The Alt-Currency Martyr

Before the feds feared bitcoin, they feared e-gold.


In the mid-1990s, just before the arrival of PayPal and more than a decade before bitcoin, an oncologist from Florida named Douglas Jackson created a system by which people could send each other digital payment tokens backed by gold. Jackson's e-gold became the world's first truly successful digital currency, serving over half a million customers and doing billions of dollars' worth of business.

But after a decade of success, the feds came after him, raiding his company's office, taking computers, freezing bank accounts, and ultimately extracting a guilty plea for conspiring in an "unlicensed money transmitting business." Once trailblazing, e-gold was quickly forgotten, derailed first by legal hassles and then by the tsunami of interest in blockchain technology.

Now Jackson has uncovered information that he thinks can not only overturn his conviction, and thus ease the path to him restarting his business, but help wean alt-currency from what he regards as a ruinous addiction to Satoshi Nakamoto's brainchild. While the value the markets place on cryptocurrency keeps rising precipitously and no e-currency model closely emulating e-gold has grabbed significant market share in its wake, Jackson remains convinced that if he could only get back in the game, things would be very different. The guilty plea that he now insists was squeezed from him through government trickery blocks his doing legal business in the e-currency space.

"It's as if I'm the only person in the world not allowed to go and compete in this area where I'd pioneered the industry," he says. "It's like everything came off the rails and it's been a decade of unprecedented malinvestment."

Sending Gold Around the World

Most oncologists don't bandy about classic Austrian economics terms such as malinvestment. But Jackson in 1994 came across a Thomas Sowell article in Forbes celebrating the 50th anniversary of the publication of F.A. Hayek's Road to Serfdom. His newly minted interest in Hayek led him to the Laissez Faire Books catalog, and then he was off and running toward his dream of a universally usable, cheap, and easy way to exchange value across the globe that didn't depend on governments making wise monetary policy choices.

Though he had never taken an economics course and barely understood accounting or double-entry bookkeeping, Jackson was soon on a monetary mission to save civilization from itself. "Many of the worst real-world calamities, wars, in particular," he told Barron's in 2001, can "be causally traced back to economic dislocations—booms and busts—that in turn could be traced to monetary manipulations."

So Jackson created a system whereby anyone with access to the internet could transfer ownership of digital tokens backed 100 percent by, and transferable into, physical gold (or, later, its cash equivalent), which he either received in bailment from customers or bought in the usual world gold market and kept stored in his office. The company made money off transaction fees, at first a flat 1 percent, then for a time, Jackson says, "capped at the equivalent of 50 cents, very inexpensive."

Still later, "we refined the fees to a sliding scale formula," he says. "The 1 percent made no sense for micro-spends, and 50 cents was too generous for large spends." Eventually, the maximum fee, which kicked in for transactions amounting to more than about $200, was a gold equivalent which tended to be about $2 at the time. A referral program paid out 10 percent of the company's transaction fee to any new customer brought in.

Jackson "didn't have a clue" how to find customers at first, he now admits. He talked up e-gold on cypherpunk-oriented mailing lists and placed some print advertisements in libertarian-oriented publications (which will "probably go down in history as the dumbest, most opaque, confusing print ads ever," he now says) and even a radio ad on an NPR affiliate in his hometown of Melbourne, Florida.

But rather than just hard-money hoarders in the rich West, many of e-gold's customers turned out to be people, often from poorer countries, who were looking for a low-cost, low-hassle, and quick means to, say, send money back to family in India, shop online without a credit card in the Arab world, or sell goods without the fear of clawbacks from buyers that credit cards make possible.

"The only pathway to business success was to target high volume payment activities," Jackson explains: "Online retail, bill payment, and remittances of international guest workers."

E-gold started gaining media attention around 1999, then "2000 was the breakout year, when exponential growth was clearly evident," Jackson says. "By February 2000 we had processed only 50,000 payments. Two months later we'd doubled that and by October we passed the million mark." The gold coins, which were starting to make the office floor groan in Florida, were soon supplanted by gold bars stored in London and Dubai vaults.

In 2000, the e-gold project split its functions into two separate companies: E-gold, which managed digital e-gold accounts and made income solely from user fees; and Gold & Silver Reserve (G&SR), which exchanged currency for e-gold and was thus capable, in monetary policy terms, of engaging in "open market operations," expanding or contracting the overall supply of e-gold according to market demand.

This bifurcation of functions was vital to moving forward, Jackson says via email. "The model of would-be competitors entailed them buying and selling their medium themselves, effectively engaging in currency exchange. This exposed them to the risk of payment reversal…exchange rate risk…and perhaps even more importantly, if the provider of the system is also the one selling the medium, virtually all of them resort to touting it as an investment (gold is good! Blah blah) and independent providers of exchange are disinclined to compete with them." A consequence of separating those two functions was that "dozens of independent businesses found it in their economic interest to promote e-gold."

As Jackson later bragged in a July 2020 online essay, written as part of a public comment process launched by the Financial Stability Board (an international body providing analysis and advice about the global financial system), "e-gold went on by 2006 to serve active customers in over a hundred countries, settle 3 billion (USD-equiv.) worth of P2P payment per annum and amassing gold reserves surpassing those then backing the Canadian Dollar or Mexican Peso." At its zenith, the alt-currency was backed by 3.8 tons of real gold.

"To say Doug was pioneering," says Kevin Dowd, a Durham University professor of finance and economics who specializes in monetary alternatives and competing currencies, "is an absolute understatement." Dowd draws attention to e-gold's market-leading provision of digital payments not tied to any government's currency with "instantaneous trade at almost zero cost, and that almost 25 years ago."

'He Should Have Been on the Federal Payroll'

It was a matter of time before e-gold would catch the attention of the government, which does not take kindly to financial transactions that it cannot easily trace and tax. Jackson became aware early on that crooks, from credit card scammers to child porn purchasers, were sometimes using his system to bilk people and traffic in illicit goods. So he volunteered user information on suspected criminals to inspectors of various federal police agencies, most notably the U.S. Postal Service. Wired later reported that E-gold had become "one of law enforcement's most productive honey pots, providing information that helped lead to the arrest and conviction of some of the web's most wanted credit card thieves and hackers."

Unlike some of the cyber-anarchists who later promoted bitcoin or other cryptocurrencies, Jackson had no ideological or practical interest in helping people commit crimes or evade law enforcement. He even elided his own company's user agreement in cooperating with cops.

"While inaccurately depicted in the media as a system affording anonymity and hospitable to criminal activity," Jackson wrote in a 2020 memo about his ongoing legal conflict, "bad actors who believed this and elected to use e-gold as a platform for illicit activities commonly discovered that decision to be their career-ending, game-over mistake."

None of that was enough to protect e-gold from the feds. In December 2005, Jackson's home and offices were raided by the Secret Service and FBI, who took everything they could and froze the company's bank accounts. (The gold by then was safely bailed overseas and held in trust.)

Judge John M. Facciola, who signed the initial warrants, would complain in a later hearing that he'd been misled to believe he was granting warrants to break up some sort of child pornography ring. Though the actual charges against Jackson and his company would have nothing to do with child porn, that didn't stop prosecutors and the media from rumor-mongering about awful transactions taking place in the shadows.

"It never occurred to me in my wildest dreams," Facciola said in a hearing 13 days after the initial raid, "that far from operating surreptitiously, there have been negotiations with this company and the Internal Revenue Service as to…transmitting money and being subject to…the Bank Secrecy Act."

Jackson, his companies, and two of his partners were charged in April 2007 with conspiring to operate and operating an "unlicensed money transmitting business," conspiring to "launder monetary instruments," and violating D.C. law (though the companies were not located there) by transmitting money without a license in the District of Columbia.

Jackson says he sincerely did not believe his companies were required to register or be licensed as a money transmitter. This was not a crazy or purely self-serving thing to believe in 2007. Jackson cited contemporaneous Treasury Department reports that discuss both e-gold and money transmitter laws and do not reach the conclusion that the former is bound by the latter.

A 2007 Indiana University Maurer School of Law paper co-authored by Stephen T. Middlebrook, who was at the time senior counsel at the Treasury Department and co-chair of its Working Group on Electronic Payments Systems, observed that four federal statutes regarding money transmitting "all contain different definitions of 'money transmitter.'" (The paper came out between the indictment and the guilty plea in the e-gold case.)

"Because e-gold is operating outside the traditional realm of money transmitters," Middlebrook's paper continued, "it is necessary to explore the nuances of the statutory definitions in order to determine whether the laws encompass e-gold. The inconsistencies in the statutes…make advising clients who want to implement novel new payment mechanisms a difficult task."

As Jackson would insist, his company did not send money from one place or person to another, like Western Union: It merely shifted ownership shares of the technically nonmonetary physical commodity of gold. It did not make loans, so it wasn't a bank. Since E-gold did not deal in "currency or funds denominated in the currency of any country," then it should be exempt from statutes governing "money transmitting," Jackson's legal team argued. No actual regulatory agency had ever told them otherwise before the arrests.

Judge Rosemary Collyer of the U.S. District Court for the District of Columbia disagreed, ruling in response to a preliminary motion that the definition of "funds" should encompass the gold value controlled by Jackson's clients. After butting up against such judgments and shelling out millions in fines and legal defense, the e-gold defendants in July 2008 decided to plead guilty, in Jackson's case to money laundering and the operation of an unlicensed money transmitting business. He was sentenced to 300 hours of community service plus a 36-month supervised release, including a requirement to wear an ankle bracelet, with six months of it pure house arrest.

Judge Collyer in her sentencing memo seemed to understand that something other than perfidy was at issue, writing that "no doubt Dr. Jackson has respect for law" and that his "intent was not there to engage in illegal conduct." Collyer added that "there is no reason to shut down e-gold and G&SR, and every reason to have them come into legal compliance….Incarceration for Dr. Jackson would be counterproductive."

Economist Dowd argues that the whole prosecution was a mistake in the first place: "It was a remarkable 'own goal' for the U.S. government to go after [Jackson]. He was bringing in a steady stream of crooks." Dowd, who wrote a 2014 monograph for the Institute of Economic Affairs on government attempts to thwart alternative currencies, contends that Jackson "should have been on the federal payroll."

Death and Afterlife

E-gold, embattled, soldiered on after the 2005 raid, despite eventually losing over $4 million to fines and takings, with client holdings tied up in what would be yearslong unfreezing negotiations with the federal government. Jackson tried to keep the company afloat, doing a more thorough job vetting customers, locking out certain suspect nations entirely. But the guilty plea itself was a Catch-22, because someone with his felony record could not obtain the licenses necessary to function legally as a money transmitting business. In 2009, E-gold ceased operations.

But now a reprieve could potentially be on the way. Jackson learned a few years ago via a Florida Freedom of Information request that the government hid from him—illegally, he argues—potentially exculpatory evidence that could have changed the course of the case and dissuaded him from pleading guilty.

A draft legal opinion done for the Florida Office of Financial Regulation (OFR) in 2006 concluded that his companies were neither "funds transmitters" nor "foreign currency exchangers" under Florida law, that there is "no evidence that e-gold is money of the United States or of any other country which is designated as legal tender," and thus that "the activities of e-gold and G&SR are not subject to regulation through" Florida's relevant money transmitter regulations.

The federal indictment stated, despite the contrary draft opinion delivered by a state lawyer to Florida's OFR, that Jackson's companies "were required to be licensed…by the State of Florida." Jackson argues that the government's obligations under the Brady Rule, which requires that prosecutors dis-close possibly exculpatory evidence, dictate that the feds should have revealed this OFR opinion.

Had he known about it, Jackson says, he would have sought a similar opinion from the relevant regulatory agency in D.C., whose laws he was charged with breaking despite not being located there. He believes they would have agreed with Florida at the time and insists that, had the feds revealed the Florida OFR opinion, he would not have pleaded guilty in the first place.

Not only did Jackson not know about this opinion but neither the grand jury that indicted him nor the judge overseeing the case did either. The Secret Service, he discovered, had instructed the OFR to not communicate with Jackson or his associates at all.

Jackson filed a petition in July 2020 to overturn his conviction. While motions have been filed on both sides, no decision has come down as of press time.

In the wake of the original prosecution, many states have clarified that businesses such as E-gold, even if not actually shifting national currencies from one person to another, do fall under the regulatory aegis of money transmitting laws. The Treasury Department's Financial Crimes Enforcement Network ruled in 2011 that any digital currency facilitator involving U.S. citizens operating anywhere in the world is subject to all the domestic regulatory burdens of an official "money services business." Nowadays, even two citizens engaging in a private trade of bitcoin for dollars can wind up before a judge. And new Treasury Secretary Janet Yellen believes that "we really need to examine ways in which we can curtail" the use of cryptocurrency "and make sure that money laundering doesn't occur through those channels."

Regulatory authorities continue to have it out for digital currencies. But Jackson believes there is a place for a product like e-gold that offers a usable escape from government monetary policy without striving to evade financial information regulations.

'It's Up to the Market To Tell Us How Useful It Is for People'

Law enforcement may have pushed E-gold out of the e-currency market, but is it still a usable business model? Crypto has since proliferated into near-infinite varieties and soared to unprecedented market valuations. Internet-enabled monetary competition between various government fiat currencies the past two decades, some economists theorize, may have helped keep price inflation low. Gold—even gold split up into bits and bytes with ownership shifted around the world cheaply and nearly instantaneously—is perhaps just a barbarous relic, destined to be outcompeted in day-to-day transactions by both government money and blockchain coins.

But Lawrence H. White, a monetary economist at George Mason University specializing in free banking and currency competition, points out that the market had decided as of the mid-2000s that e-gold met consumer demand just fine. "You can say it's not for me, it doesn't serve any need I have," White says. "But it's up to the market to tell us how useful it is for people. From a standard economic perspective, we don't second-guess people's preferences for what choices help them achieve their purposes and realize more gains from trade."

Jackson sees the rise of crypto as a direct consequence of what the government did to him. The bitcoin bubble "never would have happened in the first place if we had not had to exit the business," he contends. "Our exit afforded the foundational myth bitcoin started with, that 'look what happened to e-gold!'" If the feds could take down a single alt-currency company, better to build instead an entire decentralized system.

That's not the lesson one should take from his experience, Jackson insists. He pushes back against the widespread belief that E-gold was "shut down by the government, and the reason was some government antipathy to competition with the almighty buck. That wasn't the case, neither aspect. We weren't shut down, though we did eventually have to close down. And protecting the dollar from competition had nothing to do with it."

He points out that in the sentencing, Collyer was explicit that E-gold should continue to exist after adopting proper anti–money laundering standards and getting the appropriate money transmitting licenses. Yet his guilty plea made that impossible.

With his vision for how to run an e-currency sidelined, Jackson complains that there has been "no progress toward what I was trying to accomplish." Gold, historically and to this day, has been a great hedge against sovereigns destroying the value of their currency and therefore a great basis for new competition. Those clients of the original e-gold who eventually got their money back out of the system received anywhere from 200 percent to 500 percent more dollar value than they put in, thanks to gold's price appreciation, he says.

Bitcoin, he argues, is too slow and too expensive; it's essentially unbacked; and it consumes too many resources. And all the other cryptocurrencies that followed in its wake have never mounted a serious attempt to solve day-to-day payment or monetary problems for the masses. Instead, he thinks, they've just offered promoters a chance to cash in on speculative mania.

"Suppose that someone has 1 Bitcoin in their wallet, which they regard as having the equivalent value of $500 or $900 or, give it another day or two, $20,000," Jackson told the Financial Times in 2013. "And then suppose that some circumstance emerged that effectively prevented it from ever circulating again….Who, after six years of non-circulation, would pay that $500 or $20,000 or even so much as a nickel?"

Many in the e-currency space, even those who respect Jackson's innovative strides pre-bitcoin, consider his arguments and techniques archaic now that the blockchain has taken the field. Jon Matonis, who has followed Jackson's efforts for decades and had even been offered a job at E-gold when it was operating, is now chief economist with Cypherpunk Holdings. He is sure the blockchain has rendered Jackson's style of e-currency obsolete.

"The single biggest reason for why a decentralized cryptocurrency is a superior choice for electronic money than Jackson's e-gold model is resiliency from state actors," Matonis insists. "When challenging governments and central banks in the monetary realm, the greatest forces in the world will quickly align to work against the leading opponent, as history has demonstrated." This means any strong competitor to government money "must be the leading permissionless, censorship-resistant, decentralized cryptocurrency with the majority of the world's computational power reinforcing its distributed network every single day. This is Bitcoin."

While Jackson doesn't believe the government was deliberately trying to put him out of business, Matonis insists that "the State will simply not allow a monetary challenger to thrive." That, he writes, "is why survivability is the single most important attribute. When there is a centralized entity organizing the issuance of a monetary unit, this will present a single point of failure. When there is physical commodity backing that requires assaying and auditing, this will present an opportunity for confiscation."

From the pro-bitcoin perspective, the very fact that no one has succeeded in an e-gold-like project since Jackson was pushed out might suggest that the market has spoken and that Jackson is overly arrogant to think he and his ideas are spec-ifically indispensable in e-currency.

Still, he's trying to fight his way back in by clearing his record of what he now considers to be an illicitly obtained guilty plea. To fulfill his decadeslong mission, Jackson and partner Roger Bass, a former Intuit exec, are developing an e-gold 2.0 company called Global Standard that, like its predecessor, will offer a digital currency backed by physical gold. "As matters stand, an e-gold successor with me as a control party is effectively precluded from offering our services in the U.S. market," Jackson says. "But the conviction also negatively impacts our ability to engage around the world with not only regulators and policy officials but also with potential investors and bank partners." It's "the first thing a potential investor sees in the due diligence process."

Banks are especially skittish about his past, which is bad because "banks play a crucial role" in the Global Standard system, he writes. "They should serve as the primary vector for distributing e-gold into global circulation where it can be used not only for P2P payments but as an alternative reserve asset and medium of settlement for bank-intermediated payments."

Bass, for one, still believes in the original mission. Central bank balance sheets, he says, "are way out of whack with any historical normality," with "no gentle glide path back….Really bad things happen when money gets messed up, and right now money is just about as messed up as it's ever been."

One needn't share Jackson's triumphalist sense of his own unique mission to see that the trap the government placed him in with his conviction has stymied something many users around the globe found valuable, even if it won't drive bitcoin off the field. As Bass says, "a rural villager in India can often understand exactly how and why something like e-gold is important and how it works better than an international banker whose day-to-day life is beyond such needs and who is more than comfortable with existing monetary systems."

The government's heavy-handed leaning on Jackson was not about its concern for sensible monetary policy or our liberty—or about an Indian villager having a currency that meets his needs. It was about the government's inability to tolerate anything that makes it harder to know what it wants to know in order to enforce tax and drug laws. George Mason's White says cost-benefit analyses of "know your customer" laws show they hobble lots of beneficial economic activity for a very tiny return in crimes discovered.

But Jackson himself thinks that a good e-currency going forward need not offer a lot of privacy to users. It merely needs to be cheap, efficient, universal, and free of the mistakes caused by government monetary policy.

Jackson is sure his ability to set e-currency back on what he insists is the right track will be increased if he can get his conviction off the books. But "the past, some sort of vindication or credit, doesn't matter so much," he says. "What matters is that we return and finish the task that, incredibly, is more needed than ever after this lost/wasted decade of unprecedented malinvestment and massive criminality that resulted from the blockchain bubble."