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Load of bullion: new gold-backed bitcoin is a disaster in waiting

Load of bullion: new gold-backed bitcoin is a disaster in waiting

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Minacoin sounds like a libertarian dream, but it doesn't make sense

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Exactly one year ago, a bitcoin was worth roughly $101. In November, it was worth $1,100. Today, it’s worth $432. That zigzagging price chart is why the digital currency is often criticized for not being a "stable store of value." You have no idea what it will be worth tomorrow.

Melvin Ng, who ran the now-shuttered LibertyBit bitcoin exchange, and David Gallo, a data-center operator who took up bitcoin mining, are hoping to fix that problem with a new cryptocurrrency called Minacoin. Minacoin is based on the bitcoin protocol, which means it relies on a network of programmers to authenticate transactions and prevent double-spending. But unlike bitcoin, it’s backed by gold.

"Bitcoin is an amazing technology. It’s almost like the internet reinvented again with currency in it," Ng says. "But the currency can lose its value within a day. Gold has been around for the last 5,000 years."

Minacoin is backed by two 400-ounce bars of gold

The Toronto entrepreneurs purchased two 400-ounce bars of gold worth $1,050,000 as reserve. The total number of Minacoins will be capped at 21 million, meaning each coin is worth a nickel. And unlike actual gold, users can send Minacoins back and forth easily over the internet.

The idea is very similar to E-Gold, the infamous digital currency backed by gold, silver, and platinum that its operators stored in bank vaults in London and Dubai. E-Gold soon became popular with credit card thieves. In 2007, its founders were indicted for facilitating money laundering. After a plea agreement, the company found that it was impossible to comply with all the relevant regulations.

Unfortunately, Minacoin doesn’t seem to have learned E-Gold’s lesson. Ng and Gallo are not sure whether Minacoin will be structured as a currency backed by a reserve of gold, which would subject it to anti-money laundering regulations, or simply a way to trade gold, which would mean a different set of regulations.

"The original concept was a currency that was not a currency, kind of an IOU backed by gold," Ng says. "In terms of the technology, it’s there. In terms of the gold, it’s there. But in the last three days we’ve had a lot of issues in terms of legality and dealing with the terminology that we use."

Unfortunately, Minacoin doesn’t seem to have learned E-Gold’s lesson

It’s also unclear whether Minacoin has anything to offer. It would essentially enable the use of gold for quick transactions, but it’s unclear why anyone would want to do that. Most gold bugs stockpile their loot as a long-term investment rather than use it to buy breakfast (although the latter does happen in the woods of New Hampshire at the annual libertarian Porcupine Fest).

"As an economist, I’m almost always skeptical of people that think gold is the one true answer to all of our problems, so that already raises flags," says Eli Dourado, a research fellow at the Mercatus Center at George Mason University. "Just looking at it, these guys aren’t ready for prime time."

If you want a store of value, why not just buy gold? he asks. And if you want a currency, why not just use bitcoin?

"These guys aren't ready for prime time."

Minacoin says it believes it is not obligated to collect information on its users, which is basically a siren call to both criminals and the FBI. But again, there is no reason why criminals should use Minacoin over bitcoin.

At least the company doesn’t plan to start selling coins right away: Minacoin will soft-launch today with preorders, in order to get a sense of the demand. Ng and Gallo hope to fully launch in June.

"It’s hard to believe that the company will be able to launch in a month if it intends to target US residents," says attorney Carol Van Cleef, who was retained by E-Gold to assist in compliance. "The Department of Justice set out its expectations that a gold-backed currency needed to [be] registered as a money-services business and licensed."

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