The history of digital currency
If you thought that the history of digital currency began with the release of Bitcoin in 2009, your wrong. The truth is that Bitcoin just happened to be the first genuinely successful digital currency (cryptocurrency). The history of official cryptocurrency attempts can be traced all the way back to 1996 and a little project known as E-Gold. Remember that one? Probably not. Don’t feel bad. Not many people do. As cryptocurrencies continue to multiply and expand, let’s reflect on how we got here from there.
Internet access was far from being a global phenomenon and those that did have it probably accessed through a glacially slow 56k connection when the first digital currency arrived on the scene. E-Gold was the brainchild of a cancer doctor, Douglas Jackson, and an attorney, Barry Downey. Their creation appeared a full two years before PayPal, to let you know how “ancient” this digital currency was.
Initially, this currency was backed by a pile of gold coins in a safe deposit box in Melbourne, Florida. By 2004, there were one million official E-Gold accounts, and the idea seemed poised to continue exponential growth.
Unfortunately, that was also about the time that hackers decided to focus their efforts on infecting the platform and money launderers, and various other forms of criminals chose E-Gold as their currency of choice. It wasn’t long before public trust in the currency haemorrhaged distrust. A plea agreement against federal money laundering charges in connection with child pornography ended the company as a viable business in 2008.
This digital currency went live in 1998 and became the de-facto alternative currency when E-Gold went down in flames. In many respects, WebMoney resembles current cryptocurrencies like Bitcoin except for one big difference - decentralisation.
It turns out that the public likes the blockchain-powered idea of a distributed network and no single database. Still, this digital currency learned from E-Gold mistakes and took steps to ensure it was not so easy to use it for illicit purposes.
Though WebMoney’s public profile has fallen off the chart somewhat in the wake of the current cryptocurrency craze, the service still operates successfully, processing payments and other financial transactions for the British pound, Russian ruble, US dollar, and even Bitcoin. Based in Moscow, WebMoney provides a variety of services for customers that include payments, merchant services, online billing, and even an online trading platform.
Though eclipsed by modern cryptocurrencies like Bitcoin and its brethren, WebMoney continues to this day as an ongoing business entity.
This Costa Rica-based company had a nice seven-year run that began in 2006 and ended in ignominy in 2013 with many of its officers and promoters jailed for - all together now - money laundering and operating an unlicensed financial transaction business.
Federal prosecutors believe Liberty Reserve processed more than $6 billion in illegal money during its brief run. Whether or not the founders intended for their company to be used as a haven for criminal activity, or they just missed the entire news cycle about how E-Gold went down the tubes two years prior - the bottom line is that Liberty Reserve was a flawed idea with a big, red target on its back from the start.
The idea was to create a centralized, anonymous money transfer service. Users could create an account and transfer money between one another with no verification of identity on either end.
Naturally, cyber and real-world criminals alike flocked to the service, which quickly grew past the one million users’ mark. By that time, several governments had taken notice. Criminal charges were soon filed. The service was seised by a US-led coalition and summarily closed.
Perfect Money was created soon after Liberty Reserve and operated much the same way except for one gigantic difference.
To use Perfect Money you have to prove who you are, which is a pretty significant feature to offer if you want to keep your organisers out of prison. When Liberty Reserve bit the dust in 2013, there was an influx of users looking for a viable digital currency to park their money in.
Though the service offers transactions in multiple currencies, including the US dollar, growth is somewhat limited as it is illegal to use Perfect Money in the United States and also unlawful for any US citizen to use it anywhere else in the world. Obviously, this puts a major throttle on operations and dramatically limits how popular it will ever be, but for now, Perfect Money is still perfectly legitimate for the rest of the world.
The preceding discussion brings us to the phenomenon that is Bitcoin. When Satoshi Nakamoto (the inventor’s pseudonym) unleashed this digital currency upon the world, he made one very good decision in decentralising the whole thing, which put it beyond the reach of any government, bank, or individual. The problem with traditional currencies is that their value can be manipulated by whoever is in charge. This creates a massive amount of distrust on the part of those who are forced to use it.
Bitcoin and other modern cryptocurrency variations have capitalised on this distrust by taking advantage of Nakamoto’s underlying blockchain technology to create unhackable private currencies. For the moment, governments have allowed cryptocurrencies to flourish, though financial experts wonder for how long this hands-off approach will remain in effect. Eventually, it might be too late to act.
With more and more retailers accepting Bitcoin as a form of payment, some employees being paid in Bitcoin, and investors sniffing around the online exchanges, it behoves the public to understand how the IRS views it.
Here’s the thumbnail sketch. If you get paid in Bitcoin, you should report it as regular income - converted into the current value in US dollars - and keep good records! For investment purposes, it is counted as property, so capital gains and losses come into play.
The Bottom Line
With Bitcoin and other cryptocurrencies rapidly gaining popularity, it appears the cat is out of the bag, and he won’t be agreeable to being stuffed back in. While many early digital currencies flamed out or continue to limp along, Bitcoin’s initial release might eventually be looked back to as a defining moment in global financial history. Will the concept of a central currency eventually disappear, replaced by a basket full of private cryptocurrencies or will the iron hand of government try to assert control?
Regardless, it’s going to get interesting.