A Brief History of Digital Currencies

A while back, I wrote about a pending academic research project I was embarking upon with Jeremiah Newhall, a good friend of the site. Below you will find a draft version of a section of our paper on the history of digital currencies. Part of the reason I am posting this is to solicit feedback, so please feel free to submit your thoughts in the comments section below. Additionally, please bear with us on the citations, the long courtesy-of-Wikipedia block quotes and the potentially poor first-draft wordsmithing.

History of Digital Currencies

While we will shift to a more focused discussion of one particular digital currency below, here we will provide a brief history of digital currencies for reader context. Before doing so, however, it might be helpful to provide the definition of digital currency as we use the term below to avoid undue confusion.

Definition can of course be used frame conversations about just about any concept. If too narrow or broad a definition is used, a discussion on a concept can be stripped of its usefulness.  With that in mind, the broadest definition of digital currency would be ‘anything which facilitates transactions electronically’ and could include things as disparate as web-based bank transfers, ATM transactions, wire transfers, electronic funds transfers, credit card use on websites[1] and online bill payments. While such broad definitions might be helpful in some contexts, they are too broad for our purposes, particularly with respect to the legal regime which we believe should govern digital currencies.

Here, we are talking more specifically about digital currency systems, that is, those currency systems which facilitate transactions without the use of paper currency or coins[2] and which exist, to a large extent, independent of existing, established currency regimes[3]. Heretoforward, any discussion of ‘digital currency’ is meant to reference such independent (though not necessarily closed)[4] systems of exchange.

Digital currencies are not a new phenomenon. Almost as long as the internet has been a presence in the lives of most average Americans, digital currencies, have existed on the periphery of[5] many everyday interactions between individuals. The following categories, with examples of each, represent the evolution of digital currencies.

Online currencies[6]:

Digital Gold Currencies[7]:

OS-Gold, Standard Reserve and INTGold

Several companies claiming to be Digital Gold Currencies sprang up and failed between 1999 and 2004, such as OS-Gold,^[2] Standard Reserve^[3] and INTGold.^[4] All these companies failed because the principals diverted deposits for other purposes instead of holding them in the form of gold. In each of these cases, account holders lost several million dollars worth of gold when the "institution" failed.^{[citation needed]}

e-gold and 1mdc

Following April 27, 2007, the United States Department of Justice forced e-gold to liquidate some 10 to 20 million dollars worth of e-gold, and is attempting to bring a case against e-gold.^[5] e-gold has committed to counter what its founders have declared to be groundless allegations.^[6]

1mdc was backed by e-gold, so events that affected e-gold also affected 1mdc. Once e-gold Ltd. was instructed by the US government to freeze and liquidate all 1mdc accounts, 1mdc became insolvent by default along with all other e-gold accounts seized in the April 27 action.^{[citation needed}

e-Bullion

As of August 2008 Jim Fayed of e-Bullion is in United States Federal custody where he faces felony charges of conducting unlicensed money transactions and the murder of his business partner.^{[citation needed]}

As of January 2010 e-Bullion is closed for business and the website unavailable.^{[citation needed]}

As of June 2011 e-Bullion owner James Fayed was found guilty of murder in the State of California, and sentenced to death.

Beenz.com[8] - Beenz.com was a web site that allowed consumers to earn beenz, a type of online currency, for performing activities such as visiting a web site, shopping online, or logging on through an Internet service provider. The beenz e-currency could then be spent with participating online merchants.

The marketing and brand concept positioned Beenz as ‘the web's currency,’ global money that would challenge the world’s major currencies.^{[citation needed]} The Beenz management team raised almost $100 million from venture capitalists including Apax/Patrickof, Larry Ellison of Oracle, Francois Pinault of PPR, Vivendi Universal, Italian financier Carlo de Benedetti and Hikari Tsushin of Japan.

Since launching a new currency is illegal in many countries, beenz management and its legal teams had to meet with finance ministers across Europe to assure them that Beenz would be categorized as virtual points. Within days of its launch in the UK, Beenz' offices in London were visited by the Financial Services Authority (FSA) on suspicion of operating an unlicensed bank (apparently the FSA misunderstood that the 'Bank of Beenz' on the website was, in fact, just a marketing name for the user account area. The company agreed to change this to 'My Beenz' and the FSA was satisfied).^{[citation needed]} Beenz received several awards for its marketing campaign.^{[citation needed]}

Beenz operated in the United States, Sweden, France, Germany, Italy, Japan, Singapore, Australia and China. At its peak, there were offices in 12 countries, and translations of the beenz website into several languages.

After the dot-com bubble burst, the company replaced its CEO, Philip Letts, with a team including the founder, Charles Cohen, and other Board directors Stephen Limpe, Don McGuire and Sean Lane. The company could not go public, further funding did not materialise, and the company was sold to US-based Carlson Marketing Group in 2001 for an undisclosed sum.

Carlson planned to integrate the beenz system into the customer relationship management tools they offered to clients. After the sale of the company to Carlson, beenz account holders were given a period of time to redeem their beenz before it became integrated. After 9/11, Carlson's business (which was heavily reliant upon bank and airline points programmes) struggled and the beenz concept was shelved. Carlson did not renew the domain name.

DigiCash[9][10]- DigiCash Inc. was a pioneering electronic currency corporation founded by David Chaum in 1990. DigiCash transactions were unique in that they were anonymous due to a number of cryptographic protocols developed by its founder. DigiCash declared bankruptcy in 1998, and subsequently sold its assets to Ecash, another digital currency company, which was acquired by InfoSpace on Feb. 19, 2002.

Ecash[11] - Using cryptography, ecash was introduced by David Chaum as an anonymous electronic cash system. He used blind signatures to achieve unlinkability between withdrawal and spend transactions.^[1] Depending on the properties of the payment transactions, one distinguishes between on-line and off-line electronic cash. The first off-line e-cash system was proposed by Chaum and Naor.^[2] Like the first on-line method, it is based on RSA blind signatures.

In the United States, only one bank implemented ecash, the Mark Twain bank,^[3] and the system was dissolved in 1997 after the bank was purchased by Mercantile Bank, a large issuer of credit cards.^[4] Similar to credit cards, the system was free to purchasers, while merchants paid a transaction fee.

In Australia ecash was implemented by St.George Bank, but the transactions were not free to purchasers. In June 1998, ecash became available through Credit Suisse in Switzerland. It was also available from Deutsche Bank in Germany, Bank Austria, Finland's Merita Bank/Eunet, Sweden's Posten, and Den norske Bank of Norway.^{[citation needed]}

"ecash" was a trademark of DigiCash, which went bankrupt in 1998, and was sold to eCash Technologies, which was acquired by InfoSpace in 2002.

Virtual World Currencies[12]:

Generally[13], a virtual economy (or sometimes synthetic economy) is an emergent economy existing in a virtual persistent world, usually exchanging virtual goods in the context of an Internet game. People enter these virtual economies for recreation and entertainment rather than necessity, which means that virtual economies lack the aspects of a real economy that are not considered to be "fun" (for instance, players in a virtual economy often do not need to buy food in order to survive, and usually do not have any biological needs at all). However, some people do interact with virtual economies for "real" economic benefit.

Virtual economies are observed in MUDs and massively multi player online role-playing games (MMORPGs). The largest virtual economies are currently found in MMORPGs. Virtual economies also exist in life simulation games which may have taken the most radical steps toward linking a virtual economy with the real world. This can be seen, for example, in Second Life's recognition of intellectual property rights for assets created "in-world" by subscribers, and its laissez-faire policy on the buying and selling of Linden Dollars (the world's official currency) for real money on third party websites.^{[citation needed]} Virtual economies can also exist in browser-based Internet games where "real" money can be spent and user-created shops opened, or as a kind of emergent gameplay.

Many MMORPGS such as RuneScape, World of Warcraft, Guild Wars, Warhammer Online, Lord of the Rings Online and Final Fantasy XI strictly prohibit buying gold, items, or any other product linked with the game, with real world cash. RuneScape went as far as making this practice impossible by removing unbalanced trades and their traditional player killing system (this was scrapped on February 1, 2011 after having been in place for 3 years), resulting in over 60,000 cancelled subscriptions in protest.^[13] Final Fantasy XI and Warhammer Online both have entire task forces dedicated to the removal of real money trading from the game. To control real money trading, EVE Online created an official and sanctioned method to convert real world cash to in-game currency; players can use real world money to buy a specific in-game item which can be redeemed for account subscription time or traded on the in-game market for in-game currency.

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[1] Indeed such transactions on websites such as PayPal and eBay are roughly precursors to the concept we discuss here.

[2] Some readers will recognize this as scrip, very loosely defined as a means of exchange which is not considered to be legal tender. Colloquially, this could be anything used to facilitate transactions which isn’t government created or endorsed ‘money’.

[3] Complete independence will not exist so long as people exchange one thing for another. In terms of digital currencies, many people exchange them for existing currencies, and thus a value of the digital currency is created in the form of an existing currency. This provides a convenient means of conceptualizing what things are ‘worth’ as the value of existing currencies, such as dollars are widely understood. However, it makes ‘independence’ a difficult state of existence to ever truly achieve.

[4] Notwithstanding the previous note, ability to exchange, and therefore lack of independence does not make digital currencies dependent on other currencies. Therefore, this description, independent but not closed, is probably the best way to describe how such systems work in reality.

[5] And even centrally to; it is estimated that the currency in the World of Warcraft video game series, including its several iterations and expansions, has spawned an $XXXXX real-world transaction market where players buy gold for the game using legal tender. (need the number and a solid cite). As of 9/30/12, one could purchase 500,000 gold for $729, €568, or £452 for the O, Onyxia US - Alliance server on one exchange.  See, http://www.wow-goldstore.com/ . Potential arbitrage scenarios are seemingly available for the entrepreneurial among this paper’s readers, but are, alas, outside already oft-expanded scope of this paper.

[6] Cites required on these examples

[7] This is straight from Wikipedia…need to rewrite and find more authoritative source

[8] Ditto

[9] Ditto

[10] Check into Presenting Digital Cash, p. 99-106, 226-229; Seth Godin

[11] Ditto

 

[12] Cites required on these examples as well

[13] From Wikipedia, need to rewrite and find authoritative sources

 

Jeremiah Newhall is a graduate of The George Washington University Law School and currently serves as a law clerk in Chicago. He can be reached via the miracle of email. Joshua Sturtevant is also a GW Law grad, and currently serves as an in-house legal fellow at a renewable energy financing and development firm.