After twelve years of writing about bitcoin, here's how my thinking has changed

What follows is an essay on how my thinking on bitcoin has changed since I began to write on the topic starting with my first post in October 2012. Since then I've written 109 posts on the Moneyness Blog that reference bitcoin, along with a few dozen articles at venues like CoinDesk, Breakermag, and elsewhere.

An early bitcoin optimist

I was excited by Bitcoin in the early days of my blog. The idea of a decentralized electronic payment system fascinated me. Here's an excerpt from my second post on the topic, Bitcoin (for monetary economists) - why bitcoin is great and why it's doomed, dated November 2012:

"Bitcoin is a revolutionary record-keeping system. It is incredibly fast, efficient, cheap, and safe. I can send my Bitcoin from Canada to someone in Africa, have the transaction verified and cleared in 10 minutes, and only pay a fee of a few cents. Doing the same through the SWIFT system would take days and require a $35 fee. If I were a banker, I'd be afraid." [link]

I was relatively open to Bitcoin for two reasons. First, I like to think in terms of moneyness, which means that everything is to some degree money-like, and so I welcome strange and alternative monies. "If you think of money as an adjective, then moneyness becomes the lens by which you view the problem. From this perspective, one might say that Bitcoin always was a money," I wrote in my very first post on bitcoin. Second, prior to 2012 I had read a fair amount of free banking literature—the study of private money—so I was already primed to be receptive to a stateless payments system, which is what Bitcoin's founder, Satoshi Nakamoto, originally meant his (or her) creation to be. 

A lot of bitcoin-curious, bitcoin-critics and bitcoin-converts were attracted to the comments section of my blog, and we had some great conversations over the years. My bitcoin posts invariably attracted more traffic than my non-bitcoin ones, all of us scrambling to understand what seemed to be a newly emerging monetary organism.

My early thoughts on the topic were informed by having bought a few bitcoins in 2012 for the sake of experimentation, some of my earlier blog posts describing how I had played around with them. In 2013 I wrote about the first crop of bitcoin-denominated securities market (which I dabbled in)—predecessors to the ICO market of 2017. I also used my bitcoins to buy altcoins, including Litecoin, and in late 2013 wrote about my disastrous experience with Litecoin-denominated stock market speculation. In Long Chains of Monetary Barter I described using bitcoin as an exotic bridging currency for selling XRP, a new cryptocurrency that had just been airdropped into the world. I didn't notice it at the time, but in hindsight most of these were instances of bitcoin facilitating illegal activity, i.e. unregistered securities sales, which was an early use case for bitcoin.

Although Bitcoin excited me, I was also critical from the outset, and in later years my critical side would only grow, earning me a reputation among crypto fans as being a salty no-coiner. In a 2013 blog post I grumbled that playing around with my stash of bitcoins hadn't been "as exciting as I had anticipated." Unlike regular money, there just wasn't much to do with the stuff, my coins sitting there in my wallet "gathering electronic dust."

 "...the best speculative vehicles to hit the market since 1999 Internet stocks."

What my experimentation with bitcoin had taught me was that the main reason to hold "isn't because they make great exchange media—it's because they're the best speculative vehicles to hit the market since 1999 Internet stocks." But that wasn't what I was there for. What had tantalized me was Satoshi's vision of electronic cash, a revolutionary digital payments system. Not boring old speculation.

In addition to my practical complaints about bitcoin, I also had theoretical gripes with it. The "lethal" problem as I saw it back in my second post in 2012 is that "bitcoin has no intrinsic value." Over the next decade this lack of intrinsic value, or fundamental value, would underly most of my criticisms of the orange coin. Back in 2012, though, the main implication of bitcoin's lack of intrinsic value was the ease by which it might fall back to $0. As I put it in a 2013 article:

"Bitcoin is 100% moneyness. Whenever a liquidity crisis hits, the only way for the bitcoin market to accommodate everyone's demand to sell is for the price of bitcoin to hit zero—all out implosion" [link]

But if the price of bitcoin were to fall to zero then it would cease to operate as a monetary system, which would be a huge disappointment to those of us who were fascinated with Satoshi's electronic cash experiment. Adding to the danger was the influx of bitcoin lookalikes, or altcoins, like litecoin, namecoin, and sexcoin. In theory, the prices of bitcoin and its competitors could "quickly collapse in price" as arbitrageurs create new coins ad infinitum, I worried in 2012, eating away at bitcoin's premium. The alternative view, which I explored in a 2013 post entitled Milton Friedman and the mania in copy-paste cryptocoins,  was that "the earliest mover has superior features compared to late moving clones," including name brand and liquidity, and so its dominance was locked-in via network effects. Over time the latter view proved to be the correct one.

The "zero problem"

Despite my worries, I was optimistic about bitcoin, even helpful. One way to stop bitcoin from falling to zero might be a "plunge protection team," I offered in 2013, a group of avid bitcoin collectors that could anchor bitcoin's price and provide a degree of automatic stabilization. In a 2015 post entitled The zero problem, I suggested that bitcoin believers like Marc Andreessen should consider donating $21 million to a bitcoin stabilization fund, thus securing a price floor of $1 in perpetuity. 

No fan of credit cards, in a 2016 post Bitcoin, drowning in a sea of credit card rewards, I suggested that bitcoin activists encourage retailers that accept bitcoin payments to offer price discounts. This carrot would put bitcoin on an even playing field with credit card networks, which use incentives like reward points and cashback to block out competing payment systems.

My growing disillusionment

By 2014 or 2015, I no longer saw much hope for bitcoin as a mainstream payments system or generally-accepted medium-of-exchange. "For any medium of exchange to displace another as a means for buying stuff, users need come out ahead. And this isn't happening with bitcoin," I wrote in a 2015 post entitled Why bitcoin has failed to achieve liftoff as a medium of exchange, pointing to the many costs of making bitcoin payments, including commissions, setup costs, and the inconveniences of volatility.

In another 2015 post I focused specifically on the volatility problem, which stems from bitcoin's lack of intrinsic value. If an item has an unstable price, that militates against it becoming a widely used money. After all, the whole reason that people stockpile buffers of liquid instruments, or money, is that these buffers serve as a form of insurance against uncertainty. If an item's price isn't stable—which bitcoin isn't—it can't perform that role. 

Mind you, I did allow in another 2015 post, The dollarization of bitcoin, that bitcoin might continue as "an arcane niche payments system for a community of like minded consumers and retailers." I even tracked some of these arcane payments use cases, such a 2020 blog post on retailers of salvia divinorium (a legal drug in many U.S. states) falling back on bitcoin for payments after the credit card networks kicked them off, followed by a 2021 post on kratom sellers (a mostly-legal substance) doing the same. But let's face it, a niche payments system just wasn't as impressive as Satoshi's much broader vision of electronic cash that had beguiled me in 2012, when I had warned that "if I was a banker, I'd be afraid." 

The dollarization of bitcoin

By 2015 a lot of my pro-bitcoin blog commenters began to see me as a traitor. But I was just changing my thinking with the arrival of new data.

Searching for Bitcoin-inspired alternatives: Fedcoin and stablecoins

Bitcoin's deficiencies got me thinking very early on about how to create bitcoin-inspired alternatives. By late 2012 I was already thinking about stablecoins:

"What the bitcoin record-keeping mechanism needs is an already-valuable underlying asset to which it can be tethered. Rather than tracking, verifying, and recording the movement of intrinsically worthless 1s and 0s, it will track the movement of something valuable." [link]

Later, in 2013, I speculated about the emergence of "stable-value crypto-currency, not the sort that dangles and has a null value." These alternatives would "copy the best aspects" of bitcoin, like its speed and safety, but would be linked to "some intrinsically valuable item." A few months later I predicted that "Cryptocoin 2.0, or stable-value cryptocoins, is probably not too far away." This would eventually happen, but not for another few years.

My dissatisfaction with bitcoin led me to the idea of decentralized exchanges, or DEXs, in 2013, whereby equity markets would "adopt a bitcoin-style distributed ledger." That same year I imagined central banks adapting "bitcoin technology" to run its wholesale payments system in my post Why the Fed is more likely to adopt bitcoin technology than kill it off. In 2014 I developed this thought into the idea of Fedcoin, an early central bank digital currency, or CBDC, for retail users.

If not money, then what is bitcoin?

By 2017 or so, even the most ardent bitcoin advocates were being forced to acknowledge that Satoshi's electronic cash system was not panning out: the orange coin was nowhere near to becoming a popular medium-of-exchange. This was especially apparent thanks to a growing body of payments surveys (which I began to report on in 2020) showing that bitcoin users almost never used their bitcoins to make payments or transfers, preferring instead to hoard them. So the true believers pivoted and began to describe bitcoin as a store-of-value, or digital gold. It was a new narrative that glossed over Satoshi's dream of electronic cash while trying to salvage some monetary-ish parts of the story.

I thought this whole salvage operation was disingenuous. In 2017 I wrote about my dissatisfaction with the new store-of-value narrative, and followed that up with a criticism of the digital gold concept in Bitcoin Isn’t Digital Gold; It’s Digital Uselesstainium. (The idea that store-of-value is a unique property of money is silly, I wrote in 2020, and we should just chuck the concept altogether.)

But if bitcoin was never going to become a generally-accepted form of money, and it wasn't a store-of-value or digital gold, then what exactly was it? 

I didn't nail this down till a 2018 post entitled A Case for Bitcoin. We all thought at the outset that bitcoin was a monetary thingamajig. But we were wrong. Of the types of assets already in existence, bitcoin was not akin to gold, cash, or bank deposits. Rather, it was most similar to an age-old category of financial games and zero-sum bets that includes poker, lotteries, and roulette. The particular sub-branch of the financial game family that bitcoin belonged to was early-bird games, which contains pyramids, ponzis, and chain letters. Here is a taxonomy:

A taxonomy showing bitcoin as a member of the early-bird game family

Early-bird games like pyramids, ponzis, and chain letters are a type of zero-sum game in which early players win at the expense of latecomers, the bet being sustained over time by a constant stream of new entrants and ending when no additional players join. Pyramids and ponzis are almost always administered by thieves who abscond with the pot. Bitcoin, by contrast, was not a scheme nor a scam. And it was not run by a scammer. It was leaderless and spontaneous, an "honest" early-bird game that hewed to pre-set rules. Here is how I described it in a later post, Bitcoin as a Novel Financial Game:

"Bitcoin introduces some neat features to the financial-game space. Firstly, everyone in the world can play it (i.e., it is censorship-resistant). Secondly, the task of managing the game has been decentralized. Lastly, Bitcoin’s rules are automated by code and fully auditable." [link] 

This ponziness of bitcoin was actually a source of its strength, I suggested in 2023, because "it's tough to shut down a million imaginations." By contrast, if bitcoin had an underlying real anchor, like gold, then that would give authorities a toe hold for decommissioning it.

Bitcoin-as-game gave me more insight into why most bitcoin owners weren't using bitcoin as a medium-of-exchange. Its value as a zero-sum bet was overriding any functionality it had for making payments. In a 2018 post entitled Can Lottery Tickets Become Money?, I worked this out more clearly:

"Like Jane's lottery ticket, a bitcoin owner's bitcoins aren't just bitcoins, they are a dream, a lambo, a ticket out of drudgery. Spending them at a retailer at mere market value would be a waste given their 'destiny' is to hit the moon." [link]

If bitcoins weren't like bank deposits or cash, how should we treat them from a personal finance perspective? Feel free to play bitcoin, I wrote in late 2018, but do so in moderation, just like you would if you went to Vegas. "Remember, it's just a game."

Bitcoin is innocuous, don't ban it

By 2020 or 2021, the commentary surrounding bitcoin seemed to be getting more polarized. As always there was a set of hardcore bitcoin zealots who thought bitcoin's destiny was to change the world, of which I had been a member for a brief time in 2012. But arrayed against them was a new group of strident opponents who though bitcoin was incredibly dangerous and were pushing to ban it.

A vandalized 'Bitcoin accepted' sign in my neighborhood

I was at odds with both sides. Each saw Bitcoin as transformative, one side for the good, the other for the bad. But I conceived of it as an innocuous gambling device, one that only seemed novel because it had been transplanted into a new kind of database technology, blockchains. We shouldn't ban bitcoin for the same reason that we've generally become more comfortable over the decades removing prohibitions on online gambling and sports betting. Better to bring these activities into the open and regulate them than leave them to exist in the shadows.

Thus began a series of relax-don't-ban-bitcoin posts. In 2022, I wrote that central bankers shouldn't be afraid that bitcoin might render them powerless. For the same reason that casinos and lotteries will ever be a credible threat to dollar's issued by the Fed or the Bank of Canada, neither will bitcoin.

Illicit usage of bitcoin was becoming an increasingly controversial subject. Just like casinos are used by money launderers, bitcoin had long become a popular tool for criminals, the most notorious of which were ransomware operators. My view was that we could use existing tools to deal with these bad actors. Instead of banning bitcoin to end the ransomware plague, for instance, I suggested in a 2021 article that we might embargo the payment of ransoms instead, thus choking off fuel to the ransomware fire. Alternatively, I argued in a later post that the U.S. could fight ransomware using an existing tool: Section 311 of the Patriot Act. Which is what eventually happened with Bitzlato and PM2BTC, two Russian exchanges popular with ransomware operators that were put on the Section 311 list.    

Nor should national security experts be afraid of enemy actors using bitcoin to evade sanctions, I wrote in 2019, since existing tools, in particular secondary sanctions, are capable of dealing with the threat. The failure of bitcoin to serve as an effective tool for funding the illegal Ottawa protests, which I documented in a March 2022 article, only underlined its low threat potential:

"Governments, whether they be democracies or dictatorships, are often fearful of crypto's censorship-resistance, leading to calls for bans. The lesson from the Ottawa trucker convoy and Russian ransomware gangs is that as long as the on-ramping and off-ramping process are regulated, these fears are overblown." [link]

Other calls to ban bitcoin were inspired by its voracious energy usage. In a 2021 blog post entitled The overconsumption theory of bitcoin, I attributed bitcoin's terrible energy footprint to market failure: end users of bitcoin don't directly pay for the huge amounts of electricity required to power their bets, so they overuse it. No need to ban bitcoin, though. The way to fix this particular market failure is to introduce a Pigouvian tax on buying and/or holding bitcoins, which I described more clearly in a 2021 blog post entitled A tax on proof of work and a 2022 article called Make bitcoin cheap again for cypherpunks! 

Lastly, whereas bitcoin's harshest critics have been advocating a "let it burn" policy approach to bitcoin and crypto more generally, which involved leaving gateways unregulated and thus toxic, I began to recommend regulating crypto exchanges under the same standards as equities exchanges in a 2021 article entitled Gary Gensler, You Should be Watching How Canada is Regulating Coinbase. Yes, regulation legitimizes a culture of gambling. But even Las Vegas has stringent regulations. A set of basic protections would reduce the odds of the betting public being hurt by fraudulent exchanges. FTX was a good test case. After the exchange collapsed, almost all FTX customers were stuck in limbo for years, but FTX Japan customers walked out unscathed thanks to Japan's regulatory framework, which I wrote about in a 2022 post Six reasons why FTX Japan survived while the rest of FTX burned.  

So when does bitcoin get dangerous?

What I've learnt after many years of writing about bitcoin is that it's a relatively innocuous phenomena, even pedestrian. When it does lead to bad outcomes, I've outlined how those can be handled with our existing tools. But here's what does have me worried. 

If you want to buy some bitcoins, go right ahead. We can even help by regulating the trading venues to make it safe. But don't force others to play.

Whoops, You Just Got Bitcoin’d! by Daniel Krawisz

Alas, that seems to be where we are headed. There is a growing effort to arm-twist the rest of society into joining in by having governments acquire bitcoins, in the U.S.'s case a Strategic Bitcoin Reserve. The U.S. government has never entered the World Series of Poker. Nor has it gone to Vegas to bet billions to tax payer funds on roulette or built a strategic Powerball ticket reserve, but it appears to be genuinely entertaining the idea of rolling the dice on Bitcoin.  

Bitcoin is an incredibly infectious early-bird game, one that after sixteen years continues to find a constant stream of new recruits. How contagious? I originally estimated in a 2022 post, Three potential paths for the price of bitcoin, that adoption wouldn't rise above 10%-15% of the global population, but I may have been underestimating its transmissibility. My worry is that calls for government support will only accelerate as more voters, government officials, and bureaucrats catch the orange coin mind virus and act on it. It begins with a small strategic reserve of a few billion dollars. It ends with the Department of Bitcoin Price Appreciation being allocated 50% of yearly tax revenues to make the number go up, to the detriment of infrastructure like roads, hospitals, and law enforcement. At that point we've entered a dystopia in which society rapidly deteriorates because we've all become obsessed on a bet.

Although I never wanted to ban Bitcoin, I can't help but wonder whether a prohibition wouldn't have been the better policy back in 2013 or 2014 given the new bitcoin-by-force path that advocates are pushing it towards. But it's probably too late for that; the coin is already out of the bag. All I can hope is that my long history of writing on the topic might persuade a few readers that forcing others to play the game you love is not fair game.

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?

Central bank digital currencies and the fallacy of immaculate adoption

I recently noticed that the Bank of Jamaica, Jamaica's central bank, has implemented two new marketing strategies to drive adoption of its new central bank digital currency, Jam-Dex. Jam-Dex is one of only four operational central bank digital currencies (CBDCs) in the world, having been introduced to Jamaicans in July 2022.

Now, I have no idea if these efforts will get Jam-Dex to succeed. In 2022, the system processed just J$357 million (or $2 million U.S. dollars.), but that comprised just six months of operations, so that's probably not enough time to judge it. What particularly interests me is how Jamaica's strategy of offering incentives to businesses and consumers serves as advance warning to other central bankers that one of the key tenets of the CBDC intellectual enterprise, what I call the immaculate adoption doctrine, is wrong.

In their white papers on CBDC, central bankers generally assume that the product will be immaculately adopted. The thinking goes like this: "We don't have to worry about devising a marketing plan for our new digital currency, nor think about incentives to promote usage, or the possibility that the product fails. All we've got to do is design it, put it out there, and – presto! – the public will instantly flock to it."

But as I've been saying for a while now the immaculate adoption doctrine is wrong. CBDC will probably just be a middling payments product. Existing options like cash, insured deposits and fintech balances work just fine for most folks, CBDC adding no extra features to the mix. It's just not possible to take a middling payments product and launch it, effortlessly and immaculately, into wide adoption. A big and expensive marketing push from central banks will be required if CBDC is to ever be adopted, Jamaica's Jam-Dex being a good example. And even then there's no guarantee of success.

The immaculate adoption doctrine gets even worse, though. Supremely confident in the success of their product, many central bankers fret that it will be too popular, hurting the banking system by stealing their deposits. To prevent this, they are building flaws into the product, effectively turning a middling product into a crappy one. A crappy product is even less likely to succeed.

Dirk Niepelt and Cyril Monnet recently make this same point with respect to a euro CBDC. In order to protect the business models of European commercial banks, the ECB wants to "trim the digital euro's attractiveness," the authors say, by adding holding limits for consumers and merchants. However, given the fact that European private sector payment options are already quite convenient, Niepelt and Monnet worry that the imposition of these hurdles condemns the ECB's CBDC to death on arrival.

The immaculate adoption doctrine of CBDC needs to be replaced by the it'll-be-a-hard-and-dirty-slog doctrine of CBDC. First, if they are to flourish, CBDCs can't just be carbon copies of existing private payments options. They need to offer something unique. Figuring out what these features are will take years of trial and error. Second, central banks will have to resort to dirty marketing tricks, incentives, bribes, arm twisting – all usually the domain of the private sector – to kickstart their CBDCs. Lastly, central banks need to stop deluding themselves that they can simultaneously launch a decent CBDC while also preserving the banking status quo. Those two things aren't possible! Stop pussy-footing around and admit that the whole effort will involve breaking a few banks.

Given that CBDC will be a hard and dirty slog, and not an immaculate ascendance, central banks need to think deeply about whether they truly want to undergo the pain of issuing a CBDC, which means being sure that society really needs one. Otherwise, they shouldn't get into the game.

Elon Musk's understanding of payments dates back to his PayPal days. It needs an update

[This is a republication of my most recent CoinDesk opinion piece.]

You've heard the script before. Migrants need to make payments back home to their family, but cross-border payments are achingly slow, taking days to process. Luckily, revolutionary new technologies like blockchains, stablecoins, and central bank digital currency (CBDC) are on the verge of speeding things up, or so their advocates claim.

Even Elon Musk has joined in. In an interview last month, Musk says that the banking system is "still not real-time" and "quite inefficient," and suggests that his social network, Twitter, may be able to do something about this. His subsidiary, Twitter Payments LLC, just got its first money transmitter license yesterday from the state of New Hampshire, suggesting that he means business. [Note: Twitter Payments now has three more licenses, as illustrated below.]

Twitter Payments LLC's money transmitter licenses, via NMLS

Alas, the script is based on dubious assumptions, and money transfer company Wise (previously Transferwise) is a great example of why. Wise, based in London, now processes 55% of its customers' cross-border payments instantly, up from under 10% back in 2018. Wise doesn't rely on blockchains, stablecoins, or CBDC to get up to speed. It uses boring already-existing architecture.

The Wise example suggests that would-be challengers like Elon Musk's Twitter and advocates of blockchains, stablecoins and CBDCs may need to update their views on the incumbent infrastructure they are looking to displace.

Take Elon, for example, who helped found PayPal in 1999 and therefore knows a little bit about the payments system. In his recent interview, he describes the financial system as a heterogeneous set of databases that "slowly engage in batch processing."

Having subsequently switched his focus from retail payments to rockets and cars in 2000, what Musk seems to have missed is that batch processing of retail payments has been increasingly displaced by real-time processing. Under the older batching systems that prevailed when Elon was still at PayPal, streams of retail payment instructions would be accumulated over the course of the day into a big batch. Come evening-time or the following day that entire mass of payments was cleared and settled. Only then would the money be made available to the recipient.

Batching was efficient, but slug-like.

But then the global payments landscape entered into an era of transformation. Central banks began to build a new generation of payments infrastructure: real-time retail payments systems.

Real-time payments

These new retail payments systems process incoming retail payments on a first-come first-serve basis, and do so instantly. The central banks that offer these systems keep them open through the night and during weekends. Banks and fintechs can in turn plug into these new pieces of public infrastructure in order to offer their customers 24/7 instant payments.

The world's first real-time retail system, Zengin, was built in 1973 by the Bank of Japan, but the movement really only hit its stride in the 2000s as Korea, Mexico, and the UK sped up their capabilities. India and China went real-time in the early 2010s. The U.S. finally got its first instant retail payments system in 2017, with the debut of the Real-Time Payments network, run by privately-owned The Clearing House. It will get its second such system this summer as the Fed introduces its FedNow payments network.

According to a 2021 BIS report, over 60 jurisdictions currently now have real-time retail systems in place running alongside their older batch retail systems. This is up from almost none back when Elon was working in the payments sector.

This new generation of real-time retail payments systems is a big part of why Wise can move 55% of its customers cross-border payments instantly. Here's how it works.

Say a Wise customer in Ireland wants to send 500 euros to a family member in India. First, the money must be moved from the customer's Irish bank account to Wise's account at another Irish bank. In the old days of batch processing, this leg of the remittance would have taken a day or two. Thanks to the European Central Bank's TARGET instant payment settlement (TIPS) system, introduced in 2018, a flow like this can now occur in just a few moments.

Having received its customer’s 500 euros, Wise can now proceed to the next stage: paying out 44,000 rupees to the recipient in India. To do so it will have to transfer funds from its account at an Indian bank to the recipient's bank. In the days of batch processing, that meant adding another day or two of waiting. Nowadays, courtesy of India's Immediate Payment Service (IMPS), when Wise sends 44,000 rupees to the family member's bank account the payment can be processed in a second or two.

In sum, the Irish and Indian legs of a modern remittance can be processed in a few heart beats, much faster than the multiple day lags that dominated 20 years ago.

As more and more countries install real-time payments systems, and as Wise integrates itself with them, the proportion of Wise remittances settled in real-time will move ever closer to 100%.

But blockchain?

None of this is to say that there is no space in the cross-border payments landscape for a Twitter-based payments option, stablecoins, or blockchains. There is! It simply means that the incoming competitors need to update their oppo research. Traditional finance isn't the oaf that it is so often made out to be. It already has the technological capability for doing instant cross-border payments, which means the rebels will have to find other factors to differentiate themselves by.

Nor is this spreading bedrock of real-time infrastructure that I’ve just described at all incompatible with the new entrants. If Elon wants to build an instant Twitter payments network, he'll find the web of central bank real-time systems that have blossomed during his 20-year interlude outside the payments space to be a very useful set of rails on which to build.

As for stablecoins and blockchain-based offerings, they too may find it useful to be integrated into 24/7 central bank instant payments systems. For instance, if a DeFi speculator wants to move $10,000 from their bank into a stablecoin at 11PM on Saturday evening in order to take advantage of a fleeting DeFi arbitrage opportunity, and then move the funds back into their bank account by 11:01 PM, central bank instant payments systems can make this possible.

Let a thousand instant payments options bloom, built on top of central bank instant rails.

Will the digital euro be like cash?

The European Union published its proposal for a digital euro late last month, which will be issued by the European Central Bank (ECB) if it goes ahead. There's plenty to digest in the 62-page document, but the one area I want to focus on in this post is privacy.

Digital euros will be permitted to have cash-levels of privacy, says the EU, although only for a certain type of transaction: offline transactions.

An offline transaction is one that doesn't require the internet or any sort of connection to an ECB database. The buyer and seller each carry a local storage device where digital euros are recorded, say a "euro card" with a chip on it, and these devices can talk to each other when in close proximity, the transaction getting settled directly between the two devices. If the electricity is down, no problem. The payment will still go through.

By contrast, for online transactions there will be an ECB database in some Belgian or French data centre where individual balances are recorded. When a buyer and seller transact, the payment request is communicated over the wires to this database and respective balances are updated, much like a debit or credit card payment.

An online transaction can be made anywhere, assuming that the internet isn't down. A person in Holland can use it to buy shoes from a German website, for instance. But these transactions won't be private.

The privacy levels of offline transactions, however, will be comparable to "the use of cash," says the ECB. If you pay me 200 euros using the offline format, the ECB and third party payments services providers will "not gain access to personal transaction data." The catch is that because our local storage devices must sync up, offline transaction can only be made face-to-face, sort of like cash. So no Holland-to-Germany payments.

Who are these payments services providers, and how do they figure into the equation? If you want to get physical cash, one way to do so is to withdraw it from a bank ATM. In that same vein, to get digital euros you can't get them from the ECB, but will have to withdraw them from a payments services provider with whom you have a relationship. That provider may be a commercial bank, but it could even be the post office.

These payments services providers will also be in charge of registering the storage devices that allow for offline payments. The idea behind registration is to prevent people from having multiple storage devices, and thus evading what will surely be personal holding limits on private offline euros.

The proposal doesn't mention what the limits would be. Will there be, for instance, a maximum of 1000 in offline euros allowed on one's Euro Card at any point in time, and perhaps a monthly spending limit of 5000 euros? Lower? Higher?

My thoughts:

It's great to see the EU champion the cause of financial privacy. In consultations with citizens, privacy was considered the most important feature of a digital euro, so the EU is responding to their needs by ensuring that the ECB's role as a financial privacy provider, historically confined to paper money, continues in the digital era.

Privacy is important, but limiting the size of this anonymous financial space is also prudent, in my opinion, in order to reduce the scope for harmful activities, particularly fraud. Maximum offline balances and transaction sizes will be a key part of this delimiting effort. 

But ceilings should not be set too low, since that will make for unusable privacy. The proposal doesn't mention specific numbers for ceilings, but going forward they will be the a key line of contention, with law enforcement no doubt lobbying for the lowest possible allowance for offline euros, and thus a mostly unusable product, and citizens groups pushing for higher limits and usability.

In additional to limits on balances, the EU's proposal uses personal proximity as the way to set out the boundaries to transactional privacy. That is, in an attempt to limit the availability of privacy, and thus its potential danger, it will confine the option to in-person scenarios.

Unfortunately, if only face-to-face transactions can ever be private, then the EU is saying that it is comfortable with a large percentage of Europeans' financial lives being permanently non-private. Having already opened the door to private offline transactions, the EU has tacitly accepted the ECB's responsibility as privacy-provider to the people. Shouldn't its responsibilities extend further than that? In addition of allowing for in-person private payments, why not allow Europeans to make small amounts of private online transactions, too? This category of transactions will only get proportionately larger over time as people increasingly hunker down into their internet lifestyles.

Lastly, is the EU's commitment to offline privacy one that can be trusted? Will there be back doors? Even if there are in fact no back doors, and offline digital euro transaction are truly 100% private, in our post-Snowdon era how can users even be sure of this? The proposal gives no hints at how and why Europeans can build trust in the EU's privacy claims.

What's the marketing strategy for the Fed's CBDC?

Last month the Federal Reserve published it's long awaited report on central bank digital currency, or CBDC. Here's my quick response.

The product that the Fed is sketching will probably work fine. That is, the technology will be perfectly functional, the buttons will do what they're meant to, and the funds will get from A to B.

From a marketing point of view, however, I think the Fed's vision for CBDC is incoherent. No one is going to use the stuff. It's very possible that the Fed hasn't considered this problem. Having never dealt directly with the public, it probably doesn't have much of a product marketing team.

The main marketing pitch (as far as I can extract from the report) is that a U.S. CBDC will offer you, the American citizen, money that is "free from credit risk and liquidity risk." As a liability of the Fed, CBDC would be the "safest digital asset available to the general public." In addition to safety, the Fed's CBDC would do all the other things that money does: you could send $50 to Aunt Sally and buy clothes at Walmart with it.

Important detail: one of the key design features of the Fed's CBDC is that it would be intermediated. Instead of being offered directly by the Fed, commercial banks will manage people's CBDC.

But how on earth do you market this product?

Here's an imaginary conversation between Fed Chair Jerome Powell and a potential customer who happens to be walking past the Fed.

POWELL: Good morning sir. Can I ask you who you bank with?
PASSERBY: Chase.
POWELL: Can I interest you in switching some of your Chase deposits to CBDC?
PASSERBY: Nah, I don't want no CBD oil.
POWELL: Not CBD oil. CBDC. Central bank digital currency. It's the Fed's new product.
PASSERBY: (skeptically) Dunno. Is it better than Chase?
POWELL: (clears throat, looks at script) It's the safest digital asset available to the general public.
PASSERBY: (wide-eyed) Whatchoo sayin?! My Chase deposits ain't safe? Where's the nearest ATM?
POWELL: Relax, relax, sir. That's not what I meant. Your funds are perfectly safe at Chase. They're covered by government deposit insurance.
PASSERBY: Phew. But you said that CBD is safer.
POWELL: Both products are very safe, sir. You have nothing to worry about.
PASSERBY: (suspicious) So why should I switch?
POWELL: (reads from script again) While Americans have long held money in digital form, for example in bank accounts, a CBDC would be different because it's a liability of the Federal Reserve, not a liability of Chase.
PASSERBY: Ok, I think I get it. It let's me avoid my bank! Chase won't be able to $#@ me over anymore. Get me some of that stuff, man. I hate banks!
POWELL: Well, not quite, you see it's intermediated. You'll still need to use Chase to get CBDC. Your bank will handle your CBDC for you.
PASSERBY: Huh? If Chase is handling my CBD, what's the difference between CBD and my regular Chase account?
POWELL: ....
PASSERBY: I mean, they ain't going to charge me a fee for running it, are they?
POWELL: ....

Powell is stumped by the last two questions. That's because the Fed's CBDC just doesn't add up from a marketing perspective: it doesn't solve any of the passerby's problems. "Safe" is something that Americans already have thanks to deposit insurance. And the one thing that a CBDC might offer – it's not provided by a hated bank – has been taken off the table thanks to the Fed's decision to go with an intermediated model, for which banks will probably charge a service fee.

Maybe I'm being unfair. It could be that a smart marketing team can come up with a script in which Jerome Powell successfully convinces a passerby to switch from Chase to CBDC. But I just don't see it. 

If a product can't be marketed, it either needs a rethink or it shouldn't exist in the first place.

A CBDC, eh?

David Andolfatto recently wrote a helpful article about whether Canada needs a central bank digital currency, or CBDC. I agree with David that a CBDC is "not an essential initiative at this point in time."

The way I see it, there are two big elephants in the room when it comes to introducing a central bank digital currency. Both of them suggest we should slow down any effort to issue CBDC.

But before I get to that, what is a CBDC? In brief, a CBDC is a new payments option that would allow regular Canadians to interact digitally with our nation's central bank, the Bank of Canada. For example, instead of having to use your Royal Bank account or Visa card to buy stuff at the supermarket or on Amazon, you could pay with a central bank digital tool, perhaps a Bank of Canada app or card. The Bank of Canada has been exploring whether the idea of issuing a CBDC for several years now, but so far hasn't pulled the trigger.

Here are what I believe to be the two big risks to rolling out a Canadian CBDC.

The most important one is white elephant risk.

In mature democracies like Canada, the provision of retail non-cash payments is a mostly-solved problem. Decent access to payments is already provided by a panoply of bank accounts, financial  apps, and cards. These existing options for connecting to the payments system are very safe. The $1,000 we hold in a checking accounts to make payments, for instance, is protected by government deposit insurance.

So if the Bank of Canada were to issue a CBDC, it's not obvious to me that many of us would bother using it. It would be just one more safe payments account among a sea of safe options.

That leaves the central bank in the position of having spent large amounts of money building and maintaining a payments network that none of us really needed or wanted in the first place.

Getting rid of an expensive and lacklustre CBDC could be difficult. Central bankers may feel like their reputations are tied to their CBDC projects. This, combined with the fact that central bankers don't feel the sting of a bottom line, may allow these white elephants to limp on for a very long time.

At the moment, most Canadians don't interact with Bank of Canada products (apart from holding cash, usage of which is falling). We mostly view the central bank as a competent technocratic body that does complicated stuff with interest rates. A CBDC project would suddenly put the Bank of Canada in direct digital contact with Canadians. But if the CBDC were to become a white elephant, this proximity could backfire on the central bank. It'll be know as the agency that runs a bloated payment system that the public dislikes. We don't want the Bank's brand to be hurt. We want the Bank of Canada to be trusted and deemed competent.

The second risk is black elephant risk. A black elephant is an obvious risk that people avoid discussing ahead of time.

Most discussions about CBDC centre on the technological hurdles involved in building one. But they often ignore the pesky sociological difficulties of running payments systems.

Fickle customers want to be able to reverse payments when they aren't happy with the products they buy. Users are frequently swindled out of their money by fraudsters and will expect restitution. If Jack accidentally send $500 to Alice instead of the $50 that he intended to send, he will want $450 back. What if Alice disagrees?

This requires that central bank constantly arbitrate disputes.

That's not all. Criminals will try to use a CBDC to sell illegal products. The central bank will have to start policing what is illegal and what isn't. Controversial businesses, say white nationalist publishing houses or kinky porn sites, will line up to use it. That means getting embroiled in politics.  

These are the not the sorts of issues I want my central bankers to get bogged down in. The risk is that demanding CBDC users distract the Bank of Canada from the vital task of conducting monetary policy.

The Bank of Canada might try to outsource the governance of a CBDC to the private sector. But that begs the question: if the central bank doesn't want the burden of running a payments system, why is it trying to get in the game at all? Why not just stick with the status quo, which seems to be working?

In sum, if I had any suggestions for Canadian citizens on how they should appraise a Canadian CBDC, it would be this. Given the above white & black elephant risks, the Bank of Canada shouldn't lead, it should follow. Watch the first few trail-blazing central banks to see how their CBDC projects pan out. (The Swedes, who are aggressively purchasing a CBDC, are a good candidate). If the Swedish CBDC succeeds, copy it. If the Swedes fail, continue on as before. There's no advantage to being the first to market.

The unbanked, the post office, and fintech in the 1880s

"A large population of people are excluded from the financial system because they don't have bank accounts. Fintechs compete to connect them and parallel plans emanate from the government to reach the unbanked, including postal banking."

What year am I describing in the above paragraph? 

It could be 2021. But it also describes 1870s. 

It's 2021 and the U.S. still has a large population of unbanked, those who have so little money that banks would rather not serve them. An astonishing 5.4% of Americans—that's 7.1 million households—do not have bank accounts.

Financial technology companies (aka fintechs) like PayPal and Facebook's Libra have well-meaning plans to connect the American unbanked population. Government-run proposals abound too. Postal banking is probably the most popular option, but more exotic solutions like central bank digital currency (CBDC) have also been floated. But many economists are wary that these government efforts will cripple the private sector.

None of this is new. Concerns over the unbanked, fintech, and a government participation in the payment system were all present back in England in the 1880s. Since I enjoy when the past resurfaces in the present, I'll tell the story.

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Britain in the 1870s had a very sophisticated chequing system. Because banks were the only way for people to access cheques, and banks preferred to limit accounts to rich people and wealthy merchants, the poor and middle class were often left out. 

Luckily, the 1870s version of fintech came to the rescue. The PayPal of the day was something called the Cheque Bank. Established in 1873, the Cheque Bank—like PayPal today—was a bank-on-top-of-a- bank. What do I mean by this?

PayPal is a customer of Wells Fargo, a large commercial bank. Wells Fargo provides PayPal with banking and payments services. PayPal in turn passes these services on to PayPal account holders, folks who might not otherwise qualify as customers of Wells Fargo or, if they could, prefer the way PayPal rebundles underlying Wells Fargo services.

Stock certificate for the Cheque Bank, Limited

The Cheque Bank operated on the same principles. It opened accounts at bank branches all across United Kingdom and overseas. Like PayPal, it passed through underlying banking services to its unbanked customers. The Cheque Bank's main product was cheques, which today might seem quaint. But back then they were cutting edge.

Anyone could buy a book of Cheque Bank cheques at a stationer or cigar store, the Cheque Bank redepositing the cash it received with its bankers. The customer could then spend those cheques at stores, send them to family via the mail, or hold them as a form of saving in lieu of cash (which was always at risk of being stolen). People who accepted a Cheque Bank cheque as payment could promptly take the document to any bank and cash it.

Much like PayPal does today, the Cheque Bank held 100% reserves. That is, for every $1 in cheques it issued, it kept $1 locked up with its bankers. And so its cheques were considered to be as safe as cash. Put differently, regular banks engage in both lending and payments. But fintechs like PayPal and the Cheque Bank don't lend at all. They deposit all of their assets at an underlying bank and focus on offering the payments side of the banking business to their customers.

The Cheque Bank attracted the attention of William Stanley Jevons, one of the most important economists of the day and still very much a household name among economists today. Jevons was one of three economists (along with Carl Menger and Leon Walras) to discover the principle of marginal utility, a key economic principal which had eluded even Adam Smith. 

In his 1875 book Money and the Mechanism of Exchange, Jevons devotes a full chapter to the Cheque Bank, describing it as a "very ingenious attempt" to "extend the area of banking to the masses." Here is what one of the Cheque Bank's cheques looks like:

1899 cheque issued by the Cheque Bank [source]

The cheques could only be filled to an amount printed on the document, writes Jevons. So the above cheque, which had been purchased for £5, could be written out for anything up to £5, although in this particular case the cheque writer (H.L. Stevens) chose the sum of 3 pounds 3 shillings. 

Jevons isn't the only notable economist to write about the Cheque Bank. It also pops up over a hundred years later in economist Edward S. Prescott's work, who describes it as a "highly interesting experiment in extending the use of checks to the lower and middle classes." Prescott suggests that the ability to write a specific amount on the face of one of these cheques would have greatly facilitated payments through the postal service since there was no need for change. Unlike a regular cheque, which also offered this flexibility, the recipient of one of the Cheque Bank's cheques needn't worry about it bouncing.

Jevons was excited by the Cheque Bank. But he was not a fan of a subsequent competing payments innovation, the postal order.

The British Post Office, owned by the government, had long been engaged in the business of transmitting money orders, unofficially since 1792 and officially since 1838. A customer would walk into any money order office, put down, say, £2 and 2 shillings, and get a £2 2s money order. The recipient's name was then written on the order. It could then be sent via post to a distant office, upon which the recipient could take the money order to the counter to be cashed. The officer would first confirm the payment by referring to a separate letter of advice. This letter, sent from post office to post office, served an an extra layer of security against fraud. Only then would the £2 and 2 shillings be paid out.

The problem, according to then Postmaster General Henry Fawcett, is that the money order wasn't very useful to people who only wanted to send small amounts. "If a boy wanted to send his mother the first shilling he had saved, he would have to pay twopence for the order and a penny for postage," wrote Fawcett. In other words, to send a 12 penny (i.e. one shilling) money order, three pennies—a massive 25%—had to be sacrificed in fees. (A shilling in 1880 was worth around US$8 today.) And so it would have been an expensive payments option for the poor.

Prior to his appointment as Postmaster General in 1880, Fawcett had been both parliamentarian and the first professor of political economy at Cambridge. And while he wasn't as illustrious an economist as Jevons (he hasn't left us any bits of economic theory), Fawcett did write what was one of the popular textbooks of the day.

But if Fawcett wasn't going to change the study of economics, he did intend to change the payments system. As Postmaster General, Fawcett proposed complementing the money order with a new product called a postal note, or postal order. (The postal order had been earlier conceived of by George Chetwynd, the Receiver and Accountant General of the Post office). Like the cheques issued by the Cheque Bank founded just seven years before, postal orders would have a fixed denomination printed on them. These increments were to start at 1 shilling and go up to 20 shillings (US$8 to US$160 in 2019 dollars).

By contrast the post office's traditional payment product, the money order, was open-faced and had no denomination. Because postal orders would be issued in smaller amounts, the Post Office needn't bother sending separate letters of advice as a security measure, which meant that they would be far cheaper to process. And so the fees could be lower for postal orders than money orders, broadening the pool of customers.

In an 1880 essay, William Stanley Jevons blasted the idea of postal orders, which hadn't yet received legislative assent. Singling out Fawcett, Jevons wrote:

"The fact of course is that not only from the time of Adam Smith, but from a much earlier date, it has always been recognized that a Government is not really a suitable body to enter upon the business of banking. It is with regret that we must see in this year 1880 the names of so great a financier as Mr. Gladstone, and so sound an economist as Professor Fawcett, given to schemes which are radically vicious and opposed to the teachings of economic science and economic experience."

So that lays out the cast of characters in 1880. It includes exclusionary banks, hoards of unbanked, a set of opposed economists in Jevons and Fawcett, fintechs like the Cheque Bank, and a post office on the verge of issuing a novel product; postal orders.

2020 seems very much like 1880. To help connect the large population of American unbanked to the financial system, a number of modern day Fawcetts (Morgan Ricks, Mehrsa Baradaran, Rohan Grey) have floated public payments solutions including a return of postal banking, central bank digital currency (CBDC), or central bank-accounts-for-all.

Our modern day equivalents to the Cheque Bank includes non-banks such as prepaid debit card issuers Walmart and Netspend, both of which are trying to reach unbanked Americans. Online wallet companies like PayPal and Chime are also in the mix. And stablecoin issuers such as Facebook's upcoming Libra project talk a big game when it comes to financial inclusion. To round things out you've got your modern day Jevonses; economists who don't buy the idea that the government should get into banking (Larry White, George Selgin, Diego Zuluaga).

So how did things end up in 1880? Despite opposition from Jevons and the Economist, Fawcett's postal order dream came to fruition. After receiving legislative approval, the world's first postal orders were issued in 1881:

The world's first postal order was issued in 1881 by the British Post Office. The fee of a halfpenny on a one shilling postal order (~4%) was less than two pennies for a regular money order, which meant the not-so-wealthy could finally afford to make small remote payments. pic.twitter.com/KpbyoY0uHj

— John Paul Koning (@jp_koning) December 30, 2020

Postal orders would go on to become very popular. They largely displaced money orders, except for large amounts. Other postal systems including that of New Zealand, Canada, Australia, and the U.S. would go on to copy the idea. The UK's modern day incarnation of the post, the Post Office, still offers a version of the product.

And what about the Cheque Bank? Digging through old documents, Edward Prescott discovered that the Cheque Bank failed in the late 1890s. According to liquidation proceedings reported in the Banker’s Magazine, it was plagued by forgery problems and increased competition for less wealthy depositors from banks. Perhaps the emergence of the postal order also played a part.

I'm not invoking the 1880s as a prediction of what will occur in the 2020s. Rather, it fascinates me because it reveals how old these payments dilemmas are. The same tensions between public and private payments were present then as they are now. And it's also interesting to see how economists have always been engaged in questions of financial inclusion. Not just Fawcett but Jevons too, who we know primarily for his work on monetary theory. 

And over a hundred years later, Edward Prescott delved into the topic, too. In a 1999 paper (which mentions the Cheque Bank), Prescott discusses the idea of opening up an inexpensive type of bank account called an Electronic Transfer Account (ETA) so that all Americans, particularly the unbanked, might receive Federal benefit payments digitally. (Prescott was skeptical that ETAs might work out. The program, introduced in 1999, was discontinued in 2018 and has been replaced with a prepaid debit card program.)

In closing, the topic of how to help the unbanked is a complicated one with many moving parts. Which is why we should explore how things played out in different times. Perhaps history can get us to see the debate in a new light.

Merry Christmas and a Happy New Year!

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P.S. If you're interested in learning more about Jevons's thinking on payments, he was a big champion of the idea of creating an international coin standard. I wrote about it here. Think of it as a proto-version of the Euro. Jevons came up with a "tidy English solution" for fitting Britain into this proposed international coin union. The project never came to fruition.