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Bitcoin itself is largely based on hashcash, a ‘proof of work’ scheme proposed by Adam Back in the
1990′s as a way to stop spam. The idea behind hashcash was to increase the cost of sending email to
the point that spam became uneconomic by requiring each sender to perform a quantity of
Before the rise of Bitcoin in 2009, the most successful scheme of this kind was E-Gold, which operated
from 1996 until it was shut down by the Secret Service in 2007. E-Gold tapped into the libertarian
ideology of anonymous cash, but their technology fell far short of the rhetoric. E-Gold wasn’t really
anonymous, and wasn’t even located outside US jurisdiction. The company was registered in St. Nevis
and Kitts, the datacenter was located in Florida. The idea that E-Gold somehow operated outside the
scope of US regulation was a spectacular example of self-delusion by their management.
E-Gold wasn’t an anonymous currency as such, it was an exchange that allowed customers to transfer
ownership of gold between them. Which was sufficient to allow its use as a means of avoiding
government controls on money transfers. When the system was shut down, some of the largest
complaints came from Iran, where citizens had been using it to evade US sanctions, and were left
unable to access the money in their accounts.
The E-Gold episode had two curious aspects. One is that the exchange was permitted to operate for so
long, when it was obvious that it was operating illegally. In my work stopping Internet frauds, I would
meet Secret Service, FBI and Postal Inspectorate officers on a regular basis, and the conversation would
almost always turn to the ongoing mystery of why the scheme was allowed to keep running.,,The
authorities did not act until their hand was forced by the collapse of ‘Solid Investment,’ a Ponzi scheme
that had made extensive use of E-Gold to conceal money movements.
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