Thoughts on digital gold currencies

The rise of the internet brought with it the appearance of a new form of money known as digital gold currency. This electronic currency is not bound by the laws and whims of a single government; instead it is created by a variety of banks that exist outside the restrictions of our laws. It sounds very appealing from a free market point of view.

The idea is simple. Your fiat money is electronically traded for gold, which is stored on your behalf by a bank. You can spend this gold by sending it to other bank account holders, or by exchanging it again for another fiat currency. As this currency is backed by gold, theoretically you could also exchange it directly for gold, although this is restricted mainly by transaction costs. For example, it would be hideously expensive per ounce to send 1/100th of an ounce securely from London to Los Angeles, but much less expensive per ounce for 10,000 ounces.

You don't need to worry about exchange rates when doing metal-to-metal transactions, since you are just trading by weight. An ounce of gold will forever remain an ounce of gold, even if your country collapses and it's currency becomes valueless. Further, every transaction is permament - there is no worry that the transaction will be stopped by the bank.

There are many downsides to this new age gold standard. Fees are the real killer. E-gold, the oldest of the internet gold banks, charges fees for every transaction ranging from ~5% maxing out at a flat fee of 0.05 grams of gold (~$1 currently) for transactions greater than 5 grams. Further, there is a 1% yearly account maintenance fee. Because E-gold doesn't accept fiat money to fund accounts, you have to use an outside company to trade dollars for e-gold such as Omnipay. You guessed it - this means even more fees, mostly in the form of a bid-spot and spot-ask spread of around 2%.

This is a very inefficient way to transport money. If I wanted to send my friend $1100 using this system, I believe I would have to do the following.

1) Setup an omnipay account.
2) Fund the omnipay account, buying e-gold.
3) Setup an e-gold account.
4) Transfer the e-gold from omnipay to e-gold.
5) Transfer the e-gold from my account to my friends account

Captain Arbyte has a good description of what it takes to get the account going.

My estimate of the fees required:

1) Overseas wire transfer: ~$32 (for Wells Fargo)
2) 2% omnipay fee: $22
3) 0.05 AUG (~$1) E-Gold fee

Total fees to transfer $1100 = $53 = 5%

But wait! My friend still needs to go the other direction to get fiat money he can actually spend in his country.

4) 2% omnipay fee: $21
5) Wire transfer: ~$32

Net: $994 in his account, assuming the transaction was instantaneous and the spot price of gold didn't change in the meantime. The transaction fees are 9.6%! Even if you were transfering sums of money which made the 2 wiretransfer fees and e-gold spend fee irrelevant, the 2 x 2% omnipay would always kill you. The only place where I can see this having potential for transfering payment between countries where a direct exchange is difficult. For example, from the United States to Cuba or Iran. This brings up some lingering issues about legality and money laundering.

So really, e-gold isn't about a currency system. It's about being able to buy gold as a currency hedge "cheap" and "secure". I use the quotes because there are cheaper ways to buy this commodity which also don't depend on the security of offshore bank.

If it's so inefficient, why are there so many spends taking place? As of this writing, there were 56,235 spends in the last 24 hours with an average of ~$62.72 moving between accounts per spend. What sort of economy is fueling this trend?

A little searching revealed a Ukranian webhost, a proxy service, and a web devel company. Pretty much everything you need to set up a fairly anonymous scam site, eh?

As much as the idea appeals to me, I think digital gold currencies are too "on the edge" and FAR too expensive to be used in real life.