May 04, 2007

US moves to seize the gold

Someone pointed out that the indictment unsealed last week against e-gold, etc includes this clause:

78. As a result of the offenses alleged in Counts One and Three of this indictment, the defendants E-GOLD, LTD., GOLD & SILVER RESERVE, INC., DOUGLAS JACKSON, REID JACKSON, and BARRY DOWNEY shall forfeit to the United States any property, real or personal, involved in, or traceable to such property involved in money laundering, in violation of Title 18, United States Code, Section 1956, and in operation of an unlicensed money transmitting business, in violation of Title 18, United States Code, Section 1960; including, but not limited to the following:

(a) The sum of money equal to the total amount of property involved in, or traceable to property involved in those violations. Fed.R.Crim.P. 32.2(b)(1).

(b) All the assets, including without limitation, equipment, inventory, accounts receivable and bank accounts, of E-GOLD, LTD., and GOLD & SILVER RESERVE, INC., whether titled in those names or not, including, but not limited to all precious metals, including gold, silver, platinum, and palladium, that "back" the e-metal electronic currency of the E-GOLD operation, wherever located.

If more than one defendant is convicted of an offense, the defendants so convicted are jointly and severally liable for the amount derived from such offense. By virtue of the commission of the felony charged in Counts One and Three of this indictment, and and all interest that the defendant has in the property involved in, or traceable to property involved in money laundering is vested in the United States and hereby forfeited to the United States pursuant to Title 18, United States Code, Section 982(a)(1).

(My emphasis. I included the whole clause, intending to allow each to form their own opinions. Of course, you and I should read the whole thing...)

A little background. In the gold community, it is dictum that the US is no respecter of property rights. Twice in the 20th century, the financial rebels will point out, the US seized the gold of its private citizens, generally as a result of its own bad management of the currency, and trying to stop people from fleeing the over-inflated dollar.

In this case, the US government is seeking to seize all of the gold held within the system as reserves to the currency, without due regard to the operation of property rights for the rest of the user base. It would seem an over-broad reaching by the government, but sadly, expected and unsurprising to the digital currency community.

Whatever one thinks of e-gold, its operators and their actions, this is likely to reinforce the reputation of complete and utter disrespect that the US has for property rights around the world.

Unfortunately, this is no isolated case, but is in fact a concerted and long-lived programme by the US government to undermine property rights the world around. The US-invented Anti Money Laundering (AML) regime stretches back 20 years or more to Ronald Reagan's war on drugs, and is now sufficiently strong to destroy the effect of property laws, which latter are nothing if not strong.

AML takes implementing countries backwards in time and history. Although England and its former colonies inherited strong property rights from the days of the Magna Carta, it is as well to realise that the English experiment may have been more an exception than the rule. Consider Russia as counterpoint:

Since only the Tsar or the Party had property, no individual Russian could be sure of long-term usage of anything upon which to create wealth. And it is the poor to whom the property right matters most of all because property is the poor man's ticket into the game of wealth creation. The rich, after all, have their money and their friends to protect their holdings, while the poor must rely upon the law alone.

"The Rape of Russia" was not ancient history according to Williamson's 1999 testimony before the US House of Representatives, but living times: during the decade of the 1990s, the same group conspired with Russians to launder much of the residual value of the Russian people.

One would hope that the court is a little wise to the fact that if e-gold Ltd's system was used for crimes, then there was also use for good purposes; that is, it was the operators and some users that were responsible. Normally we would expect the system to be placed under administration, and then a wholesale cleanout of any "bad" accounts to occur, under court supervision.

If not, the author above warned the US Congress what will happen to those who dismantle what property rights there are:


In the absence of property, it was access - the opportunity to seek opportunity - and favor in which the Russians began to traffic. The connections one achieved, in turn, became the most essential tools a human being could grasp, employ and, over time, in which he might trade. Where relationships, not laws, are used to define society's boundaries, tribute must be paid. Bribery, extortion and subterfuge have been the inevitable result. What marks the Russian condition in particular is the scale of these activities, which is colossal. Russia, then, is a negotiated culture, the opposite of the openly competitive culture productive markets require.

It is fairly clear that the e-gold operation was presented to the world and operated as a property rights operation. Although not without shenanigans, the very basis of the digital gold community has been a joyful expression of the right of property, and what good it can do when it is left to run free.

Unfortunately, the US government may have learnt too much from the Russian experience. The substantial crime in the indictment is "property rights without a licence" and the fine for that is "seizing all the property." Welcome to the world of tribute; bribery, extortion and subterfuge to follow.

Posted by iang at May 4, 2007 07:54 AM | TrackBack

Just curious: how does this work when the gold is in a vault outside US jurisdiction? Are there mutual assistance treaties under which the other government will seize the property of the innocent? Does the US government force the e-gold founders to sign withdrawal orders? Do the vault operators have to accept a coerced withdrawal order, or an order that's not on behalf of the real owners?

What would a Swiss vault operator do if a foreign government suddenly said "we are now the rightful owners of bars 124, 672, and 823"? Would the answer depend on whether the vault operator had interests in the US?

If I have a deposit in a bank that gets accused of money laundering, can that money be confiscated? Not that the case is really parallel, since with the bank it's a creditor/debtor relationship instead of a bailor/bailee relationship.

Are there any legit e-gold accounts big enough that the accountholder could sue the government?

Why is Western Union still in business given that the exact characteristics the government complained of in e-gold (anonymous receipt, irreversible transactions, preference by criminals) apply to WU?

These aren't rhetorical questions, I'm genuinely feeling underinformed.

Posted by: Fred at May 5, 2007 12:57 AM

Think the U.S must mind there own business they think they OWN the world and the world must listen to them??? my god please not let them think they are number 1 in reality not they never saw a thing of the world, lol just think F.B.I must stay in there own damn U.s Shit country and putting egold down, second attempt will put many websites out of business.

Posted by: Frank at May 5, 2007 05:30 AM

Fred, that's a tall order, but here are some guesses. It is pretty much speculation, as we are now into deep dispute resolution, and it is difficult by definition. If it was easy we wouldn't be here :)

If the US Govt. wins the case, and the court orders forfeiture, then it has to go to Nevis and take control of the company. If it achieves that, then it can legally organise the servers. The trustees are the owners of the gold, and they are in Bermuda trust, so maybe off to Bermuda courts to get the Trust under control, and therefore the gold, etc.

However, if it controls the servers, it can do whatever it likes with them. This is easier because the servers are (and always were) in the US. So it can ignore the Nevis / Bermuda angles *unless seeking legal* control of the gold. The problem with this approach is that if everyone deserts e-gold (stops using it) then the value of e-gold collapses, and the servers are just a historical record of some stuff. The gold is elsewhere.

In terms of the gold disposals, there is an escrow agent, a 5PM party who stops an insider from just selling off the gold. This is a separate individual. This person should also sign for disposals of the gold from the vault.

Possible problem here is that the person may be (probably is) in the US, so will happily sign to avoid being charged with ML, etc. Or the person could have resigned before the case and not been replaced. In which case, he simply refuses to sign anything, because to do so would incur very complicated liability.

The Swiss vault operator would examine the contract, presumably, and that says e-gold and the escrow agent have to sign, presumably. Alternatively, the MLAT between Switzerland and US may allow certain crimes to override the contract. If however any user ("owner of e-gold") came along and contested, then it could enter the Swiss courts and presumably be blocked. Don't know, it gets messy there...

Deposits in banks: an easy one :) The money isn't yours, so you have less say. By law, a deposit is the money of the bank, not the account holder. You could go to court and contest an ML seizure, but this is hard because you have to show the money was completely legit, with no questions possible, under total removal of all privacy (which is the problem, really, as the tool makes money guilty-until-proven-innocent, and strips the essential privacy away). Normally however we would expect the bank to freeze the money and then ask you to explain what it is.

Legitimate e-gold accounts: unknown! The nature of customers is something that marketing people have asked many times. Some people say it is 100% ponzis, others say there are legit businesses but won't say what they are ... there are no reliable stats, just opinions. Many large account holders are (apparently) exchangers or insiders, and these people by their nature are caught up in the case.

Why is WU still in business? Because it is "inside" and "regulated" and it is the largest player. Those who are regulated expect those outside to be shut down. Those who are large encourage regulations (licences, etc) as that is costly and it reduces competition. We would generally expect that the largest player would have a hand in writing the licensing laws, to that end.

As I say, we are into domain of speculation here. The design of an FC system is such that it should not enter this space ... but if it does, it should at least be clear what the process is. The problem with e-gold is that they didn't implement the design cleanly. Now they -- and their customers -- find out whether their choices were efficacious.

Posted by: Iang at May 5, 2007 05:36 AM


Thank you. My head hurts, and it's clear that you have more than earned every penny you've billed while consulting on these things.

Followup question: was one of the mistakes you saw in e-gold related to the ownership of the bars of barbarous relic? You said the trustees are the owners, but the e-gold literature made it sound (to me anyway) like the account holder was the owner and e-gold was a storage service.

(Apropos of very little, have you read Neal Stephenson's Baroque cycle of novels? He has a lot of fun with the definition of money).

Posted by: Fred at May 6, 2007 02:22 AM


The ownership of the gold in the e-gold system (and others like it) is always a tricky issue. e-gold originally had the contract you described, in that the account holder owned the gold. Then, around October 2000, e-gold unilaterally imposed a new contract that took the gold from the account holder and placed it in a trust formed under Bermuda laws. This means that for many purposes the gold was "owned" by the trustee, or more technically the title was kept by the trustee for the benefit of account holders.

The reason for this was never fully understandable to me. DJ said "it is stronger" and that it was advised by the advisors of the time. I never heard a reason why it was stronger, myself.

It is easy to speculate on the "down" side of this act: easier ability to shift the gold behind the curtain, or escaping from US jurisdiction in some sense, or escaping from certain patent technical difficulties. I don't know whether any of these are sustainable, this is all speculation, and without some more clues it is difficult to even speculate.

Hence, I can't say it was a mistake. And, frankly, the trustee arrangement is still reasonably strong, it is still holding up for the benefit of the account holders, which is the primary goal of the design. That which was there before would probably have collapsed already.

What were mistakes: failing to implement the full 5PM, retaining all the power in the hands of the founders, keeping most of the physical elements (servers, managers/founders, exchange, support, ...) in a single jurisdiction, etc.

These were all very conscious acts, these things were well discussed at the time, so we would also need to look at the institutional factors that led to good advice being ignored and bad advice being paid for. Perhaps the Founder Paradox, click on link for a recent description of that, but perhaps not!

Posted by: Iang (Founder Paradox) at May 6, 2007 08:41 AM

You seem to be overlooking the true intent of why the U.S. government would want "ownership" of e-gold's assets. They have no intent upon stealing millions of dollars from millions of account holders, rather the intent is to potentially place the company into receivership in order to protect the consumer while the government works to eradicate the targeted illegal activity.

Can anyone think of one example of the U.S. government shutting down a financial institution of any kind, legal or otherwise, and telling innocent account holders that they're up a creek? I think you'll find the answer to this is a big "NO." The injunction allows e-gold Ltd. to continue funding exchanges using "frozen" funds. Had the intent been to shutdown the system they could have easily performed a complete freeze to prevent exchanges or gone even further to take the servers offline.

Please stop drinking the Koolaid!

Posted by: Jeffrey Lyon at May 7, 2007 02:26 AM

Think again Jeffrey. Who's been drinking the Koolaid now?

Posted by: Patrick at May 13, 2007 11:22 AM

"The Rape of Russia" Any ideas as to when we'll be able to read her book, "Contagion: The Betrayal of Liberty, Russia, and the United States in the 1990s"?

Posted by: darren at May 15, 2007 04:54 PM

Dismissing one property tradition (Russian) as inferior to another (Western, English, etc.) is a gross over-simplification (albeit very common post-cold-war triumphalism).

These things are far more complicated and difficult to understand without having a good understanding of the underlying economics. Property system A is objectively better than property system B, if value is continually being transfered from B to A.

As evidenced by the stories so eloquently described in "Raping Russia", western (and particularly English) tradition demonstrated some advantages over the Russian tradition with the massive flight of capital from Russia to the West, given the opportunity.

However, there is a reason why property is treated the way it is in Russia and that system also has certain advantages, as evidenced by the current flow of value backwards and the success of things like and, which both uphold the Russian view on property the roots of which I try to explain below.

In the large, open steppes with a harsh cimate, as well is in the taiga, the key to success for individual producers was not to efficiently grow as much as possible on a given patch of land (land has not really been a scarce resource), but to make sure that one can reap what one has sown; that it won't be forcibly taken by someone else. Thus, protection has always taken precedence before production.

It was also in the interest of producers not to stick out as excessively affluent, attractive targets for violent expropriation of their wealth or excessively hard-working, attractive targets for violent exploitation (recall that the English word "slave" comes from "slav"; the very people inhabiting most of Russia). Hiding one's wealth and capacity for production has been (and remains) essential in Russia. Formally registering property makes it actually more difficult to defend in some cases. Institutions, including legal tradition, evolved according to these needs. The costs of defense in huge, open plains are much higher than those on islands or in the mountains.

The recurring need for rapid mobilization of resources for defensive purposes, in order to maintain access to finite, but not very scarce resources resulted (among other things) in a view of property that exists in Russia today.

It also has its merits and there are some resources (e.g. information) to which this approach may actually be more appropriate.

Posted by: Daniel A. Nagy at May 16, 2007 06:54 AM
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