In the previous chapter, we explored the first form of electronic cash that emerged from the advent of the Internet and modern cryptography: David Chaum's eCash model. This model significantly influenced Satoshi Nakamoto and was a key milestone on the path that led to Bitcoin. However, the story of cryptocurrency's origins doesn't end with eCash; it also includes experiments with private currencies operating on the Internet, developed in the late 1990s.

This chapter will examine what was done with private currencies in the United States. First, we will discuss the case of the Liberty Dollar. Then, we will study centralized systems like e-gold and Liberty Reserve. Finally, we will talk about PayPal, whose approach is different but serves as an illuminating example of the model based on a trusted third party.

In all cases, authorities eventually shut down these systems or had to comply with financial regulations. This is why Satoshi Nakamoto, who understood these systems well, deeply understood the need for an alternative system that did not rely on a central authority.

The history of the United States was characterized by a great monetary plurality from its beginnings. From the 17th century to the mid-19th century, the English colony turned independent republic indeed allowed the free circulation of foreign currencies (the US dollar was not officially created until 1792), as well as the private minting of gold and silver coins. A relative banking freedom also prevailed between 1837 and 1863.

However, things changed with the Civil War, won by the Union, in a process of centralizing power. Thus, a law from Congress on June 8, 1864, prohibited the private minting of coins. This law, which has become section 486 of title 18 of the United States Code (18 U.S. Code § 486), stated: "Anyone, except as authorized by law, who manufactures, circulates, or attempts to circulate or pass, coins of gold, silver, or other metals, or metal alloys, intended to be used as current currency, whether they resemble coins of the United States or foreign countries, or are of original design, shall be fined under this title or imprisoned for no more than five years, or both."

To enforce these restrictions, Abraham Lincoln founded a government agency in 1865: the Secret Service. The Secret Service's initial mission was to combat counterfeiting and financial fraud in general. Indirectly, it strengthened the federal state's seigniorage by entrusting the monopoly on currency production to the United States Mint.

The situation became even more restricted afterwards. The central bank, called the Federal Reserve of the United States, was created in 1913, following the banking panic of 1907. Then, the classic gold standard was abandoned in 1933 as part of F.D. Roosevelt's New Deal, with Executive Order 6102, which prohibited individuals and companies located in the United States from holding gold. The reference to gold in the monetary system was finally abandoned in 1971 when Richard Nixon announced the end of the dollar's convertibility into gold internationally. With the repeal of the gold possession ban and the Internet development starting in the 1970s, the idea of deploying private currencies re-emerged. This was the case with Bernard von NotHaus, who launched the Liberty Dollar in 1998, a currency based on gold and silver that could be found in silver coins and representative notes. A non-profit organization managed the system called NORFED (acronym for National Organization for the Repeal of the Federal Reserve and Internal Revenue Code). Starting in 2003, the Liberty Dollar was also available in digital form, through an account system similar to e-gold (see the following section). The system experienced a certain level of success. Besides the circulating coins, NORFED's vaults contained about 8 million dollars in precious metals to ensure the currency's convertibility, including 6 million to back the digital unit.

Liberty Dollar (10 dollars) in silver from 2003 (source: Numista)

In September 2006, the U.S. Mint issued a press release, written jointly with the Department of Justice, in which it concluded that the use of NORFED's coins violated section 486 of title 18 of the United States Code and constituted "a federal crime." Consequently, after an FBI raid on NORFED's premises in 2007, the violations were held against NotHaus and his associates, who were arrested in 2009 and tried in March 2011. In 2014, Bernard von NotHaus was sentenced on appeal to six months of house arrest and three years of probation.

An emblematic example of private electronic currency is the e-gold system. It was known as a "digital gold currency," meaning a currency electronically transferred and fully backed by an equivalent amount of gold stored securely. It was co-founded by Douglas Jackson and Barry Downey in 1996. Douglas Jackson was an American oncologist living in Florida who followed the Austrian economist Friedrich von Hayek and wanted to create a "better money" with e-gold. The principle was that each unit of e-gold could be converted into real gold. The gold reserves were managed by a company located in the United States called Gold & Silver Reserve Inc. (G&SR). The computer system was managed by a second company, e-gold Ltd., registered in Saint Kitts and Nevis in the Caribbean. Gold was not the only metal involved: users could also hold and exchange e-silver, e-platinum, and e-palladium, built on the same model.

The e-gold system took advantage of the nascent Web, particularly the recent Netscape browser. Each client could access their account from the website, rather than having to operate dedicated software. For the time, the platform was very high-performing, utilizing a real-time gross settlement system inspired by interbank transfer. Here is what sending e-gold looked like in 2005 (image from a tutorial of the time):

The e-gold system met with great success: at its peak in 2006, it guaranteed 3.6 tons of gold, worth more than 80 million dollars, processed 75,000 transactions per day, for an annualized volume of 3 billion dollars, and managed more than 2.7 million accounts. This success was abruptly halted following the intervention of the State. After an investigation conducted by the Secret Service, Douglas Jackson, his two companies, and his associates were indicted on April 27, 2007, by the Department of Justice for facilitating money laundering and operating a money transfer business without a license. In November 2008, Douglas Jackson was found guilty and was sentenced to 3 years of probation, including 6 months of house arrest under electronic surveillance. After an unsuccessful license attempt, e-gold was forced to shut down permanently in November 2009.

Other systems were created following the same model. GoldMoney, founded by James Turk and his son in February 2001, has adapted to financial regulations today. e-Bullion, the system established by James Fayed in July 2001, closed its doors in 2008. Finally, one of the last digital gold currencies was Pecunix, which was founded in Panama by Simon Davis in 2002 and ceased operations in 2015 as part of an exit scam.

Another example of a centralized private currency system is Liberty Reserve, which allowed users to hold and transfer electronic currencies pegged to the US dollar, the euro, or gold. Arthur Budovsky, an American of Ukrainian origin, and Vladimir Kats, a Russian immigrant from Saint Petersburg, created this system. In 2006, Arthur Budovsky expatriated to Costa Rica, which was then considered a tax haven, where he registered his company, Liberty Reserve S.A.

Liberty Reserve logo in 2009 (source: Wikimedia)

The system was quite similar to e-gold, except that the funds (primarily in dollars) were held in offshore bank accounts, rather than private vaults. Liberty Reserve greatly benefited from the shutdown of e-gold in April 2007 following the indictment of Douglas Jackson and his associates. In May 2013, according to the U.S. Department of Justice, the platform had over one million users worldwide, including more than 200,000 in the United States, and processed 12 million financial transactions annually, for a combined volume of more than $1.4 billion. The use was primarily for criminal activities, but was not limited to these: Liberty Reserve was also used by Forex traders or for overseas transfers.

However, the system eventually met the same fate as e-gold. In 2009, the Costa Rican Superintendencia General de Entidades Financieras took an interest in Liberty Reserve, asking it to obtain a license (which the company failed to do). Then, in November 2011, the U.S. FinCEN issued a notice stating that the system was "used by criminals to conduct anonymous transactions to move money globally." Finally, Liberty Reserve was shut down at the end of an international operation: on May 24, 2013, Arthur Budovsky and his main associates were indicted and arrested in different jurisdictions (Spain, United States, Costa Rica) and the main site was seized by the Department of Justice. In 2016, after being extradited to the United States, Arthur Budovsky was sentenced to 20 years in prison for money laundering.

This example thus shows that jurisdictional arbitrage is insufficient to protect currency from state intervention.

Finally, we must discuss the case of PayPal. Although its creators did not intend to make it a currency independent of the existing system, they nonetheless envisioned that this product would affect society, which is in line with Silicon Valley's disruptive ideology. The PayPal product was developed by Confinity Inc., co-founded in December 1998 in San Francisco by Max Levchin and Peter Thiel, who had met a few months earlier at Stanford University. The company, initially called FieldLink, aimed to develop secure payment systems on PalmPilot handheld computers.

PayPal was created in October 1999 by a company engineer. It allowed for easy and fee-free payments between email addresses and was intended to transfer simple payments between individuals ("pay pal"). Its business model was based on earning interest from the funds of clients held in banks, which covered operating costs and rewarded shareholders. Thus, it was a service built on the banking system, similar to Liberty Reserve.

As the Internet bubble peaked, the product experienced rapid growth in the first months, notably thanks to its referral system. This success caught the attention of competitors, who had much more capital, copied the idea, and launched their version of the service, to the detriment of Confinity. This is why the company had to merge with one of them, the online bank X.com, owned by Elon Musk, to become PayPal Inc. in March 2000.

The original vision of PayPal was revolutionary, in line with Peter Thiel's libertarian vision. Here is what he said in the fall of 1999, as reported by Eric Jackson in 2012 in The PayPal Wars:

Peter Thiel on October 20, 1999, during his speech in Oakland, California for the Independent Institute (source: Youtube)

However, things did not evolve in the desired direction, and PayPal had to comply with all sorts of financial regulations, to the point that the service is now famous for its payment censorship and account freezes worldwide. It was naive to believe such a system could challenge the established power.

Thus, we observe that attempts to create centralized services as alternatives to the existing system have all eventually been halted, in one way or another. The disadvantage of these models is that they rely on a trusted third party, which can go bankrupt, abscond with the funds, or be controlled by the authorities. In the latter case, the service in question faces a dilemma: adapt by complying with financial regulations, as GoldMoney and PayPal did, or perish by refusing to comply, a fate suffered by e-gold, Liberty Reserve, and the Liberty Dollar. The closure of these systems was contemporary with the creation and early days of Bitcoin. Consequently, Satoshi Nakamoto and the early users of Bitcoin were well aware of them. As for Satoshi, he was aware of the model used by e-gold and mentioned Pecunix and Liberty Reserve several times in his public and private interventions.

Because centralized systems are fragile, proponents of freedom, including cypherpunks, sought to create a decentralized currency. It was necessary to find a way to avoid placing the entire system's infrastructure on a single point of failure. That's why several "trust-minimizing" models emerged in the late 1990s and early 2000s, before the discovery of Bitcoin. The next chapter will be dedicated to these models.