Part II: The Midas Touch.
In the early 1990s, another doctor, Dr David Chaum, a computer scientist and cryptographer, had established the groundwork for the first significant centralised digital payment system using cryptographic privacy protocols—eCash:
Chaum's system was extraordinarily elegant. It featured persuasive benefits, such as anonymity for users, bullet-proof security for merchants, and no lower limit on transaction value. It could be used to make [micro]payments of only a few pence, or entrusted with a multi-million pound deal. To make this possible, Digicash relied on its own, newly minted digital currency: cyberbucks. (Bowbrick 2003)
The privacy principle that characterised eCash was central to a movement that had kicked off in the 1970s and ‘80s when asymmetric cryptography garnered attention outside of the military and became enthusiastically advanced in a mailing list called Cypherpunks created in 1992, where the academic research of Dr Chaum featured heavily. For cypherpunks, cryptography was the weapon of choice with which to equalise the relationship between citizen and state as the invention of the Colt .45 and Winchester repeating rifle had purportedly done in the past. As with most online communities, there was spam and trolling, but there was a lot of quality discourse and in-depth technical analysis—and where there’s muck there’s brass.
The concept and technology behind eCash was sound enough: several large banks including Credit Suisse and Deutsche Bank were initially on board (and Microsoft were considering incorporating it into its Windows 95 operating system). However, Dr Jackson exposed a critical flaw in the viability of eCash in 1996 on a forum closely associated with Cypherpunks. His argument was that the advent of secure browsing had rendered eCash wallets redundant, which drew the ire of the diehards who were convinced that the future of alternative money lay in cryptography. As it turned out, both were correct: eighteen months later, despite investors sinking $20 million into the project, it failed to gain traction and the eCash company (Digicash) filed for bankruptcy.
e-gold’s trajectory was seemingly inversely proportional to that of eCash, and it dominated the digital currency market for the following decade—seeing off all comers. The reasons for this may be debateable, but e-gold offered the benefits of a simplistic, digital push-payment system backed by a real life commodity. Just create an account on the website, gain full permissions and send or receive payments in the dollar equivalent of gold (its native currency). These payments were immediately settled at low cost on a sliding scale: the higher the value, the lower the cost (around one percent or less). Because they were backed with physical gold, the sender would be informed of the exchange rate and the weight of gold corresponding to the dollar value of the payment. Assuming this was acceptable to the sender, the transaction could proceed. He or she would receive immediate notification along with a unique identifying number and the recipient’s account balance would be adjusted accordingly.
This was essentially a book entry ledger-based system that reproduced the RTGS (real time gross settlement) platform operated by government central banks (see part I), especially the Federal Reserve’s Fedwire payment system. The only difference was that the Fedwire allowed for overdrafts, whereas e-gold was strictly debit only. But it offered the same assurances and dependability.
The other advantage of e-gold over its competitors was the level of DIY that went into the website itself. To get operational quickly, a web developer took care of the front-end and form submits and Dr Jackson learned enough code to complete the backend side of things—the transaction processing mechanisms. This kept the budget to a minimum.
So would emerging companies like Amazon come knocking? No. Some poorly executed print ads in 1998 didn’t improve matters. Yet by July 1999, The Financial Times had claimed that e-gold was the “only digital currency to create critical mass on the web”. By November 2000, around the time of the dotcom bubble, e-gold was processing more transactions per month than all the competitors cumulatively, who had spent a total of $300m combined for their various alternative payment schemes compared to the $1m initial launch cost for e-gold drawn mainly from personal funds.
The e-commerce side of things never really took off, but international remittances did. The necessity for guest workers to send money back home as cheaply and simply as possible was a powerful driving factor in the rocketing fortunes of e-gold. If ever there was a mother of all use-cases, this was it: the demand for a facility to minimise or avoid the onerous fees associated with cross-border payments should never be underestimated or undervalued. e-gold remittances ultimately worked out at a tenth of the cost of traditional methods.
This is where e-gold really caught on and then went truly global. In every imaginable country, the e-gold website was being translated by enthusiasts into their native language under their own steam to increase accessibility. Even though currency exchange services were popping up to cater to the market (e-gold explicitly did not deal with currency conversions), business customers would inevitably try to persuade suppliers and employees to accept e-gold in return for goods and services, or individuals might convince landlords or grocers, for example. Then when others did the same, the pattern of growth went exponential. By 2005/2006, the transaction volume was a staggering $3b per annum. The gold reserves of Digicash at that time was comparable to those behind the Mexican peso or the Canadian dollar.
Bowbrick, Steve. 2003. "Past Currency". The Guardian. https://www.theguardian.com/technology/2003/feb/25/comment.comment.