[fc-discuss] Financial Cryptography Update: G&SR / e-gold case in Washington DC court
iang@iang.org
iang@iang.org
Thu, 26 Jan 2006 18:09:22 +0000 (GMT)
Financial Cryptography Update: G&SR / e-gold case in Washington DC court
January 26, 2006
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https://www.financialcryptography.com/mt/archives/000640.html
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The case against G&SR, operators of the e-gold payment system, has been
filed in Washington DC courts. Here are some of the filings,
apparently from the PACER system, which is a US Government site for
court documents.
www.financialcryptography.com/download/Complaint_e-gold.pdf
www.financialcryptography.com/download/Doc3e-gold.pdf
www.financialcryptography.com/download/Doc4e-gold.pdf
www.financialcryptography.com/download/Doc5e-gold.pdf
www.financialcryptography.com/download/Doc6e-gold.pdf
www.financialcryptography.com/download/Doc7e-gold.pdf
I've only briefly read parts, so far. The USG's case is based on the
Money Transmitter Licensing requirement.
=======8<===============
16. Title 18, United States Code, Section 1960 provides that:
(a) Whoever knowingly conducts, controls, manages, supervises, directs,
or owns all or part of an unlicensed money transmitting business, shall
be fined in accordance with this title or imprisoned not more than 5
years, or both.
(b) As used in this section
(1) the term “unlicensed money transmitting business” means a money
transmitting business which affects interstate or foreign commerce in
any manner or degree and
(A) is operated without an appropriate money transmitting license in a
State where such operation is punishable as a misdemeanor or a felony
under State law, whether or not the defendant knew that the operation
was required to be licensed or that the operation was so punishable;
(B) fails to comply with the money transmitting business registration
requirements under section 5330 of title 31, United States Code, or
regulations prescribed under such section; or
(C) otherwise involves the transportation or transmission of funds that
are known to the defendant to have been derived from a criminal offense
or are intended to be used to promote or support unlawful activity;
(c) the term “money transmitting” includes transferring funds on behalf
of the public by any and all means including but not limited to
transfers within this country or to locations abroad by wire, check,
draft, facsimile, or courier.
=================>8=====
Pretty broad writings! Apparently in response, G&SR published two
letters:
http://www.e-gold.com/letter.html
http://www.e-gold.com/letter2.html
=======8<===============
In an emergency hearing in US District Court January 13, 2006, the
freeze order on G&SR's bank accounts was lifted. Though numerous
criminal claims had been made in obtaining the search and seizure
warrants, the Government has not sustained these allegations and the
only remaining claim is a contention that G&SR has operated as a
currency exchange without the proper license. G&SR had previously
proposed to the Government that e-gold be classified for regulatory
purposes as a currency, enabling G&SR to register as a currency
exchange. In a Treasury report released January 11, 2006, however, the
Department of Treasury reaffirmed their interpretation of the USC and
CFR definitions of currency as excluding e-gold.
=================>8=====
So G&SR would then agree that the case turns on whether they are a
money transmitter or not, and they make this case more forcefully in
Document 4 before the judge. However it is becoming clear that G&SR
have been less than forthcoming, and have not advised their customers
of the true position. Document 4 in the above list says:
=======8<===============
*ORDER*
-----
As agreed by the parties in open court on January 13, 2006, it is
hereby *ORDERED* that Suntrust Account Number 1000..... and Regions
Bank Account Number 6709.... shall be unfrozen; however, the United
States shall retain control of the funds previously seized from those
accounts pursuant to the warrant issued bz Magistrate Judge Facciola in
Case No. 05-664 M-01 (JMF) on December 14, 2005.
*SO ORDERED.*
=================>8=====
No mention of the third bank account by the judge. And no mention by
G&SR that their accounts remain under USG control and have been so
since 14th December! Which effectively means that G&SR is under
control of the government.
In the 6th Jan letter from Dr Jackson, he wrote:
=======8<===============
There were other direct interventions as well that I am not yet at
liberty to discuss that nearly crippled OmniPay's ability to honor its
obligations to and on behalf of users.
=================>8=====
So we now have pretty clear indications that a lot is going on.
Whether G&SR have been advised or instructed to keep mum is unclear
(and I'm skeptical, especially given the content and tones of the
letters). But at the least it makes it rather difficult to carry on
business, a point G&SR makes in Document 3. Is G&SR able to deliver on
its business undertaking? If it is unable to control its funds or make
any statements adverse or otherwise as to its credit position, then
what form of exchange can they reliably do?
And what about e-gold in all this?
For those wondering what the fuss is all about, a few brief remarks of
explanation. e-gold, the payment system, is one of the more successful
ventrures in the field. It independently re-developed and championed
the centuries old approach of escrow of value as epitomised by the gold
bars held in vaults. This tool makes a pretty fair stab at
establishing a base of governance for issuance of digital currency.
In the late 90s, e-gold made several moves designed to improve the
standard of governance - moves that I had a lot to do with through my
involvement approximately mid 1998 - mid 2000. Firstly, a co-signatory
to the metal was created. Secondly, all physical assets were
progressively migrated out of the filing cabinet and into secure vaults
at repositories. Until this was done, the substantial part of the
value was in "Macotta Delivery Orders" which were directly signable by
Dr Jackson. These changes gave a _separation of roles_ aspect that
formed two of the parties in my _five parties model_, the independent
vault and the co-signatory. To be fair, Dr Jackson had already
understood the importance of the fifth party - the public - in
governance by inventing his Examiner page to show his claims of the
bars and metal under management.
In addition to protection of the gold, I also considered it essential
to protect the digital issuance in a like 5PM system. e-gold only
started on this process, before getting sidetracked on what could be
stated loosely as "offshore strategies". Although the digital systems
should have been placed under independent control, they remained
in-house. Although an independent _Mint_ role for creation of new
digital float should have been done, I have never heard of it being so.
And the entire payment system should have separated from the risky
business of exchange operations. Instead, e-gold Ltd was formed in
Nevis, and gold was transferred under dubious legal circumstances to
Trusts in Bermuda - completely at odds with the user agreement at the
time. Notwithstanding all this legal manouvering, the _substance_ of
e-gold remained firmly in-house, in Florida, and firmly under control
of Dr Jackson.
If e-gold had solidly and strongly separated itself from the highly
lucrative exchange business - deliberately left where the market was in
the USA - then G&SR could have disappeared and e-gold would have
carried on. Now however, wherefor goes G&SR, there too follows e-gold.
To all intents and purposes, they are both likely locked in a deadly
embrace with the USG.
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