Trump-proofing Canada means ending our dependence on SWIFT

It's time to stop staring into the headlights and respond to the fact that Canada is being eyed as a choice morsel by a much larger predator: our former ally the United States of America. In President Trump's very own words, he wants to use "economic force" to join Canada and the United States together. In anticipation of the U.S. turning its economic might against us, we need to locate all the ways in which our access points to various crucial financial networks are controlled by this predator, and switch those dependencies off, quickly, before they are used to hurt us. One of our most glaring dependencies is the SWIFT network.

Banking and payments run on networks. And network users tend to coalesce around a single dominant network, like SWIFT or the Visa and MasterCard networks. Which leaves whomever controls the dominant network, often the U.S, with tremendous power over all the network's other users. If Canada can reduce our exposure to some of these networks now, then we can't be exploited by the Trump regime down the road to weaken us economically, sap our strength, and threaten to take our resources or annex us.

I've already written about one point of failure: our dependency on the U.S.-controlled MasterCard and Visa card networks. Canada has enjoyed huge conveniences by being connected to the U.S. card networks. However, if Trump were to suddenly cut off our access, Canadian credit cards would be rendered ineffective in one stroke, throwing us into chaos.

The good news, I wrote back then, is that our MasterCard/Visa dependency can be solved by building a domestic credit card system, underpinned by Interac, our made-in-Canada interbank debit network. With a domestic fall-back in place, the threat of a Trump disconnection would no longer loom over our heads. Canada wouldn't be doing anything unique. All sorts of nations have their own indigenous credit card systems, including India, Indonesia, Brazil, France, and Japan.

The next chokepoint we need to address, and quickly, is Canada's dependence on the SWIFT network. Most Canadians don’t realize that SWIFT isn't just an international payment tool. It is deeply embedded in our domestic financial system, too.

What is the SWIFT network? Payments are really just synchronized updates of bank databases. A paying bank subtracts numbers from its database while the receiving bank credits its own. To initiate these updates, banks need to communicate with each other, which is where SWIFT comes in. Think of SWIFT as WhatsApp for bankers. It's a highly secure communications network that banks can use to coordinate bank-to-bank payments, otherwise known as wire transfers, between each other on behalf of their customers, using specialized financial languages like ISO 20022 or FIN.

The SWIFT network, owned by the Society for Worldwide Interbank Financial Telecommunication, a non-profit based in Belgium, has over the years become the global standard for banks to signal cross-border database updates. There is currently no alternative. Decades ago, everyone gravitated toward using the SWIFT network for international payments; so that's where a banker has gotta be.

Canada's SWIFT exposure is especially problematic. Many of the world's largest nations only rely on the SWIFT network for international payments; they do not use SWIFT for domestic payments. For security reasons, these nations have built their own bespoke messaging networks and require their banks to use the domestic network for making within-country wires. For example, India has the Structured Financial Messaging System (SFMS), the U.S. uses FedLine*, and Japan has the Zengin Data Telecommunication System.

Yet a group of smaller countries, including Canada, also rely on the SWIFT network for domestic payments. The UK, Australia, and South Africa are part of this group, too. (I wrote about this domestic reliance a few years ago, if you want more details.) What it boils down to is that if a Toronto-based customer of Royal Bank wants to wire $1 million to a Calgary-based customer of TD Bank, it is the SWIFT network that conducts the communications necessary to complete this within-Canada wire payment.

That is, our domestic payment system is fully reliant on a piece of Belgian infrastructure. And this domestic reliance is a huge weakness.

Cutting countries off from SWIFT has become one of the U.S.'s standard tools for disciplining enemies. Over the years North Korea, Iran, and Russia have all undergone it. Being de-SWIFTed isn't a killing blow, but it makes it much tougher for the offending nation's banks to interact with counterparties to make payments. Without SWIFT, bankers fall back on ad hoc networks of fax machines, email, and telex. Efficiency is replaced by clunky, error-prone workarounds.

In 2025, Canada suddenly finds itself in the same boat as North Korea, Iran, and Russia: we are all U.S. targets (or is Russia about to become a U.S. friend again?) And so Canada faces a genuine threat of being de-SWIFTed. Some of you are thinking: "But wait, JP. SWIFT is a European-based platform. As a liberal democracy, Europe is on Canada's side. They would never allow us to be cut off, right?"

Yes and no. The U.S. market is far bigger than the Canadian market. Given a U.S. ultimatum between disconnecting Canada's banking system and facing U.S. punishment, SWIFT and the Europeans may very well choose to take the path of least resistance and cut Canada off.

A potential European betrayal is precisely what happened to Iran when it was severed from SWIFT in 2018. Recall that the U.S., Europe and other partners had signed a nuclear deal with Iran in 2015 whereby Iran agreed to cease its efforts to get the bomb in exchange for a cessation of western sanctions. Trump reneged on the deal in 2018, enraging the Europeans, who wanted to continue honoring it. The U.S.'s 45th president began to pressure SWIFT to remove Iran from its network, threatening sanctions and travel bans on SWIFT execs. At the time, I thought SWIFT might resist Trump's pressure. Europe remained supportive of Iran, after all, and the EU's "blocking statute" makes it illegal for EU firms like SWIFT to comply with American sanction demands. But Europe caved and Iran was quietly unplugged from SWIFT.

In short, Canada, like Iran, can't rely on Europe to uphold its SWIFT access.

As I said earlier, a de-SWIFTing is doubly serious for Canada. Not only would it sever our banks from the sole communications network through which they can make foreign payments. We would also lose our ability to make local wire payments in Canadian dollars. Need to pay $500,000 by wire to close a house purchase? Too bad. It won't go through.

For those interested in visuals, the chart below illustrates our SWIFT dependence. Note how all arrows pass through the SWIFT network:

How a Canadian wire transfer works: When a Canadian bank (i.e. the "instructing agent") makes a wire payment to another Canadian bank (the "instructed agent") on behalf of a customer, it starts by initiating a PACS message. This message is sent to the SWIFT network, which notifies Lynx, Canada's high value payments system. All Canadian banks have accounts at the Bank of Canada, our nation's central bank. Lynx's role is to debit the central bank account of the first bank and credit the account of the second bank. A confirmation message then flows back from Lynx to SWIFT and on to the recipient bank. SWIFT is central to this entire flow. All arrow lead to or away from it. If SWIFT is no longer permitted to bridge Canadian banks and Lynx because of a Trump ban, then this entire payments flow ceases to function. Image source: Payments Canada

While we can't do much about losing access to SWIFT's international payments services, we do have options for mitigating the effects of lost access on local transactions. Canada must build its own proprietary domestic financial messaging network — urgently. For argument's sake I'll call it MapleFIN. Once built, the government could require domestic banks like BMO and TD Bank to support MapleFIN along with the existing SWIFT option, giving financial institutions two routes for passing on financial messages to other Canadian banks. Then if we are threatened with a de-SWIFTing, at least our domestic payments system won't be paralyzed; we can fall back on MapleFIN.

The oddest thing for me about the sudden emergence of the U.S. threat is that I've been looking to bad actors like Russia and Iran for inspiration on how Canada must harden itself. Like Canada, Russia was historically dependent on the SWIFT network for "almost all" domestic transactions. For many years it had no domestic financial messaging system. Then Russia unjustly invaded Crimea in 2014. It was only at that point that, realizing its vulnerability, the rogue nation belatedly built its own domestic messaging network: the Sistema peredachi finansovykh soobscheniy, or System for Transfer of Financial Messages (SPFS). When Russia's banks finally began to be de-SWIFTed in 2022, they were cut off from making cross-border payments, but at least they could fall back on SPFS for making domestic payments, saving its economy from all sorts of extra chaos.

Iran, too, has its own domestic financial messaging system, having introduced SEPAM in 2013, so when Trump's 2018 de-SWIFTing hit, at least Iran's domestic payments still went through.

We need to do what Russia and Iran did and build domestic payments networks.

A recent design change by the European Union really drives home the point that no nation should be 100% reliant on SWIFT. Like Canada, the EU has always used SWIFT for all of its domestic financial messaging traffic. SWIFT is based in the EU, so you'd think that Europeans would be comfortable being wholly dependent on it. But they aren't. In 2023, European Central Bank modified the domestic payments system so that in addition to SWIFT, banks could also transmit payment messages via a non-SWIFT competitor, SIAnet. (I wrote two articles, here and here, on Europe's decision to reduce its SWIFT reliance).

I worry that many Canadians are still stuck in the early stages of coping with the loss of our privileged relationship with the U.S. There's plenty of anger and betrayal. Many are in denial and think things will return to normal once Trump's regime comes to an end, assuming it ever does. But if we want to safeguard our economy against the years of instability ahead, we can't just stew. We need to accept that things have changed and quickly move forward to mitigate the threat. Financial messaging systems are not irrelevant bits of financial arcanery. They are a vital part of Canada's plumbing through which a large chunk of the nation's commerce flows. If the plumbing seizes up, our financial lives go on pause. Let's fix this, now.

---

*The Federal Reserve used to refer to its network as FedNet, but appears to have switched its nomenclature to FedLine.

If it's crypto it's not money laundering

It appears to be official now. According to the U.S. Department of Justice, when illicit activity is routed via crypto infrastructure, then it no longer qualifies as money laundering.

Earlier this week the Department of Justice's deputy attorney general Todd Blanche sent out an internal staff memo saying that the digital asset industry (read: crypto) is "critical to the nation’s economic development." (Editor's note: it's not.) As such, staff have been instructed to stop targeting crypto platforms such as exchanges, mixers like Tornado Cash and ChipMixer, and offline wallets for the "acts of their end users." 

What does "the acts of their end users" mean? Further clarity arrives deeper into Blanche's memo. It helpfully draws attention to how cartels operating in the fentanyl trade often use digital assets. This is well known. Tether, for instance, is a popular payments platform in the fentanyl trade. (See here, here, and here). And yet, the Department goes on to explain that while it will continue to pursue cartels, terrorist organizations, and other illicit enterprises for their financial crimes, it "will not pursue actions against the platforms that these enterprises utilize to conduct their illegal activities."

This marks a radical departure from long-established financial law on Planet Earth, where financial institutions are generally held responsible for the "acts of their end users," and are pursued when criminals use them to "conduct their illegal activities." It's what's known in law as money laundering.

Money laundering is a two-sided crime. There's the first leg: a criminal who has dirty money. And there is the second leg: the criminal's counterparty, a financial intermediary (a bank, crypto exchange, remittance platform, money courier, or helpful individual) who processes the dirty funds. Both legs are prosecutable. That's precisely what happened to both TD Bank and its cartel-linked customers when they were charged last year. Financial providers are held liable for the crimes of their users.

The same two-sidedness goes for sanctions evasion. There is the sanctioned party and there is the financial platform that facilitates their evasion. Both are indictable.  

If, as Blanche suggests, digital asset platforms are no longer to be targeted for the "acts of their end users," that's effectively saying that the second leg of a money laundering or sanctions violation is no longer a violation, at least not when a crypto platform is involved. So if cartel deposits dirty money at an exchange like Binance which facilitates their crypto transactions, the exchange won't be pursued. Only the cartel will be.

In effect the entire technology has been handed a get-out-of-money-laundering-jail-free card. A detached observer could safely assume that crypto platforms will respond by easing up on their compliance measures—they won't be indicted, after all—which, in turn, will allow more bad actors to make use of their services.

The memo provides more details. It's quite likely that both the ongoing Tornado Cash case (which I've written about extensively) and the ChipMixer case will be dropped, as the memo explicitly states that the Department will no longer target mixing and tumbling services. Tornado Cash, a smart-contract based mixer, operates with a large proportion of its infrastructure running through automated code, whereas first-generation mixers like ChipMixer are entirely human-operated. The latter had mostly disappeared thanks to a series of successful criminal convictions, but will spring back into action as the threat of indictment recedes—leading to more anonymity for the entire system, including for criminals.

The memo's prohibition against Department lawyers targeting "offline wallets" likely refers to "unhosted wallets," which presumably applies to stablecoins—a highly popular type of crypto token pegged to national currencies. Stablecoin users can either hold balances of a stablecoin like Tether or USDC in unhosted format, within their personal crypto wallets, or hold them with the issuer for redemption into actual dollars, in which case they become "hosted." The implication seems to be that if unhosted stablecoins are used by bad actors, the issuers themselves won't be targeted. It's a fantastic policy—if your goal is to encourage fentanyl cartels to use stablecoins.

This decriminalization of crypto money laundering is a ratification of how much of the crypto ecosystem already operates. Just last week, for example, I wrote about stablecoin issuers like Tether and Circle allowing Garantex, a sanctioned Russian exchange, to hold balances of their stablecoins. The issuers seem to believe that providing access to illicit end users like Garantex is legal. And now, it seems, the government has confirmed their view by no longer targeting unhosted wallets for the "acts of their end users."

Now that we've explored some of the immediate legal and technical consequences of this decision, it's worth asking: who on earth benefits from this sudden shift in policy? Because clearly most people will be made worse off. 

I'm only speculating, but here's who this policy may be designed to appease and/or reward:

• Trump-voting libertarians who have arrived at the odd belief that money laundering shouldn't be a crime.
• San Francisco crypto entrepreneurs who want to create financial platforms on the cheap, without the burden of building expensive compliance programs to prevent criminals usage. These entrepreneurs also want their crypto platforms to have access to bank accounts, but banks have been hesitant due to the high risk of crypto-based money laundering. Now that crypto has immunity, banks no longer have to worry. Crypto entrepreneurs voted for Trump, funded him, and are a big part of his administration. This is their payback.
• Trump himself who seems intent on building a murky authoritarian system of bribery and patronage à la Putin or Orban. This system requires money laundering-friendly financial infrastructure, and the Department's memo may be an early step to creating it. (The Trump family, with its many crypto-based entrepreneurial efforts, is also part of the second group.)

In the long term, banks and other traditional providers may benefit, too. With crypto-based finance now unburdened of a major law, every single financial provider operating outside of this crypto-friendly zone, such as traditional banks and fintechs, will be incentivized to switch their database infrastructure over to crypto in order to qualify for this loophole. That means shifting your Wells Fargo U.S. dollar savings account over to a blockchain-based dollar saving account. Doing so will allow banks and fintechs to cut compliance costs and increase their profits.

Once the entire financial sector has migrated through the loophole, it will no longer be a crime to launder funds for criminals. And with mixers no longer being charged by the Department of Justice, that means blanket anonymity for everyone.

As far as the public's welfare goes, the memo is awful. Like theft and fraud, money laundering is immoral and should be punished. Giving one stratum of society a free pass from any law, whether that be money laundering or theft or murder, erodes trust in government and the financial-legal system.

More broadly, society's money laundering laws are a key defence against all types of other crimes. The so-called predicate offences to money laundering such as robbery, human smuggling, and corruption become much more tricky to carry out when, thanks to money laundering laws, the financial system does its best to shut them out. The dissuasive effect engendered by this effort stops many would-be criminals from ever leaving the licit economy. Take away those laws and the case for becoming a criminal becomes much more persuasive.

Why sanctions didn’t stop Russia's Garantex from using stablecoins

Stablecoins, a new type of financial institution, are unique in two ways. First, they use decentralized databases like Ethereum and Tron to run their platforms. Secondly, and more important for the purposes of this article, they grant access to almost anyone, no questions asked. 

I'm going to illustrate this openness by showing how Garantex, a sanctioned Russian exchange that laundered ransomware and darknet payments, has enjoyed almost continual access to financial services offered by stablecoin platforms like Tether and USDC throughout its six year existence, despite a well-known reputation as a bad actor. 

Last month, law enforcement seizures combined with an indictment and arrest of Garantex's operators appear to have finally severed Garantex's stablecoin connection... or not. Evidence shows that Garantex simply rebranded and slipped right back onto stablecoin platforms.  

Stablecoins' no-vetting model is a stark departure from the finance industry's default due diligence model, adhered to by banks (such as Wells Fargo) and fintechs (such as PayPal). We all know the drill—provide two pieces of ID to open a payments account. Requirements for businesses will probably be more onerous. Anyone on a sanctions list will be left at the door. Banks and fintechs must identify who they let on their platforms because the law requires it.

By contrast, to access the Tether or USDC platforms, the two leading U.S. dollar stablecoins, no ID is required. Anyone can start using stablecoin payments services without having to pass through a due diligence process. Sanctioned customers won't get kicked off, as Garantex's long-uninterrupted access shows. Regulators seem to tolerate this arrangement—so far, no stablecoin operators have faced penalties for money laundering or sanctions evasion.

A quick history of the Tether-Garantex nexus

Garantex became notorious early on for its role in laundering ransomware payments. Russian ransomware gangs hacked Western firms, extorted them for bitcoin ransoms, and cashed out at Moscow-based exchanges like Garantex. Garantex also became a popular venue for laundering darknet-related proceeds, particularly Hydra, once the largest darknet market. Reports allege that the exchange's shareholders have Kremlin links and that terror groups Hezbollah and Quds Force have used it.

Founded in 2019, Garantex was connected to Tether's platform by August 2020. We know this because an archived version of Garantex's website from that month show trading and payment services being offered using Tether's token, USDT.

Archived Garantex.org trading page from March 2024 with USDT-to-ruble, Dai-ruble, and USDC-ruble markets [link]

This connection to Tether allowed Garantex's customers to transfer their Tether balances to Garantex's Tether wallet, in the same way that a shopper might use their U.S. dollar account at PayPal to make payments to a business with a PayPal account. This allowed Garantex's users to trade U.S. dollars (in the form of Tether) on its platform for bitcoins or ether, two volatile cryptocurrencies, and vice versa. The Tether linkage also meant that Garantex could offer a market for trading ruble-USD.

By April 2022, Garantex's bad behaviour had caught up to it: the exchange was sanctioned by the U.S. Treasury's Office of Foreign Asset Control (OFAC). U.S. individual and entities were now prohibited from doing business with Garantex. Out of fear of being penalized, most non-Russian financial institutions would have quickly severed ties with it. Yet Tether, based in the British Virgin Islands at the time, permitted its relationship with Garantex to continue without interruption. Archived copies of Garantex's trading page from mid-2022 and 2023 show that Tether-denominated services were still being offered.

The Wall Street Journal reported in 2023 that around 80% of the exchange’s trading involved Tether, despite sanctions being in place. The net amounts were not small. According to Bloomberg, an alleged $20 billion worth of Tether had been transacted via Garantex post-sanctions. A 2024 Wall Street Journal report revealed that sanctions-evading middlemen used Tether to "break up the connection" between buyers like Kalashnikov and sellers in Hong Kong, with Garantex serving as their venue for acquiring Tether balances. 

Finally, analysis from Elliptic, a blockchain analytics firm, alleges that Garantex offered USDT trading services to North Korean hacking group Lazarus in June 2023. This transaction flow is illustrated below:

The Garantex/Tether nexus in 2023: Elliptic alleges that North Korean hackers stole ether from Atomic Wallet, converted it to Tether using a decentralized exchange 1inch, and then sent Tether to Garantex to trade for bitcoin. (Click to enlarge.) Source: Twitter, Elliptic

Tether's excuse for not off-boarding sanctioned entities such as Garantex? A supposed lack of government clarity. 

When Tornado Cash was sanctioned in 2022, for instance, the company said that it would "hold firm" and not comply because the U.S. Treasury had "not indicated" whether stablecoin issuers were required to ban sanctioned entities from using what Tether refers to as "secondary market addresses." Translating, Tether was saying that if bad actors wanted to use Tether's platform to transact with other Tether users (i.e. in the "secondary market"), it would let them do so. Tether's only obligation, the company believed, was to stop sanctioned users from asking Tether itself to directly cash them out of the platform into U.S. dollars (i.e. the "primary market").

This is quite the statement. Imagine if PayPal allowed everyone—including sanctioned actors—to open an account without ID and send funds freely within its system, only intervening when bad actors asked PayPal to cash them out into regular dollars. That was Tether's stance. Or if Wells Fargo let sanctioned actors make payments with other Wells Fargo customers, but only stopped them from withdrawing at ATM. Banks and fintechs can't get away with such a bare bones compliance strategy; they must do due diligence on all their users. But Tether seemed to believe that a different set of rules applied to it.

In December 2023, Tether reversed course. It would now initiate a new "voluntary" policy of freezing out all OFAC-listed actors using its platform, not just "primary market" sanctioned users seeking direct cash-outs. This brought Tether into what it described as "alignment" with the U.S. Treasury. Soon after, Tether froze three wallets linked by OFAC in 2022 to Garantex.

However, this action was largely symbolic. By the time Tether froze those wallets, Garantex had already abandoned them and opened new ones, thus allowing the exchange to maintain access to Tether's platform. Tether's no-vetting model permitted this pivot. Archived versions of Garantex's trading page show that it continued offering Tether services throughout 2024 and early 2025.

The U.S. Department of Justice recently confirmed Garantex's tactic of replacing wallets in its March 2025 indictment of the exchange's operators. It alleges that Garantex frequently cycled through new Tether wallet addresses—sometimes on a daily basis—to evade detection by U.S.-based crypto exchanges like Coinbase and Kraken, which are legally required to block customer payments made to sanctioned entities.

That the relationship between Tether and Garantex continued even after Tether's supposed 180 degree turn to "align" itself with the U.S. government is backed up by several reports from blockchain analytics firm Chainalysis. The first, published in August 2024, found that a large purchaser of Russian drones used Garantex to process more than $100 million in Tether transactions. The second describes how Russian disinformation campaigners received $200,000 worth of Tether balances in 2023 and 2024, much of it directly from Garantex. In a March 2024 podcast, Chainalysis executives allege that "a majority" of activity on Garantex continued to be in stablecoins.

After years of regular access to Tether's stablecoin platform, a rupture finally occurred earlier this month when Tether froze $23 million worth of Garantex's USDT balances at the request of law enforcement authorities. The move came in conjunction with a seizure by law enforcement of Garantex's website and servers. 

Garantex's website was seized in March 2025 by a collection of law enforcement agencies.

In a press release, Tether claimed that its actions against Garantex illustrated its ability to "track transactions and freeze USDt." But if Tether was so good at tracking its users, why did it connect a sanctioned party like Garantex in the first place, and continue to service it for over four years? Something doesn't add up.

Not just Tether: other stablecoins offered Garantex access, too

Tether doesn't appear to have been the only stablecoin platform to provide Garantex with access to its platform. MakerDAO (recently rebranded as Sky) and Circle Internet may have done so, too.

Circle, based in Boston, manages the second-largest stablecoin, USDC. When OFAC put Garantex on its sanctions list in April 2022, Circle was quick to freeze one of the designated addresses. It did no hold any USDC balances. However, like Tether, Circle's no-vetting policy means that it doesn't do due diligence on users (sanctioned or not) who open new wallets, hold USDC in those wallets, and use them to make payments within the USDC system. Circle only checks the ID of users who ask it to cash them out. Thus, it would have been a cinch for Garantex to dodge Circle's initial freeze: just open up a new access point to the USDC platform. Which is exactly what appears to have happened.

On March 30, 2022, Garantex used its Twitter/X account to announce that it was offering USDC-denominated services. Beginning at some point in the first half of 2022, close to the time that the U.S. Treasury's sanctions were announced, Garantex began to list USDC on its trading page (see screenshot at top). The exchange's trading page continued to advertise USDC-denominated financial services through 2023, 2024, and 2025 until its website was seized last month. 

Tether, Circle's competitor, proceeded to freeze $23 million worth of USDT on behalf of law enforcement authorities, as already outlined. However, respected blockchain sleuth ZachXBT says that Circle did not itself interdict Garantex's access to the USDC payments platform, alleging that "a few Garantex addresses" holding USDC had not been blacklisted.

MakerDAO is a geography-free financial institution that maintains and governs the Dai stablecoin, pegged to the U.S. dollar. Archived screenshots show that Garantex added Dai to its trading list by September 2020, not long after the exchange had enabled Tether connectivity. According to blockchain analytics firm Elliptic, Russian ransomware group Conti has used Garantex to get Dai-denominated financial services. Garantex is able to access the Dai platform because MakerDAO uses the same no-vetting model as Tether. In fact, MakerDAO takes an even more hands-off approach than the other stablecoin platforms: it didn't seize any of the original 2022 addresses emphasized by OFAC. That's because Dai was designed without freezing functionality.

Not vetting users is lucrative

Providing financial services to a sanctioned Garantex would have been profitable for Tether and competing stablecoin platforms managed by Circle and MakerDAO. 

All stablecoins hold assets—typically treasury bills and other short term assets—to "back" the U.S. dollar tokens they have issued. They get to keep all the interest these assets generate for themselves rather than paying it to customers like Garantex. If we assume an average interest rate of 5% and that Garantex maintained a consistent $23 million in Tether balances over the 34 months from April 2022 (when it was sanctioned) to March 2025 (when it was finally frozen out), Tether could have earned approximately $3.2 million in interest courtesy of its relationship. 

Not only does their no-vetting model mean that stablecoin platforms get to earn ongoing income from bad actors like Garantex, this model also seems... not illegal? Stablecoin legal teams have signed off on the setup, both those in the U.S. and overseas. Government licensing bodies like the New York Department of Financial Services don't seem to care that licensed stablecoins don't ask for ID, or at least they turn a blind eye. (Perhaps these government agencies are simply unaware?) Nor has the U.S. Department of Justice indicted a single stablecoin platform for money laundering, sanctions violations, or failing to have a compliance program, despite it being eleven years now since Tether's no-vetting model first appeared. The model seem to have legal chops. Or not?

Banks and fintechs are no doubt looking on jealously at the no-vetting model. Had either PayPal or Wells Fargo allowed Garantex to get access to their payments services, the punishment would have been a large fine or even criminal charges. Sanctions violations are a strict liability offence, meaning that U.S. financial institutions can be held liable even if they only accidentally engage in sanctioned transactions. But more than a decade without punishment suggests stablecoins may be exempt.

This hands-off approach benefits stablecoins not only on the revenue side (i.e they can earn ongoing revenues from sanctioned actors). It also reduces their costs: they can hire far fewer sanctions and anti-money laundering compliance staff than an equivalent bank or fintech platform. Tether earned $13 billion in last year with just 100 or so employees. That's more profits than Citigroup, the U.S.'s fourth largest bank with 229,000 employees, a gap due in no small part to Tether's no-vetting access model. 

The coming financial migration?

Zooming out from Garantex's stablecoin experience, what is the bigger picture? 

I suspect that a great financial migration is likely upon us. Financial institutions can now seemingly provide services to the Garantex's of the world as long as the deliver them on a new type of substrate: decentralized databases. If so, banks and fintechs will very quickly shift their existing services over from centralized databases to decentralized ones in order to take advantage of their superior revenue opportunities and drastically lower compliance costs. 

This impending shift isn't from an inferior technology to a superior one, but from an older rule-bound technology to a rule-free one. PayPal recently launching its own stablecoin is evidence that this migration is afoot.

The argument many stablecoins advocates make to justify the replacement of full due diligence with a no-vetting access model is one based on financial inclusion. Consumers and legal businesses in places such as Turkey or Latin America, which suffer from high inflation, may want to hold digital dollars but don't necessarily have access to U.S. dollar accounts provided by local banks, perhaps because they don't qualify or lack trust in the domestic banking system. An open access model without vetting solves their problem.      

What about the American voting public? Do they agree with this migration? The last few decades have been characterized by a policy whereby the government requires financial institutions to screen out dangerous actors like Garantex in order to protect the public. Forced to the fringes of the financial system, criminals encounter extra operating dangers and costs. The effort to sneak back in serves as an additional choke point to catch them. To boot, the additional complexity created by bank due diligence serves to dissuade many would-be criminals from engaging in crime. Is the public ready to let the Garantexes back in by default? I'm not so sure it is.

Tether is available at Grinex, a Garantex reboot. [link]

Garantex's stablecoin story didn't end with last month's seizures and indictment. According to blockchain analytics firm Global Ledger, the exchange has been renamed Grinex and continues to operate. Tether services are already available on this new look-alike exchange, as the screenshot above reveals. Global Ledger says that $29.6 million worth of Tether have already been moved to Grinex as of March 14, 2025. 

This is the reality of an open-access, no-vetting financial system: bad actors slip in, eventually get cut off, and re-enter minutes later—an endless game of whack-a-mole that seems, for now at least, to be tolerated. It will only get larger as more financial institutions, eager to cut costs, gravitate to it.

Canadian banks as U.S. hostages?

BMO Financial Center in Milwaukee, Wisconsin. Blink twice if you're in danger, BMO.

Donald Trump has said he wants to use "economic force" against Canada. In my previous post, I worried that one way this force could be wielded was through Canada's dangerous dependence on U.S.-controlled MasterCard and Visa. But there's an even bigger risk. Canadian banks with large U.S. operations may have become unwitting financial hostages in Trump's 51st state strategy.

As recently as a few months ago, back when things still seemed normal, it was widely accepted that big Canadian banks needed a U.S. expansion strategy. If one of our Big-6 banks wasn't building its U.S. banking footprint, its stock outlook suffered. Canada is a mature, low-growth banking market, after all, whereas the U.S. market remains fragmented and ripe for consolidation.

This motivated a steady Canadian trek into U.S. branch banking. BMO entered the U.S. in the 1980s and steadily expanded, most recently acquiring Bank of the West in 2023, making it the 13th-largest U.S. bank. TD Bank entered in the early 2000s and has since climbed to 10th place. Given this trajectory, by 2030 or 2035, one of the U.S.’s five largest banks could very well have been Canadian.

This strategy hasn’t been without flaws. Royal Bank's first U.S. retail banking foray, its acquisition of Centura, eventually failed, though its second attempt has been more successful. TD just paid the largest anti-money-laundering fine in U.S. history. But overall, the move south has been profitable for Canadian banks and their shareholders, who constitute a large chunk of the Canadian population. The U.S. has benefited, too. Canadians have historically been decent bankers, having got through the 2008 credit crisis unscathed. Allowing a bigger slice of the American market to fall under the prudential management of Canadian executives probably isn't a bad thing, TD's money laundering gaff notwithstanding.

But in just a few months, Trump has upended this entire calculus.

Canada is now a U.S. enemy, or at least no longer a friend. We are somewhere on Trump's timeline to becoming the 51st state, against our wishes. Our existing border treaties are no longer valid, says the President, and need to be redrawn. Trump has threatened to use "economic force" as his weapon to achieve this. The attacks have already begun, beginning with tariffs to soften us up for final annexation.

Next up? My worry is that Canada's banking industry may become a second front in this war, and the hint is a stream of strange pronouncements from Trump and his surrogates about Canadian banking. According to Trump, the Canadian banking system is stacked against U.S. banks:

"Canada doesn’t allow American Banks to do business in Canada, but their banks flood the American Market. Oh, that seems fair to me, doesn’t it?"

This grievance is false, as I explained last month, but accuracy probably isn't the point. A charitable reading is that Trump is laying the groundwork for U.S. banks to gain more access to Canada’s banking sector—a manageable concern. My worry is that it's the reverse. His complaints may signal a shift in how Canadian banks operating in the U.S. are to be treated. Trump may have teed up a financial version of the Gulf of Tonkin incident; an imaginary affront that can serve as a pretext for justifying aggressive action against Canadian banks' U.S. subsidiaries.

After years of U.S. expansion, Canada’s largest banks now have relatively large American retail banking footprints, making them tempting financial hostages. Both TD Bank and Bank of Montreal now have more branches in the U.S. than in Canada. Nearly half of BMO's revenue (44%) come from south of the border while in TD's case it's 38%. Royal Bank also has deep ties. According to a recent Bank of Canada paper, half of the Big 6 Canadian banks' assets are now foreign, far more than the roughly 40% or so in 2014, with much of that chunk being American assets.

Just another bank doing business in Florida, or a financial hostage?

By damaging their large U.S. subsidiaries, Trump would directly weaken the Canadian parent companies, potentially causing havoc with the overall Canadian banking system. And a weakened financial sector plays right into Trump’s stated goal of economically undermining Canada in order to annex it.

How can Trump hurt Canadian banks' U.S. subsidiaries? Trump and his allies control much of the U.S. financial regulatory apparatus, and he has shown little regard for legal constraints. To begin with, he could set the FBI and Department of Justice on Canadian banks, increasing scrutiny of TD, BMO, and Royal Bank’s U.S. operations under the guise of enforcing anti-money-laundering laws. More surveillance would inevitably lead to a wave of fines. To avoid punishment, a Canadian bank operating stateside will have to spend much more on anti-money laundering measures than an equivalent U.S. bank.

Another tactic could be limiting access to shared financial infrastructure, such as government liquidity programs or bank deposit insurance. Trump could also try to increase the hoops that TD, BMO, and RBC must leap through to maintain their all-important accounts at the Federal Reserve, which provides access to Fedwire, the U.S.'s crucial large-value payments system.

Trump’s regulators could also impose higher capital requirements on Canadian banks compared to their U.S. peers, forcing the parents to divert ever more resources to their U.S. subsidiaries.

If Canadian banks are squeezed hard enough, they may eventually be forced to sell their U.S. operations at distressed prices. Trump could worsen this situation by imposing punitive exit fees, ensuring that Canadian banks take even bigger losses on the sale of their U.S. subsidiaries. The impairments caused to the parents' bank balance sheets would weaken the Canadian banking system and might even force the Federal government to step in with financial aid.

Meanwhile, the discounted assets of Canadian banks could be handed over to Trump’s preferred U.S. banking CEOs. Trump, after all, seems to be on course to building a kleptocracy, and key to that is the leader's ability to generate a series of gifts (i.e. acquisition approvals) that can be bestowed on business leaders who have demonstrated their obeisance.

To limit the damage, Canada may need to act quickly. The first step is freezing any further U.S. investment by BMO and the others. If Canadian banks are already financial hostages, deepening their exposure would be reckless. Bank executives may very well have already halted their U.S. growth plans of their own accord, but if not, high-level discussions with Canadian officials should drive home the urgency of the situation.

Instead of doubling down on the U.S., Canadian banks should pivot toward growth opportunities in Europe, the U.K., Australia, Latin America, and Asia. Our banks have histories dealing with these geographies. Bank of Nova Scotia, for instance, is one of the leading banks in the Caribbean and Central America.

Finally, there’s also a case to be made for a preemptive retreat. Bank of Montreal, Royal Bank, and TD Bank could start selling off their U.S. operations today before things escalate. It's a terribly difficult step to take; Canadian banks have spent decades painstakingly building their U.S. franchises. But by exiting now, they could secure better prices and avoid becoming tools for harming Canada down the road.

What was once a symbol of Canadian financial success—our banks’ expansion into what used to be a friendly U.S.—has become a national security risk. Hoping Trump forgets his fixation on the Canadian banking system and his dream of annexing us is not a strategy. There’s a high chance he won’t, and Canada must prepare accordingly.

Trump-proofing Canada means ditching MasterCard and Visa

We're all busy doing our best to boycott U.S. products. I can't buy Special K cereal anymore, because it's made in the U.S. by Kellogg's. But I'm still buying Shreddies, which is made in Niagara Falls, Ontario. Even that's a grey area, since Shreddies is owned by Post, a big American company. Should I be boycotting it? Probably. However, the disturbing thing is that I'm paying for my carefully-curated basket of Canadian groceries with my MasterCard.

If we really want to avoid U.S. products, we can't just vet the things we are buying. We also need to be careful about how we are doing our buying. Our Canadian credit cards are basically made-in-U.S. goods. They rely on the U.S-based Visa or MasterCard networks for processing. Each credit card transaction you make generates a few cents in revenue for these two American mega-corporations. It doesn't sound like much, but when multiplied by millions of Canadians using their cards every day, it adds up. Vigilant Canadians shouldn't be using them.

Canadians who want to boycott American card networks have two options. Go back to paying with cash, which is 100% Canadian. Or transact with your debit card. Debit card transactions are routed via the made-in-Canada Interac debit network.*

We're lucky to have a domestic debit card option. Our European friends are in a worse position, since many European countries (Poland, Sweden, the Netherlands, Finland, and Austria) are entirely reliant on MasterCard and Visa for both debit and credit card transactions. 

Unfortunately, going back to debit cards means doing without all of the consumer protection that credit cards offer in an online environment. Worse, you're giving up your credit card rewards or cash back. If you don't pay with your 2% cash back credit card, for instance, and use your debit card instead, which doesn't offer a reward, you're effectively losing out on $2 for every $100 you spend. This should illustrate to you, I hope, the golden shackles imposed on us by our U.S.-based credit cards. It's fairly easy to replace your American-grown tomatoes with Mexican ones or your U.S.-made car with a Japanese car. But networks, which tend towards monopolization, are not so easy to bypass.

Which gets us into the meatier issue of national sovereignty. The difficulty we all face boycotting the MasterCard and Visa networks reveals how Canada has let itself become over-reliant on these critical pieces of U.S financial infrastructure. My fear is that our neighbour's political leadership is only going to fall further into authoritarianism and belligerence, eventually making a play to slowly annex Canada—not by invasion, but by "Canshluss". If so, this will involve using our dependencies on U.S. systems, including the card networks, to extract concessions from us. "Canada, if you don't do x for me," says Trump in 2026, "we're TURNING OFF all your credit cards!" 

In anticipation, we need to remove this particular financial dependency, quick. We're already safe when it comes to debit cards; we've got Interac. But we need the same independence for our credit cards. More specifically, we need to pursue an end-goal in which all Canadian credit cards are "co-badged". That means our credit cards would be able to use both the Visa/Mastercard card networks and Interac (or, if Interac can't be repurposed for credit cards, some other yet-to-be-built domestic credit card network). With co-badging, if your credit card payment can't be executed by Visa because of a Trump freeze order, at least the Canadian network will still process it.

This is how the French card system works. While much of Europe suffers from a massive dependency on MasterCard and Visa, France is unique in having built a 100% French card solution. The local Carte Bancaire (CB) network can process both French debit card transactions, like Interac can, but goes one step further by also handling French credit card purchases. Before paying for their groceries with a card, French card holders get to choose which network to use, the local one or the international one.

THIS IS WHAT CANADA NEEDS: This French credit card, issued by Credite Agricole, is co-badged with the domestic Carte Bancaire (CB) network and the international MasterCard network. When incidents occur on one route (CB, for instance), traffic is automatically routed to the back-up route, MasterCard, and vice versa. I think that a Canadian solution to the Trump problem would look something like this French CB card.

The incoming Carney government should move to co-sponsor a CB-style domestic credit card network along with the big banks (perhaps a simple upgrade to Interac will do?). All Canadian financial institutions that issue credit cards would be required to co-badge them so that Canadians can connect to this new network as well as Visa or MasterCard. Even if annexation never actually occurs, at least we've got a more robust card system in place to deal with outages arising from hacking or natural disasters.

Along with France, we can take inspiration from India, which introduced their Visa/MasterCard alternative, Rupay, in 2012. Thirteen years later, RuPay is now a genuine competitor with the American card networks. I can't believe I'm saying this, but we can also use Russia as a model, which was entirely dependent on Visa and MasterCard for card payments until it deployed its Mir card network in 2016—in the nick of time before Visa and MasterCard cut ties in 2022.

Europe will have to push harder, too. The EU has been trying to rid itself of its Visa and MasterCard addiction for over a decade now, without much luck. Its first attempt, the Euro Alliance of Payment Schemes, was abandoned in 2013.  (In fact, one of the reasons the European Central Bank is exploring its own digital currency is to provide an alternative to the American card networks.) As Canada builds out its own domestic credit card workaround, we can learn from the European mistakes.

The U.S. is no longer a clear friend. Boycotting U.S. products is one thing. But if we truly want to reduce the external threat, we need to build our own card infrastructure—before it's too late.

---

* In-person debit payments are processed by the Interac network. However, online debit card transactions default to the Visa or MasterCard networks. While Interac does allow for online purchases, many retailers don't offer the option, and when they do, the checkout process requires the user to log into their online banking, which is more of a hassle than using a card.

What do you do with memecoins? Apparently you collect them, says the SEC

I have no idea if memecoins like dogecoin and fartcoin should be legally defined as securities, and thus come under the purview of securities regulators like the Securities Exchange Commission (SEC). Securities law is confusing. But what I do know is that the SEC's latest notion that memecoins are simply "collectibles" that people buy for "entertainment, social interaction, and cultural purposes" is naive, even dangerous.

Here is the SEC's statement:

Source: SEC

The SEC's wording is dangerous because it effectively whitewashes memecoins into the same relatively benign social-economic bucket as baseball cards, postage stamps, and Roman coinage. Memecoins don't belong there. Dogecoin and its ilk are not collectibles—they belong to the same bin (a much more dangerous bin!) as HYIPs, chain letters, ponzis, bubbles, MLMs, memestocks, lotteries, pump and dumps, and casino games. 

I don't think I'm alone in saying that I'd be okay if my 11-year old kid wanted to carefully build a collection of culturally-significant items they could fuss over after school. Comic books? Pokemon cards? Fossils? Sure, that's all good. But I'd be appalled if they went to a casino to play slots or threw away their allowance for HYIPs and MLMs. By characterizing memecoins as mere collectibles, and not as the gambling/ponzis devices they actually are, the SEC is anointing them as suitable for everyone, including our kids. It's gross that any government agency would do this.

To me the differences between memecoins and collectibles are obvious, but for those still reading, including anyone at the SEC, here's my logic:

Almost no one buys memecoins with the same earnest obsessiveness as a collector. Spend any amount of time in ancient coin collecting forums and you'll see what a true collecting mentality looks like, the immense amounts of sifting, classification, and curation that it entails, and the knowledge of cultural minutiae: "Why is Constantine II facing left on this coin, but facing forward on in this one?" By contrast, dogwifhat, SPX6900, $Trump, Pepe, Shiba Inu and other memecoins don't toggle the same grading and taxonomizing parts of our brains, nor do they invoke our instincts to build complete sets of culturally meaningful items. It's just frenetic buying, selling and number-go-up. And that's because ancient Roman coins and memecoins are fundamentally different economic goods. Memecoins are for the most part pure financial gambles with a facade of culture. Roman coins are cultural objects to the core, with a touch of financialization.

As its justification for classifying memecoins as collectibles, the SEC relies on the fact that memecoins are "inspired by internet memes, characters, current events, or trends." Think Dogecoin's shiba inu theme, or fartcoin's fart meme. This somehow uplifts them into having the status of cultural artifacts.

This is silly. If you read about the history of chain letters, for instance, you'll see that their originators often linked their letters to some sort of theme or meme. Even so, we would never say that chain letters are collectors items. Las Vegas slot machines often have themes (i.e. fruit, El Dorado City of Gold, or ancient Egypt), but let's not fool ourselves: having a theme doesn't transform a slot machine into something other than a slot machine.

No, memecoin buyers—like chain letter participants and slot machine players—want to make money, quickly. Plain and simple. That a get-rich-scheme adopts a meme doesn't redeem or transform that scheme into a collectible. The meme is a mere superficiality that serves to differentiate one gambling machine from another. It's not something that most buyers actually believe in.

I get that the line between collectibles and speculation isn't always clear—sometimes an item can be both. I lived through the early 1990s comic book collecting boom, and I can tell you that things got a little ponzi-ish. When 14-year old me bought all five covers of X-Men #1, I was only 50% motivated by a collector's maniacal desire to complete a set, the other 50% being a gamble on price. However, at the end of the day policy requires us to draw lines and make categories. For the most part, comic books have functioned as collectibles, not gambling, and deserve to be classified as such, and thus regulated as such. As for memecoins, while there are probably a few people who diligently collect sets of memecoins, for the most part they are all gambling and ponzi-ishness. And that's how they should be treated by policy makers—not as mere postage stamps.  

I'm not saying the SEC should be in charge of overseeing memecoins. If the SEC wants to wipe its hands clean of memecoins, that's fine, I guess. Some other agency will have to take charge. But why is the SEC whitewashing memecoins as it is exiting the building? By using its platform to advertise memecoins as mere collectibles, the SEC just made them seem harmless. That's reckless.

Ending the penny won't lead to more nickels

Donald Trump has ordered the U.S. Mint to stop producing the penny because it is unprofitable, costing 3.69 cents to produce each one.

In response, the lobbyists that earn big profits from the ongoing existence of the penny have come out in full force with dubious arguments for why the penny is still vital. Their newest bit of disinformation is that removing the penny will increase reliance on the nickel, which costs 13.74 cents to produce, thus putting the U.S. public in a worse position than before. This shift-to-nickels claim is wrong, but all sorts of media sources [CNN | Bloomberg | ABC News | TIME ] are repeating it without challenging it.

While it's true that the nickel is unprofitable to produce, usage of the nickel will *not* increase when the penny is removed. I'm going to show why shortly, but first a quick comment on the general idea of ending the penny.

For long-time penny critics like myself, Trump's idea is tragically undeveloped, even clumsy. All serious minds agree that the U.S. penny is pure monetary pollution and needs to be abolished. It's too small to be meaningful, yet society is forced to continue counting in pennies because the political mechanism for improving America's coinage system is broken, having been captured by the coin lobbyists and conspiracy theorists. (I wrote about the coin lobby in Pennies as state failure.)

However, to liberate society from the hassles of the penny the U.S. government can't just stop minting it, as Trump seems to think, because this doesn't prevent the existing stock of pennies that has accumulated over the last century or two from continuing to pollute Americans' economic lives. To solve this, the government must establish a rounding rule for individuals and retail establishments. When paying for goods at the checkout counter, all amounts owed must be rounded to the nearest five cents in order to prevent already-existing pennies from infiltrating day-to-day shopping experiences. 

What would this rounding rule look like? Say that your grocery bill comes out to $10.87. You pay the cashier $11 in cash. Instead of getting 13 cents change (a dime and three pennies) your bill would now be rounded down to $10.85, and you'd get a 15 cents in change instead—a nickel and a dime.

If your bill came to $10.88, it would be rounded up to $10.90, and you'd get 10 cents change instead of 12 cents.

Voila, the penny-infiltration problem is solved. No annoying one-cent pieces required in day-to-day economic life.

Now that we've got rounding out of the way, we can tackle the big penny-to-nickel lie that the coin lobbyists are circulating. Mark Weller, director for the lobby group Americans for Common Cents, was quoted in CNN last week:

"Without the penny, the volume of nickels in circulation would have to rise to fill the gap in small-value transactions. Far from saving money, eliminating the penny shifts and amplifies the financial burden."

Weller goes on to caution that the U.S. Mint may be forced to make in the range of 2–2.5 billion nickels a year if it stops producing pennies permanently, far higher than its normal run-rate of 1.0–1.6 billion over the past decade. The implicit threat here is that it's better for America to be wounded by the penny than have their throats slit by the nickel. Keep in mind that Weller and his lobbying group are sponsored by Artazn LLC, the firm that sells coin blanks to the U.S. Mint for eventual stamping into pennies.

The idea that more nickels will be required in day-to-day transactions if the penny disappears is superficially seductive, but it's wrong. That's because the removal of pennies does *not* require that nickels do any more transactional work than before. 

First, let's rebut it with a real-life example. In 2012, Canada abolished its one-cent piece and implemented five cent rounding. No nation is more similar to the U.S. than Canada, so it serves as a great foil. Did Canada experience a doubling or tripling in nickel production in order to fill the gap left by the penny? Below is the Royal Canadian Mint's nickel production from 2005 to present:

No, the amount of nickels didn't jump in 2013 or 2014, the year after the penny's abolition. In fact, since the penny ban in 2012, Canadian nickel production has remained well-below its pre-2012 level of 200 million to 250 million.

Having rebutted Weller's fill-the-gap claim by working through an example, now we'll rebut it mathematically.

Let's take a look at all retail transactions that end in 1 cent to 99 cents, and how these transactions differ in a penny and post-penny world. A store will want to have enough change on hand to facilitate each of these one hundred transaction types. In the table below, I’ve listed all one hundred transactions and, assuming the customer pays with the next whole-dollar amount (e.g., if $40.71 is due, they pay with $41), how much coin change is required.

First, let's look at the yellow half of the table, which shows how much change must be returned to the customer when the penny is still in circulation. In total, 200 pennies will be required for all one hundred transactions, with the one-cent piece showing up in 80% of all transactions. As for the nickel, a total of 40 nickels will be required, with the customer getting a nickel back in 40% of all transactions.

Now let's remove the penny and introduce rounding to the nearest five cents. Will more nickels be required to "fill the gap" left by the penny, as alleged by the coin lobby? 

Take a look at the orange area, which shows the shopping experience in a post-penny world. In the first column, I provide the rounded amount that the customer must pay. The demand for pennies has obviously fallen to zero in this world, as the policy intended. But the total amount of nickels required in our one hundred transactions remains at 40, as before. Nothing has changed. Note that the total number of dimes and quarters required also stays constant in both worlds, at 80 and 150 respectively, with 60% and 70% of all transactions needing these larger coins as change.

What is happening? If you look more closely, you'll see that certain transaction amounts that didn't require a nickel in change before, like $0.96, now require a nickel (since the amount due is rounded down to $0.95.) But other amounts that once required a nickel, like $0.92, no longer do (since the amount is rounded down to $0.90, for which dimes are the most efficient change.) In short, for every amount owed by the customer that now requires a nickel in change, another amount owed no longer requires a nickel. 

So when lobbyists like Mark Weller say that "the volume of nickels in circulation would have to rise to fill the gap," their math is flat out wrong: the removal of the penny does not require more nickels as change. 

In real life, these one hundred transactions may not be entirely random or uniformly distributed; shopkeepers may have certain preferred prices points, thus skewing the amount of coins required as change. But I doubt the effect is very large, as suggested by the Canadian example.

So both mathematically and empirically, Americans shouldn't be afraid of dropping the penny because they'll be saddled with even more awful nickels. That's just lobbyist propaganda. In a post-penny America, you get all the benefits of zero pennies with no extra nickels required.

The end of El Salvador's bitcoin payments experiment

Back in 2021, El Salvador became the first country in the world to require its citizens to use bitcoin for payments. Last month, four years later, it notched another record: it became the first country to rescind bitcoin's status as required tender. This backtracking was the result of the IMF's threat to pull billions of dollars in assistance if El Salvador didn't put an end to bitcoin's special status.

What have we learnt from El Salvador's four-year bitcoin experiment? I would suggest that it definitively proved that bitcoin is not destined to be money. As far as making payments goes, bitcoin will always be an unpopular option, even when the government gives it a helping hand. And don't blame the IMF for this; bitcoin sputtered-out long before the IMF pressured El Salvador to drop it, as I'll show.

The original motivation behind El Salvador's Bitcoin Law was to harness bitcoin as a means for reaching the unbanked, those without bank accounts, who in El Salvador make up the majority. Cash is still by far the dominant payments choice in El Salvador, but it was believed that an electronic form of cash might complement that. Another goal was to make remittances cheaper by sponsoring a new bitcoin remittance route—few countries are as dependent on remittances from family living overseas as El Salvador. 

President Nayib Bukele made the announcement at a major bitcoin event and El Salvador’s Congress ratified the Bitcoin Law a few days later. Bitcoiners literally cried for joy. For longtime Bitcoin watchers like me, it seemed like an awful idea. But at least it was going to be a fantastic natural experiment.

Satoshi Nakamoto, bitcoin's founder, saw bitcoin as electronic cash, but his dream generally hasn't come to fruition. In practice, 99% of bitcoin adoption is about gambling on its volatile price, with payments being a niche 1% edge case. Bitcoin disciples who continue to believe in Satoshi's electronic cash dream often blame what they see as government meddling for the failure of bitcoin to gain widespread usage as a payments medium. For instance, they say that capital gains taxes on bitcoin makes it a hassle to pay with the orange coin, since it leads to a ton of paper work anytime one buys something with bitcoin. Or they criticize legal tender laws that privilege fiat currency. 

But here was a government that was going to champion the stuff, nullifying all of the headwinds against bitcoin in one stroke! The government meddling hypothesis would be put to test.

The Salvadoran government used a combination of sticks and carrots to kick-start adoption. First, let's list the carrots. The capital gains tax on bitcoin was set to zero to remove the hassle of buying stuff with bitcoin. The government also built a bitcoin payments app, Chivo, for all El Salvadoreans to use. (Chivo also supports U.S. dollar payments.) Anyone who downloaded Chivo and transacted with bitcoin would receive a $30 bitcoin bonus—that's a lot of money in El Salvador. Gas stations offered $0.20 off of a gallon of gas for customers who paid with the app. People could also use Chivo to pay their taxes with bitcoin.

The biggest carrot was zero-transaction fees. Any payment conducted with Chivo was free, as was converting bitcoins held in the Chivo app into U.S. dollars and withdrawing cash at Chivo ATMs. These Chivo ATMs were rolled out across El Salvador and in the U.S., too, to encourage the nascent U.S.-to-El Salvador bitcoin remittance route. Bitcoin ATMs are usually incredibly pricey to use, but in El Salvador the government would eat all the transaction fees. What a fantastic deal.

As for the stick, Bukele introduced a forced-tender rule. Beginning in 2021, businesses were required to accept the orange coin or be punished. This was costly for them to comply with. They would have to update point of sale software, signage, train employees, and set up new processes for handling bitcoins post-sale.

By all rights, this combination of sticks and carrots should have led to a flourishing of bitcoin payments. But it didn't.

The evidence of failure

The first incrimination of the experiment is Figure 1, below. In the Bitcoin Law's initial months, remittances carried out by cryptocurrency wallets exploded, accounting for an impressive 4.5% of all incoming remittances to El Salvador. Not bad! People were actually using the Chivo app to send bitcoins to relatives back home. 

Figure 1: Data from El Salvador's central bank shows that cryptocurrency remittances from wallets like Chivo have steadily shrunk over time from 4.5% of all remittances to 0.87% of all remittances in 2024.

But instead of continuing to gain market share, crypto-linked remittances steadily deteriorated over the next four years to 0.87% of the total by December 2024—hardly a sign of success.

The data for this chart comes from the Banco Central De Reserva (BCR), El Salvador's central bank. The BCR is coy on how precisely it collects this data, but it is almost certainly dominated by Chivo-related transactions. (My note at the bottom explores the data more.)

The second indictment of El Salvador's bitcoin effort comes from survey data compiled by economists Alvarez, Argente, and Van Patten in their 2022 paper, Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador. The authors carried out a survey of 1,800 Salvadoran households to get insights into their use of the Chivo Wallet. This wasn't a lazy online survey, but an in-person survey.

The survey found that just over half of Salvadoran adults had downloaded Chivo, which is impressive (see Figure 2, below). Most hardly used it, though. While over 20% of the population continued to interact with Chivo after spending their $30 bitcoin bonus—which isn't a bad adoption rate for an app—the majority of Chivo usage was only occasional, the median Chivo user reporting no bitcoin payments sent or received in any given month, and just one payment per month in U.S. dollars. Payments tools like apps and cards are supposed to be used a few times each week; not once every two or three months.

Figure 2: While awareness of Chivo was high, most Salvadorans did not use Chivo's bitcoin functionality after receiving their $30 bitcoin bonus. Source: Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador [link]

The dominance of the app's dollar functionality over its bitcoin functionality also stands out. Chivo was supposed to be a bitcoin payments app, after all, not another version of PayPal of Venmo. For instance, the survey found that of all households who had downloaded Chivo, only 3% had ever received a bitcoin remittance via Chivo, while 8% had received a U.S. dollar remittance via the app (see Figure 3 below). If Chivo was primarily being used for fiat payments, and not bitcoin, then why go through with the whole effort of changing the law for bitcoin's sake?

Figure 3: When Salvadorans did use Chivo for remittances, they preferred it for U.S. dollar remittances over bitcoin-based ones. Source: Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador [link]

Moreover, those few citizens who did continue to use Chivo regularly were not the unbanked majority that the Bitcoin Law had originally targeted. The survey found that they were most likely to be from the already-banked minority, young, educated, and male.

By mid-2022, downloads of Chivo had pretty much dried up. Using blockchain tracing, the economists found that $245,000 per day worth of bitcoins were flowing into the Chivo app, which sounds like a lot, but in the payments business, that's peanuts.

It's also worth considering how businesses treated bitcoin after the passing of the Bitcoin Law. Despite the requirement that all businesses  accept bitcoin, just one-in-five actually did so. The survey found that acceptance was driven by large businesses—i.e. McDonald's, Starbucks, Pizza Hut and Walmart—presumably because they couldn't easily evade the consequences of ignoring the law. Bitcoin was not popular with these businesses; the survey found that of those that received bitcoin from their customers, 88% quickly converted them into dollars.

This is problematic. For bitcoin to become money, a circular economy must be kickstarted as the bitcoins spent by consumers are re-spent by businesses on inventory and salaries, which gets re-spent by consumers, and on and on. This wasn't happening.

With just 20% of the population using the app, and mostly for an occasional U.S. dollar transaction, the entire bitcoin experiment can hardly be seen as a wild success. Businesses were not keeping the bitcoins they received, and consumers who were using the app regularly were not the unbanked originally targeted by the Bitcoin Law.

The third and last bit of evidence of the experiment's failure comes from an annual survey from José Simeón Cañas Central American University (UCA) entitled La población salvadoreña evalúa la situación del país. In 2021, the survey began asking Salvadorans whether they had ever used bitcoin to buy or pay for something. This question is more open-ended than the one asked by the three economists, who focused more narrowly on bitcoin transactions conducted via Chivo. 

Figure 4: According to a survey from the UCA, while over 25% of survey participants reported using bitcoin (and not just Chivo) for payments in 2021, only 8.1% used bitcoin for payments just three years later in 2024.

In the first year of the Bitcoin Law, 25.7% of respondents said they used bitcoin for payments. That's a fantastic result, although the $30 Chivo bonus no doubt drove that large number. But over the next three years, bitcoin's usage for payments crumbled, with only 8.1% of Salvadorans reporting that they'd paid with bitcoin by 2024. This is the same downward pattern that we saw in the CBR's remittance data. That's not adoption. That's giving up on bitcoin.

The UCA survey found that the 8.1% who reported using bitcoin for payments in 2024 were not using it for day-to-day payments. Of this group of bitcoin payors, 55% used bitcoin just 1-3 times in 2024. Only 8% made bitcoin payments on a weekly or bi-weekly basis. (See Figure 5 below). I really want to highlight this last data point: in 2024, just 1 in 200 Salvadorans paid for something each week or second week with bitcoin.

Figure 5: In a 2024 survey by UCA, 8.1% of Salvadorans reported using bitcoin for payments that year. This group was then asked how often they used it, with the responses visualized in the above chart. Most used bitcoin just once in 2024, with 55% using it one to three times. 8% used it 20 or more times, which would suggest that almost no one is using bitcoin for day-to-day payments, despite that being the goal of El Salvador's 2021 Bitcoin Law.

Summing up these three pieces of evidence, despite a potent combination of subsidies and coercion, the adoption of bitcoin for payments hasn't occurred. Bitcoin usage in El Salvador is, if anything, regressing. Now that required acceptance of bitcoin is being rescinded, I suspect that it's only a matter of time before all the large businesses that introduced bitcoin payments, like McDonald's and Walmart, drop that option. With the government no longer coercing them to accept bitcoin payments, there's no commercial incentive to continue down that path.

It was IMF pressure on Nayib Bukele that finally got him to give up his bitcoin experiment. But the IMF was doing Bukele a favor, really, because the whole thing was already a failure, as I've explained with the charts above. Cancelling it outright would have been embarrassing to Bukele, but now he can deflect attention from himself and blame the IMF.

Why the failure, and what have we learned?

There is a very big hurdle that has prevented El Salvador's one-two punch of subsidies and coercion from working: bitcoin is intrinsically ill-suited to perform as money. 

The stuff is innately volatile, and so risk-shy individuals don't dare hold it or use it for payments. Risk-seekers can tolerate that volatility, but they expect to be rewarded by a dramatic price rise, and so they refuse to use their bitcoins for payments because they could miss out on the jump. The net result is that no one, neither society's risk-seekers nor its risk-avoiders, ends up paying with bitcoins. Only a tremendous amount of subsidies and coercion will ever overcome their natural preferences, but no sane government would ever try to bring those levels of coercion to bear. (And speeding things up with options like Lightning doesn't change this equation.)

The saddest thing about El Salvador's bitcoin experiment is that all sorts of time and resources have been wasted. El Salvador is not a rich country. The money spent on building and operating Chivo, compliance by businesses, bitcoin signage, and subsidies could have been better deployed on more important things like health and education.  One hopes that other countries learn from this experience and avoid going down the same route that El Salvador did. Brazil, which deployed its wildly popular PIX payment system around the same time as El Salvador launched its Bitcoin Law, provide helpful guidance.

More broadly, I'm hoping that El Salvador's failure finally kills off Satoshi's very misguided dream of bitcoin as electronic cash. I once was a believer in that dream, but for all the reasons I wrote in December, I've long since given up on any chance of bitcoin becoming a widely-circulating currency. But a lot of people continue to sacrifice their careers, time and resources to following Satoshi. Many of these are brilliant people. We want them to be creating valuable things for society. Alas, despite all sorts of evidence that bitcoin payments are a dead end, they continue to hit their heads against the wall, using excuses like government interference. 

Guys, Satoshi's dream is a mirage, a delusion, a hallucination. A government just flexed its muscles for four long years to get bitcoin into circulation, and that still didn't work. The lesson here: bitcoin is a bad payments tool and will never become widely-used electronic cash. It's time to move on.

---

*The BCB won't say how it collects this data -- according to the Salvadoran press there are legal limits on how much it can disclose -- but it describes the series as being compiled from administrative records that it receives from "cryptocurrency digital wallets." Reading between the lines, this probably includes Chivo data and any other regulated cryptocurrency service that stores customer crypto and reports to the BCB. (Because Chivo allows both U.S. dollars and bitcoins to be transferred, the BCR's data may be a mix of the two units, muddying the waters.) I think it's safe to assume that the BCR data does not include bitcoin remittances made via non-custodial services, say like Muun wallet or Blue wallet. However, since most of the governments carrot's (i.e. no fees) require the use of Chivo, it's probably a safe assumption that the average Salvadoran uses Chivo for bitcoin transfers, so the BCR data--which almost certainly includes Chivo--is fairly representative of overall usage.