WHAT IS 'Digital Gold Currency - DGC'

Digital gold currency is an electronic form of money that is backed by gold reserves held by private agencies.

BREAKING DOWN 'Digital Gold Currency - DGC'

Digital gold currency, or DGC, is an electronic currency offered by private entities and backed by physical holdings of gold bullion. The holders of any particular DGC are able to pay one another in gold, or currency units representative of gold held in physical form by the issuing company. Each of these companies, or exchanges, hold a physical reserve reflecting 100 percent of client accounts. The first DGCs appeared in the mid-1990s, led by E-Gold. A series of other currencies have appeared in the years since, with most failing for a variety of reasons.

DGCs and risk

Supporters of investment in gold and gold currencies have long touted its universality and invulnerability to the risks of a single national economy. By virtue of its direct link to a physical asset, they argue, gold currency is best suited to survive economic ups and downs. It is also not tied to the financial system of any one country. Critics contend that any gold-backed currency is too independent of a national financial system, and thus cannot be managed by governments in response to financial crisis.

As a loose network of electronic currencies operated by independent private entities, DGCs present an additional layer of risk to the buyer. Management risk, especially in an unregulated developing market, has posed a particular threat to individuals holding DGCs. E-Gold, the first DGC, eventually fell victim to its founders’ unfamiliarity with the risks of online fraud and the response it would provoke from the U.S. regulatory system. Eventually, the U.S. Department of Justice classified e-Gold as a money transmitter rather than a platform for payments between individuals, and it was unable to obtain a license to operate under this classification. Other firms have failed due to embezzlement or money laundering by executives, or their attractiveness of online identity thieves and other digital criminals.

Exchange rate risk has also threatened the holders of DGCs. The value of gold goes up and down in relation to the national currencies of the the world. If a DGC holder redeems their DGC holdings for physical gold, their new holding may not hold the same value in U.S. dollars, for example, that it once did.

Digital gold currencies and Bitcoin

In the wake of many failed DGC exchanges, Bitcoin has risen in prominence, and its users have learned from the mistakes and shortcomings of its predecessors. Instead of seeking to avoid regulation, Bitcoin users are forced to comply with a regulatory framework. Businesses operating in the Bitcoin marketplace have learned that it is in their interest to track transactions carefully, and that regulators will not look kindly upon operators unable to identify where their currency has come from and is headed. Bitcoin has not been able to completely snuff out its darker side, but the closure of the Silk Road marketplace in 2013 represents a significant step on Bitcoin’s path to legitimacy.

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