Until earlier today I’d never heard of 1MDC, but after running across it in a discussion on Liberty Dollars, I got curious. The story of 1MDC is a strange one, shrouded in more than a little mystery. However the more I’ve learned about it, the more interesting it gets.

1MDC is, or rather was, a digital currency, providing a service not dissimilar in general concept to PayPal, but using gold as a medium of exchange rather than traditional national currencies. This in itself isn’t unique — E-Gold Ltd. is perhaps best known for it — but 1MDC approached the problem slightly differently.

While E-Gold Ltd. and its competitor services, including GoldMoney and Pecunix, have actual gold reserves stored in vaults, 1MDC functioned as something of a ‘meta currency.’ Its ‘gold’ reserves were maintained in the form of balances in accounts with other gold-backed digital currencies (principally E-Gold).

This in itself is fairly interesting, because it’s such a departure from the business model shared by the other digital electronic currencies. In a way, 1MDC represented a ‘second generation’ digital currency, relying completely on ‘first generation’ currencies for its solvency.

1MDC offered its depositors several advantages over using E-Gold directly, the principal one being lower fees. While E-Gold charges an account maintenance fee of up to 1% per year with a maximum of 0.05g per account, 1MDC charged nothing. This was possible because 1MDC pooled users’ assets into a handful of E-Gold accounts, paying only one maintenance fee per account. 1MDC covered its extremely low overhead (relative to E-Gold’s) and apparently made a profit by charging its highest-volume customers — those with more than 100 transactions per month — a per-transaction fee, and levying a 5% charge on deposits back out to other digital currencies.

As innovative as 1MDC may have been, its days were numbered. By using other digital currencies as its reserve, it put itself in the precarious position of becoming instantly insolvent if something happened to those accounts. In mid-2005, something did, in the form of an investigation by the U.S. Department of Justice into gold-backed electronic currencies. Although the investigation warrants a discussion in itself — and it has produced two Wired articles (“E-Gold Gets Tough On Crime” and “E-Gold Founder Calls Indictment a Farce”) to date — the death knoll for 1MDC was when its E-Gold reserve accounts were ordered frozen. Overnight, it practically ceased to exist.

It’s not entirely clear who 1MDC’s primary users were. The DoJ would have us believe that gold-backed digital currencies in general appeal to terrorists, pedophiles, pornographers, and drug smugglers — the “four horsemen of the Infocalypse,” as Cory Doctorow once called them — but the reality is murky. Judging by the places information on 1MDC is found, it’s fairly obvious that pyramid and other ‘make money fast’ schemes may have been involved. But many have been quick to point out that the U.S. Government has a certain amount of self-interest in eliminating any and all competition to the USD, particularly currencies that defy long-established conventions.

Although 1MDC itself is dead, the concept and business model itself is too simple to ever really destroy. It wouldn’t surprise me at all if right now there’s an underground version of 1MDC in existence, perhaps with reserves a little more wisely chosen.