Throughout the existence of cryptocurrency, from the first mined blocks of Bitcoin to the modern, easy-to-use crypto conversion platforms of today, the existential question at the heart of the blockchain has been around its overarching purpose and thus how it should behave on the market.
In recent years, the consensus within both decentralised finance and the growing numbers of traditional finance institutions that have some exposure to crypto is that it should be primarily a store of value rather than a medium of exchange.
Because of this, it has been increasingly compared to gold and other similar commodities and certain economists have advocated for a crypto-based version of the gold standard.
The connection can be perhaps best understood by exploring the first successful example of a digital currency, how it was shaped by gold, and how the lessons learned by its rise and sudden fall would directly shape Bitcoin.
Electronic Gold
A digital gold currency is kind of like a stablecoin in the sense that its value is pegged to and is backed by another asset, in this case gold bullion, but instead of linking to a fiat currency such as the United States dollar, digital gold is pegged to and can be freely converted into gold.
Before the rise of the blockchain, which made digital gold currencies far more viable, there were some attempts to use gold as the basis for a digital payments system, of which the earliest and most successful was e-gold.
Developed by radiotherapist Douglas Jackson and legal professional Barry Downey in 1996, e-gold managed to escape the issues that early digital currencies such as DigiCash had suffered because the basis for its value was much clearer.
DigiCash, founded by cryptocurrency pioneer Dr David Chaum, ultimately failed because it relied on banks adopting the system, turning it into a form of traveller’s cheque that was looking for a purpose rather than the backbone of a new financial system.
By contrast, e-gold took an existing market and economic principle and found that there was a substantial group of people interested in using gold as a form of universal currency, particularly in the wake of currency crises in the late 1990s affecting countries such as Japan, the United Kingdom, Brazil, Thailand, Indonesia, South Korea and Russia.
Rather than deal with the complex, volatile and sometimes tenuous links to value, some people preferred the idea of dealing directly in gold which was ultimately untethered to a single economy and its potential issues.
The Fall Of Digital Gold
By 1999, e-gold was considered to be the only digital currency that could be described as a success, with its early implementation of an exchange system proving that digital currencies that were easy to use for people who were not technically minded were possible.
The problems with e-gold that ultimately led to its collapse were the opposite of the problems Dr Chaum suffered; whilst DigiCash would become vital to the development of cryptocurrency but was hard to sell to banks and stakeholders, e-gold was very popular but developed by people naive to regulations surrounding currency.
In many countries, it is illegal to create your own currency with a monetary exchange value without a license to operate as a bank or money transmitting business, and e-gold operated in what was a legal grey area.
Whilst officially considering itself a payment system akin to how PayPal worked at the time and was second only to PayPal in terms of popularity, the fact that account balances could be stored in an e-gold account and much of the rhetoric surrounding electronic money led to legal indictments for Mr Jackson.
He was charged with money laundering, conspiracy and running a money transmitting business without a license, alleging that Mr Jackson and the two other directors of e-gold did not do enough to stop bad actors from using the site for illegal purposes.
Facing 20 years in prison, he was ultimately sentenced to three years of probation, community service and a nominal fine, based on the fact that he personally suffered and will continue to suffer as a result of his actions.
The Rise Of Bitcoin
A few months after this sentence, and in the wake of one of the biggest financial crises the world has ever seen, Bitcoin would launch as a decentralised cryptocurrency that followed a similar mission to e-gold to provide an alternative to the traditional financial and banking system.
By the 2020s, that goal of an alternative digital financial system appears to be bearing fruit thanks to a robust interface built upon the blockchain.