How does a government react? One response: U.S.: Online Payment Network Abetted Fraud, Child Pornography - pdf

The principal owners of E-Gold Ltd., an online payment system where users convert currency assets into equivalent amounts of precious metals, were indicted last week for allegedly allowing the service to be used by criminals engaged in financial scams and child pornography.

[...] “The advent of new electronic currency systems increases the risk that criminals, and possibly terrorists, will exploit these systems to launder money and transfer funds globally to avoid law enforcement scrutiny and circumvent banking regulations and reporting,” said James E. Finch, of the FBI’s Cyber Division.

Founded in 1996, E-Gold is a unique take on Internet-based payment systems. Its 4 million registered users deposit funds into an E-Gold account and those funds are converted into equivalent amounts of gold and silver that is stored in banks in Europe and the Middle East. The company’s business was designed to appeal to persons engaged in cross-border financial transactions, particularly for persons who prefer the relative stability of precious metals to fluctuations in the value of national currencies. Over the past 24 hours, the system processed a little more than $3.4 million in transactions, according to the E-Gold Web site.

The government charged E-Gold and its parent, Gold & Silver Exchange, with operating an unlicensed money transmitting business under federal law and one count of money transmission without a license under D.C. law.