What killed the first attempts to create workable digital currencies? It was a combination of factors, all of which should be considered relevant today. Many faced the dot-com crash, while others faced criminal activity or government regulation. The first stirrings of digital currency did not take root. As early as 1983, a paper by David Chaum introduced the idea. In 1990, he founded DigiCash in Amsterdam. It went bankrupt in 1998. PayPal also emerged in 1998. It was not quite a digital currency, but it can be seen as something of a halfway point. It still thrives today. Other pioneers, despite some brilliant business models, were not so lucky.
US $10 Coin.
E-GOLD
E-gold was a digital precious metal backed currency operated by Gold & Silver Reserve Inc. It was founded by Dr. Douglas Jackson and attorney Barry Downey. Users could open an account on their website and send equivalents of precious metals to other accounts. Launched in 1996, it had slow growth to about the year 2000. It is now understood to be the first digital currency that gained widespread use. It was used for metals trading, online auctions, casinos, as well as funding other organizations (from politics through less savory endeavors). E-gold transactions allowed transfers as small as one ten-thousandth of a gram of gold. Gold equivalents could also be sent based on their fiat currency value at the time. It grew to about 5 million accounts in 2009, before it faced multiple legal issues. It was a major target of hackers. The first known phishing attack against a financial institution was made against people listed on the e-gold mailing list in June 2001. Account details (including log in attempts and transactions) for millions of accounts were compromised. This also allowed various law enforcement agencies to trace the source of funds. Ebay sellers who desired to defraud customers preferred e-gold because it allowed them to access money immediately. With all these problems, it prompted many complains to government authorities. In time the government would suggest that e-gold was the preferred payment system for criminals, terrorists and child-pornographers.
The September 11 attacks led to the USA Patriot Act (https://epic.org/privacy/terrorism/hr3162.html) which hammered the company. This act made it a FEDERAL CRIME to operate a money transmission business in a state that required a license. This caused a similar company to request clarification from the state of CA, and they were told that they were not money transmitters according to their definition. E-gold requested clarification from the IRS, who responded that according to their opinion e-gold accounts did not contain "currency.” However, the U.S. Treasury Department and the United States Department of Justice found that a “money transmitter” noted in the USA Patriot Act includes any system that allows transfer of any kind of value from one person to another. The government brought increased pressure against the company because some customers were involvement with transactions involving child pornography. In July 2008 e-gold entered into a plea agreement. Dr. Jackson pleaded guilty to the operation of an unlicensed money transmitting business as well as conspiracy to engage in money laundering. The company agreed to a consent order of forfeiture. Dr. Jackson was found to not have intentionally engaged in illegal conduct, and the court did not order closure of e-gold. However, negative coverage in the media led to a decline in e-gold use. In 2008, the agreement detailed requirements for e-gold to resume operation as a regulated financial institution.
The guilty Plea precluded the companies (or any company controlled by the e-gold directors) from being licensable in any US state. In accordance with the plea, e-gold suspended all remaining activity, which locked up all e-gold accounts. The government might supervise the distribution of gold to e-gold customers, but the company might yet find a way to comply. After the e-gold case, California and several other states amended their regulations to follow the federal precedent to define all digital value transfer systems as money transmitters (https://www.wired.com/2009/06/e-gold/).
Cover from Jack and the Bean Stalk by Jack London (Cinderella Series), M A Donohue & Co, nd.
BEENZ
Beenz was founded in 1998 by Charles Cohen, and it folded in 2001. His website allowed users to earn beenz, which could be given out for visiting web sites or shopping online (as a reward to consumers). Beenz was classified as “digital points” rather than currency because a number of nations forbid the private issue of currency. Within days of its launch the offices in London were visited by the Financial Services Authority (FSA) for operating an unlicensed bank. The company clarified that they were not in fact a bank and were allowed to continue operation. A seller could exchange beenz at any value they set. They could sell beenz back to the company at a set exchange rate. There were some problems which led to some users having their beenz taken away, which damaged their credibility (http://news.bbc.co.uk/2/hi/science/nature/423369.stm).
The company made money on the spread between the sell and the buy price of beenz. They even had a partnership with MasterCard. There was a plan to allow direct purchase, but some countries - France in particular - voiced opposition to alternative currencies. This shows what a difference a few years makes, as today bitcoin and other cryptocurrencies can be purchased in France. At its peak, there were beenz offices in 12 countries. The dot-com bubble burst and prevented further funding and the expansion of the business. It was finally sold to US-based Carlson Marketing Group in 2001. The business petered out after 9/11 and was shelved. In June 2008, CNET counted Beenz as a bad buy. The idea had incredible promise. Beenz aimed to become a “global internet currency” and to have come up with “a radical alternative to money.” The same article, written in 1999, speculated that the technology would lead to the creation of a new generation of e-millionaires (http://news.bbc.co.uk/2/hi/business/297133.stm). It seems that public acceptance was lacking, New technology (like the blockchain) was not yet in place, as bitcoin was introduced in 2009.
FLOOZ
Flooz - named after the Arabic word for money - went online in 1999. It was started by iVillage co-founder Robert Levitan. Older readers might remember that Whoopi Goldberg was the television spokesperson for the up and coming good thing. The advertising was excellent, but perhaps not enough people at the time trusted their computer with financial details. It was still an age where many people felt more secure going to a bank personally. Banks were eager to get people to check their balances online rather than waste paper, but it was difficult to convince people. After the fear of the year 2000 ended, Bank of America became the first bank to have more than 20% of its customer base use online banking. In 2013 about 51% of adults banked online, but even today older people tend not to. Flooz had an uphill battle from the start. Flooz could be obtained either as a free bonus or purchased directly from the site. A real crisis occurred in 2001 when flooz was informed that the Russian mafia used stolen credit card numbers to purchase flooz. It was suggests that about 19% of flooz was used for fraudulent purchases. The company closed in late 2001, also in part due to the don-com bubble bursting. Unused flooz was worthless after the business closed (http://www.nytimes.com/2001/08/27/business/e-commerce-report-seller-of-online-currency-may-have-been-victim-of-fraud.html).
LESSONS LEARNED
- E-gold was plagued by problems, including hacking and the inability to control users abusing the system for fraudulent and illegal purposes (which was also an issue with flooz). Today some users complain about online platforms shutting down their accounts if they used their currency to purchase pornography. Since this is a hot button issue that would generate a rapid response from the government, internet based brokers have every reason to be careful.
- E-gold fell afoul of money transmission laws in the USA. It appears that the modern understanding of cryptocurrency makes this less of an issue today, although there are still some states where this issue could re-emerge. A change in how the law is perceived can yield widespread changes in the cryptocurrency world.
- Digital currency like e-gold ran afoul of national banking laws (England and Wales) until the issues were corrected. Beenz ran into currency issues in France and other countries. It seems that as long as cryptocurrency is clearly named and stored in platforms that identify themselves clearly this is less of an issue today.
- Beenz was taken over by a concern that did not know how to utilize what they had. The dot-com bubble bursting crippled its ability to raise funds. The same issue was a deciding factor in the failure of flooz. If there is a bubble in the stock market it can have wide-ranging effects in the cryptocurrency market. Perhaps cryptocurrency and tech stocks should be seen as tapping similar pools of people for funding. If that is the case cryptocurrency enthusiasts should pay careful attention to bubbles forming in the tech stock world.
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wow amazing picture😮
I think you are discussing about failed coins, not scammed ones...?
Yes! The coins the failed due to external factors...
Very good post. We should be grateful that we are in a better condition now. I agree with the last point (very good advice) "cryptocurrency enthusiasts should pay careful attention to bubbles forming in the tech stock world". Thanks for sharing.
Actually pretty interesting on early cryptos. Many of which I never heard of.
thanks upvote ♥
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