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.

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.

How my views on financial privacy have evolved over a decade

I began exploring the topic of financial privacy and payment anonymity in the early days of this blog. Over the past decade, my views have shifted significantly—here's how and why.

Rereading my earliest mentions of financial privacy, they now seem a bit... idealistic? extreme? For instance, in my 2014 post entitled Fedcoin, a central-bank issued digital currency, I suggested that the product should be 100% anonymous, like coins and banknotes.

Criminals would undoubtedly exploit unlimited anonymous digital currency, as I acknowledged in a 2018 article entitled Anonymous digital cash. But I figured that the bad guys would find their own ways to transact anyways, say through their own mafia-created payments system, so central banks may as well go forward with anonymous digital currency, the benefits to civil society of unlimited e-cash ultimately outweighing the cost.

I wouldn't support these same ideas today, or would at least modify them, as I'll show further down.

But idealistic and extreme aren't quite the right words. I think that I was right, at least when looking at things from a certain vantage point, but it was still early in my blogging career and I hadn't yet explored other vantage points

To be clear, financial privacy, or the ability to make transactions anonymously or near-anonymously, isn't just something that criminals require. It's crucial for regular folks, too, and in my earlier blog posts I spent a lot of time detailing why this is so. After a cashier dropped my card behind the counter (and potentially skimmed it?), I wrote that cash provides buyers with a "shield from everyone else involved in a transaction" in my 2016 post In praise of anonymous money. And I still agree with that, and to this day always pay with cash when the store I'm at feels a bit sketchy. I worry that this shield will disappear as cash usage continues to decline.

Civil society's need for private transactions isn't just a weird fringe view. In a 2018 entitled Money is privacy, I described the work being done on privacy and payments by Federal Reserve researchers Charles Kahn, James McAndrews, and William Roberds. Licit transactions can unintentionally evolve into a long-term relationship, they write, including clawbacks, extraterritorial rulings, and new forms of product liability. To boot, personal information linked to digital transactions can be stolen in data breaches.
 
According to the three Fed researchers, the ability to transact anonymously converts a potentially thorny transaction into a one-and-done relationship. Licit payments that might have otherwise been deemed too dangerous can proceed, the extra trade making the world better off. (See also my 2020 article Central banks are privacy providers of last resort.)

As for crypto, I've described blockchains as dystopian hellscapes or panopticons, because every single transaction is mapped out for all to see. That makes blockchains just awful places to carry out conventional business. Firms require a degree of secrecy in order to hide their corporate strategies and tactics from competitors—but the medium doesn't permit secrets. Blockchains need more privacy. (See my 2022 post DeFi needs more secrecy, but not too much secrecy, and the right sort of secrecy). 

So what changed?

Starting in 2018, I focused more on studying fraud, including ransomware, tax evasion, and gift card schemes. I found gift card fraud particularly intriguing: semi-anonymous payment systems linked to Google Play and Apple iTunes have enabled an entire industry of scammers, including IRS and tech support fraudsters, to launder stolen funds. Network operators like Google and Apple, as well as major retailers such as Target and Walmart, quietly profit from all of this fraud. (See Gift Cards: When Good Products Do Bad Things [2021] and In-game virtual items as a form of criminal money [2019].)

Which led me to my next big truth: if privacy is crucial, so is the necessity of criminalizing money laundering.

Money launderers are the financial intermediaries who, knowing full well that a customer's funds are dirty, conduct transactions with them anyways, in a way designed to disguise its source.

The willful laundering of a criminal's money is an extension of the original crime, making a launderer just as morally and ethically culpable as the criminal they are helping. By facilitating the final release of illicit funds, the money launderer enables the crime to fulfill its purpose, completing the damage caused by the initial offense—be it theft, extortion, or human smuggling. This is why the launderer's actions deserve to be criminalized. (See A short and lukewarm defence of anti-money laundering standards from 2021).

The crime of money laundering bears a striking resemblance to the centuries-old crime of fencing—the art of accepting and redistributing stolen property. (See my 2024 post "I didn't launder the cash, your honor. The robot did") In earlier times, thieves were responsible for reselling their stolen goods themselves. However, by the 17th century, this task was often outsourced to specialized intermediaries, or 'fences.' At first, there was no legal term for this crime, but in 1692, England formally criminalized fencing, and deservedly so.

Thinking more about the crime of money laundering led me to become more critical of stablecoins, for instance. From 2014-2018 my articles on stablecoins were mostly neutral or positive, but now my posts focus on the fact that stablecoin issuers, by turning a blind eye to those using their platform, have allowed themselves to become launderers for all types of criminals. (Among others, see my 2019 post From unknown wallet to unknown wallet and my 2023 post Why do sanctioned entities use Tether?)

At this point, you may be able to see my conundrum.    

If, like fencing, money laundering should be criminalized (and indeed it is illegal in most parts of the world), that collides with my prior belief in the importance of financial privacy. After all, the only way for a banker, money transfer agent, or stablecoin issuer to be safe from a money laundering charge is to show that they did a good faith job collecting enough personal information to ensure that they weren't dealing with criminals. And giving up personal information is necessarily privacy-reducing.

One way to resolve my conundrum would have been to pick a side and advocate for it, but I think both sides are important, so I've generally tried to find a compromise. Most of my writing on the topic over the last five or six years has been trying to wrestle with where to draw the line between financial privacy and the crime of money laundering. 

My compromise position has generally advocated a privacy safe harbour for small day-to-day transactions. But anything above a certain monetary ceiling needs to be identified in order to avoid a money laundering charge.

Here are some examples of my often clumsy attempts to balance the two ideals:

• The purchasing power of the $100 note has been eaten away by inflation. Let's improve basic payments anonymity by re-introducing $500 notes, but burden those notes with a tax in order to make up for the benefits accruing to criminals. See my posts A tax, not a ban, on high denomination banknotes and Pricing the anonymity of banknotes from 2018, and Supernotes from 2019.
• If we’re going to issue a central bank digital currency, it shouldn’t be fully anonymous or fully surveilled. Instead, it should provide a limited, rationed degree of anonymity. See The dematerialization of cash (2017) and Anonymity vouchers (2019).
• Below a certain monetary threshold, cash transaction reports (CTRs) and suspicious activity. reports (SARs) needn't be filed, which means small transactions enjoy a degree of privacy. However, these thresholds are not adjusted for inflation. To preserve the small privacy safe harbour, those thresholds should rise over time in-step with the general price level. New financial products should enjoy the same shield. (See my 2020 article Why Aren’t Anti-Money-Laundering Regulations Adjusted for Inflation? and my 2023 posts In praise of anti-money laundering thresholds and Even crypto mixing deserves a threshold).
• While the crypto privacy bot Tornado Cash makes blockchain transactions private, it is also a money laundering machine, a point I made multiple times beginning in 2021 with Tornado Cash and money laundering. The proper way to build a privacy bot is to take a balanced approach that begins with screening out bad actors, and only then provides privacy, thus ensuring that the tool isn't used for laundering money. (I explore this balanced approach in my 2022 post Crypto’s privacy/commingling dilemma , my 2024 post "I didn't launder the cash, your honor. The robot did" and my 2023 article Thoughts on Privacy Pools and the law.)
  

Balancing the two ideals rather than taking an either/or approach has led me to adopt a more comparative approach to thinking about financial privacy. I've begun to analyze cross-country differences in the intensity of financial surveillance as conducted by national financial intelligence units. Canada, for instance, has chosen a balancing point that is far more in favor of financial privacy (and accordingly more accepting of money laundering) than the U.S. has, as illustrated in my 2024 post Your finances are being snooped on. Here's how.

So that's where I've landed after ten years of writing about privacy. Hard-core privacy advocates and civil libertarians would probably describe me as a sell-out or a wishy-washy centrist because I'm willing to compromise on financial privacy. Fair enough. But I do wonder how many privacy advocates would go so far as to call for an all-out decriminalization of money laundering. Doing so would maximize privacy, but surely no privacy advocate thinks that bankers who clean money for the mob should by allowed to walk free. We are probably closer than they think.

I look forward to seeing how my opinions evolve over the next ten years, as I'm sure they will. Thoughts or comments?

Pricing the anonymity of banknotes

Banknotes are useful. Not only do they provide their owner with a standard set of payments services, they also offer financial anonymity. This post introduces the idea of trying to price the anonymity component. 

To help think about why we might want to price anonymous banknote usage, I’m going to make an analogy. Imagine Walmart sells special suits that allow people to become invisible. While most Walmart customers always pay for the goods they find in the aisles, a few try these invisible suits on, grab a bunch of stuff, and sneak out without paying. The product is weaponized and turned against its provider.

This same sort of weaponization characterizes the modern provision of banknotes. The government, like Walmart, provides citizens with a privacy-enhancing product: cash. Because its coins and banknotes don’t leave a paper trail, they act as a financial cloak. In the same way that an invisible suit can be used to evade Walmart’s checkout counter, a government-issued banknote can be turned against its provider by allowing users to avoid paying for the government services they have consumed. 

Walmart may wish to do something about the weaponization of invisible suits, especially if the costs imposed by abusers of suits begin to exceed the amount of income the company gets from buyers of invisible suits. One option Walmart has is to stop selling the product. No one would fault them for putting an end to an unprofitable business line. Invisible-suit aficionados could just shop elsewhere. 

But what if Walmart is society’s only provider of invisibility? This complicates things. While a few bad apples regularly abuse Walmart’s invisible suits by using them to steal, many others use the suits in legitimate ways. So while a decision to stop selling invisible suits might improve Walmart’s finances, it might also make society worse off. 

This same tension crops up in the debate over the future of cash. A ban on cash would help reduce tax evasion and improve government finances. But since banknotes are the only anonymous financial product, and no other entity is permitted to provide banknotes, a ban would put an immediate end to financial privacy. Because privacy is something that regular folks value for licit reasons, their welfare would be reduced.

Say Walmart does the noble thing. It continues to stock invisible suits to meet the public’s demand for privacy. But the company still has costs it must meet, including wages, inventories, and rent, and with a steady loss of payments facilitated by the weaponization of invisible suits, that hurdle becomes much harder to clear. To plug deficits, Walmart may have to ask all its rule-abiding customers to pay a little bit more for their purchases by raising all of prices by a little bit. 

But an across-the-board price increase hardly seems fair. Those abiding by Walmart’s rules are being asked to make up for a shortfall that is entirely the fault of suit-stealing rule breakers. Honest shoppers who don’t generally like to use invisible suits will be particularly furious — and who can blame them? They are being asked to pay more for the goods they hold dear in order to support the use of a single product they never cared for much anyway. 

This same lack of fairness plagues modern tax systems. The government needs to fund (via taxes) the services it provides, but the presence of cash is weaponized against the system by tax cheats. The funding gap that emerges must be made up for by all of the remaining citizens — the non-cheaters. So taxes, or the price of government services, will be higher in the presence of cash than in a world without cash. Non-cheaters, particularly those who don’t use cash, will feel betrayed because they must pay higher taxes to support the ongoing provision of a product they don’t necessarily value. 

Walmart may have a better option. Instead of increasing the price of all goods to make up for the behavior of a few invisible-suit users, it can just raise the price of suits high enough to make up for the shortfall. So customers who like invisibility end up bearing the costs imposed by thieves who weaponize suits. This targeted approach seems like a fairer path for Walmart to take. It releases a large chunk of its customer base from the obligation of offsetting the invisibility-induced shortfall while still giving those who value the privacy provided by invisible suits the option of buying them.

If setting a higher price for invisibility is the best option for Walmart, what about modern banknote-providing governments? In the same way that Walmart increases the price of invisible suits to offset the shortfall created by those who weaponize them, a government can introduce a levy on cash users. Rather than placing this levy on all banknote denominations, it might target high-denomination banknotes instead. The idea is that bulky $1s and €5s may be less useful in large-scale tax evasion than $100s and €200s. 

By setting a levy or negative interest rate of 5 to 10 percent per year on high-denomination notes (there are various ways to do this), the government would be able to earn a large-enough stream of revenue to help offset the shortfall created by cash-using tax evaders. The effect would be a lower tax bill for all non-cheaters, both for those who generally do not use cash and those who use only small-denomination notes ($1 and €5s). In effect, the anonymity provided by $100s and €200s would now be directly paid for by the users of those $100s and €200s. Unlike an all-out ban on banknotes, financial anonymity would still be provided. 

I think it makes sense for the Walmart in our thought experiment to give anonymity pricing a shot. Maybe governments should entertain the idea, too.

[This post was originally published at the Sound Money Project. I've modified it slightly for clarity.]

Setelinleikkaus: When Finns snipped their cash in half to curb inflation

On the last day of 1945, with World War II finally behind it, Finland's government announced a new and very strange policy.

All Finns were required to take out a pair of scissors and snip their banknotes in half. This was known in Finland as setelinleikkaus, or banknote cutting. Anyone who owned any of the three largest denomination Finnish banknotes — the 5000 markka note, the 1000, or the 500 — was required to perform this operation immediately. The left side of the note could still be used to buy things, but at only half its value. So if a Finn had a 1000 markka note in their wallet, henceforth he or she could now only buy 500 markka worth of items at stores. As for the right side, it could no longer be spent and effectively became a bond (more on this later).

Source: Hallitus kansan kukkarolla, by Antti Heinonen

Setelinleikkaus was Finland's particular response to the post-War European problem of "monetary overhang," described in a 1990 paper by economists Rudi Dornbusch and Holger Wolf. After many years of war production, price controls, and rationing, European citizens had built-up a substantial chest of forced savings, or involuntary postponed consumption, as Dornbusch & Wolf refer to it. With WWII now over, Europeans would soon want to begin living as they had before, spending the balances they had accumulated on goods and services. Alas, with most factories having been configured to military purposes or having been bombed into dust, there wasn't nearly enough consumption items to make everyone happy.

It was plain to governments all across Europe what this sudden making-up of postponed consumption in a war-focused economy would lead to: a big one time jump in prices.

This may sound familiar to the modern day reader, since we just went through our own wartime economy of sorts: the 2020-21 battle against COVID and subsequent return to a peacetime economy. The supply chain problem caused by the COVID shutdowns combined with the big jump in spending as lockdowns expired, spurred on by a big overhang of unspent COVID support cheques, led to the steepest inflation in decades. 

According to Dornbusch and Wolf, European authorities fretted that the post-WWII jump in prices could very well spiral into something worse: all-out hyperinflation, as had happened after the first World War. Currencies were no longer linked to gold, after all, having lost that tether when the war started, or earlier, in response to the Great Depression. 

To prevent what they saw as imminent hyperinflation, almost all European countries began to enact monetary reforms. Finland's own unique reform — obliging their citizens to cut their stash of banknotes in two — would reduce the economy's stock of banknotes to just "lefts," thereby halving spending power and muting the wave of post-wartime spending. After February 16, 1946 the halves would be demonetized, but until then the Finns could continue to make purchases with them or bring them to the nearest bank to be converted into a new edition of the currency.

As for the right halves, they were to be transformed into a long-term investment. Finns were obligated to bring each right half in to be registered, upon which it would be converted into a Finnish government bond that paid 2% interest per year, to be repaid four years later, in 1949. It was illegal to try and spend right halves or transfer their ownership to anyone else (although it's not apparent how this was enforced).

In theory, turning right halves into bonds would shift a large part of the Finnish public's post-war consumption intentions forward to 1949, when the bonds could finally be cashed. By then, the economy would have fully transitioned back to a civilian one and would be capable of accepting everyone's desired consumption spending without hyperinflation occurring.

To our modern sensibilities, this is a wildly invasive policy. Had setelinleikkaus been proposed in 2022-23 as a way to dampen the inflationary effects of the reopening of COVID-wracked economies, and we all had to cut our dollar bills or yen or euros in half, there probably would have been a revolt.

With the benefit of hindsight, we know that setelinleikkaus didn't work very well. Finland continued to suffer from high inflation in the years after the war, much more so than most European countries did.

Why the failure? As Finish economist Matti Viren has pointed out, the reform only affected banknotes, not bank deposits. This stock of notes only comprised 8% of the total Finnish money supply, (Finns being  uncommonly comfortable with banks) so a major chunk of the monetary overhang was left in place.

Another glitch appears to have been the public's anticipation of setelinleikkaus. According to
former central banker Antti Heinonen, who wrote an entire book on the subject, banks began to advertise their services as a way to avoid the dangers of the upcoming monetary reform (see images below). So Finns deposited their cash prior to the final date, the monetary overhang to some degree evading the blockade.

Finnish bank advertisements warning of the upcoming note cutting
Left: "Bank accounts are fully secured in the banknote exchange."
Right: "Depositors are protected."
Source: Hallitus kansan kukkarolla, by Antti Heinonen (Translations via Google Translate)

If the Finnish experiment was a dud, other European responses to the post WWII overhang — either  redenominations, temporarily blocking of funds, or all-out write offs of bank accounts — were more successful. Germany's monetary reform of 1948, which introduced the Deutschmark and was later dubbed the "German economic miracle", is the one that captures the most attention, but here I want to focus on a lesser known reform.

Belgium's Operation Gutt, named after Belgium's Minister of Finance, Camille Gutt, was the earliest and perhaps the most dramatic of the post-war monetary operations. Taking place over four days in October 1944, Belgium contracted its entire money supply, both banknotes and deposits, from 165 billion to 57.5 billion francs. That's a two-thirds decline! You can see it illustrated in the chart below, along with the monetary reform enacted by the Dutch the following year, inspired by the Belgians.

A chart showing the incredible contraction of Belgium's money supply in 1944
Source: Federal Reserve Bulletin, October 1946 (red arrow is my emphasis)

It's not just the size of Operation Gutt that is striking to the modern eye. It's also the oddity of the tool being used. Today, we control inflation with changes in interest rates, not changes in the quantity of money. To soften the effect of the global COVID monetary overhang, for instance, central banks in the U.S., Canada, and Europe began to raise rates in 2022 from around 0% to 4-5% in 2024. 

By making it more lucrative for everyone to save and less attractive to borrow, central bankers were trying to reduce our propensity to spend our COVID support payments, and with less spending, prices wouldn't get pushed up as fast. This reliance on interest rates as our main tool of monetary policy is a relatively new phenomenon. In times past, central banks tended to lean heavily on changes in the supply of money, which may explain why in 1945, their main response — in Europe at least —  was to obliterate the public's money balances rather than to jack up interest rates to 25% or 50%.   

It's worth exploring in some more detail how Operation Gutt was designed. On October 9, 1944, Belgian bank depositors had 90% of the money held in their accounts frozen, leaving just 10% in spendable form.

As for holders of banknotes, there was no Finnish-style cutting. Rather, Belgians had four days, beginning October 9, to bring all their banknotes to the nearest bank, only the first 2,000 francs qualifying for conversion to newly printed versions. All notes above that ceiling got blocked in a separate account (along with excess deposits), some of which would be released slowly over the next few years—while the rest would remain frozen forever, subject to whether the owner was deemed to have been a collaborator who got rich during the occupation. (Finland's setelinleikkaus also had this same "cleansing" motivation.)

In 1944, a line forms at the National Bank of Belgium to exchange notes.
Source: National Bank of Belgium on Flickr

In this sense, the post-WWII European monetary reforms were not only designed to reduce inflation, but also had a moral basis. Think of them as progenitors to India's 2016 demonetization, which was designed to catch so-called "black money," although it failed to do so.

Did Operation Gutt work? Incredibly, the decimation of two-thirds of the money supply in just a few days did not cause an immediate fall in Belgian prices. According to Belgian economic historians Monique Verbreyt and Herman Van der Wee, the Belgian retail price index stood at 260 the month of the reform, but had risen to 387 by September 1945. So it would seem that the whole operation failed. This surely draws into question the quantity theory of money, one of the basic tenets of monetary economics. A decline in the money supply, all things staying the same, is supposed to cause a fall in prices. Here is a glaring case in which it didn't.

However, the National Bank of Belgium (NBB), the country's central bank, strikes a more constructive tone. In a recent retrospective on Operation Gutt, the NBB describes the reform as a gamble that paid off over time, eventually inspiring the "Belgian Economic Miracle", a period of low inflation and fast growth lasting from 1946-1949. By contrast, France did not embark on its own monetary reforms, the NBB takes pains to point out, and it thereby "paid the consequences of post-World War II inflation well into the 1960s." Belgium's inflation rate was also much lower than Finland's in the four or five years after the war. 

Which gets us back to Finland. Unlike the Belgian central bank, Finland's central bank — Suomen Pankki — notably avoids almost all mention of its post-war reform on its website. According to Matti Viren, setelinleikkaus led to "distrust towards the authorities and economic policy for decades," so there may be some sheepish reticence on the part of the central bank to draw attention to it.

But setelinleikkaus and Operation Gutt aren't just archaic monetary policy dead-ends. One day I suspect they'll be back. Not just as a special tool for responding to emergencies, but as a day-to-day policy wrench, albeit in a new and refined form. 

Cash, which is awkward to immobilize for policy reasons, will be gone in a decade or two, leaving the public entirely dependent on bank deposits and fintech balances which, thanks to digitization and automation, can be easily controlled by the authorities. To rein in a jump in inflation, central bankers will require commercial banks and companies like PayPal to impose temporary quantitative freezing on their clients'  accounts, but unlike Finland's 1945 blockade, the authorities will be able to rapidly and precisely define the criteria, say by allowing for spending on necessities — food, electricity, and gas— while embargoing purchases of luxury cars and real estate.

The future version of setelinleikkaus won't be clumsy, it'll be a precise and surgical inflation-fighting tool, albeit a controversial one.

Your finances are being snooped on. Here's how

We all have a pretty good idea that our finances are being snooped on, but most of us aren't quite able to articulate how. We know that we're being snooped on by two groups, corporations and the government. This post will focus on how the government surveils our transactions, because democratic governments generally (but certainly not always!) tell us ahead of time what information they will gather, and how the data will be used.

Governments snoop on law abiding citizens' financial data for good reasons – they are trying to trace the money in order to catch bad guys. The government has been given the power to collect this information without having to ask a judge for approval, say by requesting a search warrant. 

I think there is a degree of acceptance among citizens that some amount of warrantless financial snooping is okay, because it reduces crime. But as the intensity of surveillance increases it eventually reaches creepy territory, at which point most of us would prefer the brakes be applied.

Where is this line? I'm a committed comparativist. To get a good sense of how one is snooped on, and whether it has passed over the line to being creepy, one needs a reference point. So in this blog post, I'll compare how two groups of citizens – Americans and Canadians – are being surveiled by their respective governments, so that both groups can better understand, by reference to each other, where they stand.

The first section focuses on the inflows of personal financial data from citizens to the government. The second section will focus on the outflows of data from the government to law enforcement.

***How citizens' personal financial data flows into the government***

Both the U.S and Canadian governments collect large amounts of financial data about their citizens. They do so by requiring banks and other financial institutions to record information about their customers and submit reports to the government about their customers' transactions when certain triggers have been met.

First, let's touch on the total amount of data being hoovered up. On this count, Canada far exceeds the U.S. In the 2022-23 reporting period, Canadian financial institutions submitted a total of 36 million reports to the government containing information about Canadians' financial transactions. That's almost one report per Canadian every year. 

Meanwhile, U.S. institutions sent 27.5 million reports to their government about Americans' financial dealings in 2023, a rate of around 0.1 report for every American, which is ten-times less intensive than in Canada. So based purely on the quantity of data collected, Canada seems to be closer to the "it's getting uncomfortable" level than the U.S. (See table below).

What accounts for this big difference in reporting intensity? In short, it's due entirely to cross-border wire transfers. In Canada, every electronic fund transfer leaving or arriving in Canada must be reported by banks to the government if it sums up to $10,000 or more. So if you've sent an $11,500 wire transfer from your Bank of Montreal account to your son or daughter who lives in London or Paris, congratulations, your name is in a Canadian government database. Or if you run a business and have received a $15,000 digital payment from a U.S. company for services rendered, your corporate data is sitting somewhere in an Ottawa government server.

If you're an American making a foreign wire transfer, your information will not get sent to a government database. The U.S. authorities do not require financial institutions to submit personal information on digital cross-border flows. (Mind you, they have been trying for some time to get the ability to collect this data.)

In the 2022-23 financial year, 27 million of these cross-border wire reports were submitted by Canadian banks, accounting for the lion's share of all 36 million reports submitted to the Canadian government that year.

Apart from cross-border transaction reporting, the nature of Canadian and U.S. eavesdropping is broadly similar.

Let's start with cash transaction reports, or CTRs. When a Canadian goes to their bank and deposits $10,000 or more in cash, the bank will generate a report that it sends to the Canadian government. U.S. banks report deposits and withdrawals of $10,000 in cash to the US government.

So if you're selling a used car and the buyer pays you $12,000 in banknotes, and you deposit that to your bank account, you're now in a government database, whether that be in Canada or the U.S.

Canadian banks generated 8 million CTRs in 2022-23 whereas U.S. banks generated 20.8 million in 2023. Pound for pound, Canadian banks submit more cash transaction reports to their government than U.S. banks, around 0.21 per Canadian compared to 0.06 per American. I'm not sure why. The threshold for reporting a cash transaction in Canada is lower in the U.S. (CAD$10,000 is worth around US$7,300) which may explain some of the difference? Dunno.

With CTRs and cross-border wire transfers, the invasiveness is kept relatively low thanks to the objective criteria that triggers a filing. Exceed the $10,000 threshold and at least you know ahead of time that your information is going to be recorded. A law-abiding citizen who is uncomfortable having their finances being collected by the government can choose to avoid sending cross-border payments or dealing in large amounts of cash. But this objectivity doesn't exist with the next type of report: those related to suspicious activities. 

On both sides of the border, financial institutions must submit reports about transactions deemed suspicious to their respective governments. If you've made a transaction that a bank deems to be suspicious, you'll never know that you've landed in a government database. That's because banks are prohibited from notifying their customers that their activity has been snitched on.  

The determination of what qualifies as suspicious involves a fair amount of subjectivity. Canada requires that financial institutions have a reasonable grounds to suspect that a transactions is linked to terrorism or money laundering before reporting it. That means that mere hunch won't cut it – a Canadian banker must be able to articulate a clear reason for suspicion. Mind you, there's no penalty for banks that fail to attach a specific reason to a report, so the reasonable grounds to suspect standard is often ignored. 

We know that many of these hunch-based reports end up in the government's database. Over the years the Office of the Privacy Commissioner of Canada has collected a list of reports that failed to reach the reasonable grounds to suspect standard, including one case in which some individuals were suspected simply because they had Middle Eastern passports:

From the Office of the Privacy Commissioner's 2017 audit of FINTRAC [source]

My reading of the U.S. requirements for reporting a suspicious transaction suggest a looser standard than in Canada. While U.S. bankers are encouraged to provide a specific red flag in their CTRs, the implementing regulations say they can still file a report if they merely "suspect" a transaction to be associated with money laundering or terrorism, which is a lower standard then the requirement to have a "reason to suspect."

In Canada, there is no size threshold for suspicious activity reporting: even a $50 payment can be reported by a bank. By contrast, the U.S. has set a $5,000 threshold before a suspicious action report must be filed. (When suspicious activity reports were first introduced to the U.S. in 1994, the government floated the idea of not including a threshold at all, as Canada would later do in 2001, but retreated because this would impose a "burden of reporting.")

This difference in thresholds suggests Canada should have a much higher intensity of suspicious transaction reporting than the U.S. Not so. Canadian banks generated 560,858 suspicious transaction reports in 2022-23, around 1.4 reports for every 100 Canadians. Compare this to the 4.6 million reports filed by U.S. banks in 2023, which also comes out to 1.4 reports per 100 Americans. So even though bankers in the U.S. are required to ignore small suspicious transactions below $5,000, they more than make up for it by reporting a larger proportion of transactions than Canadian bankers do. I can only guess why, but this may be due to the looser standard for suspicion, discussed above.

There are several other types of transactions that must be reported to the government, including large virtual currency reports in Canada and foreign bank and financial accounts reports (FBAR) in the U.S., but the volume of this sort of reporting isn't as significant as the other types already discussed, so I won't touch on them.

So to briefly sum up, pound for pound a Canadian is more likely to appear in their government's financial database than an American is. This is because Canadian financial institutions collect personal information linked to cross-border wire transfers – the U.S. doesn't. The most privacy-invasive reports are suspicious ones. Compared to Canadian banks, U.S. banks are more trigger-happy when it comes to deeming a given transaction as suspicious, but the US$5,000 floor on reporting suspicious transactions somewhat mitigates this eagerness. 

Having dealt with what sorts of data flow in to the government, let's talk about what happens next with the data.    

***How personal financial data flows from the government to law enforcement***

The personal financial data accumulated by the two governments are managed by each nation's respective financial intelligent unit, or FIU. In Canada, this institution is known as the Financial Transactions and Reports Analysis Centre of Canada, or FINTRAC. In the U.S., the body that collects personal financial data is known as the Financial Crime Enforcement Network, or FinCEN.

It's here with the management of harvested financial data that the policies of the two countries really start to diverge.

To begin with, let's start with the length of time that data can be kept. In the U.S., FinCEN holds data indefinitely, so its database is forever growing. Canada allows FINTRAC to keep data for at least ten years and up to fifteen years, but after that FINTRAC must destroy any identifying information if it was not disclosed to law enforcement. Since most of FINTRAC's data is not disclosed, that means large amounts of data fall out of FINTRAC's database every year, and thus the amount of personal information collected grows at a slower rate than FinCEN's data hoard.

The differences between the two countries grows even wider when it comes to the question of who has access to citizens' financial data. In brief, U.S. law enforcement is granted broad access to the raw data whereas Canadian law enforcement's ability to see the data is strictly limited.

472 different U.S. law enforcement agencies at the Federal, state, and local levels have the ability to directly query FinCEN's database of CTRs, suspicious activity reports, and more. This amounts to around 14,000 law enforcement officers who can search through the personal financial data of American citizens. In 2023, these 14,000 users conducted 2.3 million searches using FinCEN's query tool.

FinCEN's data can also be downloaded in bulk form to the in-house servers of eleven different federal agencies, including the FBI, ICE, and the IRS. Bulk access (also known as Agency Integrated Access) means that the FBI, ICE, IRS, and eight other agencies don't need to use FinCEN's query tool. This bulk data can be access by another 35,000 agents. Alas, FinCEN doesn't track how many in-house searches were conducted by these agents in 2023, but I'd guess it's in the tens if not hundreds of millions.

By contrast, Canadian law enforcement agencies do not get direct access to FINTRAC's financial data trove. Instead, FINTRAC employs an internal force of a few hundred data analysts to parse the database for clues that suggest participation in money laundering or terrorist financing. Only when FINTRAC employees have attained a reasonable grounds to suspect that a pattern of transactions has crossed the line can they pass a report on to a Canadian law enforcement body, such as the RCMP or municipal police. This report is known as a financial intelligence disclosure and includes information like the name of the transactor, their address, telephone number, criminal record, and more.

FINTRAC submitted 2,085 of these disclosures to law enforcement in 2022-2023.

So to step back for a moment, tens of thousands of U.S. law enforcement officials conduct tens of millions of searches through Americans' personal financial data to get leads. In Canada, this same database can only be accessed a small number of FinCEN FINTRAC analysts, who selectively push a few thousand reports out to Canadian law enforcement each year. 

That's quite the contrast. Put differently, unlike their U.S. equivalents the RCMP, Sûreté du Québec, Ontario Police Police, and other policy agencies do not have the power to pull personal financial data willy-nilly from the government's database. This means far fewer eyeballs on Canadian financial records. As far as protecting the financial privacy of citizens, the Canadian access model does a better job. The U.S. access model is friendlier to law enforcement and stopping crime.

A disadvantage (or advantage, depending on your tolerance for being watched) of the American system is it allows the 11 agencies with bulk access to create "data cocktails" – personal financial data downloaded from FinCEN spiked with their own data sources – in order to better investigate suspects. For instance, according to a 2009 report from the Government Accountability Office, the FBI incorporates bulk FinCEN suspicious activity reports into its Investigative Data Warehouse along with 50 other data sets from different sources. The IRS's Reveal System, portrayed below, ingests FinCEN reports along with tax data to conduct more complex investigations.

The IRS's Reveal System, which ingests FinCEN CTRs along with other non-FinCEN data [source]

I don't know if the FBI and IRS data cocktails still exist, and in what form, but they certainly give a flavor of what sorts of broad access law enforcement can get to personal financial records in the U.S.

By contrast, Canadian law doesn't allow for U.S.-style data cocktails. An agency like the RCMP can't mix FINTRAC's store of personal financial data with their own bespoke data sources because the RCMP is prohibited from pulling raw CTRs, cross-border wire transfer reports, and suspicious transaction reports out of FINTRAC. Only FINTRAC gets to determine what information gets pushed out to the RCMP.

This firewall isn't accidental. As Horst Intscher, a former director of FINTRAC explains, a degree of privacy protection was purposefully built into FINTRAC's original design: "Because of the very broad range of information that the [Proceeds of Crime (Money Laundering) and Terrorist Financing Act] makes it possible for us to receive from reporting entities, it was determined at the original passage of the legislation that protections had to be built, so it would not be construed that there was a flow-through of massive amounts of personal information directed to law enforcement agencies."

In other words, FINTRAC was designed to prevent the likes of the RCMP from creating an FBI-style Investigative Data Warehouse. 

However, the wall imposed between Canadian law enforcement and FINTRAC does have a degree of porosity, enough to provide law enforcement with an indirect way for pulling data out of FINTRAC. If the RCMP is investigating a suspected money launderer, it can submit information about the suspect to FINTRAC in the form of a voluntary information record. For example, it might say that "Joe Blow and his sister-in-law Martha are the subjects of an investigation for drug trafficking and money laundering, and we just thought you should know that." This new data becomes part of FINTRAC's database, against which FINTRAC's agents will check all other data. If the agents spot a match, and it meets the bar for a "reasonable grounds for suspicion", then they must send the RCMP a disclosure containing the relevant personal financial information.  

In 2022-23 FINTRAC received 2,550 voluntary information records from Canada’s law enforcement and national security agencies (including from members of the public), a large number of these eventually boomeranging back to law enforcement in the form of a disclosure. How many? The head of FINTRAC once claimed that "65% to 70%" of FINTRAC's ultimate disclosures to law enforcement are triggered by voluntary information submitted by law enforcement, which hints at how porous the wall is.

----

That sums up my comparison of the inflows and outflows of personal financial data to the U.S. and Canadian governments. This is just a cursory analysis. There are all sorts of other vectors across which to compare the scope of the two nations' data collection efforts that I haven't explored. I've focused on the factors that I think are the most important.

Readers from other countries may be curious to find out about their own FIUs to determine where they stand relative to Canada and the U.S. If so, leave your findings in the comments. My Australian readers, for instance, may be interested to note that their government collects far more private information than the U.S. and Canada combined. AUSTRAC, the Australian FIU, collected 192 million transaction reports in 2023, an astonishing 7 reports per Australian!  This is because AUSTRAC receives information on all cross-border wires, with no lower threshold.

At the outset of this article I suggested that many of us would tolerate some loss of privacy in order to make it easier for the police to catch criminals. A few of us will accept a large loss. Others will not tolerate even the smallest infringement on privacy. An individual's line in the sand is very much a personal matter. I'm going to leave it to the reader to decide which country (if either) approaches the right balance. Is Canada too lax relative to the U.S.? Does the firewall we've erected between the cops and the trove of financial information give criminals free rein? Or does the U.S. not sufficiently respect privacy? Should the FBI and its sister agencies lose some of their unfettered access to Americans' personal financial data?