Non Bank Digital Currency Payment Systems: Regulations & Growth
Mark Herpel
August 04, 2010
Digital currency is often described as money or value that circulates online but does not circulate through a bank or recognized financial institution. Many digital currency companies emerged in the mid to late 1990's with names such as DigiCash, CyberCash, eCash and e-gold. During the 1990's these privately issued digital tokens representing value were not recognized as government issued "money". Consequently, the creation and transfer of the units was not considered a regulated banking operation. This was true for almost a decade.
The "digital currency" unit of the 1990's was an anonymous digital token which could be transferred from one account to another within a closed system. These systems could be described as large accounting programs where one account is debited and another account receives the credit. What makes these systems so special is that from the early 1990's digital currency granted anyone in any country, instant & easy access to the world of online commerce.
In its early days, this industry operated in a brand new unlicensed and unregulated environment. While about a dozen or so companies online today still live in that bubble, the largest companies and the industry leaders have all gone through a period of growing pains and evolved into more modern systems.
However, several popular digital currency companies were intentionally domiciled or re-domiciled in under regulated or obscure jurisdictions lacking sophisticated regulation and Internet oversight. These companies presently transferring funds around the globe each day for thousands of anonymous customers are quite simply flying below the radar. While freedom lovers call it "privacy", international law enforcement does not always hold that view. No matter what your perspective on the situation, this is definitely not conventional online banking.
To open and operate a digital currency account in the late 1990's all you needed was a computer and an Internet connection. Almost all of the early systems operated using a similar type of model. Some companies changed over the years and grown out of that first structure, many have not. Since the mid 1990's, very few have retained all of their original features. Unlike an online bank account "digital currency" is defined by these features. During the past decade, some of these features were popular but have evolved while other features are still widely used.
Today, however, this loose concept has evolved and several of the larger countries like Australia, Canada and the U.S. have encircled both the issuers & exchange agents with challenging new regulations along with clarifications of the existing bank laws.
In contrast to online bank accounts, digital currency has more anonymous cash like features. A banker would say, the accounts lack oversight. These digital currency units are issued by a private company and quietly move around the globe with just a few keystrokes. No strict bank regulators or sophisticated AML software is monitoring this account activity. This was true in the 1990's and is generally still true today.
In a recent interview for DGCmagazine with the operator of gBullion, a brand new digital gold currency domiciled in the UAE, I asked, "...if I am transferring 1 million euro a week through my gBullion account, month after month, do you ever ask the account holder for a source of funds on where that money came from and is that information reported to any government organization or tax authority?
The answer was no: "If identification is confirmed and we ´know our client´ they can buy or sell gold daily up to amounts of €1.000 000, €2.000 000 or even €10.000 000 per day. This is their right..."
Here is a new online financial business which would permit deposits of €2.000.000 - €10.000 000 per day being deposited and or withdrawn, but never question where the funds originated. Is this freedom & privacy or simply ignorance?
Operators of these early 1990's style digital systems did not have bank accounts and never accepted direct transactions with retail consumers. All financial transactions between retail public customers were completed via independent third party exchange agents. Retail customers always sent money to a third party and not the operator of the system. This structure provided absolute protection for the assets backing the digital units. Whether the value behind the digital currency was cash, precious metal or anything else, at all times that value remained protected from the everyday risks of doing business. Today, many existing companies still use an identical structure.
This model creates a 'round-the-clock' third party liquid market for the digital units and offers a myriad of payment options in various countries. The ability of a customer to fund or withdraw money from their digital currency account using any number of a dozen local methods is a spectacular incentive for global non bank users. (cash, IBAN, SWIFT, Western Union, Ukash, cashU, Moneygram, Anelik, Zoom, money order etc.) It is doubtful if any type of regulations could ever slow down the growth for this type of third party exchange business.
On the opposite side of the payment spectrum, companies like PayPal are integrated with banks, process credit card transactions and operate as licensed a money transmitters. The PayPal's of the world require all national currency transactions to flow directly through PayPal bank accounts. All customer funds sent to PayPal or withdrawn from those accounts must flow directly through PayPal. No third party exchange transactions have ever been permitted. Unlike digital currency businesses, the big online payment processing companies absorb 100% of the risks when dealing with the public.
In 2002 while PayPal prepared for a public offering, the company's corporate lawyers were quick to secure those important financial licenses required for doing business in the United States. However, during those years between 2002-2005 most digital currency companies were not following that same regulatory path.
Regulation & Growth
It's been said that government regulations lag behind the development of new technology by 3 or more years.
In 2006, concerned with the anonymity of digital currency products, a number of U.S. government agencies began to take a closer look at the industry along with those independent exchange agents which handled the customer transactions. All of companies located in the continental U.S. fell under scrutiny. The following year a number of these businesses were charged with operating as unlicensed money-transmitting businesses.
In April of 2007 a U.S. court ordered seizure forced the e-gold company to liquidate a large number of customer accounts and hand over the funds. The amount of seized money was in the millions. The confiscated accounts mainly belonged to independent exchange agents operating within the United States which had been declared "unlicensed & illegal".
This 2007 action killed 99% of the digital currency business in the U.S., eventually lead to criminal charges for e-gold and forced the closure of payment systems such as 1MDC & Crowne Gold. What is interesting to note regarding e-gold is that during the period of 2005-2008 while they were engaged in a very public legal battle, the number of customer accounts more than doubled as e-gold picked up 3 million new accounts. Since the company never used paid advertising this was the first main stream publicity it had ever received.
Immediately after this action, a few large agents and operators permanently fled the U.S. for more casual business environments such as Central America. Several of them left the business and retired. The industry had seen a similar consolidation resulting from new Financial Services Licensing regulations enforced by the Australian Securities and Investments Commission (ASIC) during 2004. Forced out of business in Australia, some had closed but other larger agents changed jurisdictions and simply moved their business. The world is a very big place.
While regulations and growing pains have becoming the norm for digital currency companies, this has not slowed the industry's growth.
Global leader Webmoney Transfer has shown dramatic growth each year for the past decade. (as indicated by this chart) The number of users, day to day transactions and funds on deposit have surged as Webmoney has expanded into new territories and offered new products. Webmoney Transfer now has more than 11 million customer accounts and has never required any user to have a credit card or bank account. That digital currency flows through more than 8,000 cities in 70 countries around the globe.
The 2009 e-money industry in Russia had sales of more than 40 billion rubles ($1.3 bil USD). Despite the Russian government's effort to pass new e-money regulation this year which could possibly effect business expansion through higher fees, Webmoney's business is booming. GoldMoney customer holdings have just passed $1 Billion USD in value and there are even several other new digital currency companies new to the marketplace in just the past year.
Outside of the United States proper digital currency regulations compatible with current market models should not slow industry growth. In fact some additional KYC and AML regulations should help bolster the growth of digital currency across major emerging markets.
New consumers entering the digital currency marketplace do not come from credit card companies or banks. In fact it is very difficult to convince anyone to put down their plastic. Digital currency attracts those people in cash markets wanting to do business online. Digital currency speaks to those customers in markets not yet serviced by the PayPal's of the world and new users surface from an ever expanding customer base of non-bank consumers.
The business opportunities that digital currency offers to someone without a bank account or credit card are enormous. In the years ahead we can expect to see more non-bank Internet users and despite additional government regulations the forecast is for a continued boom in these products.
by Mark Herpel, e-Finance & Payments, Law & Policy Newsletter, July 10 Volume 04 Issue 07, http://www.e-comlaw.com(image comes from Webmoney Transfer, http://www.wmtransfer.com/eng/about/statistics/stat_years.shtml )
The "digital currency" unit of the 1990's was an anonymous digital token which could be transferred from one account to another within a closed system. These systems could be described as large accounting programs where one account is debited and another account receives the credit. What makes these systems so special is that from the early 1990's digital currency granted anyone in any country, instant & easy access to the world of online commerce.
In its early days, this industry operated in a brand new unlicensed and unregulated environment. While about a dozen or so companies online today still live in that bubble, the largest companies and the industry leaders have all gone through a period of growing pains and evolved into more modern systems.
However, several popular digital currency companies were intentionally domiciled or re-domiciled in under regulated or obscure jurisdictions lacking sophisticated regulation and Internet oversight. These companies presently transferring funds around the globe each day for thousands of anonymous customers are quite simply flying below the radar. While freedom lovers call it "privacy", international law enforcement does not always hold that view. No matter what your perspective on the situation, this is definitely not conventional online banking.
To open and operate a digital currency account in the late 1990's all you needed was a computer and an Internet connection. Almost all of the early systems operated using a similar type of model. Some companies changed over the years and grown out of that first structure, many have not. Since the mid 1990's, very few have retained all of their original features. Unlike an online bank account "digital currency" is defined by these features. During the past decade, some of these features were popular but have evolved while other features are still widely used.
- Digital currency accounts can be opened and used instantly.
- There were no distinctions between a personal account or a "merchant account". All digital currency accounts were identical whether personal or "merchant"
- All transactions clear instantly, no delays...ever.
- All digital currency transactions are final, no charge backs or reversal of funds...ever.
- To open and use a digital currency account the currency issuer/operator did not require identification, credit check or verification of identity. (GoldMoney was an exception with a CAP. Webmoney accounts(passports) require ID for anything more than a basic act.)
- There were no age limits, a 10 year old could operate an account with no questions.
- There were no jurisdictional restrictions. Residents of Iran, Cuba, India, South Africa or China were all free to use digital currency.
- Unlike a bank account, there are no minimum deposits required to open and maintain that account. Digital currency accounts can be opened with no deposit and remain open without issue or fee.
- There were no type of business restrictions. Gambling, online pharmacies, pornography, MLMs, investments, pyramid/ponzi schemes and many others were permitted using digital currency. (Exceptions: GoldMoney & Webmoney have restrictions)
- Account holders were always adding withdrawing funds (national currency) through third party independent agents, not the digital currency issuer/operator.
- Because funds could not be reversed, there are never withholdings or reserve funds. 100% of each transaction clears and is immediately available.
- Digital currency transaction fees were and still are extremely low. Compared to credit card processing fees, digital currency transaction fees are often less than 1/5 of the cost.
Today, however, this loose concept has evolved and several of the larger countries like Australia, Canada and the U.S. have encircled both the issuers & exchange agents with challenging new regulations along with clarifications of the existing bank laws.
In contrast to online bank accounts, digital currency has more anonymous cash like features. A banker would say, the accounts lack oversight. These digital currency units are issued by a private company and quietly move around the globe with just a few keystrokes. No strict bank regulators or sophisticated AML software is monitoring this account activity. This was true in the 1990's and is generally still true today.
In a recent interview for DGCmagazine with the operator of gBullion, a brand new digital gold currency domiciled in the UAE, I asked, "...if I am transferring 1 million euro a week through my gBullion account, month after month, do you ever ask the account holder for a source of funds on where that money came from and is that information reported to any government organization or tax authority?
The answer was no: "If identification is confirmed and we ´know our client´ they can buy or sell gold daily up to amounts of €1.000 000, €2.000 000 or even €10.000 000 per day. This is their right..."
Here is a new online financial business which would permit deposits of €2.000.000 - €10.000 000 per day being deposited and or withdrawn, but never question where the funds originated. Is this freedom & privacy or simply ignorance?
Operators of these early 1990's style digital systems did not have bank accounts and never accepted direct transactions with retail consumers. All financial transactions between retail public customers were completed via independent third party exchange agents. Retail customers always sent money to a third party and not the operator of the system. This structure provided absolute protection for the assets backing the digital units. Whether the value behind the digital currency was cash, precious metal or anything else, at all times that value remained protected from the everyday risks of doing business. Today, many existing companies still use an identical structure.
This model creates a 'round-the-clock' third party liquid market for the digital units and offers a myriad of payment options in various countries. The ability of a customer to fund or withdraw money from their digital currency account using any number of a dozen local methods is a spectacular incentive for global non bank users. (cash, IBAN, SWIFT, Western Union, Ukash, cashU, Moneygram, Anelik, Zoom, money order etc.) It is doubtful if any type of regulations could ever slow down the growth for this type of third party exchange business.
On the opposite side of the payment spectrum, companies like PayPal are integrated with banks, process credit card transactions and operate as licensed a money transmitters. The PayPal's of the world require all national currency transactions to flow directly through PayPal bank accounts. All customer funds sent to PayPal or withdrawn from those accounts must flow directly through PayPal. No third party exchange transactions have ever been permitted. Unlike digital currency businesses, the big online payment processing companies absorb 100% of the risks when dealing with the public.
In 2002 while PayPal prepared for a public offering, the company's corporate lawyers were quick to secure those important financial licenses required for doing business in the United States. However, during those years between 2002-2005 most digital currency companies were not following that same regulatory path.
Regulation & Growth
It's been said that government regulations lag behind the development of new technology by 3 or more years.
In 2006, concerned with the anonymity of digital currency products, a number of U.S. government agencies began to take a closer look at the industry along with those independent exchange agents which handled the customer transactions. All of companies located in the continental U.S. fell under scrutiny. The following year a number of these businesses were charged with operating as unlicensed money-transmitting businesses.
In April of 2007 a U.S. court ordered seizure forced the e-gold company to liquidate a large number of customer accounts and hand over the funds. The amount of seized money was in the millions. The confiscated accounts mainly belonged to independent exchange agents operating within the United States which had been declared "unlicensed & illegal".
This 2007 action killed 99% of the digital currency business in the U.S., eventually lead to criminal charges for e-gold and forced the closure of payment systems such as 1MDC & Crowne Gold. What is interesting to note regarding e-gold is that during the period of 2005-2008 while they were engaged in a very public legal battle, the number of customer accounts more than doubled as e-gold picked up 3 million new accounts. Since the company never used paid advertising this was the first main stream publicity it had ever received.
Immediately after this action, a few large agents and operators permanently fled the U.S. for more casual business environments such as Central America. Several of them left the business and retired. The industry had seen a similar consolidation resulting from new Financial Services Licensing regulations enforced by the Australian Securities and Investments Commission (ASIC) during 2004. Forced out of business in Australia, some had closed but other larger agents changed jurisdictions and simply moved their business. The world is a very big place.
While regulations and growing pains have becoming the norm for digital currency companies, this has not slowed the industry's growth. Global leader Webmoney Transfer has shown dramatic growth each year for the past decade. (as indicated by this chart) The number of users, day to day transactions and funds on deposit have surged as Webmoney has expanded into new territories and offered new products. Webmoney Transfer now has more than 11 million customer accounts and has never required any user to have a credit card or bank account. That digital currency flows through more than 8,000 cities in 70 countries around the globe.
The 2009 e-money industry in Russia had sales of more than 40 billion rubles ($1.3 bil USD). Despite the Russian government's effort to pass new e-money regulation this year which could possibly effect business expansion through higher fees, Webmoney's business is booming. GoldMoney customer holdings have just passed $1 Billion USD in value and there are even several other new digital currency companies new to the marketplace in just the past year.
Outside of the United States proper digital currency regulations compatible with current market models should not slow industry growth. In fact some additional KYC and AML regulations should help bolster the growth of digital currency across major emerging markets.
New consumers entering the digital currency marketplace do not come from credit card companies or banks. In fact it is very difficult to convince anyone to put down their plastic. Digital currency attracts those people in cash markets wanting to do business online. Digital currency speaks to those customers in markets not yet serviced by the PayPal's of the world and new users surface from an ever expanding customer base of non-bank consumers.
The business opportunities that digital currency offers to someone without a bank account or credit card are enormous. In the years ahead we can expect to see more non-bank Internet users and despite additional government regulations the forecast is for a continued boom in these products.
by Mark Herpel, e-Finance & Payments, Law & Policy Newsletter, July 10 Volume 04 Issue 07, http://www.e-comlaw.com(image comes from Webmoney Transfer, http://www.wmtransfer.com/eng/about/statistics/stat_years.shtml )
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