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The Gold Standard The Gold Standard Institute

Issue #43 ● 15 July 2014 1


The Gold Standard
The journal of The Gold Standard Institute

Editor Philip Barton
Regular contributors Rudy Fritsch
Keith Weiner
Sebastian Younan
Occasional contributors Thomas Bachheimer
Ronald Stoeferle
Publius
John Butler
Charles Vollum

The Gold Standard Institute

The purpose of the Institute is to promote an
unadulterated Gold Standard

www.goldstandardinstitute.net

President Philip Barton
President – Europe Thomas Bachheimer
President – USA Keith Weiner
President – Australia Sebastian Younan
Editor-in-Chief Rudy Fritsch


Membership Levels

Annual Member US$100 per year
Lifetime Member US$3,500
Gold Member US$15,000
Gold Knight US$350,000
Annual Corporate Member US$2,000
Contents
Editorial ........................................................................... 1
News ................................................................................. 2
Part II: A Regulatory Model for a Free Gold
Standard ........................................................................... 2
A Drawing-Board Currency as Ersatz Constitution . 5
Comments on a Free Gold Standard .......................... 6

Editorial
Fans of Central Banking Have an Achilles Heel
Most of my writing about the gold standard is about
how it works, and how the paper dollar standard
doesn’t. A casual conversation I had with someone
recently underscored that there is an even stronger
argument.
Our opponents, those who support central banking
and irredeemable paper money, have to make two
cases. One is to defend the theory and practice of
central banking, that central bankers are wise and
honest and that their debt-based paper money
works. They have to argue that the dollar does
everything you want money to do, such as hold its
value, enable proper accounting, encourage savings,
support a stable economy, etc. Well, they can go
through the motions and fool the ignorant.
The other is that they have to defend the use of
force against innocent people.
Central planners constantly run into the problem
that people are not willing cogs. We don’t want to be
jammed into the machine where directed. The
central planners never have our best interest at heart.
Quite the contrary, they seek to sacrifice our
property, liberty, goals, and well-being. Supposedly it
serves some sort of public good, though it’s never
the good of any particular member of the public.
Anyways, no one ever goes along voluntarily. Central
planners have to pass laws, in order to do whatever
good to us that they feel needs doing. Safely backed
by the law, they need not worry about our petty little
concerns. They can force the unwilling to obey,
under threat of loss of property, liberty, and
ultimately life.
If you don’t agree with this, think about what will
happen if you refuse to pay your taxes. It may take a
few years, but sooner or later, armed agents of the
government will come to arrest you. If you don’t
want to be arrested, they will force you into
handcuffs. If you are able to fight that off, at some
point they will shoot you dead.
The Gold Standard The Gold Standard Institute
Issue #43 ● 15 July 2014 2

In the case of irredeemable paper money, there are
several ways that the government forces people to
use it. One is the capital gains tax on gold. Another
is the legal tender law. There are others.
The economic arguments for irredeemable paper and
central banking are fallacious and often frivolous.
We can and should confront every falsehood, every
logical error, every misrepresentation of the gold
standard and its defenders. We must also make the
affirmative case for the benefits of the unadulterated
gold standard.
However, we have one more weapon. It demands to
be used, when the context is appropriate. Our
adversaries are confessing to the very failures of their
system. If paper scrip were truly superior to gold,
people wouldn’t need to be forced to use it. When a
bully can’t prevail in an argument using reason, he
becomes violent. Our monetary opponents are
bullies. They resort to force, which is their moral
failing.
This is their Achilles heel, and it’s even more
important than their economic errors.
At best, central bank advocates are Machiavellians,
seeking to use people as a means to their own ends.
At worst, they are little Hitlers and Stalins,
rationalizing their actions with the tired cliché “you
have to break a few eggs to make an omelette.”
We need to strip their veneer of respectability. Many
people will get that, even if they don’t understand
monetary economics.
Keith Weiner
News
Forbes: Your personal debt is not entirely your fault.
≈≈≈
Mining.com: Donald Duck Gold coins sell out in 10
minutes. Scrooge McDuck the heroic accumulator
would have been more appropriate.
≈≈≈
Forbes: America needs the Gold standard more than
ever.
Keith Weiner on Financial Sense.
≈≈≈
RT.com: “The Americans are taking good care of
our gold, we have no reasons for mistrust,” Nobert
Barthle, the German Parliament Budget spokesman,
told RT
≈≈≈
Business Standard: $15b of Chinese loans backed by
Gold that does not exist
≈≈≈
Digital Journal: Gold at the turn of a tap in Montana
≈≈≈
Mineweb: Mali’s first Gold refinery (first since
Mansa Musa)
≈≈≈
Bullion Street: Deutsche Bank opens 1500 tons Gold
vault in London
Part II: A Regulatory Model for a Free
Gold Standard
The primary pitfall that led to the demise of the first
generation of digital gold currency was the lack of a
regulatory model.
Most of the early digital gold companies
incorporated as regular companies without obtaining
special licenses for financial services. After they
grew large enough to warrant government attention,
they found it difficult to obtain financial services
licenses, and most of them were prosecuted and shut
down.
Most governments did not have license categories
for fully reserved digital payment systems in the late
1990’s, so those companies that applied for licenses
were in most cases denied them.
The Regulatory Problem
For the Free Gold Standard vision set forth in Part I,
we need a digital gold transaction system as well as
one or more financial exchanges to efficiently trade
our gold issuance against foreign currency. Those
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Issue #43 ● 15 July 2014 3

roles fit the definition of regulated financial
institutions.
Instead of asking governments to create new
regulations or categories for digital gold systems, let’s
look at the existing landscape of regulated
institutions. Most countries have a pyramid of
financial institutions with a central bank at the apex:
 Central Bank
 Capital Markets (stocks, commodities, bullion
& forex exchanges)
 Commercial Banks, Savings & Loans
 E-money Issuers
 Non-bank Financial Institution(s)
 Money Service Businesses & Agent Networks
(eg. Western Union)
 Stock Brokers
 Forex Bureaus
 Credit Unions
 Cooperative Societies (Secondary)
 Cooperative Self Help Groups (SHG’s)
These financial institutions often fall under different
regulatory agencies, and in some cases multiple
agencies.
Pathways to Licensed Digital Gold Business
1. Set up a Bank
The safest way to set up a digital gold currency
system from a regulatory perspective is to simply buy
a regular banking license and set up a gold bank.
However, this is also the most expensive and highly
regulated option.
2. E-Money License
The European Union has an “E-money Directive”
1

that allows for e-money licenses for non-bank
financial institutions. An e-money license costs
almost the same as a banking license, and is more
limited in scope. There are limits on total transaction
size and volume per account, which may be
detrimental to our goals.

1

http://ec.europa.eu/internal_market/payments/emoney/index_
en.htm

3. Money Service Business
Some countries may allow digital gold companies to
be licensed as Money Service Businesses; however
that is far from certain. Money services regulations
were designed around remittance services, and
bureaucrats may not easily accept the idea of gold
money remittances.
4. Credit Union
A credit union is a special kind of cooperative
society, which hold interesting possibilities. A
cooperative society is a special kind of corporation
where each shareholder only has only one vote, no
matter how many shares they hold. Cooperatives are
for-profit entities that in most cases pay dividends to
the shareholders.
A credit union is a special kind of bank that is
organized as a cooperative society and serves a
limited “field of membership” - often the members
of a cooperative society, or employees of a certain
company, or an association of people holding a
common interest.
In many countries credit unions have lower capital
requirements and regulatory costs than banks.
Credit unions grew out of the Great Depression and
have historically been seen as ways for communities
to organize and help themselves for savings,
checking and getting loans. Consequently, credit
unions often enjoy a kind of sacred political status
and reduced regulatory burden.
In some jurisdictions, such as Hong Kong, credit
unions have explicit authority to trade in bills of
exchange.
2
Credit unions may also issue debit cards,
which means they have access to the global
ATM/debit network. Access to the ATM network
will be important for our goals.
5. General Cooperative Society
A general cooperative society, or “self help group”,
can offer savings and investment services to its
members. Whereas a credit union offers checking
accounts (“front office services”) to members, a

2
Bills of exchange are critical to enable supply chains to perform
invoicing and accounting in gold.
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Issue #43 ● 15 July 2014 4

cooperative society is limited to “back end services”,
meaning savings, securities and lending, but not
checking (demand deposits). Obviously, this may
vary from one country to another.
Cooperatives may issue and trade their own shares,
as well as internal investment funds, amongst their
members.
In most countries cooperatives fall under a different
regulatory agency than banks or capital markets.
Given the significant freedom and power that
cooperatives have to offer financial services to
members, this can be a safe regulatory cocoon in
which to nurture the Free Gold Standard until we
have grown large enough to apply for public banking
and capital exchange licenses.
Cooperative societies also have another special
advantage - they can form branches or chapters even
in other countries. A branch is considered to be a
cooperative society itself, as well as being a regulated
institution. This means that the headquarters chapter
may legally rely upon the assurances of other
chapters with regard to the identity of their
members. This could prove to be quite helpful with
regard to Know Your Customer (KYC)
requirements, because it would enable foreign
members of the Society to open a financial account
with our digital gold issuer without having to appear
in person in that country.
A cooperative society coupled with a credit union
hits the “sweet spot” for our needs:
 Cooperatives can have a global field of
membership with local chapters.
 A cooperative chapter can be relied upon as a
“regulated institution” for KYC.
 Cooperatives can issue and trade internal
securities (ie, private equity)
 A credit union has all the powers of a bank
for money transfers.
 Credit unions may gain access to the global
ATM networks.
 Credit unions may support a market in foreign
exchange.

A Long-Term Strategy
As a community of outsiders trying to bootstrap a
Free Gold Standard in a world of fiat money, we
need to use our capital wisely. We need time and
freedom to build and test our systems, make our
mistakes and correct them, before we reach for a
more public market.
Creating a cooperative society, “The Gold Standard
Society”, coupled with a credit union that serves the
members of that Society, I believe that we can
achieve the regulatory model that we need to operate
at low cost without running afoul of government
authorities.
The credit union can act as the first digital gold
issuer, if need be, as well as host the first digital gold
forex exchange - giving us breathing room to grow
our user base as well as our technology and market.
The Society may establish procedures for identity
verification so that the credit union may rely upon
the assurance of a local chapter that Bob is really
Bob - and still satisfy the regulator.
Once the Society has all of its systems working
smoothly, we can apply for banking, securities and
forex exchange licenses in the countries where that
makes the most sense. As we grow, banks, credit
unions and other financial institutions may join the
Society as digital gold issuers.
This seems to me to be the least expensive and
lowest risk regulatory path to creating the Free Gold
Standard and Digital Gold 2.0.
My company, Dinero Limited, has created a pilot
institution in Kenya as a cooperative society that
issues gold accounts to its members and uses our
software to do it. We met with the central bank there
and they affirmed that so long as the cooperative
only offers accounts to members, it is minimally
regulated. We have not yet created a credit union,
but we have demonstrated that this approach can be
effective.
3


3
Due to high corruption and weak rule of law, Kenya is not a
suitable jurisdiction to act as a base for a worldwide society,
which is why we are looking at other jurisdictions for the Gold
Standard Society.
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Issue #43 ● 15 July 2014 5

Conclusions
Lack of a viable regulatory model and domiciling in a
hostile jurisdiction were the primary causes of the
demise of the first generation of peer to peer, digital
gold currency systems.
There are multiple regulatory pathways to create an
institution that has the power to issue peer to peer,
digital gold accounts.
Of those pathways, a bank, a credit union, and a
savings cooperative are the three institutions that
offer the most regulatory protection and would still
leave us the freedom to pursue our business model
and goals.
The combination of a cooperative society with a
credit union seems likely to offer the greatest benefit
to us at the lowest cost.
The primary mission of the Gold Standard Society
will be to create a contractual framework to allow
many digital gold issuers to be interoperable. The
special powers of cooperative societies and credit
unions will enable the Society to set up the first
digital gold issuer, as well as a digital bullion market.
Ken Griffith
Ken Griffith can be contacted at ken@dineroltd.com. Ken was
editor of The Gold Economy Magazine, VP Marketing at e-
Bullion.com, and later started web consulting company Cottage
Networks, LLC to develop quality websites for small companies.
Ken has served on the Dev Team at CMS Made Simple, and was
a founding member of the International Association for
Financial Cryptography in 1998. Ken's current project is Dinero
Limited, a social savings platform for smart phones that works
with social savings groups to improve financial inclusion in
Africa.
A Drawing-Board Currency as Ersatz
Constitution
Twelve years have passed since politicians
introduced the artificial currency euro to half of
Europe without bothering to ask the electorate.
These were turbulent times indeed: the new money
had to be rescued several times, no other currency
before has faced such massive criticism.
The amount of propaganda on behalf of the euro is
unprecedented in history, and the public debate
continues still. Why this should be the case will be
discussed in this article.
The Inception
Right from the beginning, this drawing-board
currency was different from its predecessors. In the
past, all participants in the marketplace introduced
money from the bottom-up. Usually, it emerged
victorious from a variety of competing alternatives
and was subsequently officially endorsed by the
political elites of the day.
In stark contrast, the euro was construed by politics
and introduced in a top-down manner.
On January 1, 2002 – after a rather short planning
and preparation phase (given the complexity of the
project) – humankind’s biggest currency experiment
began. Never before was a currency introduced:
 across such diverse countries and regions,
 with such varied cultures and ways of life,
 with such different economic systems, and
 at such different stages in their economic
cycle.
Why the haste, one might ask. After all, it was
commonly known that the different countries had
not converged economically or culturally to an
extent that would have made such a monetary union
feasible.
The mindboggling haste was due to the fact that EU
did not manage to agree on a constitution. Without a
constitution, though, the conglomerate would have
become an „ever closer union“ at a much slower
pace, if at all.
Uniting Peoples and Cultures in Four Steps
The failure to create a constitution is not due to
administrative incompetence but rather to the very
nature of the problem. Historically, societies have
united in a set sequence of steps. The process takes
several centuries and includes the following phases:

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Issue #43 ● 15 July 2014 6

1. Trade
It all starts with an interest in other people’s goods.
Merchant routes and market places are established to
facilitate trade.
2. Foreign trade and military alliances
Military forces safeguard these trading routes.
Military alliances are founded to secure peace.
3. Language, cultural exchange
Travelling merchants bring back home knowledge of
different customs, languages, cuisine and cultures;
these are partially adopted by the people at home.
The exchange of cultures and habits as a major
foundation of unity has begun.
4. Sense of justice/legal system
At the very last moment, societies begin to adopt or
even unify legal habits. The legal system (which in
essence is a codification of prevailing moral
standards) is vital to the identity of individuals –
therefore, they are loath to change it.
With this historical background in mind, it is obvious
that people could not follow politicians’ visions with
their hearts and minds. Despite their pretty names,
the constitution substitutes (Maastricht and Lisbon
treaties) are of only limited use. Without a proper
constitution, the vision of a unified Europe was
doomed to fail. Haste then created the monster
called the euro, which was supposed to be a medium
for European integration and cohesion.
Function Shift
In order to make a political vision come true, legal
procedures were circumvented in a nimble way. An
ersatz medium in the shape of a currency was
created – and we cannot even picture where this will
all end.
The consequences of the shift from money’s original
function as a medium of exchange and store of value
towards constitution substitute can be already felt
everywhere.
While money (just about!) still works as a medium of
exchange, it cannot fulfil its role as a store of value
any more. The massive loss of purchasing power
people suffered since the euro introduction was
unimaginable in times of national currencies.
One might even suspect that this effect was not
altogether unintentional but rather part of the
creeping monetary dispossession of the people of
Europe.
Thomas Bachheimer
President of the Gold Standard Institute Europe
Comments on a Free Gold Standard
Last month Ken Griffith discussed the seven
elements needed for a new Free Gold Standard, a
Digital Gold 2.0. The early digital gold system Ken
discussed was of particular interest to me at the time
because of its possible strategic implications for the
Perth Mint. As a result, I recorded their weekly
reported balances for many years to understand how
this new market was developing. The chart below
shows these early years,
4
with GoldMoney surviving
while the others closed. Understanding why is crucial
to a successful Digital Gold 2.0.

Based on my experience watching Digital Gold 1.0
form, and providing one of them custodial services
for a period, below are some comments on Ken’s
seven elements in the spirit of constructive criticism.
1. Jurisdiction
I agree with Ken that a friendly jurisdiction is
necessary for a successful Digital Gold 2.0 ecosystem
to develop. However, the location of the system is
not as important as the location of the users.

4
Gaps occur where figures were not available; e-Bullion stopped
reporting its balances in early 2005 but the business continued.
The Gold Standard The Gold Standard Institute
Issue #43 ● 15 July 2014 7

A capital gains tax on gold in the jurisdiction of the
user is a huge impediment to people in that country
using gold as money. As the value of fiat currencies
fluctuates around gold it creates gains and losses that
have to be accounted for (software can help with this
burden) and paid, something that does not apply to
the local currency.
While I would not argue that a capital gains tax is so
fatal to a Free Gold Standard that no one should
spend time developing the systems and institutions
for it, I would argue that the prime objective of
organisations such as the Gold Standard Institute
and those involved in digital gold systems should be
the repeal of capital gains taxes on gold in all
jurisdictions.
As a side note, I would argue that any person or
organisation that does not advocate for the
abolishment of such taxes would reveal themselves
as an advocate of a statist Gold Standard rather than
a Free Gold Standard.
2. Primary Specie for Contracts
I disagree with Ken’s recommendation that “we need a
standardized specie for gold contracts that is small enough to
be practical for daily transactions”. In his article on digital
gold 1.0, Ken states that it was a flaw that these
systems used “the spot price of 400 oz gold bars on the
London market, and their contracts were deliverable at that
spot price. To cause physical gold to circulate the digital gold
must be contractually deliverable in the smallest specie, not the
the largest one.”
These days the public is increasingly moving to
digital payments and away from physical cash, as
noted at a recent Mint Director's Conference.
Therefore I do not see that there will be much
demand for “physical gold to circulate”: why should
one need to “cause” it to circulate if the public does
not demand it? If the gold backing digital gold
systems is likely to sit still in a vault and rarely
circulate physically, then the objective should be to
minimize the cost of acquiring such gold.
Mandating the use of 1 gram bars or a similar small
size will add an excessive premium to the “gold
money” unit, a cost which paper currency does not
have. To obtain as wide an adoption as possible, one
needs to reduce friction costs between the digital
gold system and fiat currencies (which people will
have to move between for some time). If people will
lose a significant percentage of their wealth
converting into and out of digital gold because it has
to be backed by small forms of gold it will prevent
adoption.
The lowest cost form of gold is the internationally
accepted 400oz bar. Unlike small bars, the 400oz bar
is numbered, which will facilitate auditing and
transparency. It is a lot less costly to audit one 400oz
bar than 12,441 one gram bars. In addition, the
400oz bar has the greatest trading liquidity, ensuring
that a digital gold system is connected into the wider
gold market in the most efficient manner possible.
A digital gold system will face a fluctuating demand
for its money, as fiat currencies do. When there is a
surge in demand for gold, mandating one gram bars
will place a digital gold system at risk of an inability
to source product due to limited production capacity
in the industry, as we saw in 2008 following the
global financial crisis
5
. In periods when demand
reduces significantly and the gold behind a system
needs to be liquidated, small size bars or coins will
incur a cost to be melted into 400oz bars, resulting in
the gold money unit trading at a discount. Potential
users will see such systems as unstable in value with
a wide bid/ask spread relative to fiat currencies.
A further argument for the use of 400oz bars is that
each region has different preferences – Asia often
works in gram bars while the US prefers ounce
coins. Whatever form is chosen it is unlikely to have
worldwide appeal.
It would be far more effective for any users wishing
to convert into physical forms to be serviced by the
existing network of bullion dealers, and choose
whatever form or size they wish, rather than a
mandated standard. By leaving convertibility to the
free market a digital gold system is likely to get
enthusiastic engagement from existing bullion
dealers, which will go a long way to attracting
consumer use. Such dealers could also easily use a

5
http://goldchat.blogspot.com.au/2014/01/coin-shortages-
and-rationing-are-in-our.html
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Issue #43 ● 15 July 2014 8

100% backed digital gold system as an alternative to
the London unallocated metal account system for
payment settlement with mints and distributors for
new stocks of small bar or coin.
3. Digital Gold Payments & Accounting
Inter-system clearing is essential for a viable digital
gold ecosystem. It is unlikely that digital gold system
operators in different countries would be willing to
use one global firm as a clearer and would prefer to
trust a local existing precious metal operator like a
refiner or mint, from whom their agent networks
and bullion dealers would source gold locally.
The use of 400oz bars would enable such local or
regional clearers to co-ordinate globally and at least
initially, piggy back off the existing London Precious
Metal Clearing Limited system.
4. Agent Network
To bootstrap a digital gold system existing bullion
dealers and FX operators will need to be accessed.
Even new operators will use existing over-the-
counter trading networks to hedge their transactions.
All of these ultimately settle gold into 400oz bars,
another reason why this should be the standard for a
digital gold system.
5. Electronic Exchanges
In his article, Ken claimed that “we need efficient foreign
exchange between gold and fiat currencies. Therefore we
eventually need an electronic trading market” giving the
example of Bitcoin, which has developed its own
exchanges.
In the case of Bitcoin, this was necessary because
Bitcoin had no prior history of value or exchange
rates with other currencies. This is not the case with
gold, which has a highly liquid market quoted in all
major currencies, and an extensive over-the-counter
network of traders, on which to draw.
In operation, consumers will value a 100% gold
backed digital gold system off existing gold market
pricing, so integration with the current market is
unavoidable. I am not sure of the advantages of
incurring costs in constructing new exchange(s)
when its prices and activity will be arbitraged back to
existing exchanges and the over-the-counter market
by traders in any case. I would suggest that it would
be better to use the existing system and save the cost
and headache of trying to duplicate it.
6. Dispute Resolution System
I agree with Ken that an arbitration or dispute
system voluntarily implemented by the digital gold
operators is essential. It will go a long way to
assuaging Government and regulators that this is a
responsible industry and will minimize the chance of
them taking a negative view of it.
7. Regulatory Model
Ken is correct that complying with existing
regulations is essential but I do not necessarily see
regulators “as well-meaning parasites”. While it can be
argued that regulations can often be excessive in
areas, many just encode good corporate governance
practices and consumer expectations.
As Ken notes, “e-gold and the other systems were
overwhelmed with a wave of digital crime from 2001 onwards.
Hackers, auction fraud and Ponzi schemes were the primary
pathogens infecting the digital gold systems” - facilitated by
no or little identity verification for accounts.
Whether the US Government waged a “jihad”
against these digital gold systems, or was just validly
trying to shut down the extensive criminal activity
they allowed, it is clear from the earlier chart that the
two major players at the time were losing market
share to GoldMoney (which enforced know your
customer rules) well before any regulatory crack
down by the US Government. This indicates that the
public voted for an operation that complied with
regulatory rules, even if not required to do so.
For me this is the key lesson from the Digital Gold
1.0 experience: being a leader in governance and self-
regulation makes commercial sense as it is what the
mainstream consumer wants and goes a long way to
favourable regulatory treatment.
Bron Suchecki
Bron Suchecki writes in a personal capacity and the views
expressed do not represent those of the Perth Mint.