Feds get serious about digital gold currencies

[Steve Schear]

Law enforcement officials are investigating the business of Florida 
oncologist-turned-Internet entrepreneur Dr. Douglas Jackson to determine if 
he had any knowledge of criminals allegedly using his gold-backed currency 
system to launder money or steal identities.  In December the FBI raided 
Jackson's Melbourne business, Gold & Silver Reserve Inc., the parent 
company of e-gold Ltd., and his home in  Satellite Beach.

The E-Gold raid may be set off by an alleged digital currency scam by a 
minor digital currency company.  The U.S. Department of Justice raided the 
offices and homes of the principals of INTGOLD which had been portrayed by 
some members of the DGC community as a Ponzi scheme in the weeks leading 
up.  Some of the funds in INTGOLD traveled through exchange agents also 
dealing in E-Gold had been deposited or withdrawn through independent 
exchange agents.  E-Gold, arguably the oldest DGC, did not appear to be 
anymore involved in the fraud than banks who unknowingly receive allegedly 
tainted funds.

In the raid, federal agents took files and hardware related to e-gold, an 
on-line service Jackson started in 1996, which turns physical dollars into 
digital currency that is backed by gold repositories in London and
Dubai.  Some aspects of the company's operations were reported by Jackson 
to have been impaired.  Bank accounts were seized and some funds were 
impounded.  Jackson said the investigation has resulted in a loss of 
revenue when computer servers were taken off-line for 36 hours.  "The worst 
effect, of course, is on our reputation," Jackson said. It "will surely 
impair our efforts to build strategic relationships with the host of 
businesses and individuals that would benefit from an embrace of e-gold."

It seems there has been some on-going regulatory maneuvering by E-Gold to 
have its services classified as a currency rather than a payment system 
operator or money transmitter.  Whether an on-line payment system or 
digital currency service meets the definition of a money transmitter 
pursuant to U.S. Banking Secrecy Act (BSA) regulations, though, depends 
upon its location and the ways in which it participates in or conducts 
transactions. Many on-line payment systems are based outside the United 
States and are not subject to US jurisdiction. Some on-line payment systems 
maybe be licensed in one country and maintain operations in various other 
countries without a physical retail presence anywhere. Determining which 
legal entity has jurisdiction for regulatory and enforcement purposes can 
be challenging for regulators.  As a result, potential users around the 
world now are finding they can go on-line to access payment solutions that 
may be unavailable from a domestically-regulated service provider.

In possible coordination with the raid an uncomplimentary and perhaps 
unfair piece about E-Gold was published by in January 9th issue of 
BusinessWeek magazine, with the article noting that e-gold and similar
on-line payment systems are becoming the currency used by cyber-criminals 
to steal credit card information, sell identities and  make ill-gotten cash 
disappear.  Experts say similar issues will keep cropping up as the world 
moves to digital medium and online payment systems gain more mainstream 
acceptance.  At e-gold alone, Jackson estimates his site has more than 1 
million users moving billions of dollars a year for a small fee.

Jackson denied he didn't adequately police his company, adding that he has 
an investigative staff that responds to inquiries from agencies inside and 
outside of this country that need information about 
e-gold  customers.  Jackson said, "E-gold has a long history of cooperation 
with law enforcement agencies in the U.S. and worldwide, providing data and 
investigative assistance in response to lawful requests" and that prior to 
the raid he had met with officials from the FBI, the Internal Revenue 
Service, the Securities and Exchange Commission and other federal agencies 
to ensure his company was compliant with the law.  Jackson added that, on 
more than 300 occasions they provided the government with information 
regarding individuals government agencies believed were breaking the law.

The case against G&SR, operators of the e-gold payment system, has been 
filed in Washington DC courts.  Here are some of the filings, apparently 
from the PACER system, which is a US Government site for
court documents. [Thanks to Ian Grigg and his excellent Financial 
Cryptography blogg 
https://www.financialcryptography.com/mt/archives/000640.html for the 
following links]

www.financialcryptography.com/download/Complaint_e-gold.pdf
www.financialcryptography.com/download/Doc3e-gold.pdf
www.financialcryptography.com/download/Doc4e-gold.pdf
www.financialcryptography.com/download/Doc5e-gold.pdf
www.financialcryptography.com/download/Doc6e-gold.pdf
www.financialcryptography.com/download/Doc7e-gold.pdf

Steve

[Portions of the preceding were excerpted from a January 6, 2006 article in 
Florida Today]