Wednesday, January 31, 2024

What does the recent ruling on the Emergencies Act mean for your banking rights?

A Federal judge ruled last week that the emergency banking measures taken to end the Ottawa convoy protest in 2022 contravened the protestor's rights. In this post I want to provide my reading of this particular ruling and what is at stake for Canadians and their bank accounts. 

To be clear, Justice Mosley's ruling touched on far more than the banking measures, and extended to the broader legality of the government's invocation of the Emergencies Act on February 14, 2022, subsequently revoked on February 23. However, since this is a blog on money, I'm going to limit my focus to the banking bits of the court ruling.

(By the way, I've written about emergency banking measures a few times before.)

To remind you, there were two emergency banking measures enacted in February 2022 that affected regular Canadians. The most well-known measure was the freezing of bank accounts. The RCMP collected the names of protestors, and forwarded these to banks and credit unions, which used this information to locate protestors' accounts and immobilize their funds. In the end, 280 bank accounts were frozen.

The second and less well-known banking measure was the requirement that banks share protestors' personal banking information with the RCMP and the Canadian Security Intelligence Service (CSIS), including how much money the protestor had in their account and what sorts of transactions they made.

Justice Mosley has ruled that these banking measures  both the freezing and the sharing  violated the Canadian Charter of Rights and Freedoms. Specifically, they contravened Section 8 of the Charter, which specifies that everyone has the "right to be secure against unreasonable search or seizure."

The best way to think about Section 8 is that all Canadians have privacy rights. These rights cannot be trodden on by the government. The police can't conduct unjustified personal searches of your body or home, say by snooping on your credit card transactions. Nor can they seize your bank statements or your computer in order to gather potentially incriminating information on you.

This doesn't mean that a Canadian can never be subject to searches and seizures. Section 8 doesn't apply when the person who is subject to a search or seizure has no privacy rights to be violated. So for example, if I leave my old bank statements in the trash on the curb, it's likely that I've forfeited my privacy rights to them, and the police can seize and search them without violating Section 8 of the Charter.

An interesting side point here is that Canadians don't forfeit their privacy rights by giving up their personal information to third-parties, like banks. We have a reasonable expectation of privacy with respect to the information we give to our bank, and thus our bank account information is afforded a degree of protection under Section 8 of the Charter.

My American readers may find this latter feature odd, given that U.S. law stipulates the opposite, that Americans have no reasonable expectation of privacy in the information they provide to third parties, including banks, and thus one's personal bank account information isn't extended the U.S. Constitution's search and seizure protections. This is known as the third-party doctrine, and it doesn't extend north of the border.

Canadians can also be lawfully subject to searches and seizure by the police if these actions are reasonable, as stipulated in Section 8 of the Charter. There are a number of criteria for establishing reasonableness, including that a search or seizure needs to be authorized by law, say by a judge granting a warrant. In addition, the law authorizing the warrant has to be a good one. (Here is a simple explainer.)

Before we dive into why Justice Mosley ruled that the government's bank account freezes and information sharing scheme violated Canadians' rights, we need to understand the government's side of argument.

On the eve of invoking the emergency measures, Prime Minister Justin Trudeau promised that the government was "not suspending fundamental rights or overriding the Charter of Rights and Freedoms." He reiterated this a week later after the Emergencies Act had been revoked:

But what about the legal specifics of the banking measures? Were they compliant with the Charter, and how? Government lawyers argued from the outset that the requirement for banks to share personal banking information with the RCMP and CSIS did not violate Section 8 of the Charter. While the sharing order constituted a search under Section 8, it was a reasonable search, they said, and reasonable search is legitimate.

As for the freezes, and here things get more complicated, the government maintained that they did not constitute seizures at all, and thus weren't protected under Section 8. The government begins with a literal argument. The funds in the 280 frozen bank accounts were not taken or seized; rather, banks were simply asked to "cease dealing" with some of their customers in such a way that these customers never lost ownership of their funds. This was a mere freeze, the government claims, rather than a harsher sort of government "taking" of funds , say like a Mareva injunction, warrant of seizure, or restraint order, all of which are seizures under Section 8 of the Charter.

As back up, the government offered a more technical argument. According to Canadian legal precedent, it is only certain types of government searches and seizures that trigger Section 8 protections. These are laid out in a case called Laroche v Quebec (Attorney General). Specifically, only those seizures occurring in the process of an investigation and prosecution of a criminal offence are protected. The government maintains that the freezes it placed in February 2022 were not related to a criminal offence  they were merely designed to "discourage" participation in the protest  and so they were not the sorts of seizures protected by the Charter. (The government's full argument that it laid out for Justice Mosley here.)

The invocation of the Emergencies Act required the independent inquiry be launched, the results of which were released in February 2023. The commissioner of that inquiry, Justice Rouleau, ended up siding with the government's assessment of the legality of the bank account freezes. The freezing of accounts was "not an infringement" of section 8 of the Charter, wrote Rouleau, because they were not a seizure.

Here I'm going to briefly inject my own personal thoughts as a citizen blogger.

Look, I think it's a good thing that the government has various financial buttons at its disposal that it can press to lock or restrict my funds, like restraint orders. But I also think its a good thing that these buttons are subject to certain controls, one of which is that they must respect my basic rights, even in an emergency situation. I find it somewhat worrying that in this particular case the government seems to be arguing that it has at its disposal a new type of "immobilize funds" button that is completely exempt from charter oversight due to the fact that it, somewhat arbitrarily, escapes definition as a seizure. This seems like a distinction without a difference to me.
Disagreeing with both Justice Rouleau and the government's logic, Justice Mosley in his judicial review ends up siding with the counter-arguments deployed by two civil liberties organizations that opposed the government in the case. (Their respective arguments are laid out here and here).

First, regarding the sharing of information with the RCMP and CSIS, Mosley rules this constituted a search covered by Section 8. Contra the government, these searches were not reasonable, and thus they violated the protestors' Charter rights.

While the government had argued that the searches were reasonable due to their limited duration and targeted focus, the judge finds that they lacked an "objective standard." Banks only needed a "reason to believe" that they had the property of a protestor before reporting the information to the RCMP or CSIS, but according to Mosley this criteria was too wide and ad hoc to qualify as reasonable. Would a hunch or a rumour qualify as a "reason to believe"? Perhaps.

The searches were also unreasonable, according to Justice Mosley, because they had none of the other well-defined standards for reasonable search, including a lack of prior authorization for each search by a neutral third party like a judge. In February 2022 it was bankers, not judges, that carried out the searches, assembly line-like.   

As for the freezes, Justice Mosley disagrees with the government's arguments, finding that the freezing of bank accounts did indeed constitute a seizure of the sort protected by Section 8. Adopting the viewpoint of a regular Canadian, he first argues that a "bank account being unavailable to the owner of the said account would be understood by most members of the public to be a 'seizure'."

Mosley proposes an alternative opinion that it was the forced disclosure of the financial information by banks to the RCMP and CSIS that constituted a seizure. In this reading, what was being seized was personal payments and ownership data. The protestors had a "strong expectation of privacy" in these financial records, and thus Section 8 is applicable.

So to sum up, a Federal court has deemed that the bank accounts freezes placed on protestors in February 2022 were indeed seizures, and not some other strange sort of freeze-not-a-seizure, and therefore they were subject to the Charter. As for the searches, they were unreasonable (as were the seizures). The government will be appealing to the Federal Court of Appeal, so these arguments will be re-litigated. Stay tuned.

My take is that Justice Mosley's rulings are reasonable and helpful guidelines for future governments seeking to levy banking measures in subsequent emergencies. The ruling doesn't expressly ban the levying of bank freezes, and that's probably a good thing. Let's not forget that the requirement for banks to cease dealings with protestors, albeit illegal in this particular case as per Justice Mosley, was a fairly effective measure. The threat of having their money immobilized helped get the protestors to leave, right? And not a single person was injured. Think of bank account freezes as the domestic version of foreign sanctions, a way to bloodlessly defuse an emergency situation and avoid sending in the more deadly cavalry. This seems like a good tool, no?

The catch, as Mosley suggests, is that the government needs to tighten up the the process of freezing bank accounts come next emergency so that they are constitutional. How tight? One might argue that the standard for freezes shouldn't be as high as a regular restraint order on funds during a non-emergency. On the other hand, freezes shouldn't become some sort of dark tool for circumventing the Charter.

Wednesday, January 24, 2024

Do bitcoin ETFs conflict with bitcoin's original ethos?

Some folks are suggesting that a bitcoin ETF is absurd because it doesn't fit with Bitcoin's original ethos. On the contrary, I think it's a nice snug fit.

It would be a misunderstanding of bitcoin's history to assume that it was the idealism of cypherpunk-ism that gave birth to the Bitcoin movement. Bitcoin would never have got off the ground without a massive amount of old fashioned greed. In bitcoin-speak, this greed usually goes by the term number-go-up, and it was crucial from the start. The new bitcoin ETFs are certainly not cypherpunk, but they are very much in the founding spirit of number-go-up.

One of the main goals of the 1990s cypherpunks, if you recall, was to create anonymous digital cash. And while bitcoin certainly has some roots in cypherpunk ideals, the ethos of number-go-up clashes with the dream of digital cash: after all, an asset with a volatile price makes for an awful medium of exchange. Before long, number-go-up had drowned out the cypherpunks.

I recall walking into Montreal's Bitcoin Embassy in 2014, which was located on the busy intersection of St-Laurent and Prince-Arthur. I had already been researching and writing about bitcoin for a few years, but decided to play it dumb to see how the folks at the Embassy would approach the task of teaching a newbie about bitcoin. Instead of preaching to me about how to make a bitcoin payment from my own self-custody wallet, the ambassador walked me over to a large screen showing bitcoin's price. "Look, it's rising," he said in awe.

That, in short, sums up bitcoinism. Like 1980s televangelism with its gold-plated cowboy boots, mansions, private jets, and a dose of God on the side, bitcoin is all about the price chart with a small helping of cypherpunk ideology.

Number-go-up has always required getting ever more people into the game. Bitcoin, after all, is itself sterile. Unlike a publicly-traded business, it doesn't generate a stream of improving profits, so the only way for its price to keep rising is to recruit more players, much like a pyramid or a chain letter. From the early days, getting access to traditional financial and banking infrastructure has been crucial to making this recruitment process go as smoothly as possible.

Docking bitcoin to the existing financial edifice began in 2010 with the first bitcoin exchanges, which hooked into the crucial global bank wire systems like SWIFT, as well as local wire systems like the Federal Reserve's Fedwire system and Europe's SEPA system. These integrations were key to pumping the initial rounds of money into the game, and pushing the number above $1, and then $10, $100, and $1000.

Later on, bridges to the Visa/MasterCard debit card and credit card networks brought an even tighter fusion between bitcoin and the regular world, more inflows, and more number-go-up. The addition of bitcoin purchases to mobile payment apps like PayPal and Cash App came after. Viewed in this context, ETFs are nothing new, really; they only represent the next coupling between the two worlds.

As for regular old finance, it isn't complaining. The task of players like Visa is to generate profits  they want nothing more than to add new products like bitcoin to the list of products they already connect. The curious result is that no chain-letter style product has ever gone as mainstream as bitcoin has.

Now that bitcoin ETFs exist, number-go-up demands even more linkages to traditional finance and banking. What's next? One possibility: expect the bitcoin community to lobby for federally-chartered banks to be allowed to offer bitcoin products alongside savings deposits and retirement accounts. Banks offering bitcoin to their retail client base may seem inconsistent with bitcoin's more cypherpunk-y dreams of replacing the banking system, but on the contrary: its hard to imagine a more fantastic recruitment tool for number-go-up.

Monday, January 8, 2024

It's time to impose Iran-calibre sanctions on Russia

Russia is sometimes described as the world's most sanctioned nation. And while that's true, the long list of sanctions that the G7 coalition has placed on Russia in response to its attack on Ukraine are surprisingly light compared to the fewer but far more-draconian sanctions placed on Iran over the last decade or so.

This ordering of sanctions precedence is a mistake. With its all-out invasion of Ukraine, Russia has moved past Iran into top slot at world's most dangerous nation. Vladimir Putin merits a sanctions program that is at least as onerous as Iran, if not more so, yet for some reason he is getting off lightly. It's time to apply Iran-calibre sanctions to Russia.

What makes a draconian sanctions program draconian?

What makes the Iranian sanctions program so draconian is that many of the sanctions are so-called secondary sanctions, a feature that has been mostly absent in the Russian sanctions program.

When the U.S. or EU levy primary sanctions on an entity, they are saying that American individuals, banks, and businesses (and European ones, too) can't continue to interact with the designated party. This hurts the target, but it leaves foreign individuals, banks, and businesses with free reign to fill the void left by departing American and European actors, thus undoing part of the damage.

Secondary sanctions prevent this vacuum from being occupied. The U.S. government tells individuals or businesses in other nations that they, too, cannot deal with a sanctioned entity, on pain of losing access to U.S. economy. It's either us, or them.

When applied to foreign financial institutions (i.e. banks) secondary sanctions are particularly potent. The U.S. tells foreign banks that if they continue to provide banking services to sanctioned Iranians, the banks' access to the all-important U.S. financial system will end. Since the U.S. financial system is so crucial, foreign banks quickly offboard all sanctioned Iranian individuals and businesses. The sanctioned Iranian entity finds that it has now been completely removed them from the global financial system. This financial shunning effect is much more powerful than the effects created by primary sanctions or secondary sanctions on non-banks.

Notice that I've limited my commentary on secondary sanctions to the U.S. Since it first began to use secondary sanctions in 1996, the U.S. Treasury has become a master of the art, whereas as far as I know they are a tool the EU has long resisted adopting.

The bank-focused secondary sanction placed on Iran over the last decade-and-a-half have been particularly devastating because they target a broad sector of Iranian society, most crucially the Iranian oil sector, the life blood of Iran's economy. Secondary sanctions prevent foreign banks from processing Iranian oil trades on pain of losing access to the U.S., and so most foreign banks have chosen to cease interacting with the Iranian oil companies.

The chart below illustrates the effectiveness of this approach. When President Obama placed the first round of bank-focused secondary sanctions on Iran's oil industry in 2012, the nation's oil exports immediately cratered from around 2 million barrels per day to 1 million barrels. When he removed them in 2016, they quickly rose back up. And when Trump reapplied the same secondary sanctions in 2018, they collapsed once again, almost to zero.

Source: CRS [pdf]

In short, U.S. secondary sanctions imposed huge body blows on the Iranian oil industry. These same forces have not been brought to bear on Russia's oil industry.

A dovish Russian sanctions program

While the Russian sanctions program is often portrayed as being strict, it is far lighter than other sanctions programs, including the one placed on Iran, because it is comprised almost entirely of primary sanctions. (For a good take on this, see Esfandyar Batmanghelidj here). While a small list of secondary sanctions have been placed on Russia, for the most part they have not been of the banking type.*

The second reason why the Russian sanctions program is dovish is that the oil component of the EU and U.S. sanctions campaign has been particularly lenient. Take a look at the above chart of Iran oil exports and you can see very real evidence of damage from sanctions. Scan the chart of Russian oil exports below, however, and it suggests business as usual.

Source: CREA

Sure, the EU and other coalition partners have cut Russian oil imports to almost nil, and that's great. But overall, this effort hasn't done much harm to Putin, since over time the coalition's respective share of Iranian oil exports has simply been taken up by nations like India and China. Both before and after the 2022 invasion of Ukraine, Russia reliably shipped around 1,000 kt/day of crude oil and crude oil products.

Underlying this leniency, G7 businesses are still allowed to engage in the Russian oil trade, as long as this doesn't involve bringing the stuff back to the EU. For instance, foreign buyers of Russian oil (say like Indian refiners) are allowed to hire European insurers and shipping companies to import Russian oil.

There is a limitation on this. European insurers and shippers can only be used by an Indian refiner, or some other foreign buyer, if the purchase price of Russian oil is set at $60 or below. This is what is known as the G7 oil price cap.

Because the insurance and shipping industries of the UK, EU, and U.S. have a large share of the market, Russia has had little choice but to rely on coalition intermediaries for selling at least some of its oil at $60. This has come at a cost to Russia; it must sell at below-market prices. And that certainly makes Russia worse off than a world in which there was no oil price cap.

But the very fact that these purchases are occurring at all, compared to a world in which Iran-calibre sanctions would prevent them from ever taking place, illustrates how weak the oil price cap is. 

Russia's oil export income is the life-blood of Putin's war economy. These funds gets funneled directly to the front-line in the form of weapons and supplies. It's time to get serious about Russian sanctions, remove the dovish oil price cap, and apply to Russia the same calibre of secondary sanctions that so effectively crimped Iranian oil exports.

We may have to deescalate sanctions on Iran in order to escalate them on Russia

What has prevented the U.S. and its allies from applying draconian Iran-style sanctions to Russia? One of their main worries is that taking a major oil exporter out of the market will have major macroeconomic impact. 

Russia currently exports around 4 million barrels of crude oil per day, as well as a large amount of refined products such as gasoline. Assuming that half of this were to be removed by secondary sanctions, world oil prices would probably rise. Voters in the EU and US would get angry. Neutral countries dependent on oil imports  China, India, Brazil  would push back against the colation, because they'd have to scramble to replace a major supplier. Secondary sanctions aren't just a nuisance for these neutral parties. Due to their extraterritorial  nature, secondary sanctions impinge on the sovereignty of neutral nations. This creates hostility, understandably so, the negative blowback eventually flowing back to the U.S.

So if the EU, U.S. and the rest of the coalition are going to get serious about sanctioning the Russia's oil industry, and thus removing a few million barrels of oil per day from the world market, they may need to counterbalance that in order to soften the blow. One way to do so would be to free up more Iranian oil exports, which means softening the sanctions on Iran.

That doesn't mean not applying sanctions to Iran. A version of the $60 price cap on Iranian oil probably makes a lot of sense. However, a fully armed financial battleship  i.e. bank-focused secondary sanctions directed at a major crude oil exporter's oil industry  may be something that has to be reserved for one country only: Russia.

Now, I could be wrong about the world being unable to bear draconian sanctions on two major oil exporters. Maybe I'm creating a false dichotomy, and in actuality the choice is less stark and the coalition can actually apply draconian oil sanctions on both Iran and Russia. If so, I stand corrected.

Either way, Russia's oil industry has skated through the invasion and resulting sanctions remarkably unscathed, as the Iranian counterexample illustrates. It's time to cut off Russia's main source of revenues by putting the same set of secondary sanctions that Iran has faced on Russia's oil patch. 

* There are a few bank-focused secondary sanctions placed on Russia. Notably, Section 226 of CAATSA (2017) requires foreign financial institutions, or FFIs, to avoid certain sanctioned Russians or sectors on pain of losing access to the U.S. banking system. (See here, for example.) However, the U.S. must not be enforcing Section 226 very tightly because I haven't found a single case of a bank being punished under 226.

This December, another round of secondary sanctions was imposed on FFIs. Any foreign bank that facilitates transactions involving Russia’s military-industrial base may be cut off from the U.S. financial system. Additionally, any bank that conducts transactions for specially designated nationals who operate in Russia's technology, defense and related materiel, construction, aerospace or manufacturing sectors may face punishment. Note that both rounds of secondary sanctions leave the Russian oil industry untouched.