bitcoin

W15608

BITGOLD: TURNING DIGITAL CURRENCY INTO GOLD?

Brady Burke wrote this case under the supervision of Professor Jean-Philippe Vergne solely to provide material for class discussion.
The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have
disguised certain names and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.

Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-12-23

INTRODUCTION

Bitcoin’s token value is so strong because of the network effect. And that’s exactly what we’re
doing with BitGold.1

Blockchain technology has unleashed a wave of payments innovation that will empower people the
world over by lowering costs and increasing access to safe and transparent financial services. We
see gold, the asset bitcoin was designed to mimic, as an important element in this empowerment.2

Josh Crumb, co-founder and chief strategy officer of BitGold

Since my days as a professional investor I have wondered why there’s no easy way to own and
spend gold in a legal, transparent and tax-compliant manner.3

Roy Sebag, founder of BitGold

In April 2015, BitGold was undergoing the final steps towards its historic initial public offering (IPO),
planning to raise between CA$10 million to $20 million4 on the TSX Venture Exchange. Blending
blockchain technology and aspects of digital currencies like bitcoin, BitGold sought to pave a path to
legitimacy for future financial technology startups by going public.

Roy Sebag and Josh Crumb co-founded BitGold in early 2014, with a mission to make gold accessible
and useful in digital payments and secure savings. BitGold intended to provide global access to gold
while at the same time offering digital payments based on blockchain technology.5

1 R. Sebag and J. Crumb, “BitGold, Bitcoin, Gold and Money,” https://youtu.be/vOlLyGOEZWE, accessed November 22, 2015.
2 M.A. McCrae, “BitGold Raises $3.5 Million from Soros Brothers, Sandstorm Gold,” January 5, 2015, Mining.com,
www.mining.com/bitgold-raises-3-5-million-from-soros-brothers-sandstorm-gold-89051, accessed September 20, 2015.
3 K. Lee, “Loma Vista Capital Inc Announces Going Public Transaction with BitGold Inc.,” Marketwired.com, January 28,
2015, www.marketwired.com/press-release/loma-vista-capital-inc-announces-going-public-transaction-with-bitgold-inc-cnsx-
lov-1986825.htm, accessed April 2, 2015.
4 All currency in Canadian dollars unless otherwise specified.
5 A blockchain is a public ledger or distributed database that maintains a continuously growing list of data records that are
hardened against tampering and revision, even by operators of the data store’s nodes.

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BitGold’s IPO came on the heels of a tumultuous year for digital currencies, blockchain technologies and
for bitcoin itself. While 2013 saw a meteoric rise in bitcoin’s price, reaching its peak at US$1,100,
bitcoin’s price in 2014 plummeted from those heights. By December 2014, bitcoin’s price had dropped
more than 50 per cent since the start of the year, trading in the mid-$300 range. The world’s largest
bitcoin exchange, MT Gox, filed for bankruptcy and prices fluctuated throughout the year. On the other
side, Dell, PayPal, Microsoft and other major corporations began accepting bitcoin payments. In Canada,
bitcoin continued to be legal, regulated under anti-money laundering and counter-terrorist financing laws.

BitGold’s decision to go public was not based solely on an opportunity to raise capital. Roy Sebag,
BitGold’s founder, indicated that his primary motivation in taking BitGold public was to build trust and
legitimacy with its future customers. Sebag noted, “Going public is like a quasi-bank licence. We have
corporate governance standards and an independent auditor, PriceWaterHouseCoopers, auditing or
reviewing our financials four times a year under International Financial Reporting Standards.”

Sebag, his co-founder Josh Crumb and the team at BitGold had some important decisions to make
regarding the future of the company after the IPO. How could BitGold continue to maintain its
legitimacy? How could it build its customer base and momentum? When and how could it enter the larger
and more lucrative U.S. market?

HISTORY OF GOLD USE

Gold has been widely used throughout the world as money, for efficient indirect exchange and to store
wealth. For exchange purposes, mints produced standardized gold bullion coins, bars and other units of
fixed weight and purity.

Of the 92 naturally occurring elements on the earth, eight are known as noble metals. The oxygen, carbon
dioxide and gases that make up our air have no tarnishing effect on these elements through the life cycles of
humans. Of the eight noble metals, only four became broadly employed as commodities: gold, silver,
platinum and palladium. Over thousands of years of experiments, civilizations consistently resolved that
gold was the most useful element to possess and trade as an accepted form of value, with its functionality
stemming from its elemental properties. Since gold needs to be produced only once and is extremely
efficient over time, it can be exchanged perpetually with very little cost compared to the co-operative value
it brings.

In 1944, in an effort to rebuild the international economic system, the Bretton Woods system of monetary
management was established by the 44 nations that made up the Allied Powers of the Second World War.
Each country was obligated to adopt a monetary policy that fixed the exchange rate to the U.S. dollar, which
was backed by gold. By 1971, the U.S. share of the global output dropped, and a negative balance of
payments, combined with rising debt and growing inflation, sparked a decline in U.S. gold reserves. This
situation led the United States to unilaterally terminate convertibility of the U.S. dollar to gold, effectively
bringing the Bretton Woods system to an end. The U.S. dollar became a fiat currency as a legal tender that is
not backed by a physical commodity. Since 1971, most countries have issued their own fiat currencies.6

Today, gold, as a form of money, is primarily used as a store of value. In an uncertain economy, gold has
emerged as a possible financial staple, as people will invest in gold through coins, bars and bullion.
Gold’s unique qualities also make it considerably useful in a large number of industrial applications, and
as such, it also has a commodity-driven demand profile. BitGold’s mission is to provide global access to
gold for secure savings and transactions, making an extraordinary element useful and empowering again.

6 Fiat currency is money that a government has declared to be legal tender but is not backed by a physical commodity.

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According to an information circular sent out to shareholders by BitGold’s directors: “Gold has been used
throughout human history as a store of monetary value, and as such, enjoys investment demand for its
monetary utility. Gold’s unique qualities also make it considerably useful in a large number of industrial
applications, and as such it also has a commodity-driven demand profile.”

BITGOLD

BitGold believed that gold would play an essential role in the development of digital currency technology,
and thus, the company offered an alternative to fiat currencies, which were exposed to devaluation and
inflation risks, and to modern crypto-currencies, which had no intrinsic value and suffered from price
fluctuations and regulatory issues.

In March 2015, BitGold launched its desktop website platform as an invitation-only private beta. The
platform allowed users to buy gold that was stored in one of the company’s vaults. Customers would be
able to then use the gold in their accounts to make payments in stores and online.

In a press release, Roy Sebag stated,

Payment technology breakthroughs have created a historical opportunity to solve one of the main
challenges preventing gold from being useful again in daily transactions. True gold ownership
requires gold to be safely vaulted and stored, making it extremely difficult to spend, especially in
micro-transactions. BitGold solved this problem by developing a patent-pending technology and
platform that is part gold exchange, part payments technology and part custodian, resulting in a
powerful user experience that advances gold from a physical element to an instantly accessible
unit of account and store of value for the Internet, an operating system for gold.

Blockchain technology created digital payments innovations that lowered costs and increased access to
safe and transparent financial services. According to BitGold co-founder Josh Crumb,

The flexibility of the BitGold platform allows gold to be a core savings account coupled with
digital currency for seamless global payments, or as a natural-world storage and safety valve for
an inevitable Internet of money. The Internet of money should be rooted in choice and individual
empowerment, and we provide that in a flexible and secure platform.

BitGold’s patent pending technology, Aurum, incorporated elements of blockchain technology. For bitcoin
users, the blockchain guaranteed that no one could reverse a transaction or double-spend bitcoins. But unlike
the blockchain, Aurum was not a decentralized tool. Its primary function involved record entry and
arbitrating the value of physical gold. BitGold’s Aurum technology helped to ensure that physical gold was
secure in vaults. Further, Aurum allowed for real-time audits of all the gold held in all vaults, enforcing a
reconciliation of all corresponding account holders and the allocated physical gold holdings in vaults.

Aurum distributed the records in three ways:

1. Digital and physical copies were distributed to disaster-recovery backups at randomized times each day.
2. Every 24 hours, an encrypted digital copy was sent to a third-party auditor through a secure encrypted

connection.
3. A third-party auditor conducted both planned and surprise audits at the Vault Custodian, ensuring that

the reported gold holdings were reconciled through physical inspection.

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BitGold advanced the digital payments revolution by helping people securely acquire, store and spend
gold with unprecedented simplicity. Its payment service provided users with a secure vault account to
purchase and hold gold, the ability to make and receive instant gold payments, and a debit card for
spending gold at traditional points of sale (see Exhibit 1). Through a network of automated teller
machines, customers could fund their accounts with local currency. Accounts were free to create, and all
gold was fully redeemable as one-kilogram bullion bars or 10-gram (branded) Gold Cubes (see Exhibit 2).
BitGold aimed to make the entire process of acquiring, storing and spending gold easy for everyone
involved (see Exhibit 3).

BitGold’s revenue model was based on a simple transactional fee. To buy gold, BitGold charged users a fee
of 1 per cent of the official price, and in turn, users received free gold storage. To physically redeem gold
bullions, users were charged $25 for shipping and insurance. Sending and receiving gold payments was free
for users, and they could sell gold within 1 per cent of its value (see Exhibit 4). BitGold purchased gold
directly from an approved list of refiners whose gold met a minimum specification, bypassing
manufacturers and retailers in the process (see Exhibit 5). By comparison, buying gold from traditional gold
marketplaces required customers to pay a premium of anywhere from 3 per cent to 10 per cent.

BitGold created an ecosystem around the use of gold. This user-friendly model enabled greater access,
security and usability of gold than ever before.

BITGOLD’S PATH TO LEGITIMACY

In all its core functions, BitGold strived to gain mainstream acceptance. Sebag’s history as a value
investor and hedge-fund manager, combined with Crumb’s experience as a senior metal strategist at
Goldman Sachs, provided BitGold with a strong financial-services background.

In 2014, BitGold successfully closed a $3.5 million Series A financing round, attracting investments from
mainstream investors. Participants in the round included PowerOne Capital, PortVesta Holdings, Sandstorm
Gold, and Soros Brothers Investments, the latter run by Alexander Soros, son of billionaire investor George
Soros. Following this financing round, Nolan Watson, Sandstorm CEO and chairman, stated:

I am of the firm belief that with recent advances in payment technology, we are the first
generation that will have the option to easily and conveniently use gold as money. BitGold, in our
opinion, is creating the best-in-class platform to make that happen. We at Sandstorm are very
keen supporters of their efforts.7

BitGold viewed transparency and accountability as key ways to build trust with its customers. From the
outset of BitGold, Sebag and Crumb proactively navigated regulatory hurdles by connecting to key
politicians and legislators. The partners viewed BitGold as a “Trusted Limited Third Party,” becoming an
operating system for a user’s vaulted gold. BitGold designed its corporate structure and organization in
line with financial service best practices while running entirely on an allocated and fully redeemable
ledger, with every gram, kilo or tonne of gold corresponding to a specific customer. BitGold aimed to act
like a quasi-bank by working through mainstream institutions (see Exhibit 6).

The idea of combining blockchain technology and gold was not new, and other platforms aimed to
effectively digitize gold. Bullion Bitcoin and Serica both blended gold, bitcoin and blockchain
technology, while GoldMoney enabled users to buy gold online and store it in physical locations. BitGold
pursued a different model for growth, following the path of the popular bitcoin wallet, Coinbase.

7 N. Hajdarbegovic, “Canadian Startup BitGold Closes $3.5 Million Funding Round,” Coindesk.com, December 24, 2014,
www.coindesk.com/canadian-startup-bitgold-closes-3-5-million-series-funding-round/, accessed April 1, 2015.

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Page 5 9B15M129

The Competition

Bullion Bitcoin

The Bullion Bitcoin exchange operated out of London, England, allowing sophisticated investors, as
defined by the U.K. financial regulator, to trade physical gold bullion for bitcoin. Bullion Bitcoin
recorded all transactions on the blockchain to increase transparency. The company “fixed” the price of
gold in bitcoin terms twice a day, and traders submitted bids and asks for bitcoin and gold during these
sessions. The exchange then attempted to match the majority of the bids and asks.

These exchanges were restricted to sophisticated investors and professional clients, as defined by the
financial services regulator in the United Kingdom. Bullion Bitcoin charged a 0.5 per cent commission on
each transaction, with a minimum subscription of one kilogram of gold (about $41,000). Adam Cleary,
Bullion Bitcoin’s founder, stated: “I’m hoping to appeal to goldbugs who might be looking for a way to
move their gold to bitcoin. There are also people have who made a lot off bitcoin from the early years and
want to move into something tangible.”

Serica

Serica’s DigitalTangible platform was a secure asset exchange and digital money platform based in San
Francisco, California. Serica brought software engineering, cryptofinance, financial custody and blockchain
technology to traditional custodian finance, with the aim of helping global customers secure profits in the
growing digital money space. Serica allowed investors to move value from physical gold holdings to
bitcoin, which could then be stored or traded (see Exhibit 7). The company’s Proof of Custody global gold
accounting ledger lowered customers’ costs for investment and portfolio management. From July to October
2014, the DigitalTangible platform had undertaken over $210,000 in total gold sales. Additionally, its peer-
to-peer trading platform completed $35,000 in transactions in just one week.8

GoldMoney

GoldMoney was founded by the Turk family in 2001, offering a convenient and trusted way for
consumers to buy and store precious metals. Since 2001, GoldMoney had allowed its users to buy gold
online and store it in physical locations. The company boasted over 20,000 customers in 105 countries,
with over $1 billion of precious metals stored in eight state-of-the-art facilities around the world.
GoldMoney also delivered physical gold to its owner or exchanged it into a desired currency. GoldMoney
was a debt-free, market-leading, profitable, privately owned company. Its owners were well-established
investors, including IAMGOLD (one of the 10 largest Canadian gold mining companies) and Eric Sprott,
founder and chairman of Sprott Asset Management. Other notable shareholders included Doug Casey,
chairman of Casey Research, and David Tice, founder of the Prudent Bear Fund. While GoldMoney did
not trade in bitcoin, it offered users a method similar to BitGold’s for buying and storing gold.9

Coinbase

Coinbase was the world’s most popular bitcoin wallet, making it easy and secure to buy, use and accept
bitcoin currency. In 2015, Coinbase raised $75 million in Series C financing, the largest funding round to
date for a bitcoin company. The round was led by DFJ Growth, with participation from existing investors,

8 D. Palmer, “DigitalTangible Expands Crypto 2.0 Gold Trading Platform to Asia,” Coindesk.com, October 1, 2014,
www.coindesk.com/digitaltangible-expands-crypto-2-0-gold-trading-platform-asia/, accessed May 10, 2015.
9 GoldMoney, “Frequently Asked Questions,” 2015, GoldMoney.com, www.goldmoney.com/faq, accessed May 10, 2015.

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including Andreessen Horowitz, Union Square Ventures and Ribbit Capital. The resulting capital would
enable Coinbase to drive mainstream consumer and merchant adoption and further expand into
international markets. Many industry observers noted that this investment round may be the moment
when bitcoin went “from rebellious financial industry outsider to a member of the in-crowd.”10

By focusing on digital payments, BitGold differentiated itself from Bullion Bitcoin and Coinbase by
allowing uses for gold beyond a bitcoin-gold exchange. By utilizing aspects of blockchain technology,
BitGold pushed itself beyond GoldMoney’s offering (i.e., buying and storing of gold) to enable users to
actually spend gold.

In a manner similar to Bitgold, Coinbase leveraged investments from mainstream institutions to help
build legitimacy (see Exhibit 8).

NEXT STEPS

Sebag and Crumb faced some key decisions to continue to build out their platform for mainstream
adoption of using gold in day-to-day payments. With an IPO around the corner, BitGold was prepared to
move from a private beta to a full-scale launch. Key areas that BitGold now needed to face included:

• Geographic focus: BitGold’s IPO was taking place in Canada; however, as a global platform, BitGold

aimed to appeal to users in developing countries around the world. Where should BitGold focus on
acquiring users?

• Industry standards: How could BitGold continue to stay on the right side of the law?
• User acquisition: How could BitGold market its services to users and merchants, both in Canada and

abroad?
• U.S. market: Based on the current regulatory environment, BitGold decided to wait before launching

in the United States. The environment for bitcoin start-ups in the United States had been described as
a “patchwork of conflicting regulations, statutory interpretations, and regulatory delays” that differs
state by state.11

A crucial step for BitGold’s expansion would involve seeking compliance with the National Automated
Clearing Housing Association (NACHA). NACHA managed the development, administration and
governance of the Automated Clearing House Network, the backbone for the electronic movement of
money and data in the United States. Yet, without the regulatory framework of a traditional bank, how
could BitGold become legitimate under the eyes of NACHA? How should BitGold orchestrate its
expansion into the United States?

10 Coinbase, “Coinbase Raises $75M from DFJ Growth, USAA, NYSE,” January 20 2015, https://blog.coinbase.com/
2015/01/20/coinbase-raises-75m-from-dfj-growth-usaa-nyse/, accessed April 9, 2015; and M. Carney, “The Most Important
Thing about Coinbase’s Mega-Round Isn’t How Much It Raised. It’s Who Invested,” Pando.com, January 20 2015,
http://pando.com/2015/01/20/sure-coinbase-raised-major-cash-but-its-who-it-aligned-itself-with-that-could-really-move-the-
needle/, accessed April 9, 2015.
11 Inside Bitcoins, “Bitcoin Startups Face a ‘Patwork’ of U.S. State Regulations and Delays,” Insidebitcoins.com, December 22,
2014, http://insidebitcoins.com/news/bitcoin-startups-face-a-patchwork-of-us-state-regulations-and-delays/27871, accessed
May 10, 2015.

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EXHIBIT 1: BITGOLD’S DEBIT CARD

Source: Company files.

EXHIBIT 2: BITGOLD’S 10-GRAM GOLD CUBES

Source: Company files.

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EXHIBIT 3: BITGOLD’S VALUE TO USERS

Source: Company website.

EXHIBIT 4: BITGOLD’S FEE STRUCTURE

Source: Company files.

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EXHIBIT 5: GOLD INDUSTRY’S VALUE CHAIN

Source: A. Gilroy, “Investing in Gold: A Must-Read Value Chain Analysis,” Yahoo Finance, September 23, 2014,
http://finance.yahoo.com/news/investing-gold-must-read-value-210111836.html, accessed April 2, 2015.

EXHIBIT 6: REGULATION, SECURITY AND COMPLIANCE PROCESSES FOR BITGOLD

Mining
(includes

cyanidation
and smelting)

Refining Manufacturing Retailing

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EXHIBIT 6 (CONTINUED)

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EXHIBIT 6 (CONTINUED)

Source: Company website.

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EXHIBIT 7: SERICA’S DIGITALTANGIBLE PLATFORM

Source: D. Palmer, “Digital Tangible Expands Crypto 2.0 Gold Trading Platform to Asia,” Coindesk, October 1, 2014,
www.coindesk.com/digitaltangible-expands-crypto-2-0-gold-trading-platform-asia/, accessed May 10, 2015.

EXHIBIT 8: BITGOLD’S COMPARABLES

BitGold Bullion Bitcoin Serica GoldMoney Coinbase
Currencies
Accepted

Gold, bitcoin and
fiat currencies

Gold and bitcoin Gold and
bitcoin

Gold, precious
metals and fiat
currencies

Bitcoin and fiat
currencies

Potential
Users

Anyone who
wants to buy and
sell gold

‘Sophisticated
investors,’
people who
invest in Gold or
bitcoin

Gold
investors

Anyone who
wants to buy and
sell gold

Bitcoin users

Uses of
Platform

Exchanging
currencies,
payments and
physical/online
storage

Exchanging
currencies and
physical/online
storage

Exchanging
currencies

Exchanging
precious metals
with currencies
and storing
precious metals
in a cost-
effective way

Exchanging
currencies,
payments, and
physical/online
storage

Use of
Blockchain
Technology?

Limited – Aurum
is a centralized
system. Sebag
aims to use the
blockchain to tap
into new
efficiencies.

Yes Yes No Yes

Source: P. Rizzo, “BitGold Backed By Sprott in Public Stock Market Deal,” Coindesk, January 28, 2015,
www.coindesk.com/sprott-bitgold-public-stock-market-deal/, accessed May 10, 2015.

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http://www.coindesk.com/sprott-bitgold-public-stock-market-deal/