Everyone who has been following the evolution of crypto currency exchanges has learned how expensive it is to comply with all of the regulations in the money transmission business. It can literally takes years and millions of dollars to get permission from the government to start an exchange that accepts dollars for crypto currencies. All alt-coin communities have experienced the frustration of having to go through two exchanges (dollars to bitcoin and bitcoin to alt-coin) just to enter or exit the ecosystem. This two step process is expensive and ultimately limits adoption. Today I would like to present the case for abandoning fiat all together and adopting a truly free market currency: gold, silver, and other metals.
As you know my goal is to find free market solutions that make government irrelevant. It doesn’t do our society any good to move to a crypto-asset that is pegged to the fiat dollar if the government still retains the ability to debase our currency. Instead, we need to adopt crypto-assets that are pegged to other forms of money and then encourage people to adopt these physical assets as money rather than paper fiat.
Some of you may be familiar with e-gold. E-gold was a private, international digital currency that was 100% backed by gold. The service allowed people to open accounts anonymously and at its height had over 3.5 million customers with deposits worth over $85 million in gold. E-gold charged just 1% transaction fee with a 50 cent cap. Sadly, e-gold was shut down for the same reason as many crypto currency exchanges: it was a money transmission business (aka MSB) that accepted fiat and didn’t follow MSB regulations.
The problem with e-gold was that it was both a currency issuer and the exchange that accepted dollar deposits. At the time it was the second largest internet payment processor next to PayPal. It is the combination of services that exposed e-gold to the huge regulatory requirements, but not all companies that buy and sell gold are subject to FinCEN and MSB licensing provided their business does not transfer funds among customers.
Under FinCEN rules, dealers in precious metals, stones, or jewels are required to establish an anti-money laundering program consisting of the following steps:
- Policies, procedures and internal controls, based on the dealer’s assessment of the money laundering and terrorist financing risk associated with its business;
- A compliance officer who is responsible for ensuring that the program is implemented effectively;
- Ongoing training of appropriate persons concerning their responsibilities under the program;
- Independent testing to monitor and maintain an adequate program.
Additionally, if you sell gold or silver in certain cases a 1099b report is required by the IRS.
What is clearly not required is a license as a money transmission service. This dramatically lowers the cost of compliance and opens up huge new opportunities for the crypto currency community.
What we can learn from this is that companies can buy and sell gold for crypto-currency without having to register as a MSB. This is huge because it also frees us entirely from the current financial system and yet allows us to quickly convert tangible wealth into crypto-wealth and back again.
Shipping Gold vs Wire Transfer
A wire transfer costs $35 dollars on the sending side and $16 on the incoming side. Anyone who has deposited or withdrawn money from BitStamp has run into these kinds of fees. An international wire transfer can take about 5 business days.
Blanchard charges $27 dollars for shipping 0 to 5 oz of gold and up to $99 for 50 oz of gold. Over 50 and shipping is “free”. What this tells us is that for most wire transfers of sizes used by ordinary people the cost of shipping gold is comparable to the cost of a wire transfer and they both take about the same amount of transit time.
For all practical purposes, I could deposit gold or silver to a US exchange with the same speed and cost as an international wire transfer.
Avoiding E-Gold’s Fate
E-gold was shut down because it violated various laws around accepting deposits in gold and silver and allowing those deposits to be transferred among its customers. Each and every day for the past 40 years there have been dozens of companies that have been buying and selling gold and silver by mail without any trouble. The key is to never issue IOU gold notes and silver notes and to make every transaction “final” and of the same character as any other purchase.
This is where BitShares and BitGold come into play. BitGold is a digital asset similar to Bitcoin that is fully decentralized with no issuer. It is backed by 2-3 times its value in BitShares and the collateral is held by the blockchain itself and cannot be seized, stolen, or confiscated. Like BitUSD it can maintain a purchasing power within a few percent of actual gold or silver coins at all times.
It would be amazing if someone like coinabul bought and sold gold coins for a fixed spread relative to BitGold. With a couple of these businesses in place, every local pawn shop would feel confident buying and selling Gold for BitGold (with a small fee). The end result is that pawn shops and coin stores around the world become the local branches of a fully decentralized e-gold like 'bank'.
Pegging to Coins not to Spot
The spot price of gold is known to be heavily manipulated and is not a good estimate of the value of gold for immediate delivery. Instead it serves as the value of a gold contract on an exchange that allows settlement in fiat and requires large quantities before you can politely beg for delivery.
I had Stan, my father, call around and get price quotes for immediate delivery of gold from various companies. The average premium for 1oz of gold in any form (Eagle,Maple Leaf, Krugerrand, Kangaroo, or Panda) is about $55 dollars or about 4% over spot price. The average shipping price was $29.
In my opinion, this is a more accurate and useful measure on the price and value of gold. After all, wouldn’t it be much more convenient if all of your agreements could specify payment in either physical gold coins or BitGold? If you peg to the spot price then every agreement would have to name two prices depending upon how someone wanted to settle. Pegging to the price of a gold coin also makes it easier for individuals to compare fees charged by bullion dealers.
In an ideal world, two strangers meeting on craigslist would simply trade BitGold for gold at 1:1 because neither party is “in the business” and thus there are no fees to be charged. This situation would completely change the crypto currency landscape and make it much easier for everyone involved to facilitate trade without having to rely on the banking system at all.
By pegging to gold coins speculators can free themselves from the risk of spot price manipulation and gain a return from a rising premium for physical delivery. In a shaky economic environment where the commodity exchanges could decouple from the physical prices, only BitShares offers gold traders a counter-party free means of trading Gold vs Silver and Gold vs dollars.
Benefits of Pricing in BitGold vs BitUSD or Bitcoin
When buying or selling gold or silver online there is a one week delay from the time you "lock in your price" until the dealer receives the physical goods. This exposes every trade to volatility risk, especially if you are trading Gold for Bitcoin. On the other hand, if you are selling Gold for BitGold then both buyer and seller are protected from volatility for the duration of the trade. This is especially useful for escrow transactions which can take time to settle.
Local trading of Bitcoin has not been very successful because of the high spread charged by local buyers and sellers. If you have to match bid, ask, and location you have a much smaller market than if you only have to match location; this is why most Bitcoin trading is done on a few large centralized exchanges. BitGold removes the price volatility from the equation of local trading which will make it far more viable.
Lastly, trading BitGold for Gold locally is far less likely to run into situations like the men in Florida who were arrested for selling $30,000 worth of Bitcoins to under cover cops.
Bitcoin vs E-Gold
E-gold was fully redeemable for $85 million dollars which if we were to compare it to Bitcoin would be like asking what the value of Bitcoin would be today if $85 million dollars worth were sold in a single day. It is safe to say that the Bitcoin price would sag significantly if redeemed at such a rate which would lower its price significantly giving it an effective market cap of half what it is notionally worth today. This means that Bitcoin is currently 15 times larger than E-Gold at its height.
If there existed $85 million dollars of BitGold within the BitShares ecosystem, then it would have a total collateral worth at least $255 million and would likely represent less than 10% of the BitShares supply (because not everyone would be willing to short) and because people would likely have an equal amount of value held in BitUSD, BitSilver, and BitCNY. In any event, we can conclude that if BitShares can gain the same adoption for BitGold that e-gold managed years ago then it would have a market cap of over $2.5 billion dollars and a price of $1 per BTS.
The success of e-gold proves there is demand for a digital gold currency. BitShares with BitGold is the first real solution that has the potential to succeed where e-gold failed.
BitGold pays a Yield
The icing on the cake is that BitGold will pay a yield proportional to the expected growth rate of BitShares itself relative to gold. For the first time in history a 300% reserve system is able to offer a relatively low risk return on gold and silver with a cut in the upside potential of the blooming crypto-currency space.
BitShares delegates should heavily consider whether or not their price feeds are reflective of the true price of 1 oz of gold for immediate delivery and consider making adjustments to the spot price to account for the real world premiums that exist. This will make BitGold far more attractive to gold bugs that do not want to trade on the rigged system and hope to see huge gains when the spot price decouples from physical prices. We need to encourage gold and silver dealers to adopt BitGold as a means of payment so that we can form a network of “local branches” around the country in every local coin shop or pawn shop.
Liberty minded people trust gold and silver and will more readily adopt crypto currencies if they are pegged to something they trust and not to something controlled by those who enslave us with their fiat monetary system.