Bitcoin: Open Source Cryptocurrency

Infoworld has published a great piece about the innovation of open source software, "Open source innovation on the cutting edge", which featured the peer-to-peer electronic cash system developed by Satoshi Nakamoto, Bitcoin. The Monetary Future also covered Bitcoin in a March 12, 2010 post.

From Neil McAllister at Infoworld:

"Alternative currencies for e-commerce have been attempted many times, but never one quite like Bitcoin. Its creator, Satoshi Nakamoto, has dubbed it a 'cryptocurrency', because it relies on public/private key cryptography to facilitate electronic trading in a completely anonymous, secure, peer-to-peer fashion.

Unlike past attempts at digital currency, there are no dedicated servers managing Bitcoin transactions and no central authority. All of the 'banking' functions are distributed across individual nodes on the Bitcoin peer-to-peer network.

That presents an obvious problem. How to control inflation when there's no one to manage the supply of currency? The answer is that Bitcoin is backed by a kind of digital 'gold standard'. Bitcoins are created only when a user contributes something of material value: specifically, CPU cycles, which are used to solve calculations for grid computing projects. The more cycles you contribute, the fatter your Bitcoin wallet grows -- though there are throttles in place to prevent users with fast processors from generating wealth too quickly.

By far the most efficient way to accumulate Bitcoins, however, is to exchange them with other users for goods and services, which might be anything from virtual items in an online game to a real-life used car. The advantage over existing payment systems is that because Bitcoin is distributed and decentralized, no one can veto your trades and there's no middleman to skim transaction fees. Users don't even need to disclose their real-life identities to complete Bitcoin transactions. In that sense, it's not just the Bitcoin software that's open source -- so is the currency."

Federal Reserve Notes Take Over

Michael S. Rozeff, on May 24, 2010, published part eleven of his brilliant story on America’s decline into unconstitutional money, entitled "The U.S. Constitution and Money".

Rozeff's mission is to summarize one of my favorite monetary books of all time, Edwin Vieira’s Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution.

Part eleven of the series is on federal reserve notes and Rozeff states, "This article begins with the story of the removal of silver from the money system between 1933 and 1968. It goes on to the partial reintroduction of silver and gold in the 1970s. I then survey many court cases from 1968 onwards that pitted the courts, who favored FRNs, against gold and silver advocates. These battles put a number of constitutional issues on display. They do not reveal a flattering portrait of American judges and courts at work, to say the least. Besides monetary and constitutional ignorance and error, we see bias, stonewalling, evasions, inapposite citations, slipshod thinking, and worse."

The U.S. Constitution and Money, Part 1 and Part 2, can be found here.

The U.S. Constitution and Money, Part 3 and Part 4, can be found here.

The U.S. Constitution and Money, Part 5, can be found here.

The U.S. Constitution and Money, Part 6, can be found here.

The U.S. Constitution and Money, Part 7, can be found here.

The U.S. Constitution and Money, Part 8, can be found here.

The U.S. Constitution and Money, Part 9, can be found here.

The U.S. Constitution and Money, Part 10, can be found here.


The U.S. Constitution and Money: Federal Reserve Notes Take Over (Part 11)

The U.S. Constitution and Money, Part 12, can be found here.

Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York. He is the author of the free e-book Essays on American Empire.

Britain Bans Sale of 500 Euro Note

By Dominic Casciani

BBC News
Thursday, May 13, 2010

http://news.bbc.co.uk/2/hi/uk_news/8678886.stm

Exchange offices in the UK have stopped selling 500 euro banknotes because of their use by money launderers.

The Serious Organised Crime Agency says 90% of the notes sold in the UK are in the hands of organised crime.

Soca deputy director Ian Cruxton said 500 euros had become the currency of choice for gangs hiding their profits.

The move means nobody will be able to buy the note in the UK - but travellers will be able to sell them if they enter the UK carrying them from abroad.

There has been mounting international concern over the note, which is worth more than £400, and its use by criminals or tax evaders.

Massive sums

Soca says that an eight-month analysis of movements of the note in the UK revealed that it was almost exclusively used by money launderers shifting cash for major crime gangs.

The British trade in the notes is thought to be worth some 500 million euros - but less than 10% of them are bought by legitimate tourists and business travellers. Financial crime investigators concluded that there was no credible or legitimate use for the note in the UK.

Instead, gangs are reportedly shifting massive sums of sterling, typically from drug dealing, through "front" exchange businesses.

Read the rest of the article.

For further reading:
"Six Kinds of United States Paper Currency", Kelley L. Ross, September 9, 2009
"FAQs: Currency", United States Department of the Treasury, November 28, 2007
"Euro giving Franklin a run for the money dominance of the C-note", Andrew Maykuth, Arizona Daily Star, May 29, 2005
"United States Currency", Ryan Thompson, undated

DGC Magazine Interview with gBullion

Mark Herpel of Digital Gold Currency Magazine has completed his interview of gBullion, a new digital currency issuer that burst onto the scene in March 2010. Christine Thompson, PR and Marketing Communications Manager, answers the questions in this DGC exclusive and reveals important jurisdictional considerations and physical server locations of the gBullion system.


DGC Magazine Interview with gBullion

Central Banks as Sources of Financial Instability

George Selgin has published an excellent piece in The Independent Review (volume 14, number 4, Spring 2010) entitled "Central Banks as Sources of Financial Instability". Selgin is a senior fellow at the Cato Institute, professor of economics at the University of Georgia, and the author of the Independent Institute book Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775–1821.

Selgin states:

"The present financial crisis has set in bold relief the Jekyll and Hyde nature of contemporary central banks. It has made apparent both our utter dependence on such banks as instruments for assuring the continuous flow of credit in the aftermath of a financial bust and the same institutions’ capacity to fuel the financial booms that make severe busts possible in the first place."

"Yet theoretical treatments of central banking place almost exclusive emphasis on its stabilizing capacity—that is, on central banks’ role in managing the growth of national monetary aggregates and in supplying last-resort loans to troubled financial (and sometimes nonfinancial) firms in times of financial distress."

"I propose to challenge this conventional treatment of central banking by arguing that central banks are fundamentally destabilizing—that financial systems are more unstable with them than they would be without them. To make this argument, I must delve into the history of central banking and explain both why governments favored the establishment of destabilizing institutions in the first place and why there is the modern tendency to regard central banks as sources of financial stability. I hope to show that the modern view of central banks as sources of monetary stability is in essence a historical myth."

Interview with Sylvain Falardeau of xGold.ca

Interviewed by Mark Herpel
DGC Magazine
Sunday, June 1, 2008

http://www.dgcmagazine.com/blog/index.php/2008/10/22/sylvain-falardeau-of-xgoldca/

Digital Gold Currency Exchange Agent Sylvain Falardeau Talks About the Industry

Meet Sylvain Falardeau. He operates the digital gold exchange service xGold.ca and the DGC payment gateway Money Proxy.

Sylvain has in the past few years created innovative software for the integration of digital gold systems into everyday life. He markets and advertises online and offline. His local talents in Canada far exceed the marketing of any other agent I know in Canada. Even his business card is a scratch off free sample of digital gold.
His web site xGold.ca flawlessly integrates Canadian online banking and digital gold exchange. You can buy as little as $10 in gold for just a tiny fee.

His business slogan is a simple one,
"Gold at your fingertips"
"L'or à votre portée."

It's always a pleasure to discuss business with Sylvain. Here is my interview.

(Q) xGold.ca is an exchange provider for digital gold currency. There are now some popular e-currencies like Liberty Reserve which are not backed by gold. Have you considered exchanging for non-gold backed digital money?
xgold.ca is really about gold currencies. We do not expect to add any non-gold backed currencies. We are thinking to add c-gold in the coming months.

(Q) What is the most popular service that you provide to users? In the last three years since your business opened, what size growth have you seen in daily orders?
We have basically three services:

1. Gold to Bank
2. Bank to Gold
3. Invoice Payment

Gold to Bank is our most popular service. We now process 350% more grams with Gold to Bank transactions than in the first months of our opening. Our Bank to Gold service rose by 285% during the same period. In proportion, we have nearly twice Gold to Bank transactions than Bank to Gold. We are clearly buying more than selling.

(Q) What is your rate today on e-gold exchanges? Does that change daily? We have a 9.5% fee for Gold to Bank with e-gold. We monitor the market and our cash reserve then adjust the fees accordingly.

(Q) What is your goal in operating this DGC business? What would your mission statement say?
"Gold at your fingertips" really describe our service. After the first account authentication and authorization, buying gold is as easy as normal online banking. No wire transfers, money orders or Western Union.

Our goal was to make it easy for anyone to start buying gold. People normally think they need a lot of money to start. And with other exchange agent, you also have to get a money order or have to worry about fees (basic fees in Canada for wire transfers are 15-30$ + the time to get to the bank if you do not have the online web interface). The minimum amount for a Bank to Gold transfer is 10$. So even a student can purchase 10$ of gold with his paycheck every two weeks if he wants. It is basically, gold for everyone. When we started the project, we also tried to differentiate ourselves from other exchange agents. When we began in the field, we purchased gold from other well established agents. We sent wires transfers, they paid us when it cleared in their bank accounts. It makes it difficult to profit from an opportunity when the exchange rate of gold is low. In a couple of days, the gold may have risen quickly and you have lost a deal. At xgold.ca, all transactions are quoted at the time you approve the transaction. You know the amount in gold or dollars you will receive in your account: no surprise. This is really convenient for buyers and sellers.

(Q) Your service offers a direct online banking connection for customers. Is that only Canadian bank accounts?
Yes, we only deal with Canadian bank accounts. We aim to provide integration between the banking system and gold currencies instead of simply buying and selling gold. Our customers do not have to deal with wire transfers or money orders. They login, click "Bank to Gold", enter the amount, confirm the transaction and it's done. After the transaction clears, they receive the gold in their account.

(Q) How is your business, the Money Proxy http://www.moneyproxy.com coming along?
The system is fully operational but lacks integration with products available on the market. Our clients do not want to develop custom solutions when they implement a payment system. They want their cart software to directly support your service. Money Proxy was added to AEC, a Joomla! plugin to manage subscriptions. We will add direct support of our service in other products, like Virtuemart, in the coming months.

(Q) How does the Money Proxy work? How easy is it for developers to implement the Money Proxy into their web site or shopping cart?
It is a multi-currencies payment gateway. It allows merchants to offer many payment options to their clients without having to open and manage multiple accounts and systems. We provide an automatic exchange to gold, independent of the payment option used by the client. Every day, your merchant account, denominated in gold grams, is withdrawn to your e-gold or Pecunix account automatically. We provide a documentation for developers to integrate Money Proxy with their website. It is really similar to e-gold or Pecunix shopping cart interface. We also provide an interface in your merchant account to help you test your "callback" script (it is the script receiving the secure payment notifications).

(Q) If a exchange agent or web site owner wants to incorporate some of your software into their business, do you offer such integration and how would they go about contacting you regarding your applications such as Money Proxy?
Our experience in software development allows us to build custom solutions. People interested can simply get to http://www.moneyproxy.com/contact-us We will be happy to evaluate their propositions.

(Q) Do you ever see a time when DGC business will surpass credit cards for retail online purchases?
It would be fun to see, but, realistically, no. And this is not necessary for an alternate payment systems to succeed. I think what they need now is simply more merchants!

(Q) For enterprising DGC people in Canada, is there an opportunity to partner with your business and expand?
We do not have affiliates with xgold.ca yet. With Money Proxy, you can get a percentage of the fees we collect from the merchants you referred to us. We are open to business propositions or ideas.

(Q) You've told me before that xGold.ca is a Pecunix PREO, what does that mean and why are you one? Being a PREO does that help your customers?
The Pecunix PREO (Preferred Retail Exchange Organisation) are listed on www.pecunix.com as independant exchange agents. We decided to apply to let people know we exist and to be known by Pecunix administrators as legitimate agents. It helped our reputation, like being a member of the GDCA, to be recognized as trustworthy.

(Q) As a Canadian user, if I sell Pecunix to you today, when will the funds post in my account?
For Gold to Bank, it is two business days. Our system will calculate the exact deposit date, taking into account banks holidays and week-ends. So before accepting the transaction, you know when you will receive your dollars.

(Q) Do you offer the lowest rates for Canadian buyers?
I think our rates are really good, considering the fact that you have the control *when* you buy/sell and eliminate the risks of rapid gold exchange rate changes.

(Q) What is the absolute smallest CAD purchase I can make using your service?
0.5 grams for Gold to Bank, 10$ for Bank to Gold

(Q) I know you offer a DGC bill pay service, can Canadian customers. This is a first of its kind for DGC users in Canada?
Yes, we offered this service but it is temporarily out of service now (scheduled to resume this summer). It was used by a minority but was more a marketing strategy. When we introduced people to gold currencies, they asked "but, what can I do with this gold in my account?". It was interesting to let them know they can pay their electricity/phone/cable/etc. bills like they do with their online banking interface. We have 2300+ utility companies in our database. It is more than the number of merchants accepting gold currencies right now!

(Q) As a Canadian bank account holder, what do I need to provide in order to begin exchanges through xGold.ca?
For Gold to Bank transactions, you enter your bank account number online and you can make your transaction right away. For Bank to Gold, you have to fill and send a banking authorization form by mail. A voided check should be included with the form. After verification, we activate your account with a limited amount (300$/month). If you need larger amounts, we ask for other authentication documents (passport, driver license, utility bills).

(Q) I've seen that great sign you have for your car door, I think that is excellent advertising and peeks people's interest. What other advertising have you done and do you target specific groups?
We have done radio promotions in Quebec. We offered a cinema ticket for 1$ (to be paid in gold). We also have a "scratch" business cards acting like a voucher. You simply open a gold account and we deposit a quantity of gold instantly. It helps to get people started with at least something in their account. There is also the spudz which is very popular. It is a microfiber cloth for lens and computers. Even people not really interested in gold like it and it gives us great visibility.

(Q) When I interviewed you about one year ago, regarding the percentage of exchanges which were e-gold or Pecunix you stated that, "...90% of our business with e-gold.". With all that has happened in the last year with e-gold, how is your business split today between Pecunix and e-gold?
Now, we have people buying Pecunix and selling e-gold. Not really surprising with the current e-gold market.

(Q) Do you still have faith that e-gold will survive the onslaught of problems the government has created by their attacks?
I hope e-gold will prevail. I am not aware of all the details of the case but one thing is sure: the current situation of high out exchange rates make it less appealing to new users.

(Q) In a previous interview with me you stated that, "We out exchange with Omnipay." Do you still use OmniPay and has there been any interruption in that service?
Omnipay closed his service last year. It was supposed to be temporary because of a relocation to Africa but they did not resume their service yet. We now use other e-gold exchangers for out exchange when necessary.

(Q) I assume you have seen the recent high rates some agents are charging for e-gold exchanges. Will you be able to continue providing e-gold services if the high rates persist?
If it continues for too long, we may drop e-gold completely until the case is solved with the US DoJ.

(Q) Webmoney Transfer is automated to receive payment vouchers from what I often refer to as 'cash to digital services' around the globe like Ukash, paysafecard, cashU and ever paymer. Customers pay cash locally, receive the voucher, log in and instantly fund their WM accounts with the voucher numbers. Would you consider automating your business to include global payments from sources like these?
We thought about implementing this option when we began working on xgold.ca. Our business cards are an example of vouchers you can cash instantly. But, to be effective, you need a good number of places where you can purchase these vouchers. We may expand our payment options in the future with technologies from other companies but will have to be sure their terms of service allow the purchase of digital gold currencies.

(Q) Does your service allow user to automatically move value from Pecunix to e-gold? (autoexchange)
No, they cannot do it directly. We did not want to enter this market because other exchange agents did it. We wanted to be different. But this is not definitive, we may implement it in the future.

(Q) A year ago, the price of gold was about $650, I've always been curious to ask agents, have you made more profit on the rise in recent gold prices or your customer exchange fees?
We always make more profit from the rise in the price of gold than with our fees. I think you cannot separate the fees and the money you gain/loose with the exchange rate of gold in the long run. If we only made 3% profit on transactions, we would not be in this business anymore.

(Q) How much gold do you have on you right now?
When I meet new people, I normally have an once of gold and business cards loaded with grams of gold. They are always amazed: what? 900$ for this small thing! The most surprised are the one I first met a couple of years ago. They ask "was it not at 500$ the last time we've met?". And they are the one not buying gold or even exchanging their electronic business cards I gave them. Go figure.

I'd like to thank Sylvain for answering my questions and sharing his industry insight with us.

China's Online Payment Firms Edgy Over Regulation

By Ma Jingying & Wang Shanshan
Caixin Online
Thursday, May 13, 2010

http://english.caing.com/2010-05-12/100143296.html

BEIJING -- China's third-party payment industry has been around for more than a decade, but nearly half of that period has been shadowed by unfinished plans to regulate the sector.

Most of today's more than 300 players are private enterprises, and collectively, they deal with tens of millions businesses and individuals every year. Last year, more than 580 billion yuan ($84.9 billion) in transfers were recorded. These companies also provide payment mediation and settlement services.

Despite the sector's size and growth, however, the government has delayed finalizing formal regulations. Until now, the central bank has done little more than request public comments on draft payment and settlement regulations, as well as electronic payment guidelines, released way back in 2005.

The page may turn soon, but that hasn't settled concern that smaller companies may lose out to industry giants. A source close to central bank authorities told Caixin that final regulations may be released before July. Caixin also learned a central bank payment system linking many of the nation's big commercial banks -- but perhaps not third-party payment firms -- will come online in August.

Meanwhile, payment companies across the country are waiting to see how the changes may affect their bottom lines.

Major participants such as Alipay hope the measures formally validate their profitable businesses. But smaller competitors worry about being locked out by high entry barriers, and finding their huge investments going to waste.

Successful business model

Third-party payment companies have grown quickly to satisfy the cash-flow needs of the e-commerce industry. They generally function as money gateways and "transfer stations" between merchants and banks.

The model's earliest domestic practitioner was the semi-official PayEase, formally called the Capital E-commerce Project. It was jointly launched in November 1998 by the Beijing Municipal Government, Bank of China, the State Internal Trade Bureau and central ministries, including the Ministry of Information Industry.

An independent third-party payment company called Central iPS was launched two years later in Shanghai. That was followed by a March 2002 agreement by the State Council, with central bank approval, to create Union Pay and its ChinaPay Services Ltd.

PayEase, iPS and ChinaPay followed the same basic business model by charging merchants for access to online money transfers. But the model was shaken when basically no-fee payment companies led by Alipay and Tenpay -- a service of online-game and messaging provider Tencent -- joined the race.

By doing business with platforms such as Tencent and online-shopping giant Taobao, payment companies evolved into "credit intermediaries." Going through a third party effectively resolved trust issues inherent in online transactions. And due to their interdependence, the online-shopping and third-party payment businesses developed in tandem.

Transaction levels started to swell five years ago, doubling in a year to more to 16.3 billion yuan in total market value in 2005 and building to an astounding 581 billion yuan last year. Analysys International forecasts online payment will continue to soar, reaching 886 billion yuan this year, 1.25 trillion yuan in 2011 and 1.67 trillion yuan in 2012.

Regulation delays

But the industry is practically operating in a regulatory vacuum. The government rewrote its 2005 regulatory proposal in 2007, and sources told Caixin that proposal was revised last year. The latest version includes rules for market access and risk control.

"The current copy of the regulation is completely different compared to the 2005 draft," said a senior industry source. "Because the industry is so new and growing quickly, regulators have to keep up."

Companies have long been anxious about these government delays, especially when it comes to issues surrounding business licenses. Some companies thought the central bank was rolling with a licensing process a year ago, when it started collecting records from third-party payment companies and convened a National Association for Payment Clearance meeting.

But one source said only 130 of the nation's more than 300 payment firms submitted records for the process, which reflected "the central bank's effort to collect basic information from these third-party payment companies in terms of capital, business methods and profits." And that's as far as the process went.

"In our communication process with the central bank, we expressed our hope for clarification on a few points: What can't be done, what can be done better, and what has been done wrong in the past and needs to be corrected," said Alipay Chief Executive Officer Peng Lei. "On these points, we hope for regulatory guidance."

The impending arrival of the central bank's so-called Super Online Bank has thrown another variable into the mix. The "bank" is actually an Internet application system connecting online banks to the central bank's China National Advanced Payment System.

"This is the equivalent of adding a safety valve," said a banking source. "Online banking services offered by various commercial banks will no longer individually connect to the central bank's core payment settlement system, but will instead connect through the Super Online Bank unified access point."