gold bars
"Gold is not an investment - it's a currency."

Bitgold uses gold as a rail to connect currencies at zero cost, outwith the banking system. In this respect it achieves a similar use case to Bitcoin, the frictionless exchange of value using the internet.

But Bitgold is a centralised system which hosts a digital ledger denominated in "commodity money": all currency transactions are fully reserved in physical gold held in bullion banks where the gold backing the transactions is sold by one bank and bought by another.

"So it's like Bitcoin, with the difference that no bank actually wants to buy or sell Bitcoin," says Roy Sebag, founder of Bitgold. Not using the banking system to transfer money has been seized upon by an army of remittance providers, all with novel ways of moving currency about. But these services are still literally within the banking system, points out Sebag, because they are ultimately tied to fiat. FX backed by gold is a different proposition entirely, he said.

"Here the cross is very tight; you could convert a dollar into a euro at effectively the FX cross using gold. If you tried to do it through the banking system there would be a wire fee, there would a handling fee, there would be a transaction fee, there would be a margin. So it's cheaper to move a euro into dollar using gold than it is a euro into a dollar."

Sebag explained that he and co-founder Josh Crumb, formerly a senior metal strategist at Goldman Sachs, were impressed by Bitcoin's unprecedented money experiment but felt early on its issues with consumer protection and reversibility of transactions could best done with gold. This allowed for a way of circumnavigating the banking system while being completely regulated.

"We wanted to be within the regulatory system the same way that PayPal is within the regulatory system. So under the umbrella of a money services business regulatory structure where you fully know your customers, you are filling out suspicious activity reports, and there is some type of a purchaser resolution process that you can reverse transactions through, and also promoting tax compliance."

Sebag's contention is that gold should be returned to its original status, a unit of account that empowers and that's transactional, rather than some "nation's form of debt or fiat currency within the banking system". He believes the problems started with gold when it became demonitised in 1971. In this event central banks promised to control money with interest rates.

"But look what they have done," said Sebag. "They have lowered interest rate to zero and now they are going negative, which means their experiment failed. They are now essentially subsidising debtors, which means they are widening the wealth gap, making it easier for 1% to access money. Money is not only unhinged, it's costing more to move unhinged money."

The situation has been worsened by banks which have responded to increases in the value of gold by manufacturing investment products for gold, targeting investors to generate a lot of margin. "These guys started building ETFs gold funds, and they ended up turning gold into an asset class. So a fund manager would rotate away from Apple and Google into gold when the market got bad.

"We saw was this is a mistake. Gold is not an investment - it's a currency. It shouldn't be compared to Google. Gold should be compared to currencies and when it's compared to currencies it always rises against them.

"When we started getting close to zero interest rates Josh and I knew it was time to do something. If you are not getting paid interest why would you use your bank for payments or for merchant processing or for lending. All the bank's horozontal business lines were built after they had deposit base; banks can't do payments better than a company like ours if all we are doing is focusing on payments. And now we are getting into something different which is negative interest rates so fiat currency erodes."

Sebag explained that gold can be re-appropriated as a unit of account, starting by pegging your labour to it, your salary. He said Bitgold employees deposit their monthly wages into a gold account and receive X grams of gold according to the exchange rate between it and their currency. "They have a certain weight of gold and over the course of the month they are using the gold as they are buying their coffee, consuming services and goods. But the remaining gold that they have left is worth about 30% more than if had they been paid in Canadian dollars."

Sebag said non-Westerns in places like India and China understand that gold is currency. Westerners may have regulatory concerns – which Bitgold has addressed - and also people may have also been put off because gold brought with it "the wrong crowd".

"As the price of gold kept going up it brought with it the wrong crowd - gold bugs, anti-taxes, the world is going to end buy gold, canned food and ammo."

"We are not a bank. We are not fractionally reserving, not lending, not taking a deposit and lending eight times to someone else. That would mean you need a banking licence and capital ratios and things like that. And all our transactions are tax compliant. Say someone is using Western Union to send $100 and the value of that $100 is higher by the time the guy in India gets it – Western Union actually steals that gain.

"But if you are using gold and the gold goes up in value and you redeem it and there's a delta, there's a gain, you have to pay tax on it. It's a capital gain because gold isn't legal currency; it's just like paying tax on interest.

"We built a system that automatically records these deltas even in with a merchant doing hundreds of thousands of transactions. Every time you settle back to your fiat currency, it's added up and you have to pay tax on it, or you have to add it to your adjusted gross income when you file your tax return."