The e-gold rumours

December 23, 2006

Gentlemen,

As always when something unusual happens at e-gold, the rumour mills are running hot. Indeed, people in our industry seem to have a definite liking
to jump to conclusions, make baseless assumptions, and spread all kinds of rumours, often in good faith and with no ill intent. If I believed these
rumours in relation to businesses I am responsible for myself, well, then each of my own ventures has been investigated, closed down, etc. twice in
the last six months. Yet, all of them are still around, and despite a hiccup in two countries we are operating in, the overall group is still doing well,
and is profitable. Some sectors are even growing nicely.

Based on that, I read and re-read the various posts regarding e-gold’s situation in the past few days, and think it’s time for me to chime in.

What do we actually know at this point?

We know that G&SR was raided early in the year and that the raiders took copies of everything. We know that e-gold’s business volume had been steadily growing and then briefly dropped substantially. We know that some US based accounts were frozen and balances confiscated, only to be returned to G&SR shortly afterwards.
We know that G&SR, factually, is not identical to e-gold, but one is more or less dependent on the other. We know that e-gold sold some bars early in the year, and only began buying bars again, recently.

We know that e-gold suspended all accounts of Iranian nationals, and then seems to have also haunted customers who may or may not have been doing
business with Iranian nationals in the past. And, most importantly for some of us, we know that the business volume for exchangers is much, much, much lower than it should be, given the time of the year.

Now then, assuming that the above are the facts we can base speculations on, it looks to me as if e-gold is in a situation where the US government pretty
much told them “offshore, noffshore, you are here, you are under our jurisdiction, you follow our laws”. If this is correct, which is not automatically a bad thing, mind you, then G&SR and by extention also e-gold, is subject to much more stringent reporting rules than assumed. And it is subject to liability and aiding/abetting definitions currently applied. And while the case against G&SR being a remittance service is still pending, e-gold might be treated by the authorities as a quasi money services business (MSB), with all the related reporting obligations.

On a side note, I am reminded that when the new financial & money services reporting rules were implemented last year and I mused about applicability
to our industry, many people went through lengths explaining why it didn’t apply. I went ahead and registered one venture as an MSB with FinCEN anyway,
and we never got any trouble since. In the end, the letter of the law and our interpretation of it is worthless, if the authorities decide to interpret it differently, and when push comes to shove, then the interpretation of the government prevails until turned over in a court of law.

Back to e-gold. They had to sell some bars. I do recall that there was serious selling presure at the time, with customers trying to get rid of e-gold, when the news about the government action frist broke. Pair that with the bad press and consider that the gold price was falling shortly afterwards – substantially so – and the only thing I am wondering about is that e-gold didn’t have to sell more bars when people ‘cashed’ out. In fact, I do recall that at the time this in iteself strengthened my confidence in
e-gold, because I would have expected an actual run, which didn’t materialize.

Now e-gold started to suspend Iranian accounts. Considering that the authorities took copies of everything early in the year, chances are that it took them this long to notice the probably substantial number of Iranian-held accounts. I don’t necessarily think that e-gold happily rolled over on the first whim, but wouldn’t be surprised if they actually fought to keep the right to do business with everyone, but ultimately had to cave, which would contribute to the explanation of why it took so long.
Alternatively, e-gold might have become aware that having Iranian (and maybe Cuban? customers could get them into trouble, leading to them freezing
accounts preemptively, to should good faith, if nothing else).

And while I do feel sorry for the Iranians, am convinced that many of them were running legitimate businesses and that e-gold was the only way they
could do so, due to the draconic currency and exchange restrictions in force in Iran, I am also convinced that this step was in the very best interest of
the other customers of e-gold. I don’t really care for e-gold being morally right or fighting an ethical battle against the authorities if they risk
loosing my gold in the process. As such e-gold is doing exactly what every rational user would want them to do – whatever necessary to keep the gold of users safe and out of the hands of El Confiscators.

So, from where I am sitting, my sympathies for Iranians and any business operator whos lifelyhood is affected from these measures notwithstanding,
e-gold is doing its upmost to make sure that they don’t give the authorities any angle to move against them. In other words, e-gold is trying their very
best to be a law-abiding corporate resident (being an offshore citizen at the same time), which is exactly what I want people I am dealing with to be.
Faulting e-gold for abiding the law is comparable to being ready to deal with known criminals. And as e-gold is operated from the US, it is US law they have to abide by. I
am glad they are doing just that.

Reviewing the above, I can’t find anything that would even remotely suggest that e-gold is in financial trouble. While legal battles are very costly, as
far as I know it is G&SR, not e-gold, fighting this battle. And, more importantly, it was G&SR’s bank accounts that were frozen and that had a
balance of over $800,000 at the time. In other words, based on the procedures e-gold uses, these $800,000 must have been G&SR’s property,
rather than customer funds, because if they had been customer funds, then the gold balance of e-gold would have had to be short by a similar amount.
As the funds then were being made available to the company again, G&SR would have had plenty to finance its defence.

In other words, there is no indication at this time of any wrongdoing of e-gold. While it would most certainly be better for them to come forward and
say so themselves, there is a very good chance that they can’t really do so, without compromizing the standing of G&SR.

Yes, their customer service sucks – but only if you forget that e-gold is a currency. Imagine you calling the Fed to declare that you have been robbed
and demanding retribution or replacements, more protection, etc. Yes, they should get another audit and so put everyone’s mind at peace, but then,
those who doubt their honesty now, will most probably then doubt the accuracy of the audit. Remember Enron?

Thus, for the time being, I have complete confidence in the people running e-gold, simply because I have been in this industry for eight years now, am
running several related ventures, and have yet to see any indication that something was not above board.

Cheers,
Robert.

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