Digital Currencies: A Gold Standard for Bitcoin

Anthem Blanchard grew up with gold. His father was such a dedicated gold bug that he flew a biplane towing a 50-foot sign declaring LEGALIZE GOLD! at President Richard Nixon’s second inauguration to promote the idea that ordinary Americans should be allowed to buy it.

The biplane was chased away by the US Secret Service, but James Blanchard III’s wish ultimately came true: in December 1974, Americans were allowed to buy the metal after a 40-year moratorium.
            
The younger Mr Blanchard inherited his father’s passion. After finishing his studies in the early 2000s he went to work for GoldMoney, one of the first online gold companies. And now he plans to take gold further into the digital era, launching a gold-backed digital currency that he calls the Hayek, after Friedrich Hayek, the Austrian economist and free-market hero. Hayek also happens to be Anthem Blanchard’s middle name. His first name was inspired by a story by Ayn Rand, patron saint of libertarianism.

His company, Anthem Vault, is one of a number of businesses that aim to turn gold from a traditional safe haven investment into the basis of a new digital currency — and in the process correct what some consider to be the original sin of monetary policy: the abolition of the gold standard in 1971.

The concept is a perfect meld of ideals from two generations of libertarianism: the older “hard money” crowd who distrusts currencies printed by central banks and the adherents of bitcoin, the world’s most widely used digital currency.

“We are a renaissance. Gold is the oldest form of value. We’re just coupling it with the newest, most innovative medium of exchange,” the 35-year-old Mr Blanchard says. “We want to really coalesce with the bitcoin community. That’s the idea.”

The financial crisis and years of loose central bank policies have spawned a new generation of libertarians who doubt the value of paper currencies. They have turned to gold, like their predecessors, who advocated holding precious metals after Nixon severed the link between the dollar and the metal.

Many have found that the libertarian ideals that underpinned the founding of bitcoin in 2008 mesh perfectly with those that have long supported the gold market. While attempts to create gold-backed currencies have failed before, advocates say regulations are now more supportive as governments realise the potential of payment technologies, such as the underlying software used to authenticate transactions in bitcoin.

“The sort of people who like bitcoin tend to share similar world views as those of gold,” says Adam Cleary, founder of Bullion Bitcoin and director of the UK Digital Currency Association.

“Bitcoin is a challenger system: it says we want a system that allows for the private dissemination of currency and the existing establishment model is that we should have central banks issuing currency,” he says.
“In an age when you have negative interest rates and Grexit you have to wonder if central banks really have everything under control.”

Signs of clarity on regulations from governments are allowing many digital-currency based businesses to move out of the shadows. Guidance issued by the US Treasury in 2013 clarified requirements to register as money services businesses. The UK government also said this year it is looking at regulating digital currencies for the first time.

“The evolution of cryptocurrency allows a new method of exchange that’s incredibly cost-efficient and time-efficient,” Mr Blanchard says.

The new ventures will have to overcome the history of past failures such as e-Gold, one of the first attempts to start a gold-backed digital currency in the late 1990s. After it grew to more than 4m accounts and over $60m in deposits, Douglas Jackson, its founder and an oncologist from Florida, pleaded guilty in 2008 to running an illegal money transmitting business. Federal investigators charged that, “criminals of every stripe gravitated to e-gold as a place to move their money with impunity”.

The company identified 12,869 accounts containing funds connected to criminal acts including child pornography, credit card fraud, identity theft, investment fraud and the sale of stolen or non-existent goods, the DoJ said.

Advances in software make doing a full background check on customers easier now, says Roy Sebag, a former hedge fund manager who set up Toronto-based BitGold with an ex-Goldman Sachs metals strategist. Companies like Jumio, started in 2010 and backed by Facebook co-founder Eduardo Saverin, promise to verify credentials issued by more than 120 countries.

BitGold wants to create a platform similar to PayPal for gold, allowing users to set up an account in minutes and buy gold, which it can transfer to anyone with a mobile phone or email address. The gold can be bought with a credit card or bitcoin. It has raised around $12m from outside investors, including Soros Brothers Investments, run by George Soros’ son, and Canadian asset manager Sprott.

Mr Sebag says the financial crisis had a deep impact on him: it led him to close his hedge fund in Israel and move to Canada. It also spurred his interest in gold.

“It was so odd for me to see everything I’ve learned about markets and how they were supposed to function be untrue,” he says about his experience in 2008. “It was a crazy period. I was looking to protect my portfolio, my investors’ portfolio, and asking people, my mentors, people in markets, and the thing that kept coming up was gold, gold, gold.”

Mr Blanchard says the Hayek is backed by 1g of gold and is cleared and transmitted through the bitcoin “blockchain”, the digital currency’s public ledger, used to confirm transactions. The gold is purchased through his company’s accounts.

But there are doubters. Backing a digital currency with gold means there still needs to be a centralised system to manage and record who it is that holds the metal. In contrast, bitcoin was designed in a way that eliminated the need to trust a central authority to confirm ownership. One of bitcoin’s strengths is its use of a dispersed network of computers to confirm transactions.

“They have come together because they are snake oil salesmen who are looking to sell this to the gullible public,” says Jeffrey Robinson, author of Bitcon: The Naked Truth about Bitcoin. “Who would want a gold-backed cryptocurrency when you can just buy gold?”

The volatility of bitcoin has put off many gold investors, who want nothing to do with digital currencies. After soaring to over $1,200 in November 2013, bitcoin prices have collapsed and now trade below $250.
FT.com: http://on.ft.com/1d4c6SQ