Introduction to Digital Currencies

Lesson 2 – Early Digital Currencies (1980-2009)

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Welcome back to Introduction to Digital Currencies, an original Coin Academy course. There are four lessons in this course. We’re currently on the second lesson, Early Digital Currencies 1980 through 2009. Let’s go and get started.

1981, oftentimes, we refer to this as Digital Currency Year 0. Set against the backdrop of the IBM 5150, the early electronic spreadsheets, and the “scratch and hiss” modems of the era, something important happened. A gentleman by the name of Michael Linton built an electronic spreadsheet, which he used as a ledger to record transactions in a Mutual Credit system in Canada. Entries were actually phoned in and then they were manually entered into this electronic ledger. Members of the Mutual Credit system could then exchange goods and services for either a locally created currency or for points which could be redeemed for other goods and services within this network.

Primitive as it was, this system known as LETS, the Local Exchange Trading System, is actually the first fully digital currency. Though it seems like it was only substituting an electronic ledger for a paper ledger, the reality is there actually was a currency or a point system associated with this. Moreover, it’s still in use today in a number of locations around the world. So simple as it is, it’s remained quite resilient.

There were, however, a number of false starts that were to come about. Most of these based around the rise of the Internet. During the early 1990s and the 2000s, there were several attempts at Internet-based digital currencies. All of which were doomed to failure. Two of the most popular were known as E-gold and Flooz.

Now, let’s talk about E-gold first. This went actually quite a long run from 1996 through 2009. It basically used the Internet as a way to allow people to create an account and then send payments that were backed by Gold. Their peak annual turnover, $2 billion, was actually quite successful in that regard. However, they didn’t have very good protections in place for preventing money laundering and for verifying the identity of individuals, and so it became basically a haven for money laundering or so it was claimed by the Department of Justice. Department of Justice eventually forced E-Gold into liquidation and then the process seized $90 million in E-Gold assets. E-Gold was popular enough they’d actually spawned several competitors including e-Bullion and Gold Money, both of which quickly shut down after E-Gold was forced into liquidation by the Department of Justice.

Flooz was another matter entirely. Flooz operated only from 1999 through 2001, the peak of the .Com boom years. Basically, they issued a currency, Flooz, which was used with merchants who participated in the system, but you could actually these things so they actually were truly a currency, not simply a coupon. However, acceptance was very, very limited. It only worked with participating merchants and they never achieved the widespread adoption that was necessary for them to evolve into a proper functioning system. They actually burned through 35 to $50 million in venture capital before they exploded in 2001. These were not the only false starts though they were probably the two highest profile false starts.

There is another system called Hashcash, which actually remains relevant for reasons you’re about to discover. Hashcash started in 1997 and it may still be going today. There’s no reason it wouldn’t be, but it certainly isn’t very widely used. Basically, it was a micropayment protocol that used email programs as a generator of the micropayment value. It wasn’t widely adopted though it technically still does exist today, but what’s important here is the proof-of-work system that they created for Hashcash is still used in systems like Bitcoin. Basically, the proof of work was the email program generated the appropriate information that became the value in the micropayment protocol. That’s very, very similar to the way that Bitcoin currently uses proof of work to produce new Bitcoins at least conceptually.

Another false start was Liberty Reserve. Liberty Reserve operated from 2006 through 2013. It was a centralized digital currency known as Liberty Reserve Dollars. The value of it was pegged to either US dollars, Euro, or Gold. And at the peak, they had about one million registered users so it actually did fairly well. However, similar to E-Gold, it became a haven for money laundering and it was shut down. And the founders were actually prosecuted in this case. The last example that I want to look at is something called BitGold. BitGold was first promulgated in the early 21st century. But it was proposed as a decentralized currency system that was never actually implemented. I mentioned it here because it’s often viewed as a precursor of Bitcoin.

None of these systems ever achieved widespread adoption. Part of the reason that they did not achieve widespread adoption was the fact that they were actually quite centralized. There are some exceptions here. The proof-of-work system out of Hashcash became valuable. And it was something that was built upon. The decentralized nature of BitGold, though it was never actually implemented, became something that was built upon. However, the other systems that actually got up and running and were turning over some significant quantities of cash never actually made that leap into a proper decentralized system that gave it the protection from being a target for legal prosecution.

We’re going to look more at that topic in detail in the next lesson when we focus on decentralized computing and the rise of cryptocurrencies so join us for that lesson.