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.

RELATED TERMS
  1. Gold Bug

    An individual who is bullish on gold. Gold bugs believe that ...
  2. Gold Certificate

    A physical document resembling a paper bank note that entitles ...
  3. Gold Bull

    A gold bull anticipates the price of gold increasing over a period ...
  4. Bullion

    Bullion refers to gold and silver that is officially recognized ...
  5. Gold Fix

    The London Gold Fix was replaced in 2015 by The London Bullion ...
  6. Digital Currency Exchanger - DCE

    A digital currency exchanger charges a commission to exchange ...
Related Articles
  1. Investing

    The Midas Touch For Gold Investors

    Find some golden opportunities by investing in gold commodities or futures contracts.
  2. Investing

    Gold: The Other Currency

    Throughout history, gold has held its value against paper currencies. Learn how it can help offset market risks.
  3. Investing

    What Drives The Price Of Gold?

    Gold prices are based on the economy and actual uses, but there are many other factors that dictate gold's perceived value.
  4. Investing

    How gold affects currencies

    There is a strong correlation between gold's value and the strength of currencies trading on foreign exchanges.
  5. Investing

    8 Reasons To Own Gold

    This precious metal's rich history stems from its ability to maintain value over the long term.
  6. Investing

    The Gold Showdown: ETFs Vs. Futures

    ETFs and gold futures are two ways to diversify into the metals asset class, but there are advantages and disadvantages to both instruments.
  7. Investing

    Why the Price of Gold Is More Than Just Supply & Demand

    The price of gold is driven by multiple factors that work together in at times counterintuitive ways. Understanding the place of gold in a portfolio requires a look at history.
  8. Investing

    Which Gold ETF Should You Own?

    Now may be a good time to get into gold ETFs. Here's how to do so, and which ETFs should be considered the best bet.
  9. Investing

    The Relationship Between Gold, Gold ETFs, and Other Funds

    Gold ETFs typically track the price of actual gold; inverse and leveraged ETNs don't necessarily do so in the long term.
  10. Investing

    The Better Inflation Hedge: Gold or Treasuries?

    Owning gold may not be the best option for hedging against inflation. What else, then? Try treasuries or gold ETFs.
RELATED FAQS
  1. Has gold been a good investment over the long term?

    Examine the investment performance of gold dating back to 1933, when President Roosevelt required all gold bullion, coins ... Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center