Bullion and Bandits: The Improbable Rise and Fall of E-Gold
E-Gold founder Doug Jackson wanted to solve the world’s economic woes, but got an electronic ankle bracelette for his trouble.
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Despite the sudden burst of success, the venture was plagued with setbacks. E-Gold’s servers buckled under the growing traffic load, hanging transactions and frustrating users. Copycat entrepreneurs erected their own gold-backed systems — e-Bullion, GoldMoney and OSGold – and poached E-Gold customers. When Jackson finally scaled up his infrastructure in 2003, solving the performance problems, cyber scammers entered the scene, launching a sortie of phishing attacks against users, tricking thousands of them into disclosing their E-Gold passwords, then draining the accounts.
Eventually Jackson deployed an anti-phishing remedy, and business rebounded in September 2004. A year later, customer accounts numbered about 3.5 million in 165 countries, with 1,000 new accounts opening every day. Millions of dollars were zipping through E-Gold’s system 24-hours-a-day, bouncing between the U.S. and Europe, South America and Asia. E-Gold collected 1 percent of every transaction, with a cap at 50 cents.
E-Gold was now second only to PayPal in the online payment industry. At last, Jackson says, he felt relief.
“We had been stuck year-in and year-out on whatever crisis-du-jour required our immediate attention,” he says. Now “we felt like we’d finally achieved a turning point.”
But E-Gold’s increasing popularity with customers drew less-welcome attention as well.
The federal government began to take notice in 2003, when the Secret Service launched an undercover operation against a website called Shadowcrew — a legendary forum for “carders” who trafficked in stolen credit and debit card numbers. Cyber crooks in Eastern Europe were stealing millions of card numbers in phishing and skimming scams, then passing the data to accomplices around the world. The low-end cashers coded the numbers onto blank cards, then siphoned money from ATMs and transmitted the bulk of proceeds back to the former Soviet bloc.
When authorities monitored the criminals’ communications, they discovered that E-Gold was among the carders’ preferred money-transfer methods, because the system allowed users to open accounts and transfer funds anonymously anywhere in the world.
When the Shadowcrew investigation wrapped in October 2004 with the shuttering of the site — and the arrest of more than a dozen members — the Justice Department turned its sights on E-Gold. Its goal was to force the service to comply with regulations governing money-transmitting services like Western Union and Travelex. Federal regulations required those businesses to register with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), to be licensed in states that required it, to diligently authenticate the identity of customers and to file suspicious activity reports on shady-looking customers. But E-Gold wasn’t doing this.
Jackson believed E-Gold was exempt from regulation because it was a payment system not a money transmitter. And although it did transfer money, customers could park balances in their accounts, as with a bank.
But Jackson insisted E-Gold wasn’t a bank, either. It was something new — something the world and the U.S. government hadn’t seen before. He wasn’t alone in this view. Many internet-based payment services, including PayPal during its early years, believed they were exempt from regulation. They mostly flew under the radar of prosecutors until something brought them into the spotlight.
Jackson says he got the first inkling of the rampant, organized crime in his system when he read a June 2005 New York Times story about the growth of the carding forums. “To my horror … E-Gold is mentioned in this ghastly, horrible way of it being, you know, the bitch of criminals,” he says.
He concedes he knew that Ponzi schemers and other scammers sometimes used his system , but he’d always responded to government subpoenas for information about suspicious customer accounts. So he contacted the Secret Service to ask why the agency hadn’t sought his help to track the crooks in the Times story. The agency, which was already secretly targeting E-Gold, ignored him. (The Secret Service didn’t respond to interview inquiries for this story.)
The hammer dropped on E-Gold around 5 p.m. on a mild day in mid-December 2005. A herd of Chevy Suburbans wheeled up to Jackson’s house and expelled more than a dozen FBI and Secret Service agents. Simultaneously across town, the Justice Department’s “Operation Goldwire” unfolded with more agents raiding the offices of Gold and Silver Reserve, the company that operates E-Gold. A third group descended on a co-location facility in Orlando where E-Gold Limited, a holding company for E-Gold’s assets, racked its database servers.
The feds carted away more than 100 boxes of electronic records and paper files, including birth certificates, photos and a deed to the Jackson family burial plot. The gold and silver reserves remained safe overseas, but the government froze the company’s domestic bank accounts. Jackson’s venture was dissolving around him.
Jackson wasn’t sure what the feds hoped to find in all those records; once E-Gold got its systems back online he turned to his database for answers.
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