This is Part 1 of The Material Evolution of Digital Currency to Crypto series.
Whenever I speak to crypto-curious people, I like to give a little bit of the history and context that bitcoin was birthed from because I think it helps in understanding the big picture (and because I’m a dirty Marxist and I like my history materialistic). However, our story doesn’t actually start at the creation of bitcoin but actually long ago in the “before times”. That’s right, our story starts in the 19th century in the good ol’ US of A.
The Pre-Bitcoin Age / Digital Money has been Around for a While
In 1871, Western Union created the very first money transfer service using the coolest new gadget that all the cool kids were into, the telegraph. It finally made possible for robber barons to move their oodles of money away from angry striking workers in the form of a virtual representation of money. Finally they didn’t need so many big heavy safes to store their cash. The invention also came in time for the first Gilded Age in America, a time known for its excess of wealth for industrialists and abject poverty for their workers.
Or “Job Creators” or “Philanthropy Donors” or “Charity Funders”
To make a long story short, as most things over time, ways to transfer value between people or accounts evolved with the latest technologies that could reduce the process time and increase the ease at which people could do it. So many different ways were invented for a money receiver to see a bigger number in their bank account faster.
Now let’s travel to the past’s future where in the 1970s three interesting things are happening in the world of finance.
- The beginning of ~neoliberal~ economic policy largely in the US and the UK in the form of banking deregulation
- Credit cards are being pushed onto people and an increasing rate to make it easier for people to buy stuff they wouldn’t buy otherwise
- A network of banks in California start the first automated clearing house (ACH) which processes large volumes of credit and debit transactions in batches using computers, which are like telegraphs but better
All of the ingredients were now in place for the financialization of many aspects of our lives because buying stuff is easy and fun now! In order to facilitate the continued profits for the financial elite, computer databases were used to automate financial activity, especially as a way to keep track of the debts people owed now that credit was so easy to get. Surely this was a good idea because all the wealth that the rich would make off of the new “pro-market” policies would trickle down onto the commoners who could then pay back their debts…
The point I’m trying to make here is that digital currency (the representation of monetary value using digital technologies) has actually existed for quite some time in centralized databases held by financial elites who used them as vehicles for enhancing their own wealth with the help of the State while increasing economic inequality. Therefore, it isn’t surprising that people disillusioned with the status quo were open to alternatives presented to them. Although most people might associate digital currency with bitcoin and other cryptocurrencies, the only thing we can call these representations of money held at banks and payment processing companies is digital currency. Cryptocurrencies are simply a form of digital currency that uses peer-to-peer (P2P) technology.
So many different kinds of monies to buy things I don’t need!
But before we see the shift into using P2P technologies for blockchain based cryptocurrencies, there were actually a few attempts to make cash digital to use over the internet. The first electronic cash company, DigiCash was founded by a cryptographer named David Chaum (one of the original cypherpunks) in 1990 based on his own 1983 research paper. Interestingly, it detailed a protocol with every proposed element of the bitcoin blockchain except for Proof of Work. This also meant that the system didn’t have the ability to prevent the double spending problem, but only detect it. Unfortunately, the company filed for bankruptcy in 1998. Some people cite the reason was that it was ahead of its time and too early for the rise in e-commerce.
Poor David could’ve been the messiah to take us to the digital currency promise land
The first widely used internet money was digital currency backed by precious metals called e-gold. Founded by oncologist Douglas Jackson and attorney Barry Downey in 1996, the company stored gold coins and other metals in safe deposit boxes at different banks. Users could access a portal where they saw real-time reports about their holdings in each metal including the serial numbers of the gold bars they owned. It boasted millions of users in its prime who used it for online shopping, metals commodity trading, and online gambling. It’s also important to note one of the big reasons for its popularity was that e-gold existed outside of the traditional banking system and was considered an alternative to it. Does it sound familiar to bitcoin yet?
E-gold was eventually shut down along with other digital gold companies after a US court ruling related to shifting definitions of “money transmitter” under the Patriot Act. The new definition required that they have a license to exist when the definition changed to include any form of transfer of value, including gold. In 2007, the owners of the company were indicted by the United States Department of Justice on four counts of money laundering and allowing the purchase of child pornography (in classic libertarian style).
Although, it seems likely that they were unfairly shut down by the State on the behest of financial elites due to the activities of a minority of users, from an anti-capitalist perspective, I don’t think it would have really mattered whether or not they were still around now. What is much more interesting about e-gold is the ant-establishment philosophy underpinning its popularity and the foreshadowing of what was to come very soon after they shut down.
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This ends Part 1 of the series, check out Part 2 here.
