, without needing a bank account or a lawyer. “As we know from economics, transaction costs are a critical factor that limits entrepreneurship and wealth creation.”  And transaction costs aren’t only measured in terms of money, but also in the time, effort, licenses, and other obstacles put up by bureaucracies. “So by radically reducing transaction costs and eliminating middlemen, we can dramatically expand entrepreneurship and wealth creation.”

“What we are going to have is contracts that are dramatically simplified, so someone who just has a mobile phone, who is in Africa who does not have an education but can understand their local language or English, will just have a few check boxes. It will say I want this clause, check, etc. click and done. So by eliminating the middleman, you do not need a bank account, you do not need a lawyer, and it dramatically reduces transaction costs.”

Monetas’ aim is simple, to make it possible for those who cannot afford, do not have access to, or are not well served by the current banking and legal system to have the ability to freely transact with one another and participate in the world economy.

You can visit Monetas’ site for more information on their upcoming products.

This is particularly exciting not only because an alternative currency is rapidly gaining online payment market share, but because the non-political, borderless nature of Bitcoin is being recognized and openly appreciated.

In fact these are among WordPress.com’s stated reasons for accepting the cryptocurrency. “Bitcoin has no central authority and no way to lock entire countries out of the network.”

In his press release WordPress.com’s Andy Skelton gives the reasons for the change in payment options…

“At WordPress.com, our mission is making publishing democratic — accessible and easy for anyone, anywhere. And while anyone can start a free blog here, not everyone can access upgrades (like going ad-free or enabling custom design) because of limits on traditional payment networks.

Today, that changes: you can now buy WordPress.com upgrades with bitcoins.

PayPal alone blocks access from over 60 countries, and many credit card companies have similar restrictions. Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons. Whatever the reason, we don’t think an individual blogger from Haiti, Ethiopia, or Kenya should have diminished access to the blogosphere because of payment issues they can’t control. Our goal is to enable people, not block them.

Bitcoin is a digital currency that enables instant payments over the internet. Unlike credit cards and PayPal, Bitcoin has no central authority and no way to lock entire countries out of the network. Merchants who accept Bitcoin payments can do business with anyone.” (emphasis mine)

In a blog post covering this news, BitInstant’s Erik Voorhees understands the importance of this news. He writes…

“My heart skipped a beat when I read that. They get it.”

“This has profound consequences for Bitcoin’s reputation.

While those who deeply understand the value of individual liberty have had little problem seeing the virtue of a decentralized, non-state monetary system, many shortsighted observers have focused only on the more salacious aspects of its use, discrediting it as such.”

Erik also calls out other organizations that should be accepting Bitcoin for exactly these reasons. Specifically, the EFF, the Mises Institute and Wikipedia.

I hope that this move by WordPress.com will pave the way for these and other organizations to also adopt alternative payment methods. Because, as Erik put it, “Bitcoin will be increasingly understood as a tool for human liberty (rightly so). And indeed, if one understands how money works in our world, it is by far the best tool for human liberty since the Internet itself”

Dwolla has just announced their new mass payment system, appropriately titled MassPay.

This service offers businesses a faster and simpler alternative to check-writing and wire transfers, by allowing them to pay up to 2,000 people at once. It is seen as an attempt to take on PayPal whose own Mass Payment service only supports payments to 250 recipients, and charges 2% for each payment.

All that a Dwolla client needs to do to use the service is upload a CSV file with just two columns: one colum containing the email address, phone number or Dwolla ID of the recipients and the other containing the amount to be paid.

Further details on the service can be found here and the below video demonstrates the MassPay service.

Video Link

This move is aimed mostly at preventing copyright infringement and how you feel about it will likely depend on how you feel about copyright laws. However, this begs the question, will this encourage file sharing sites to switch to alternative payment options?

Update: The above link to PayPal’s site is not working well, and so below is a screen shot.