Cryptocurrencies - A Short History in Time
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Cryptocurrencies - A Short History in Time
From Barter to Beenz to Bitcoin - we take a look at the history of digital currencies
The second instalment of our cyptocurrency series examines the short history of digital currencies. Look at the crypto predecessors and you may well gain insights into their future. What were the digital currencies of yore and whatever happened to them? What stopped them in their tracks? At Letts Journal, we like flipping things on their head. And we believe in learning from the past.
It is generally considered that e-gold was the first widely used Internet money. Introduced in 1996, and backed by gold, it grew to several million users before the US Government shut it down in 2008. E-gold has been referred to as “digital currency” by both US officials and academia.
E-gold's failure was ultimately due to their inability to provide a system of reliable user identification and the failure to provide a workable dispute resolution system to identify and cut off illegal and abusive activity in their user community.
Its founder, Douglas Jackson, ended up getting sentenced in the US after pleading guilty to money laundering-related crimes, and to operating an unlicensed money transmitting service. Even though some of the investigating FBI agents believed he hadn’t meant to create the ultimate money-laundering machine, he ended up serving time. Some argue that e-gold was an example of getting ‘too big to succeed’.
Bitcoin and other leading cyrptocurrencies should beware of e-gold’s journey. It’s quite telling that the ECB openly admits Bitcoin and other cryptocurrencies may threaten its “monetary sovereignty” – signifying the concern to no longer be able to engage in monetary financing. In sum, more EU regulatory action on crypto is highly likely.
The US are expected to take action as well. U.S. Treasury Secretary Janet Yellen has stated that “misuse” of cryptocurrencies constitutes “a growing problem” and that “we really need to examine ways in which we can curtail [cryptocurrencies’] use and make sure that money laundering doesn’t occur through those channels.”
But to discover the true origins of digital currency you have to look even further back, to retail barter exchanges, sprouting from a truly efficient and fertile root: business-to-business e-commerce. It seems that small companies turn to barter like the countryside gentry bring pheasant to the kitchen table. When a business needs to conserve cash or jump-start sales barter is appealing and easily done. Hundreds of thousands of businesses have traded through barter exchanges in the US alone, according to the International Reciprocal Trade Association.
A barter exchange - for those who haven't used one - combines the functions of classified advertising and a bank. Stay with me. Customers sign up to sell anything from drywall(??) to dentistry, the exchange compiles the listings in an online directory, and buyers contact sellers directly or through a broker employed by the exchange. All sales are executed in digital trade dollars, which customers accumulate by selling their own goods and services or by borrowing from the exchange.
An accountant, for example, might earn 500 trade dollars for doing a Web designer's taxes and use the credit to purchase a photocopier. The exchange collects a commission - typically 5% - in “real” money from both parties. It seems they value the hard stuff a little more than their somewhat ‘funnier money’.
Mesopotamia tribes were likely the starting point of the bartering system back in 6000 BC. These ancient people utilised the system to get the food, weapons, and spices they needed. A little later, because of salt's great value, Roman soldiers bartered their services for the empire in exchange for salt. Proving how much the Italians like to cook. Thank god, and a little Dolmio, for that.
The first retail barter exchange was started in the 1960’s in California. The key feature of these exchanges is the third party trading element - acting as third party record keepers and trade facilitators between their member companies. An internally issued trade credit, a private currency, is used to record the sales and purchases of the members. As members accumulate trade credits from their sales, they can spend these credits with ANY other participating member of the exchange.
Most retail barter exchanges have their own private currency. These alternative currencies support billions of dollars worth of transactions annually. They represent a closed system as you cannot exchange one retail barter currency for another. But, some of the larger corporate barter exchanges such as International Monetary Systems, ITEX and Bartercard support many thousands of businesses around the world and large volumes of transactions.
In the late 1990’s some of the world’s leading venture capitalists including Kleiner Perkins, Draper Richards and GE Capital piled into these trading exchanges, buying them up and racing to digitalise them and create some kind of future ebay for business. The most successful was BarterTrust (later Tradaq) which bought a dozen leading retail exchanges and hired some of Silicon Valley’s top executives, financiers and technology experts to take this trading powerhouse public on Nasdaq. It was to be the largest US business-to-business marketplace and the first unicorn in the space. BarterTrust was slated to go public in 2000. Their timing was perhaps the only major kink in the plan.
After the dotcom collapse, BarterTrust’s IPO was delayed and the Letts Journal’s well known editor was headhunted from leading the team at Beenz to become this Silicon Valley darling’s CEO. He introduced mechanisms and data-analysis techniques to better manage digital currency flows and trading, while containing acquisition fuelled expenses, growing revenues and fully digitising the business and its currency. Tradaq, once better organised, merged with ITEX, which today is a publicly listed entity. Tradaq accelerated the transition of retail barter exchanges from early stage alternative currency to full digital currency. You know, from Mickey Mouse money to, well, almost real money.
The latest Letts, in turn, had led Beenz from a whacky promotional concept through to one of the most traded Internet currencies. Indeed, many argue that Beenz was the real precursor to bitcoin. Perhaps not such a hill of beenz after all.
Beenz, had its roots in mass market reward schemes such as S&H Green Stamps in the US and Green Shield Stamps in the UK. The former were earned for buying gas at petrol forecourts (which perhaps made them a little less ‘green’ than their namesake). Beenz, on the other hand, were earned for doing things online such as filling in forms, clicking on ads and joining online competitions and promotions - making them a little more eco friendly. At its peak, 80% of US households used S&H Green Stamps. Beenz had around 6 million users.
Beenz could be spent, like Flooz, at a good number of ecommerce stores, internet businesses and established brands. They even went as far as to enter into a partnership with credit card giant Mastercard, offering Beenz debit cards which allowed its users to convert their digital currency into cash at an ATM. Beenz had the foresight to peg their digital currency to the dollar and, as a result, enable their alternative money to get converted into a number of other traditional currencies.
Beenz was bought by Carlson Group - who were originally the Gold Bond Stamp Company, issuer of Gold Bond Trading Stamps, which was a leading competitor to S&H Green Stamps. Circular (economy) indeed.
E-gold, ITEX, Beenz and Flooz laid the ground for cyrptocurrencies to be born, and in particular bitcoin, the original cryptocurrency. Founded in 2009 by a programmer (or, possibly, a group of programmers) under the pseudonym Satoshi Nakamoto, bitcoin has ushered in a new age of blockchain technology and decentralised digital currencies. The approach was developed to better protect them from interference and to challenge the current banking system. It seems some lessons were learned from the demise of e-gold.
But, it was bitcoin’s predecessors that whet the appetite of millions of users and thousands of businesses to the benefits of alternative currencies driving new transactions, loyalty and alternative trading mechanisms. They proved that a certain number and type of world consumer likes the idea of a private currency. Perhaps its just that we don’t like having all our eggs in one basket. Or our money in one Credit Suisse… Or maybe we just don’t like bankers that much.
These currency alternatives, and Beenz in particular, developed advanced technologies and models that we now take for granted with modern cryptocurrency. They established the procedures, methods and forms of exchange. They figured out how to design and develop digital money and the technology necessary to earn, save and spend it. They pioneered digital wallets and merchant payment systems. They built digital exchanges, currency systems and powerful security devices. They developed data and transaction analytics that made certain stock exchanges look backwards at the time.
The main take away from these earlier digital currencies was the importance of liquidity and value. Liquidity requires there to be enough digital dollars in circulation - getting bought and sold. Value, in the end, is a function of choice. And choice is driven by the amount of things of genuine value that users can spend their currency on. You know real beans, or a true-world trip to Mickey’s kingdom. After all, there is no limit to the amount of things you can spend your physical dollars on.
If digital currencies are to survive, they will need to develop a sizeable network of merchants offering a large and diverse spread of goods and services to spend the alternative money on. If not, their users will get bored and, in the end, will no longer ‘value’ the alternative money. This could prove to be a challenge for the current wave of cryptocurrencies.
While retail barter currencies and their exchanges have proven to be the most sustainable and long term success models, Beenz and Flooz laid the ground for cryptocurrencies to be born. Perhaps we should look to them to better understand where digital currencies, including cryptocurrency, might go next?
This is the second in a three part series on ‘The Future of Cryptocurrency - Present, Past and Future’. Next week we will publish the last part, examining where cryptocurrencies will likely head to in the future. Subscribe today to get the Letts Journal direct to your inbox.
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