Generally, when people are looking for an easy-to-use crypto wallet app, one of the main uses they have for it is to trade cryptocurrencies.
Typically, this is done on a cryptocurrency exchange, and for many people is the first step from fiat currency to tokens.
There are various different types, which can either be completely decentralised, centralised or some kind of middle ground, but it is typically the easiest way to load up a wallet to enable purchases and interactions with other parts of the crypto ecosystem such as NFTs.
They generally work in a similar way to currency exchanges, but one of the most interesting aspects of crypto exchanges is that the concept and several successful attempts actually predate Bitcoin, the first and most valuable cryptocurrency.
The Golden Age
In 1996, e-gold launched as one of the first successful digital currencies in the world, succeeding where early contemporaries such as ecash did not through being backed by gold coins and later gold bullion.
Because it was not as overly reliant on banks in the same way that ecash was, which made the latter more akin to a highly secure type of traveller’s cheque, e-gold managed to cultivate a somewhat substantial secondary market, particularly once similar digital gold currencies such as e-Bullion and 1mdc launched.
This led to the launch of The Gold Age, a Panama-based independent digital exchange that was the first of its kind.
Parker Bradley’s idea was similar to e-gold and others in the space; he would take fiat currency and exchange it for “spends” equivalent to grams of precious metals such as gold and palladium, as well as other digital gold currencies.
Ultimately it would be successful for two years before being the subject of a raid that forced Mr Bradley to sell to new owners Arthur Budovsky and Vladamir Kats.
This lasted until 2006 when the pair were indicted by the New York District Attorney on charges they both strictly deny.
They were initially both sentenced to five years in prison, but when the sentence was suspended, Mr Budovsky fled the country to try a different approach in the digital currency exchange business.
The Eclipse
After landing in Costa Rica, Mr Budovsky launched the Liberty Reserve, a digital currency exchange that allowed for fiat and digital currencies to be exchanged using stablecoin-esque tokens called Liberty Reserve Dollars and Liberty Reserve Euros, which could be transferred to other users and withdrawn.
As with any other exchange, the money was made on the transaction fees, which were $2.99 or one per cent of the transaction, whichever was higher.
Much like e-gold and the Gold Age, it was very popular, very quickly, with currency brokers, multi-level marketing companies and frontier market traders using it as a currency exchange.
However, problems started to emerge for Liberty Reserve in 2009 when business authorities in Costa Rica informed Mr Budovsky’s office in San Jose that the state recognised Liberty Reserve as a money transmitting business, which required a business licence.
Whilst unrelated, this was around the same time that several digital gold currencies had been shut down for similar reasons. As they were centralised companies handling fiat currencies, e-gold was required to follow know-your-customer (KYC) guidelines that it had not previously.
By 2011, when Mr Budovsky became a naturalised citizen of Costa Rica, the state had denied Liberty Reserve a business licence, and by all rights, this should be the end of the lineage of the first digital currency exchange.
However, according to a later indictment, Mr Budovsky continued to run Liberty Reserve through five other shell businesses, triggering a criminal investigation across 17 countries and no less than three financial seizures from 2011 to 2013.
The indictment itself was based in the United States, despite Mr Budovsky no longer being an American citizen (having renounced his citizenship in 2012) and Liberty Reserve not being an American company.
The reason for this was that under the terms of the Patriot Act, any business that handled US dollars could be subject to investigation, which led to the seizure and shutdown of the site, as well as 45 bank accounts around the world used after 2011.
Ultimately, Mr Budovsky would plead guilty and be sentenced to 20 years in prison, but the ramifications for cryptocurrency exchanges were substantial.
By the time of his sentencing, crypto exchanges and alternative coins were available, people could buy from a wide range of stores using Bitcoin, and the early mistakes of digital currency exchanges were learned from.