Thanks Benson.

Jose

The real problem for digital currencies isn’t the functioning of the currency itself, but rather the exchange process.

Some day, perhaps, when digital currencies have gained much broader acceptance, it will be possible to trade them directly for a wide variety of goods and services. Until then, however, a digital currency’s viability in the marketplace will be determined by the ability to exchange it for “real” money: especially dollars, but possibly also euros, yen, or other convertible currencies.

Somebody has to provide an exchange service. But that somebody, unlike the digital currency itself, cannot exist in isolation on some offshore island; rather, at the very least, the exchange service must have access to the banking system in order to receive and disburse “real” money.

And there’s the rub. Long before the court ruling on e-gold, U.S. authorities have been picking off the exchangers one by one like ducks in a shooting gallery at a carnival. The real question to ask, therefore, isn’t “will U.S. authorities be able to forbid or eliminate digital currencies” (they won’t), but rather, “will U.S. authorities be able to criminalize and destroy the business of exchanging digital currencies for U.S. dollars” (quite possibly).

There is a peculiar irony in this. Exchangers don’t “transmit” money at all. Rather, they simply buy and sell a somewhat nebulous product (a legally probably unenforceable claim on genuine or bogus precious metal evidenced by a few electrons on a disk at an undisclosed location) in exchange for cash. There is no reason why this should be illegal as long as the exchangers are up-front about what buyers are getting in return for their money. Nonetheless, because exchangers are the Achilles heel of the system, the Feds go after them with a vengeance.

It would be interesting to see if someone with a money transmitting license (e.g. someone who operates a currency exchange in the U.S.) can or will become a dealer in digital currencies. Such an individual would have to adhere by strict “know your customer” guidelines, i.e. they would have to require proof of identity from all customers and to keep it on file.

(Such an exchanger, however, would have no way of knowing where his customers’ digital currency came from, or where they intended to spend it. Then again, dealers in gold coins don’t know where sellers got their coins, or what buyers intend to do with them.)

Does anyone know if this is feasible? I believe that the future of digital currency in the U.S. is dependent on the possibility of such exchange businesses existing on U.S. soil.