In recent days bitcoin has surged past the $200 price level. That’s a bit like the Dow blazing past 15,000, which it did in May. Bitcoin’s market cap is once again over $2 billion on the back of stunning 50 percent price rises in less than two weeks.
Digital currencies have come a long way and although still niche, illiquid markets, their evolution continues at a rapid rate. But when did these disruptive, digital money trends get started? I think you can trace it to the early 1990s, well before crypto-currencies had even been conceived.
The first developments in this new money trend started with the marriage of the oldest forms of money – gold and silver bars – expressed in the 1s and 0s of the information age. After David Chaum, a mathematician started his DigiCash experiment in 1990 – it ultimately failed – and other pioneers filed patents for digital gold payments systems, the action really got started in 1996 when eGold was founded by oncologist Douglas Jackson and attorney Barry Downey.
eGold was a micropayments system backed by precious metals that was launched two years before PayPal. It tapped into a vein of ready, patent demand, quickly attracting a global user base and gaining attention. With increasing attention cyber-criminals were attracted to eGold too, enjoying its anonymous nature and launching phishing attacks against eGold members. By 2002 eGold had 1 million members. But eGold’s pioneering ways, inability to effectively thwart cyber-criminals and it’s founders’ unmoving Libertarian philosophy would come to haunt it later.
In 2008, eGold was processing over $2 billion of transaction a year, with impressive velocity in its currency system — the underlying bullion changed hands more than 100 times a year. Then in 2009 eGold hit 5 million users before being shortly suspended for legal issues. After a long legal battle the directors reluctantly accepted a bargain with US prosecutors in July 2008. Most charges against eGold were dropped but those relating to money laundering and criminality resulted in fines of $3.7 million. Ultimately this proved to be the end of eGold as a force, as the US Patriot Act’s increasing scope claimed a high-profile scalp.
After eGold’s early success eBullion was launched in December of 2000 by Jim Fayed. eBullion was also a model based on the instant transfer amounts of gold and silver between users seeking to transact outside of government money. Like its forerunner, eBullion enjoyed significant traction, partly as a result of eGold’s problematic reputation as a haven from criminals.
In August 2008 eBullion also came unstuck in the courts, also being prosecuted under the Patriot Act for crimes relating to money transmission, money laundering and criminality. The eBullion story got a whole lot spicier due to the founder, Jim Fayed’s untimely murder of his wife and his subsequent incarceration. Notably during the eBullion take down, company and client assets were seized and clients around the world were never compensated for their losses.
We now saw the early maturations in this market for digital gold and silver providers, with new entrants like GoldMoney arriving in 2001, founded by precious metals guru, James Turk.
GoldMoney sought to carefully position itself as the ‘white glove’ alternative to eGold and its perceived frontier business practices. GoldMoney’s PR strategy was effective as it deployed stronger security technologies, extensive client identification and money laundering checks and successfully built a brand as the trusted choice for gold and silver.
Over time GoldMoney came to be used more as a savings mechanism by clients holding bullion in vaults all round the world than as a payments mechanism. GoldMoney had more than $2 billion of client assets owned through its platform by 2011. The company actually turned off the ability to make payments from one account to another in January 2012, citing insignificant demand and the high costs of regulatory compliance.
After experiments in the early 2000s, Liberty Reserve also enters this trend in 2006. By enabling users to convert their dollars and euros into Liberty Reserve dollars, Liberty Reserve euros or ounces of gold, Liberty Reserve served as another alternative payment mechanism outside of government money.
Liberty Reserve’s highly anonymous nature, where clients didn’t have to pass any ID checks, was controversial with the regulators eventually prosecuting the founder, Arthur Budovsky, and six others in 2013 under the US Patriot Act. All the accused were found guilty of money laundering and operating an unlicensed financial transaction company. Estimates of how much money was, in fact, laundered through Liberty Reserve vary, ranging from $3 million to $10 million.
After the bullion-based disruptions cryptography technologies that had grown and matured with ecommerce on the internet generally were now ready to enter the monetary fray, being leveraged in new ways to further disintermediate state-provided money systems.
In 2008 a person or entity called Satoshi Nakamoto posted a paper online called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, describing a community electronic cash system based on open-source cryptographic protocols independent of central banks or governments. This vision soon became a reality with the Bitcoin Genesis Block.
The first bitcoin transactions occurred in 2010 with the notable 10k BTC pizza sale entering the annals of digital currency history. Over the next few years bitcoins circulated in relative obscurity as a global network of libertarian, anti-fiat developers worked away to improve and evolve the currency. During this time bitcoin attracted quite a few high-profile fans and cheerleaders, the largest being maverick financial journalist, Max Keiser.
New competition and evolution in crypto-currency
After a few years as the pioneer, bitcoin was joined by new competitors with new takes on crypo-currency.
Litecoin and Namecoin arrived in 2011, PPCoin is started in 2012 and in September of that year the Bitcoin Foundation is established to ‘drive bitcoin advancement’. The emergence of new digital currencies is still occurring today, with Feathercoin appearing in early 2013.
New infrastructure and technologies began to grow within this crypto-currency ecosystem, one example of this is in early 2012 businesses like BitPay reported over 1,000 merchants accepting bitcoin through its payment processing service. Around the same time payment processor Coinbase also reported selling $1 million in bitcoin in a month.
The authorities soon made their appearance in the crypto-currency story too, with the US’ Financial Crimes Enforcement Network (FinCEN) acting as the main protagonist, freezing Dwolla’s accounts and affecting US clients using the digital currency exchange Mt.Gox. Only a month later FinCEN established regulatory guidelines for virtual currencies like bitcoin and its brethren. FinCEN classified miners of these currencies who then sold them as Money Services Businesses, potentially subject to registration and other legal obligations.
Evolution and development continued to occur in the market for digital currencies, before widespread coverage in the mainstream media occurred in early 2013 thanks to a perfect storm of fear stoked by Cyprus’ role in the continuing euro saga. Since then we’ve seen a calming of media and public attention, now piqued once more as bitcoin consolidates above $200.
Where next for money?
The internet and technology might indeed represent the biggest threat to state enforced money systems, but as of yet we have not seen the great disruption some hope for. The US dollar is still the world’s reserve currency, not bitcoin, and other national monies still hold far larger pools of capital than their new competitors.
However, we have indeed seen enormous progress and evolution in digital money, which is being continued by huge inflows of venture capital, development skills and computing power. Bitcoin breaking the $200 mark will act as a rallying point for crypto-currency evangelists and a key step on this currencies maturation.
It is still extremely early days in this great fiat disruption. At this time little more than $2 billion makes up bitcoin’s market cap, while the other major crypto-currencies have market caps in the millions.
We cannot yet know if being ‘of nature’ is gold’s greatest strength here, when digitized. We also cannot yet know if crypto-currencies’ superior mobility over gold is a trump card, or whether being ‘of man’ poses a problematic vulnerability. The authorities and regulators also present a great unknown. Thailand, for example, recently banned bitcoin.
It’s been a wild ride so far in this disruption (this infographic visualises it) and it looks like it’s going to get a whole lot more interesting.