For centuries, people of the world have used cash, such as coins and notes, as a medium of exchange. When modern economies adopted an electronic version of money, this government-issued digital value could only circulate through highly regulated banks and financial institutions. This electronic money also became a powerful government tool that provided daily control over a nationās money supply.
However, the new Internet delivered innovative methods of creating private digital versions of currency, along with many advanced methods for transferring this online value. The Internetās new decentralized features, protocols, and freedom altered the existing definition of electronic money and ushered in the concept of privately issued digital currency.
During the late 1990s, Internet entrepreneurs began to experiment building ingenious new versions of electronic money known as digital currency. Existing US financial regulations had only supervised and controlled the movement of electronic money through banks and regulated financial institutions. The new Internet digital currencies were moving locally and internationally well beyond the reach of US financial regulations and government supervision. In fact, from 1996 through 2006, some government agencies even had a difficult time identifying and defining these new financial technologies.
By 2016, there were thousands of Internet digital currency products representing money and other value, circulating alongside government-issued legal tender. In a few regions, the private digital currency has almost replaced the governmentās electronic version. Digital tokens have brand names, static and changing monetary values, and various features which directly compete with government-issued money and bank products.
The adoption of new financial regulations in the USA and the restrictive environment created by the new laws forced the closure of many innovative digital currency businesses. Of the nine businesses profiled in this book that operated between 1996 and 2006, only two are still operating in 2015. Seven of the digital currency systems were sidelined because of criminal activity or shut down due to US regulations. The notable exception to being āshut downā or regulated out of the business was e-gold. While the e-gold operators were convicted of multiple felonies related to the money transmitting operation and most of the company assets were forfeited, the business was never forced to close. The e-gold operation voluntarily closed down.
Only two of the nine companies, which had been early entries in the marketplace survived the changing rules and unregulated environment. These were GoldMoney and WebMoney Transfer . Both businesses are discussed in this book. Careful examination of digital currency history suggests why these companies were able to succeed while others had failed.
Beyond these nine businesses, dozens of other digital currency systems and products operated throughout that first decade. However, by late 2011, strict new financial regulations caused the closure of all digital currency operations in the USA. The only digital currency products left circulating through the USA were the newer decentralized cryptocurrencies that operated without a parent company or primary server. By 2012, foreign corporations engaged in US digital currency business and unwilling to comply with the strict new FinCEN regulations pulled out of the American market.
Many people and companies have been prosecuted by the federal government and state government for violating laws that related to Money Service Business and Money Transmitter Licensing. Seven of the nine companies profiled in this book, along with the business operators, were directly involved and connected to criminal prosecutions. Analysis of nine accepted digital currency systems that emerged in the decade between 1996 and 2006 includes the following topics.
- 1.The operatorsā motivations for developing the digital currency system
- 2.Features, currency design, and the development of exchange networks
- 3.Comparisons of early digital currency systems with conventional bank products
- 4.Technical structure that permitted the circumvention of existing US regulations
- 5.How US government agencies reacted to the new unregulated technology
- 6.US financial regulations created to combat the new unregulated digital currency systems
- 7.Government actions in the prosecution and asset seizure of the digital currency company assets
- 8.Why only two of the nine digital currency companies survived
- 9.The potential target market of users for each digital currency as defined by the operators early in their business
- 10.Identifying actual users along with motivations for using digital currency
- 11.What actions the two surviving companies voluntarily took that ensured the companiesā survival
- 12.Why digital currency systems and products succeed in consumer markets and the primary reasons for failure
Digital currency offers many of the same functions of government-issued money. Digital currency is an efficient medium of exchange. Users can purchase goods and services using digital currency units. Digital currency is a store of value. Privately issued tokens have a value which can remain steady over time. Account owners can use online digital currency as a saving account for the long-term storage of value. Digital units backed by gold or denominated in a national currency can function as a unit of account. Digital currency units are modern, recognizable, and measurable economic units that are familiar in global economies.
When discussing private digital currency, it is important to recognize that the underlying topic is money. Most users identify privately issued digital currency as money. People around the world have preconceived notions of money and how it should function in their life. In modern societies, money is a very intimate topic. Spending habits, debt, credit cards, and banking are all money topics that are not openly discussed in public or with strangers. Human patterns and values surrounding money are often learned as a child and remain with a person their entire life. Consequently, the introduction of a new kind of private money in a modern society will be met with resistance. This situation is particularly evident in America.
Who Uses Digital Currency and Why?
In the decade that followed 1996, over a dozen new digital currency systems were introduced to the world. Each system delivered new innovative technology along with exciting commercial features which were believed to be beneficial for the economy and the population. The first of these platforms was e-gold . The companyās website described it as āBetter Moneytm.ā Compared to fiat paper currency, supporters claimed that e-gold was faster, cheaper, and safer than government-issued ābankā money.
The research presented in this book attempts to show the reasons an entrepreneur operator may have had for creating these digital currency businesses. The book also asks who used the digital currency and for what purpose. In understanding these questions, it may be possible to look ahead and plot a more successful strategy for the future introduction of new innovative digital currency products.
People with no access to banks or bank products will quickly adopt digital currency as a substitute for electronic government money and bank services. Whether the digital currency product is accessible from a cellphone, kiosk, or personal computer, it can immediately replace missing financial tools typically provided by a bank. In cases where a population with no bank access adopts a privately issued digital currency unit in place of bank services, users recognize those units of digital currency as money. In economies without bank access, a new digital currency should function well for both merchants and consumers. Historically in these environments, customers have used digital currency to purchase goods and pay for services including phone bills, utilities, food, transportation, local wages, and medicine. For a population without access to a bank or bank products, the use of a new digital currency does not replace existing bank products. In this kind of nonbank marketplace, as users adopt the new digital currency, they are not required to stop using an existing bank product such as a credit card. These users are entering the digital currency marketplace because they have no bank alternatives. Because they are not changing their existing financial habits, only adopting new methods of payment, these populations should quickly and easily accept the new type of digital currency. In this economy, it is expected that both merchants and consumers will...