Monday, November 23, 2020

Stablecoins as a route into Venezuela?

Over the last decade, few nations have experienced as much monetary and payments chaos as Venezuela has. Fans of bitcoin, Dash, and other cryptocurrencies have all tried to help by introducing Venezuelans to their preferred coin. But even with Venezuela's bolivar currency entering hyperinflation stage, cryptocurrency adoption never happened

Circle, a U.S.-based company that issues the stablecoin USDC, is the latest to join the Venezuelan crusade. Last week it belatedly announced that it had partnered with the opposition Guaidó government  to deliver financial aid to Venezuelan health care workers. Here is Circle's CEO, Jeremy Allaire:

In its blog post, Circle says it helped to get million of dollars to Venezuelans by leveraging "the power of bypass the controls imposed by Maduro over the domestic financial system." Allaire suggests that in his tweet that stablecoins have now become a "tool of US foreign policy."

Did stablecoins play a vital role? I'm skeptical. If you pick through the transaction chain carefully, USDC's role was trivial. Nor does the wider claim made in Circle's post, that stablecoins have somehow arrived on the world stage as a foundational infrastructure in the future of the international monetary system, hold much water. 

For those who don't know, stablecoins are sort of like bank accounts with U.S. dollars in them, the difference being that they are hosted on a blockchain like Ethereum. Yes, they are a new and rapidly growing segment of the payments ecosystem. But if any payments instrument has helped Venezuela over the last few years, it's not stablecoins. Rather, it's the twin combination of old fashioned U.S. paper money and regular U.S. dollar bank accounts. More on that later.

A bit of background. The U.S. has declared the Maduro-led government to be illegitimate and thrown its support behind the Venezuelan opposition government led by Juan Guaidó. In 2019, U.S. officials cut off Maduro's access to Venezuela's U.S.-based bank accounts and put Guaidó in control. To give credence to the Guaidó opposition, an idea was hatched to take $19 million from these U.S. bank accounts and somehow airdrop it into the pockets of poorly paid Venezuelan health care workers. Each health care worker was to get $100 a month for three months.

Airtm, a money services business that offers U.S. dollar accounts, was recruited by the U.S. government to be the distribution agent for this $19 million airdrop. Airtm is a traditional e-wallet, much like PayPal or Skrill. People can get an Airtm account after going through a know-your-customer process, submitting ID and such. Having been approved, they can then transfer funds between their bank account or other wallets like Neteller. The money can also be spent using a virtual MasterCard debit card.

The first step in the Venezuelan campaign: move Guaidó's $19 million from his U.S. bank account to Airtm's U.S. bank account so that Airtm could distribute the funds. 

This is an easy step, right? It's just a US-to-US transfer, after all. Guaidó's bank simply initiates a wire transfer via Fedwire, the Federal Reserve's large value payment system, upon which the $19 million arrives in Airtm's U.S. bank account. It shouldn't take more than a few minutes. With that step out of the way, Airtm can now create $19 million in Airtm deposits for distribution to Venezuelan health care workers.

Instead, USDC stablecoins were substituted (either fully or partially) for Fedwire. Guaidó's bank bought $19 million in USDC stablecoin tokens (or maybe just a portion of that), and then sent these tokens to Airtm. Now Airtm could create $19 million in Airtm deposits for distribution.

By inserting itself into the US-leg of a transaction, Circle gets to make the claim that it was part of a stirring effort to bypass "censorship by the Maduro regime." But really, all it did was take the place of a very plain vanilla Federal Reserve transaction, one that never faced any obstacle anyways. The tough part isn't state-side, it's getting the fund to Venezuelans, In effect, USDC's role in this chain of transactions is superfluous (a point that Cas Piancey also makes here). Mind you, it certainly does make for good marketing.

Once Airtm had received the $19 million (via Fedwire or USDC), it could now embark on the tricky Venezuelan leg of the campaign. This involved signing up Venezuelan health care workers for Airtm accounts and then crediting their new account with U.S. dollar balances. (Nope, it didn't credit the workers with USDC. Airtm created internal database entries representing U.S. dollars for distribution to health care workers). From the sounds of it, this process didn't always go smoothly. The Maduro regime blocked Airtm's website, which meant that Venezuelans would have to use a VPN to connect. After talking to a number of medical workers, José Rafael Peña Gholam described the payouts as "somewhat chaotic."

I suspect this is why PayPal, which has much wider usage in Venezuela, probably opted out of the airdrop and let Airtm conduct it. PayPal didn't want to put its existing business at risk of being sanctioned or blocked by the Maduro government.  

If Airtm is to be the deployment vehicle for future Guaidó airdrops, it will have to refine its process. This isn't Airtm's first attempt to airdrop funds into Venezuela. Leigh Cuen chronicled an earlier attempt by Airtm to airdrop cryptocurrencies to Venezuelans for charity purposes. Only 57% of recipients ever engaged with the funds.

Now for my second criticism. The Circle press release describes Airtm's U.S. dollar accounts, or AirUSD, as a stablecoin-backed dollar token. And thus it can boldly claim that thanks to the combination of AirUSD and USDC, the world has just witnessed a "global first with use of stablecoins for foreign aid."

But Airtm's so-called stablecoins are not stablecoins. That is, U.S. dollars held at Airtm are not U.S. dollars held on a blockchain. Rather, they are very much like U.S. dollars held at PayPal or Skrill or Neteller. You know, good ol' fashioned centralized money. So for each Venezuelan that did succeed in connecting to Airtm to claim their dollars, they were getting non-blockchainy stuff.

So much for a "historic moment" in which "economic and political leaders have turned to stablecoins." USDC played a bit role, and AirUSD aren't stablecoins. 

That being said, stablecoins like USDC could be part of future relief programs. We'll have to see. One problem with using stablecoins for these sorts of airdrops is the massive customer due diligence requirements. The airdrop required vetting 60,000 Venezuelans to determine that each one was indeed who they claimed to be. But compared to e-wallets like PayPal and Airtm, stablecoins issuers have incredibly lax know-your-customer standards. Circle probably just doesn't have the staff to pull a carefully targeted airdrop off.

For now, no payments product has been more helpful for Venezuelans than classic U.S. paper dollars. So much U.S. currency has flooded into the country that it has effectively dollarized. An honourable mention goes to Arizona-based Zelle, a network that allows for instant transfers between U.S. bank accounts. Venezuelan retailers have adopted Zelle as an electronic payments method, although this surely goes against Zelle's terms of service:

I've written about Zelle usage in Venezuela before. Just as there is nothing blockchainy about paper dollars, there is nothing blockchainy about Zelle either.

Thursday, November 19, 2020

Programmable money isn't new, we've had it for ages

I often hear that modern money just isn't up to snuff because it isn't programmable. That's why we need Ethereum, stablecoins, and other exotica like central bank digital currencies. These platforms will provide the world with much needed programmability.

Stablecoin issuer Circle is one of the bigger marketers of this idea, but it's far from being the only one: 

"While value exchange may be the initial killer app, it’s the programmability of digital money that will ultimately usher in business model breakthroughs." [link]

I disagree. We've had programmable money for ages. Let me offer a quick guide.

Microsoft doesn't have a bunch of employees who sit at desks and manually sign paper checks all day. No, it uses software that automates payments to its tens of thousands of suppliers, employees, contractors, investors, and the tax authorities. Every day this software relays payment instructions to the Federal Reserve's clearing house for processing. The Fed doesn't rely on physical labour either. FedACH, as it is known, is an automated clearing house. It uses software to automatically clear all incoming payments.

By the way, ACH go back to the 1970s. If Microsoft's software-based payments and FedACH aren't programmability, I don't know what is.

Another example of programmable money is the recent Korean COVID-19 stimulus payments. Koreans had the choice to receive either a prepaid debit card, credit card points, or gift cards. Since the idea was to help local businesses, the prepaid cards and card points were programmed with certain limitations. To begin with, the funds expired by August 2020 in order to discourage hoarding. Secondly, money could only be spent at qualifying shops. That meant no online shopping, no purchases at large-scale supermarkets or entertainment places, and the money had to be spent in the district where the recipient lived.

Programming COVID relief didn't require anything fancy like Ethereum or stablecoins. The card networks make it easy to do this sort of thing.

We scan see another example of card programmability in Australia with its controversial cashless welfare card (or "Indue" card), currently in pilot mode. Once government benefits are deposited onto the Indue Visa debit card, the money is "quarantined" such that it can't be withdrawn as cash from automatic teller machines or used to shop at merchants that sell restricted items like alcohol, tobacco or gambling products. The idea, presumably, is that low-income people can’t control their spending, and thus their money has to be programmed to overcome their shortcomings.

Source: The Gaurdian

Again, this didn’t require Ethereum or stablecoins or a Australian digital currency.

Automated escrow is another example of programmable money. Using Ethereum’s programming language, Solidity, one can create an escrow contract that locks up some Ether until certain conditions are met and a payout is made. But Ethereum isn't the only platform that can do automated escrow., for instance, lets users code up escrow arrangements using its application programming interfaces, or APIs. stores the dollars and then automatically pays out once an event has been triggered, say a used car inspection has been passed. 

No fancy blockchains here.

Speaking of APIs, the Europeans are probably the leaders in bank account programmability. Thanks to the Second Payment Services Directive, or PSD2, European banks are now obligated to grant fintechs access to customer accounts via APIs. (Some people refer to this as “Open Banking.”)  This provides fintechs not only with the ability to peer into what those bank accounts hold, but also the ability to program those accounts to make transfers and such. And thus they can provide the public with new financial tools, built on top of banks.

Monzo, a UK-based digital bank, provides a taste of what this sort of programmability might offer. In 2018, it introduced functionality that allowed its customers to connect their bank account to a range of other web services and create automated rules or ‘recipes’. Such recipes could allow customers to use data from, say, a weather application to trigger a change in their Monzo account, say to move money to a savings pot.

Even my plain vanilla Canadian bank account grants me some basic programmability. I can set up my Tangerine bank account to pull money from my Royal Bank account, and choose how often this will happen (daily, weekly, monthly), and select how long these periodic transfers are to last. Sure, it's limited. There are no if-than statements. But most regular folks probably don't require much programmability. And banks may not be too keen to provide it to us anyways. We'd probably mess it up, and then they'd have to spend time and money cleaning up our mistakes.

So to repeat, programmability is already here. Has been for a while.

If anything, public blockchains like Ethereum offer a different sort of programmability. Rather than the code being hosted by a commercial or government entity, it is hosted on a neutral, decentralized platform. 

There is a niche for this sort of programmability. Jack may not trust the automation provided by a payments company or a central bank utility. He could be cut off, say because they deem him to be a risky customer, or maybe because he is doing illegal things. But Ethereum isn’t controlled by anyone, so Jack can be sure that the automation provided by Ethereum won’t suddenly stop.

P.S.: Antony Lewis has also been thinking on this topic. Head on over.

Tuesday, November 10, 2020

Why are so many Americans content to be unbanked?


Here's a surprising statistic: 5.4% of American households didn't have a bank account in 2019. That's 7.1 million households. Oddly, unbanked households seem fine with this state of affairs. More than 56% of unbanked households say they are "not at all interested" in owning a bank account.  

For us non-Americans looking in, these numbers are very strange. I live in Canada, and bank accounts are pretty much universal here. If you don't have one, you'd probably be quite interested in getting one. Ditto for other developed nations such as Australia, Japan, Sweden, France, and Germany. The banked rate in these countries lies between 99%-100%, much higher than the U.S.'s 94.4%.

In this post I want to try and figure out why there are so many U.S. households without bank accounts, and why so many of them seem uninterested in having one. Lucky for us, the Federal Deposit Insurance Corporation's (FDIC) biannual national survey of bank account usage provides a ton of data on the topic.

Two major reasons for being unbanked

According to FDIC, the most popular reason cited by unbanked households for not having a bank account is don't have enough money to meet minimum balance requirements. 48.9% of all unbanked respondents chose this option. What this indicates is that banks are setting standards that many Americans simply cannot meet, particularly poor households (FDIC data shows that 23.3% of families with income below $15,000 are unbanked compared to an American average of 5.4%). Perhaps the unbanked are "not at all interested" in getting an account because they're tired of being rebuffed.

The second most popular reason that the unbanked give for not having a bank account is don't trust banks at 36.3%. The 2019 survey doesn't provide much colour on what this means. Do unbanked households not trust banks because of surprise fees? Are there cultural explanations?

Why Americans don't trust banks

Luckily, there is a bit more detail on trust in FDIC's 2011 survey. When FDIC statisticians queried those who said they didn't trust banks for follow up reasons, 60% said that they simply didn't trust banks, 20% said banks do not feel welcoming, and another 4% said there were language barriers. This clarifies things a bit, but again the vague notion of trust dominates.

In 2016 FDIC conducted a series of interviews with bank, nonprofits, counselors and consumers in an effort to better understand the lack of trust among the unbanked. Describing the barriers to trust, a bank executive mentioned "a narrative that is built up within [their] mind." Another executive listed a reputation for "trying to pull one on over me." One counselor brought up "uncertainty about the security of funds" and another said "they’re often paranoid about [banks] ... They just think that the bank is a bad institution, and they want to stay away from it... Often, it’s just a lack of knowledge or just like they don’t understand it, so they just stay away."

This last comment is especially interesting. Do people not trust banks for the same reason that they don't trust vaccines, the veracity of the moon landing, or accounts of Elvis's death? Banking, after all, is complex. It's a bit of a black box. And so the public writes its own mythologies about banks. It may be that some of these mythologies prevent people from getting a bank account.

Don't trust vaccines, don't trust banks

For the rest of this post, let's assume that there is a large portion of the population that is unbanked for economic reasons, and another portion that is unbanked for mythological reasons. As banks get better at serving people and the economy improves, the population that is unbanked for economic reasons should contract. But we'd expect the population that is unbanked out of superstition to remain stable over time. Bank haters are always going to hate, even if the economy perks up.

Does FDIC data confirm this hypothesis?

I think it does. The U.S. economy has steadily improved since 2011. At the same time, banks are getting more accessible. According to Bankrate, a company that gathers data about consumer finance products, minimum balance requirements on checking accounts are at six-year lows. Half of all checking accounts are considered free, the highest percentage since 2010. 

And so we'd expect many who were unbanked due to concerns over minimum balance requirements to now have bank accounts. And that is what has happened. Since 2013, the proportion of unbanked households reporting that they are unbanked because of minimum balance-related problems has fallen, as indicated in the chart below. Meanwhile, the proportion who are unbanked because they don't trust banks has risen.

We'd expect bank account openings to be especially marked among poor Americans, since they are more likely to be constrained by minimum balance requirements than middle-class Americans. And that's what FDIC data shows. The unbanked rate for those with less than $15,000 in annual income has improved from 28.2% in 2011 to 23.3% in 2019. The unbanked rates of other vulnerable demographics have improved as well:

However, the unbanked rate for households that earn $30,000 to $50,000 has hardly budged (see chart below). It was 4.9% in 2011. In 2019 it was 4.6%. (That's around 1.1 million households in the $30k-$50k bracket that don't have account!) This same invariance over time characterizes households in the $50,000-$75,000 income bracket. Around 1.7% of American households in this category don't have a bank account, the same level as 2013.

What explains the historical stability of unbanked rates among the richer unbanked? Given higher incomes, concerns about minimum account balance requirements may be less important than concerns about trust. And thus the unbanked rate among these groups is unlikely to be affected by improvements in the broader economy.

America's terminally large population of unbanked

Perhaps one day all American households that were unbanked for economic reasons will have bank accounts. The only remaining unbanked would be those households who are philosophically unbanked. Subsequent improvements in the economy or bank accessibility would have no affect on their banking decisions. 

How big might this core group of bank skeptics be?

Say that bank skepticism lies in the same bucket as Elvis belief and moon landing conspiracies. We know that belief in conspiracy theories is not equally distributed across income groups. Low-income people are more likely to believe that there is some evil actor pulling on the strings, and so they may be more prone to be bank skeptics. We already know that the unbanked rate among households who make $30,000 to $50,000 has stabilized at around 5%. It hovers around 1.5 to 2% among households making $50,000 to $75,000. For those earning less than $15,000, will the unbanked rate eventually stabilize at 7.5%? 10%?

So while America's overall banked rate will continue to improve from 94.4%, there may be a good chance that it peaks-out at some permanent plateau significantly below 100%. In Canada the banked rate lies somewhere between 99% and 100%. I'd guess that the US peaks below that, say at 97% or 98%. Canadians like a good conspiracy theory, but we are much less conspiracy theory-prone than Americans. If a culture of anti-bank mythologizing draws from the same source as conspiracy theorizing, we can assume that Americans are more likely to be prone to bank skepticism than Canadians.      

What does all this have to say about policy surrounding the unbanked? 

Postal banking vs Walmart cards vs FedAccounts

The plight of the unbanked has been used to justify all sorts of government fixes: a Federal Reserve-issued digital currency, FedAccounts, postal banking, a USPS prepaid card, and a public Venmo. At the core of all these projects is the idea that unbanked Americans are unbanked because of excessive fees and high minimum account balance requirements. And that theory may be right, to a degree.

But none of these projects tries to account for people who may be unbanked for the same reason they don't want to be vaccinated, or because they believe in QAnon. One of the motivating ideas behind FedAccounts, for instance, is to have the Federal Reserve provide a public option for the unbanked. But it could be that folks who are philosophically opposed to banks will also be intolerant of an account at the FED. God know the U.S. is rife with central banking conspiracy theories.

This may be one reason why places like Walmart are the best option for reaching the unbanked. Walmart isn't a bank, so it can attract bank skeptics. And it has the financial heft to offer those on a low income a set of well-priced banking products via its Walmart MoneyCenters (which offer check cashing, bill pay, and money orders) and its prepaid debit card, the MoneyCard. Many of the 5.4% of the population that FDIC categorizes as unbanked are happily getting financial services at Walmart. They aren't really unbanked; they are differently banked.

If not the Fed, perhaps the United States Postal Office is the right institution for reaching the philosophically unbanked. The USPS is not a bank. And according to Morning Consult, the post office is the most trusted brand in America. When asked how much do you trust each brand to do what is right? 42% of Americans responded that they trusted the USPS "a lot." And so people who bristle at the idea of keeping a Chase debit card in their wallet may very well be proud owners of a USPS card.

P.S.: In a recent article for AIER Sound Money Project, I wrote about postal banking. But rather than advocating branch banking I suggested a USPS prepaid debit card/mobile app. Branch banking is in long-term decline. Below is a chart showing how branch visits have fallen across all demographics from 2017 to 2019:

Much of this decline in branch visits is due to the huge popularity of mobile banking. Keep in mind, however, that low income people are more likely to rely on branch visits for their primary method of accessing bank services than high income people, as the chart below illustrates:

Even so, I question the wisdom of investing billions of dollars to convert 30,000+ USPS branches into full service banks when a single digital bank with an app & debit card will do. Yes, USPS branch banks would have been useful in 2017 or 2019, especially for low-income people and the elderly. But branch banking is a long-term investment, one with a payback period measured in decades. And I suspect that by 2025 or 2027 it will be uncommon for people of all income groups to visit their branch for teller services.