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Digital currencies: A gold standard for bitcoin
By Henry Sanderson
Financial Times, London
Friday, May 15, 2015
http://www.ft.com/intl/cms/s/0/38d02382-f809-11e4-962b-00144feab7de.html
Anthem Blanchard grew up with gold. His father was such a dedicated goldbug 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.
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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 4 million accounts and over $60 million 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 $12 million 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 1 gram 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 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.
"Most investors in gold are looking for the reassurance of a tangible asset, and no crypto-anything," says Jeffrey Nichols, managing director of American Precious Metals Advisors. "These are typically long-term investors seeking risk reduction and insurance against all sorts of risks -- hardly the profile of bitcoin users. This is even more true of investors across Asia where the lion's share of physical investment [in gold] now occurs."
Still, both the gold and bitcoin communities find common ground in their dislike of government-issued currencies.
"The young people can identify with the hard-money crowd, the more traditional gold crowd because they both see clear evidence that modern central banking and money management are not serving the broader interest of society," says John Butler, managing partner at Amphora Capital, who used to work at Lehman Brothers. "Everyone is wondering where the money comes from in a way they didn't pre-2008, and 1971 was the same."
Stephen Macaskill, who runs Amagi Metals, a Denver-based precious metals seller, says when they started accepting bitcoin, goldbugs gave him a hard time, saying it was a Ponzi scheme. Now they are a lot more accepting.
"We have a unique message which is: Preserve your wealth in gold and use bitcoin to spend money," says Mr Macaskill, whose father was a friend of James Blanchard. "You're not helping out bankers who have been bailed out."
For the younger Mr Blanchard, his business is a fulfilment of his father's love of Austrian economics and belief that governments have never been able to manage money or currency. He hopes his father would have seen the advantages of the technology that allows for a decentralised system that will exist as long as there is a computer connected to a server.
"I think he'd be sceptical of the technology at first. It wasn't something familiar to him," he says. "But I think that with the combination of the two of us he would be really excited about it ... being able to see his love of Hayek's vision and of the Austrian economic vision be realised. I think that's what he would have really appreciated and loved."
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