Thursday, March 18, 2010

The Digital Currency Doppelganger

Peter C. Tucker, J.D., Business Editor for Cardozo Journal of International and Comparative Law at Benjamin N. Cardozo School of Law, has published an engaging chronicle and modern analysis of the digital currency environment. It's entitled "The Digital Currency Doppelganger: Regulatory Challenge or Harbinger of the New Economy?" in Volume 17, Number 3 (2009) and the full article is available via a one-click download here. In addition to profiling certain digital currency issuers and exchangers, The Monetary Future has covered legal and physical jurisdiction concerns. Those articles can be found in the blog archives.

Unfortunately, the author here comes down on the side of regulation, both domestic and international. Financial privacy and monetary freedom are fundamental human rights that have been continually eroded, especially when it comes to the innovation and evolution of digital currencies. It is always amazing to me that the same people respecting the anonymity of a paper $100 bill do not seem to respect that same privacy when it is extended into a 'digital cash' equivalent. A digital bearer certificate, privately issued, would emulate the anonymity and untraceability features of a paper bill just like the ones in use today. The cryptographic technology exists now. Privacy should not be sacrificed simply for the sake of going digital.

Tucker correctly states that digital currencies ultimately are born of market demand. This market demand may be driven by microtransactions, wealth preservation against fiat currencies, confidentiality from merchants, general financial privacy, etc. Also, the commodity backing a private currency must be determined by the market, in accordance with Mises' regression theorem. Exchange agents provide a much-needed function in terms of localizing the service, facilitating rapid growth, and providing a vibrant two-way exchange for multiple digital currency issuers. The exchange agents also provide an additional layer of protection from over-zealous governments that seek to restrict the financial privacy of their citizens. Therefore, I come down firmly on the side of 'harbinger of the new economy' and I hope to play a part in its realization.

From the Introduction:
"You are a doctor, a board-certified oncologist and a founding partner of a lucrative group oncology practice. You enjoy the wealth and prestige that comes with practicing medicine until one day you read a book, Friedrich A. Hayek’s The Road to Serfdom. Long interested in credit theory, you familiarize yourself with the bad boys of economic theory, the Austrian School. You become convinced that the phenomenon of cyclical economics, the peaks and troughs of economic progress that have been observed for centuries, could be almost entirely attributed to the manipulation of money supplies by the federal governments of the world. Steeped in economic theory, you begin to hypothesize that wars and recessions the world over have been fertilized by the noxious manure of monetary manipulation. Although you continue to see patients your hobby, your interest becomes an obsession, a plan. You teach yourself a programming language and begin writing code day and night, often forgetting to eat. You lose weight, stop attending your local church, and finally, you sell your medical practice and liquidate your life’s savings. You launch a private currency on the Internet. You are Dr. Douglas Jackson, the founder of E-Gold Ltd."
"Nine years later, Dr. Douglas Jackson had a bad day. On the evening of December 19, 2005, Secret Service and U.S. Federal Bureau of Investigation (FBI) agents raided Dr. Jackson’s home and the offices of Gold & Silver Reserve Inc., the parent company of E-gold Inc. The agents copied data from Dr. Jackson’s servers, but did not immediately file charges. However, on April 24, 2007, a federal grand jury indicted both companies, Dr. Jackson, and his business partner on 'one count of conspiracy to launder monetary instruments, one count of conspiracy to operate an unlicensed money transmitting business, one count of operating an unlicensed money transmitting business under federal law and one count of money transmission without a license under D.C. law.' According to the indictment, Dr. Jackson and his business partner conducted fund transfers on behalf of customers whom they knew to have funded their accounts with moneys gained from unlawful activity, 'namely child exploitation, credit card fraud, and wire (investment) fraud; and thereby violated federal money laundering statutes.' The conspiracy to commit money laundering charge alone carries a maximum sentence of twenty years."

3 comments:

  1. I've downloaded the .pdf, but haven't yet mustered the courage to read Dr. Tucker's paper given his position on regulation. How disappointing.

    I'd be interested and tremendously excited if someone can actually figure out how to create a market-driven, anonymous currency that is truly independent of any political sphere. Otherwise, I'm afraid its shelf-life will be short, especially within the United States.

    ReplyDelete
  2. His final statement that the U.S. should take a wait-and-see point of view is reasonably good. The paper is chocked full of details. However, his facts regarding e-gold and some statements are incorrect so they will need a fixin' :-)
    Mark

    ReplyDelete
  3. From the author, Peter Tucker:

    I’m writing to correct a misunderstanding. From your blog:

    "Unfortunately, the author here comes down on the side of regulation, both domestic and international."

    I apologize if the article was misleading, but I would like to point out that the conclusion of the paper is decidedly not pro-regulation. The entire undertone of the paper is anti-regulation.

    As per the conclusion section of the paper, the conclusion is that U.S.-based entities in the digital currency space should make every effort to comply with regulations that weren’t designed to apply to them because the Justice Department seems willing to bend over backwards to MAKE these regulations apply. In this regard, the article serves as a warning, a signpost to people trying to start digital currencies (i.e, it’s possible and viable, you just have to be careful how you structure it).

    ReplyDelete