[fc-discuss] Financial Cryptography Update: GP4.2 - Growth and Fraud - Case #2 - e-gold

[iang@iang.org]

 Financial Cryptography Update: GP4.2 - Growth and Fraud - Case #2 - e-gold 

                           December 26, 2005


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https://www.financialcryptography.com/mt/archives/000610.html



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e-gold rocketed to success in late 1999 in a classical exponential
growth curve that took everyone by surprise.  Why the mathematics of
growth continue to shock and awe has never been explained to me, but
when you've just taken a technically bankrupt firm to a paper value of
half a bill inside a year, such academic trivia has little import.

For all that, at one point on the curve from second half of 1999 to
first half of 2000, the e-gold payment system experienced in rapid
succession:

<ul><li>rapidly growing exchange orders,</li>
<li>the first independent exchanger, albeit small and unwelcome, but
followed by dozens more</li>
<li>a small group of vendors of supporting software services</li>
<li>a casino and a lottery game</li>
<li>investment from J.W.Zidar, later revealed as the owner/operator of
a $72 million scam</li>
<li>bootstrap super-issues over the top of e-gold</li>
<li>a rash of fraudulent transactions from mainstream American online
banks with swiss cheese ACH interfaces, and</li>
<li>a rampage of scams!</li></ul>

Not necessarily in clear and consise order, and it should be recognised
that those were turbulent, exciting and stressful times!

The arisal of scams on e-gold bears studying.  The first one identified
was called <i>Advance</i> and it was a classic <i>Ponzi</i> scheme.  In
this model, new members join, advancing funds for investment, but the
the supposed investments are used to pay off old investors.  As long as
new investors come in, older investors could be paid off, and could
then <i>perpetuate the myth of great returns</I>.  Sometime the music
stops, though, and then the scam falls apart.

<center><img src="/images/gp7.png" width="621" height="255"><br><b>fig
7. e-gold hits the <i>GP</i> point 1999 Q3</b></center>

There is some definitional discussion due around whether the scams that
hit e-gold were attacks on the system or the members, and much debate
as to whether it is e-gold's responsibility to treat it or not.  But
for the present purposes, the result is clear:	<i>e-gold was worth
stealing</i> and thus <i>GP</i> was achieved.  The security of the
system (bog-standard SSL) was, during the time of interest, adequate to
the task of stopping hackers from stealing directly;  so fraudsters
simply moved to stealing from each other.

Even as <i>Advance</i> was being unwound by e-gold, there were others
in the pipeline.  It is salutory that e-gold and other digital gold
issuers took substantial and diverging steps to avoid the fate of
scams.	In contrast, <a
href="https://www.financialcryptography.com/mt/archives/000604.html">th
e mutual funds industry</a> hunkered down for a year or two
($3,000,000,000 in fines or so hardly scratched the surface), and now
the signs are that it's business as usual - get your late orders in as
slowly as you like!  That's the difference between open governance and
regulatory fiat, but that's the topic of other rants.

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