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.

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* 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.

The vandalization of "bitcoin accepted" signs

[Here's an article I wrote for CoinDesk's recent Payments Week series.]

Why We Need Crypto Payments to Work

Crypto has always held out the promise of a payments revolution. But that revolution never happened.

We're 13 years into the Bitcoin age, and there’s only one store in my neighborhood in downtown Montreal that advertises that it accepts bitcoin. I was passing by that store the other day and noticed that a vandal had crossed out the bright orange ₿ written on the storefront, adding a "non" in protest.

Why? The vandal didn't provide us with more information. But if I had to guess it probably had to do with their opinions on the environmental implications of bitcoin's security method, proof-of-work. Proof-of-work requires huge amounts of electricity, and in an age of global warming there's no place for such an awesome display of energy consumption.

This small example is illustrative of the crypto payments challenge. It's tough enough for crypto to gain acceptance as a payments network. The medium’s inherent volatility and novelty are huge hurdles. Add to that concerns about crypto’s effect on the environment, and getting the payments ball rolling becomes even more of a challenge.

But even normies who don't care about crypto should want it to succeed as a payments medium.

Cash is rapidly disappearing as a payment medium. The big winners are the Visa and MasterCard card oligopolies. Every time someone deserts cash, the card networks get a little more powerful. As consumers we don't often notice the few cents that the card networks extract from us when we pay with our debit or credit cards, but it leads to fantastic profits for them. Visa and MasterCard's returns on equity – 40% and 120% respectively – give testament to their wide oligopolistic moats. (The average company's return is a meager 10-15%).

There are a number of solutions to oligopolies, one of them being competition. If there are more payment networks fighting for market share, we consumers (and the retailers we frequent) can at least choose the cheapest one.

And that's why it would be nice if crypto worked for payments.

Alas, crypto usage has been mostly confined to the relatively small confines of the speculative crypto economy, only leaking out once in a while to serve as a normie payments medium. These leaks may be slowly plugging up, too. Over the last year or so, activists have been trying to push the small advance that crypto has achieved in the payments realm into retreat.

My neighborhood store is just one example. The storekeeper's internal dialogue might have gone after seeing their store window vandalized: "Why bother accepting the odd bitcoin payment when it attracts such negative attention?"

Last month, hundreds of long-time Wikipedia editors asked the Wikimedia Foundation to stop accepting cryptocurrency, the most popular reason put forth being its environmental sustainability. A few months before, Discord – a popular messaging platform – quashed rumors of a cryptocurrency integration after pushback from users concerned over energy use.

The Wikipedia editors' vehemence stands in contrast to the tiny amount of crypto that Wikimedia has collected. According to Wikimedia, just 0.08% of its donations have been in crypto, mostly bitcoin. The Wikimedia Foundation has little reason to say no to the activists. At 0.08%, crypto isn't proving to be very useful for accepting payments. Why bother pushing back?

Had the activists campaigned for Wikimedia to stop accepting Visa, for instance, it'd be a complete non-starter. Visa has an advantage over crypto. It’s already big, likely accounting for a decisive percentage of Wikimedia donations.

That you can’t say no to Visa, but you can say no to crypto, illustrates the crypto payments dilemma. Retail payments networks are notoriously difficult to bootstrap. It's the classic chicken-and-egg problem. For an individual to adopt it, a new payment option needs to be already useful (by being widely available and spendable at shops), but it can't be already useful if no one wants to try it in the first place.

Making this paradox worse is that the card networks already have firm footholds. People have grown used to their plastic, and the incumbents use dirty tricks to enforce lock-in, like card reward points and no-surcharge policies. The nut is made even harder to break by crypto's incredible volatility. Risk-averse new users are reluctant to try it.

But the crypto world has evolved a response to volatility. Stablecoins are a type of cryptocurrency that is pegged to traditional fiat money, which makes them less intimidating for people to use. And so where regular crypto comes short, stablecoins at least stand a fighting chance against the MasterCard and Visa oligopolies.

Unfortunately, stablecoins are built on energy-intensive proof-of-work blockchains, which opens them up to the growing environmental critique. Given the already difficult chicken-egg payments problem being faced by stablecoin issuers, the last thing they need is for card users to come up with one more excuse not to give stablecoins a try.

Mozilla's recent reappraisal of its crypto acceptance policy provides a good example of how I hope the debate evolves. In January, Mozilla – the nonprofit organization that makes the Firefox web browser – decided to temporarily pause cryptocurrency donations to see how crypto "fits with our climate goals."

This month Mozilla announced its new policy. Rather than closing the door on crypto, it came up with a more nuanced solution. Mozilla won’t accept proof-of-work coins, but it'll accept proof-of-stake cryptocurrencies it sees as "less energy intensive."

If Mozilla's more welcoming policy is emulated, and one hopes it is, it offers stablecoin issuers a window. But this window comes at a price. If stablecoins are ever going to compete in a meaningful way with the card networks, they need to dissociate themselves from proof-of-work. That may mean avoiding expansion to proof-of-work blockchains. At the worst, it means helplessly waiting while the proof-of-work chains on which they already exist, like Ethereum, switch over to less energy intensive security methods.

Removing as much ammunition as possible from critics will make the already difficult chicken-and-egg payments problem a little easier for stablecoins to solve. We need them to win, though. Visa and MasterCard aren't getting any less dominant.

A dark world where bitcoin payments have gone mainstream

[This is an adaptation of an article I wrote last year for CoinDesk]

Satoshi Nakamoto's electronic cash system – Bitcoin – was originally intended for people to make online payments. But it never caught on as a mainstream payments option. Bitcoin's wild, and potentially lucrative, price changes have prevented it from developing into a popular substitute for Zelle, Visa, ACH, or PayPal. On top of that, the process used to run the bitcoin network, proof-of-work, is incredibly costly (by design).

What would cause bitcoin payments to go mainstream in America? That is, if ten years from now everyone was using volatile bitcoin tokens as their main medium of exchange, what major events would have gotten us to that point?

Unfortunately, the path to mainstream bitcoin payments is not an uplifting one. It requires that the U.S.'s reliable payments pipelines, the ones that have knitted Americans together for decades, stop doing their job. This unraveling of the payments system would be just one part of a broader decaying of American society. Only when these core payments systems are inoperational, and American society is on its knees, will a third-best payments rails like bitcoin be called into play.  

Here's a short story about how America's payments infrastructure slowly implodes and bitcoin payments go mainstream.

We all know that America is ideologically divided. This political storm has been spreading into commercial affairs with companies being required to take a stand on many polarizing issues. The payments industry in particular has become a major venue for conflict. (Think controversies over fundraising for Kyle Rittenhouse and card network censorship of sex workers.)

Imagine a world in which these divisions were to deepen.

In 2023, activists successfully pressure payment processors to make broad-based purges of businesses that are deemed too Republican. One casualty, the Wall Street Journal, is de-platformed by its acquiring bank. (An acquiring bank is the financial institution that hooks businesses into the Visa and Mastercard networks.) The Journal quickly gets a new Republican-friendly acquirer. Companies with Trump-supporting executives like Home Depot and Goya Foods are cut off by their acquiring banks, too.

Republican activists react by pressuring financial institutions to unplug Democrat-aligned businesses. In 2024, several large banks stop connecting abortion clinics to the Visa and MasterCard networks.

By the late 2020s a divided ecosystem of payments processors and acquirers has emerged. One half specializes in connecting businesses and nonprofits deemed Republican to the card networks. The other half specializes in connecting Democrat ones. Any bank or processor that tries to stay neutral is shunned – she who connects my enemy to Visa is my enemy.

Even at this level of divisiveness, Republicans and Democrats can still make payments with each other. That's because MasterCard and Visa remain neutral. The two networks allow both Republican- and Democrat-aligned acquiring banks, and the businesses that these banks serve, to connect to their networks. And thus dollars can flow across the ideological chasm.

But in 2029, Democrat activists succeed in pressuring Visa to end their neutrality and disconnect all Republican acquiring banks and processors. Suddenly, businesses that are deemed Republican can no longer accept Visa cards. The next year MasterCard is pressured to go Republican. All Democrat-leaning businesses are exiled from the MasterCard network.

America is now divided into two card fiefdoms. Apple (D) is Visa, Walmart (R) is MasterCard. Amazon (D) is Visa, Home Depot (R) is MasterCard.

But commerce can still occur across the divide. Any consumer who wants to shop at both Republican and Democrat stores need only make sure they have both a Visa and a MasterCard.

Getting both brands might not always be possible, however. Republican individuals may find it difficult to pass the increasingly politicized application process for a Visa card. Likewise, Democrat consumers find it challenging to make it through the application process for a MasterCard. 

That's when bitcoin might become a more useful payments mechanism. Since the Bitcoin network is censorship resistant –  anyone who want to use it can easily get access – it provides a means for Republicans to shop at Democrat stores and vice versa.

And so bitcoin finally becomes more popular for payments, but only because American society has moved backwards to a less civilized state. The easiest and most efficient option, cards, have degraded to the point that a back-up technology, Bitcoin, must be relied on. You can see that bitcoin isn't a progressive technology, it is a retrogressive one.

Up till this point in my story, the broad ideological upheaval between left and right has been reflected in a splitting-up of the card networks. Notice that the underlying payments plumbing on which America's entire private payments system runs, the Federal Reserve, has remained neutral throughout.

In 2031, that changes. The neutrality of the Federal Reserve, made up of 12 district Reserve banks, comes to an end. The CEO and directors of the Federal Reserve Bank of Kansas City, all staunch Republicans, decide to stop providing Democrat-leaning banks in their district with access to Fedwire. (The Kansas City district includes the states of Kansas, Wyoming, Nebraska, Colorado and Oklahoma.)

Fedwire, the Federal Reserve's real-time settlement system, is America's core payments utility. When anyone makes a payment from his or her bank to another bank, it'll eventually be settled by a movement of funds along Fedwire. By cutting off Democrat-leaning banks and their customers from this key utility, the Kansas City Fed effectively severs them from the U.S. payments system.

In retaliation, the Federal Reserve Banks of San Francisco and Boston disconnect Republican banks from Fedwire, in one swoop unbanking all Republican-leaning businesses located in their districts. The remaining ten district Reserve banks all pick sides, too.

If they haven't already done so, Republican leaning businesses rush to relocate to Republican districts. Otherwise they will not get banking services. Democrat businesses migrate to Democrat districts.

Those businesses brave enough to stick it out in a hostile district will need an alternative payments mechanism for connecting with their suppliers and customers. Cash will be one option. For non-face-to-face payments, however, bitcoin may be their only option. And so as America descends into partisanship and the Federal Reserve crumbles, an awkward bitcoin "cash system" becomes a way around an increasingly balkanized payments system.

Even in this hyper-factionalized America, inter-district trade between Democrat and Republican zones can still occur. A car mechanic in a Democrat district can buy tires from a part dealer in a Republican state. That's because Democrat-leaning Federal Reserve banks (such as the San Francisco Fed) remain connected to Republican-leaning Federal Reserve banks (such as the Kansas City Fed) through Fedwire. Fedwire continues to unite disparate parts of the country.

That stops in 2033. The San Francisco Fed halts all incoming payments from Republican Reserve banks including the Kansas City Fed, Atlanta Fed, and Dallas Fed. In reaction, Reserve banks in Republican enclaves such as Kansas City cut off Democrat districts. At that point there ceases to be a universal U.S. dollar. Money held in accounts in Georgia and Florida and Oklahoma can't move into accounts in California or Washington, and vice versa. The payment tissue that once connected all Americans has torn.

With the collapse of Fedwire, cross-border trade and remittances between hostile Democrat and Republican enclaves get very tricky to carry out. Society may have regressed far enough back that silver and gold once again become an international settlement medium, just like in the 1600s and 1700s. Or perhaps bitcoin would become America's preferred medium for making payments across enclaves. Unlike gold, bitcoin can be transferred remotely.

The collapse of America's payment infrastructure would be just one theatre in a much larger cleaving of American society along ideological lines. Other key bits of American infrastructure would also begin to fall apart: the courts, law enforcement, the education system. There would be large physical dislocations as Republican families flee Republican enclaves and Democrats to Democrat enclaves.

But if America's electrical and telecommunications infrastructure has crumbled, too, would it even be possible for people to use bitcoin, which is reliant on the internet?

It’s a stretch, but we can imagine distributed solar power solving the electricity problem. As for accessing the bitcoin network, tinkerers could try to connect old-fashioned ham radios to Blockstream's bitcoin satellite. If the remnants of AT&T and Verizon can only provide patchy internet service, so-called decentralized mesh networks might offer an alternative way to access the web.

This dystopian future probably isn’t going to happen. It's just a story. For now, bitcoin remains an unpopular payments system. Let’s all hope that it stays unpopular. No one wants to live in a country that has declined so far that bitcoin has become a vital way to make payments.

Embargoed by MasterCard/Visa, kratom vendors turn to crypto and eChecks

I spend a fair amount of time tracking real-world use cases for cryptocurrencies. I'm not talking about silly speculation, or millionaire crypto hobbyists using their bitcoins to buy Teslas, or illegal dark web markets that use Monero for payments. I'm talking about actual licit businesses that have turned to cryptocurrency payments -- not because they particularly care about crypto -- but because they need to.

To date, the retail kratom industry is one of the best examples I've been able to find of broad non-speculative licit cryptocurrency adoption. Kratom is a plant that grows in southeast Asia. The kratom leaf can be ground into a green powder that, when ingested, acts as a stimulant. In the U.S., online kratom stores are ubiquitous.

I'm not going to get into whether kratom is dangerous or has medicinal value, or whether it should be legal or not. (For that sort of discussion, I'd suggest visiting the FDA, WebMD, or the Mayo Clinic.) The main point I want to make in this post is that kratom is legal in the US (although several states have banned it).

Although kratom is legal, MasterCard and Visa have decided to prohibit kratom sales from their networks. This poses big problems for online kratom shops. Because the card networks dominate online payments, exile by these oligopolies causes serious financial damage to the unfortunate targets. To survive, the kratom industry has been forced to turn to backup payments systems.

MasterCard's Business Risk Assessment and Monitoring (BRAM) policy, for instance, lists a number of impermissible activities:

Source: Netpay

Most of the prohibited transactions listed by MasterCard are illegal, such as the sale of child pornography. But some are legal, including the sale of "certain types of drugs or chemicals." MasterCard specifically mentions salvia divinorum, a legal drug that has hallucinogenic properties. Although it isn't listed as an example, kratom is usually considered to fall into the same category as salvia.

Acquirers, the financial institutions that connect businesses to the card networks, face large penalties if Visa or MasterCard catch them facilitating prohibited card transactions. To reduce this risk, acquirers will often hire what are called Merchant Monitoring Service Providers, or MMSPs, to scan through retailer data and spot anything that looks dangerous. MMSPs such as LegitScripts are very aggressive about rooting out kratom sales.

Despite the card networks disallowing kratom sales, many of the 20 or so sites that I scanned through still offer card payments. According to my research, kratom sites have a number of ways of securing card availability, one of which is called transactions laundering. That is, a kratom site camouflages its prohibited product sales by routing them through a front store that sells legitimate goods. Eventually these prohibited transactions get caught by the card network or the acquirer, and the site's card network access is revoked. It then has to scramble to build another front.

One commenter on Reddit describes kratom transaction laundering thusly:

"...we can do manual credit cards (as I can) over the phone because we use standard processors that don’t know it’s kratom. We do this by creating Dba’s that have fake web presences selling other products and they don’t find out it’s kratom for a while. Usually we can get a processor to work for 3-12 months before it gets shut down."

(Note: Dba refers to "Doing Business As". A DBA is a business pseudonym or a “fictitious name filing.”)

Another route that kratom sites take to get access to the card networks is to use an overseas aggregator. Kratom Crazy, a website that has since closed for business, describes how and why:

"International is the only way to go because card schemes are less aggressive on banks in international communities. This doesn’t mean they can’t be fined or shut down – oh because they can and still do. No aggregate account we have ever seen has lasted over 6 months before being shut down. The major downside is these accounts are usually 9% fees and up plus 10% rolling reserve over 6 months. So the merchant takes 19%+ off the top immediately plus they have to wait for 2-3 weeks before seeing the first days processing payout. Its a bad deal all around and a massive risk for losing money. In addition, when these accounts get shut down, there is usually no payout to the merchants."

So the upshot is that the sort of card network access that many kratom sites have managed to secure is unreliable and spotty. Indeed, many sites don't accept cards at all, including (at the time of writing) OG Botanicals, Canada Kratom Express, Krypto Kratum, and Rhizohm. Rhizohm's payments page goes to some pains to explain how it would rather be honest than lie to get card access:

Source: rhizOhm

Which gets us to cryptocurrency. Almost all of the kratom sites, including those that haven't been able to sneak themselves into the card networks, accept cryptocurrencies including Bitcoin, Ethereum, Litecoin, XRP, Stellar Lumens, or some other one. Third-party crypto processors like CoinPayments or Coinbase Commerce are typically used for payments processing.

When they accept cards, kratom sites often offer discounts for cryptocurrency payments. For instance, Happy Hippo's checkout page offers a 20% discount:

It's easy to understand why kratom sites would offer such discounts. It's expensive to use overseas aggregators for card payments. By steering a customer to Bitcoin or Ethereum, a kratom vendor saves itself the pain of a 10-15% card processing fee.

But cryptocurrency isn't the only payments option that kratom sites fall back on. Even more popular than crypto is eChecks, a traditional "fiat" form of payment that gets processed via an automated clearing house, or ACH. A kratom buyer inputs their bank routing and account numbers into the payments page, the payment then gets routed to the ACH network and, once cleared & settled, the funds arrive in the kratom merchant's bank account.

In the same way that a business must work with a card acquirer to get access to Visa or MasterCard payments, they must work with an eCheck acquirer in order to accept eCheck payments. But onboarding standards seems to be much looser with eCheck acquirers than card acquirers. For instance, in the screen shot below an eCheck acquirer is actively soliciting all sorts of high-risk industries, including not only kratom but also CBD oil and MLM-based businesses.  

If there's an online retail payments option that's as badass as bitcoin, it's got to be eChecks.https://t.co/HJfEIeQER3 pic.twitter.com/sb4DnHW2X1

— John Paul Koning (@jp_koning) October 7, 2021

Many kratom sites also accept a bespoke payments method called GreenBean Pay. Users open an account with GreanBean Pay and submit their banking account information. The service then uses Plaid -- a piece of financial plumbing that allows apps to hook into banks -- to link to the buyer's bank account and process the kratom payment.

Lastly, a bunch of kratom sites accept person-to-person payments options such as Cash App, Venmo, Zelle, and Interac eTransfer. (This probably goes against these services' terms of service, which generally limit usage to person-to-person payments).

While these backup options have become vital for connecting kratom retailers to the public, they are not really a great substitute for a card network connection. Cryptocurrency is clunky, awkward, and risky. eCheck is slow. By not offering the convenience of card payments, kratom sites lose out on a steady stream of would-be buyers. And this is evident by how desperate they are to find hacks that get them back into the Visa and MasterCard walled gardens.

In closing, I want to touch on something I mentioned in my previous post on MasterCard and porn. A big reason that card networks refuse to process legal transactions for things like kratom (or, similarly, for salvia divinorum, which I wrote about here) is they don't want to damage their brand. These substances may be permitted by law but they are controversial, and so the networks refuse to touch them.

All businesses have the right to protect their brands. But the card networks are oligopolies, and thus necessary for online survival. And so in my view the card networks should be required to forfeit their right to protect their brands. That is, Visa and MasterCard (insofar as they retain their oligopolistic powers) should not be be allowed to police vendors for what they deem to be controversial but legal products.

Which is not to say that I'm a champion of kratom. I'm only suggesting that the appropriate way to control such a product is not by card network bans, but by the Drug Enforcement Agency declaring it to be a scheduled drug.

The good news is that these sorts of situations are very rare. The card companies allow almost every legal transaction under the sun on to their networks, save a few outliers like kratum. This means that the population of licit businesses that need to use a back-up system like cryptocurrency payments (or echecks) is not very big. But examples like this still warrant our attention. Even if we don't particularly care about kratom, one day a product that we regularly consume could get censored by Visa or MasterCard.

MasterCard as censor

Governments have incredible powers to dictate what people buy online.

By virtue of being oligopolies, the two payments networks -- MasterCard and Visa -- exercise the same powers as governments do. If MasterCard bars your business from its network, you effectively don't exist.  

We may not agree with how governments set rules about what things we can buy, but at least there is a somewhat transparent and democratic process -- however flawed -- behind the government's decisions. Visa and MasterCard's rulings, on the other hand, are opaque and driven by card executives, not voters. It is important to monitor these networks to see how they are exercising their powers of online censorship.

In this spirit, here are some thoughts on MasterCard's new rule change, AN 5196, which governs websites that provide adult content. Now, it could be that you don't particularly care about porn. But even then, it's worthwhile to pick through the rule change to see how the scope of online commerce is about to be narrowed. As I wrote in my recent article for the Sound Money Project, the sex industry exists at the edge of the payments universe and thus serves as a useful barometer for the general state of payments inclusion.

AN 5196: A short description

Issued earlier this year, AN 5196, or Revised Standards for New Specialty Merchant Registration Requirements for Adult Content Merchants, requires adult sites to obtain consent from all models who are depicted in a video or image. Sites must also verify the identity and age of all models. These systems must be in place by October 15, 2021. It is the job of acquirers, those companies that connect adult sites to the MasterCard network, to ensure that rules are being followed. Sites that don't comply will be disciplined or banned.

Here is how one site, JustForFans, is implementing the changes:

"We understand how scary this transition can be for our models..." JustForFans, a porn site, explains how MasterCard's new rules for adult content are being implemented: https://t.co/WV6QHoEmlx pic.twitter.com/gGxuJVroFJ

— John Paul Koning (@jp_koning) September 24, 2021

In addition to collecting information, MasterCard will now require that content be reviewed by sites prior to publication to ensure that it is not illegal and that it does not "otherwise violate the Standards." If the content is a real-time stream, the site must be able monitor it and take it down immediately.

AN 5196 will also require porn sites to provide their acquirer with monthly reports including a list of all content flagged as "potentially illegal or otherwise in violation of the Standards," as well as the actions taken to address these violations.

Although MasterCard's actions are designed to reduce the amount of illegal adult content, it will also result in less legal adult content being available online. I'll get into that later.

For now, let's start by going through the justification for MasterCard's censoring of illegal content. This decision isn't entirely up to MasterCard, as I'm going to show.

The fight against illegal online content

Many nations have laws that prohibit various types of adult content. Child pornography is universally illegal. Revenge porn, or the posting of pornographic images of a partner without permission, is also prohibited in many jurisdictions, either explicitly via anti-revenge porn laws or through anti-privacy and/or anti-cyberharassment laws. Sex trafficking, which includes cases such as Girls Do Porn, (a company that used fraud and intimidation to recruit non-professionals to pose in porn videos) is also illegal. Obscenity is prohibited in many jurisdictions, too.

Society has generally gone one step further than punishing the people who are responsible for committing crime. To help further reduce crime, we also punish the financial institutions that facilitate these illegal transactions. If a bank knowingly provides services to a child pornography site, for instance, that bank may be held criminally liable for laundering money.

To avoid being punished for accepting the proceeds of crime, financial institutions make an effort to filter out illegal payments, say by implementing customer due diligence, or know-your-customer (KYC), requirements. By demonstrating to law enforcement that they have filters in place, bankers can avoid prosecution for money laundering.

It is courtesy of this filters that financial institutions like MasterCard help project society's laws about content, however imperfect, onto online commerce. MasterCard performs this role of censor because we (i.e. voters and politicians) have delegated it that role.

Which gets us back to AN 5196.

A 2020 exposé by the New York Times revealed that one of the world' biggest porn sites, PornHub, had allowed child sexual abuse material and other non-consensual videos to appear on its site. (I wrote about this event here.) Because card acquirers must ensure that the businesses they connect to the MasterCard network are not selling illegal content, Pornhub should never have been allowed to host this content in the first place.

MasterCard's response was AN 5196. Prior to the Pornhub incident, acquirers were obligated to stop illegal porn from being transacted on the MasterCard network, but they were allowed to devise their own methods for doing so. The new rules impose explicit and uniform procedures across all acquirers. (I've already described what they are in the first section, including collecting identification.)

Legal content caught in the blast radius

AN 5196 will almost certainly reduce the amount of illegal content being transacted along the MasterCard network, and thus the amount of illegal content available on the internet. And that's a good thing. Some illegal content will inevitably flow to alternative adult sites that use cryptocurrencies or eChecks for payments. But without the ease of card transactions, this content won't attract the same number of eyeballs as before.  

Unfortunately, AN 5196 has a blast radius. It will also reduce the amount of legal adult content available on the internet. Because adult sites will now have to collect the personal data of all people appearing in videos and other images, content makers who worry about being doxxed by insiders at porn site, or who fear losing their data to hackers who compromise sites, will stop providing content. (To be fair, some adult sites were already requiring identification prior to MasterCard's rule change.)

It might be possible to design systems to reduce the amount of law-abiding models who self-censor themselves out of fear of losing personal data. But this would require a different, more privacy friendly, approach to managing identity. That's a whole other conversation.

MasterCard's ban will also reduce the amount of legal but risqué/controversial material that is available online. 

You'll notice that AN 5196 requires adult sites to preview all content not only for potentially illegality but also for violations of "the Standards." 

What are MasterCard's standards?

In addition to prohibiting illegal material, MasterCard has long prohibited any transactions that may hurt its brand or "damage the goodwill of the Corporation." It provides a bit more clarity on this in 5.12.7 (2) of its rule book, where it declares the following activities to be in violation of its rules:

"The sale of a product or service, including an image, which is patently offensive and lacks serious artistic value (such as, by way of example and not limitation, images of nonconsensual sexual behavior, sexual exploitation of a minor, nonconsensual mutilation of a person or body part, and bestiality), or any other material that the Corporation deems unacceptable to sell in connection with a Mark."

I'm not entirely sure how MasterCard or its acquirers determine what is "unacceptable" or lacking "serious artistic value." Whatever the case, AN 5196 is likely to lead to an increase in brand-related censorship. The new set of rules requires that adult sites peruse each individual bit of content prior to publication. With sites applying more attention to content than ever before, this increases the likelihood of legal material being removed out of concern over MasterCard's reputation.

In addition, sites must now file monthly reports with their acquirers in which they list all content flagged as illegal or in violation of the Standards. The pressure to demonstrate that they are protecting MasterCard's brand will probably lead adult sites to apply harsher censoring standards than before.

Should monopolies be allowed to censor legal material?

If I may editorialize a bit, all businesses have the right to protect their brands. But MasterCard is an oligopoly, and thus necessary for online survival. And so it should be required to forfeit that right. That is, MasterCard shouldn't be allowed to police content for what it deems to be controversial material that could hurt its reputation. Governments have to provide services to every citizen, even ones who look funny or do strange things. The same should apply to MasterCard. 

So to sum up, the scope of online commerce is about to be narrowed. AN 5196 will reduce the amount of content available online by: 1) reducing illegal adult content; 2) reducing legal adult content being produced by those preferring anonymity, and; 3) reducing legal content that is deemed to be brand-damaging.

As far as I know, this is the first time that a card network has forced a set of content providers to adopt a know-your-customer requirement. For now, MasterCard has limited this requirement to adult sites. But who knows, one day it may require other types of content providers (i.e. social media?) to adopt the same standards as porn. While there may be benefits to this sort of policy, let's not forget the costs.

The bitcoin-to-salvia divinorum trade route

I am now writing editorial articles for Coindesk. In my first piece I explored Strike, a new app that intends to bring bitcoin payments to a mainstream audience. Coindesk allows me to repost articles after a delay. Rather than putting up the whole thing, I'm just going to take a few bits from it and try to create something new.

We've been discussing bitcoin-as-money on this blog for almost eight years now. Since then the stuff has always been just one design flaw away from taking off as a way for regular folks to make payments. So when I heard about Strike, my curiosity was piqued. Is it bitcoin's killer app, the one that that covers up enough of bitcoin's nuisances that it brings bitcoin payments to a mainstream audience? Or is bitcoin so intrinsically awkward that it will always be consigned to being a niche payments rail?

The rough idea is that Strike will make bitcoin more friendly by standing as gateway between normies who prefer to pay with fiat and savvy bitcoin users. To better understand what this means, here's an example:

"Say you’d like to buy an antique vase for $100 at your neighbor’s garage sale. You don't have any cash on hand. But you do have your credit card. Needless to say, your neighbor doesn’t have a card terminal set up. But she does have a lightning channel open. Strike allows the two of you to connect. The $100 flows from your bank account to Strike’s bank account, upon which Strike sends 0.01 bitcoins to your neighbor via lightning.

That’s it. Without even knowing it, you've paid your neighbor with bitcoin. No volatility. And no need to learn how to use a strange new payments network. The entire experience simply piggybacks off of your existing knowledge of how to use a debit card.

As for your neighbor, with just a lightning address, she can immediately accept non-reversible payments from debit card holders all over the world."

This sort of hybrid fiat-to-bitcoin system is a pretty neat idea. Regular folks get to keep buying stuff with their debit cards but without even knowing it are settling in bitcoin. But how popular could Strike get?

I want to back up a bit and focus on the seller in a hypothetical fiat-to-bitcoin payment. In my set-up above, I envisioned a neighbour who is holding a garage sale. Without a point-of-sale terminal, a card can't be used. This opened the field up to bitcoin. But what I omitted in my example was the option to use popular person-to-person payments app like Venmo, Zelle, or Square Cash. Why would the neighbour bother accepting bitcoin (i.e. Strike) if she can just get dollars instantly delivered via the Zelle app?

Let me formulate this question more generally. If someone says that they can either pay you in bitcoin or fiat money, which of the two would you choose to receive?

Most people will choose to receive fiat, not bitcoin. Bitcoin is a recursive, self-referential guessing game. This results in an incredibly volatile price. Regular folks are simply too scared to play the bitcoin guessing game, even if it's just for a few minutes or hours. Fiat is stable and comfortable.

If we normies are going to gamble (say by playing poker in the evenings or buying lottery tickets on Mondays), we usually don't want to mix those habits with our day-to-day payments activities. There's a time and a place for gambling. And there's a time and a place for receiving salary payments and holding garage sales. But as a rule, we aren't generally comfortable combining our gambling habits with our payments routines, say by accepting lottery tickets (or bitcoins) as salary.

That being said, given the question I posed above, there will always be some folks who choose bitcoin over fiat. What sorts of people might these be?

They have to be the sort of people willing to put up with bitcoin's volatility. Bitcoin hobbyists are one demographic who fall in this category. Those with huge risk appetites are another. But these aren't big markets.

A larger audience can be found among people who sell illegal products. These sorts of transactions can't be processed by fiat payments systems like Visa or MasterCard. Bank-to-bank payments leave a paper trail. Accepting bitcoin (and putting up with its volatility) may be their only safe choice for selling illegal goods & services.

Connecting hundreds of millions of debit card owners to the illicit economy would constitute a massive market. In practice, however, this probably isn't a connection that a regulated payments processor like Strike can facilitate. Say Strike starts to link cocaine-using debit card owners to anonymous bitcoin addresses controlled by cocaine dealers. Politicians, law enforcement, and regulators would be furious.

To cut down on transactions for illegal goods & services, I suspect Strike would have to start verifying the identities of the owners of the bitcoin addresses it connects to. But then underground users would shun the Strike network. Not entirely, of course. Even if Strike were to implement identity checks, small illicit trades would still continue. After all, even though Venmo users must identify themselves, Venmo still attracts plenty of of drug transactions.

There is another group of people that would choose bitcoin over fiat. Consider vendors that sell legal goods but have nevertheless been cut off by mainstream payments networks.

If you look through MasterCard's Business Risk Assessment and Monitoring (BRAM) policy, for instance, you can see a list of impermissible activities:

Source: Netpay

Most of the activities listed in MasterCard's BRAM are illegal. But some are legal, including the "sale of certain types of drugs or chemicals (such as synthetic drugs, salvia divinorum, psilocybin mushrooms and spores, and nitrite inhalants)."

Take salvia divinorum, a leaf that has hallucinogenic properties but is legal in most U.S. states. Neither MasterCard nor Visa will let their networks to touch it.

If you take a look at three Salvia vendors located in the U.S.—The Best Salvia, Salvia Extracts, and Salvia Hut—none of them accept credit cards. They can't. "Do you accept credit or debit cards?" Nope. We will get fined by Visa or Mastercard if we accept credit or debit cards," says Salvia Hut's page. But all three stores accept bitcoin.

Here's an example of Bitcoin as a niche payments rail. Visa & MasterCard refuse to process salvia divinorum transactions. So stores that sell this hallucinogenic (but legal) herb depend on bitcoin for payments.

Check out the payments page for https://t.co/ErGkELYe2x pic.twitter.com/07TlJPWBKV

— John Paul Koning (@jp_koning) March 6, 2020

So here is a market that could certainly use Strike as a bridge to its card-paying customers. Instead of having to go out and buy bitcoins, a Salvia buyer could pay with their card via Strike, the bitcoin leg of the transaction being processed invisibly in the background. That's pretty convenient.

But salvia isn't a very big market. And as a visit to the three salvia stores will show you, bitcoin shares the Salvia payment market with e-checks (a bank-to-bank ACH option). One of the stores (see below) accepts Western Union money orders as well as PayPal and Square Cash. (I suspect that this is probably against the terms & conditions of PayPal and Square Cash). This goes back to my original question. Why would a garage sale transaction (or a salvia transaction) be expedited via bitcoin rails if the counterparties to the deal can use fiat routes like e-checks or Venmo/Square Cash/Zelle?

So let's encapsulate the conundrum. MasterCard's BRAM allows it to process almost every legal transaction under the sun, save a few outliers like salvia. This means that the population of underserved licit users that would need to use a back-up system like Strike's hybrid fiat-to-bitcoin payments app is not very big.

But this is a familiar conclusion to anyone who's been reading my posts over the years. When it comes to bitcoin-as-money, the same old problems keep cropping up. Crippled by its recursive, self-referential nature, volatile bitcoin never plays more than a niche role as a payments network.

That's probably better than nothing. When fringe vendors are temporarily cut off by the likes of Visa and MasterCard, and their Venmo account is frozen, and e-checks are off limits, at least these folks will always have an option for making transactions.

Starbucks, monetary superpower

I recently spent some time on Twitter discussing the monetary wonders of Starbucks. In this post I'll bring a bunch of tweets together into a single blog post.

I don't go to Starbucks very often, so I only recently learnt that the company has succeeded in getting many of its customers to stop using cash and debit/credit cards to buy coffee. Instead, they are using  Starbucks's own payments option:

Wow Starbucks, what a great gig.

Starbucks has ~$1.6 billion in 'stored value card liabilities' i.e. the Starbucks Card. So ~6% of the firm's liabilities are comprised of coffee addicts paying 0% for the privilege of lending to their supplier.
Source: https://t.co/nGH2arujYz pic.twitter.com/cGcSW3L4MM

— JP Koning (@jp_koning) August 11, 2019

Starbucks has around $1.6 billion in stored value card liabilities outstanding. This represents the sum of all physical gift cards held in customer's wallets as well as the digital value of electronic balances held in the Starbucks Mobile App.* It amounts to ~6% of all of the company's liabilities.

This is a pretty incredible number. Stored value card liabilities are the money that you, oh loyal Starbucks customer, use to buy coffee. What you might not realize is that these balances  simultaneously function as a loan to Starbucks. Starbucks doesn't pay any interest on balances held in the Starbucks app or gift cards. You, the loyal customer, are providing the company with free debt.

Starbucks isn't the only firm to get free lending from its customers. So does PayPal. That's right, customers who hold PayPal balances are effectively acting as PayPal's creditors. Customer loans to PayPal currently amount to over $20 billion. Like Starbucks, PayPal doesn't pay its customers a shred of interest. But Starbucks's gig is way better than PayPal's. PayPal is required to store customer's funds in a segregated account at a bank, or invest them in government bonds (see tweet below). So unfortunately for PayPal, it earns a paltry amount of interest on the funds that customers have lent it.

PayPal is a good example of a modern 'narrow bank'. Customers have deposited ~US$20 billion at PayPal. And PayPal invests these funds in very boring things listed below, like bank deposits, time deposits, government debt etc.

Source: https://t.co/snJel203QM pic.twitter.com/EDfMA2Wkux

— JP Koning (@jp_koning) August 21, 2019

Starbucks, on the other hand, doesn't have to keep customer funds in a low yielding segregated account or government bonds. Why is that? PayPal allows people to cash-out of PayPal dollars into regular dollars, so for regulatory purposes it must keep an adequate reserve on hand to facilitate redemptions. But the only way to cash out of Starbucks balances is to buy a coffee--a promise that Starbucks can always keep! And so Starbucks can immediately put its customer loans to work in higher-yielding opportunities like funding its operations and expansion.

In addition to borrowing from its customers, Starbucks also borrows from professional investors. Here's a list Starbucks's long-term debt:

Starbucks is paying an interest to bond and note-holders that ranges as low as 0.46% (on its yen notes maturing in 2024) to 4.5% (on its 2048 notes). You can see why borrowing from customers in the form of stored value card liabilities is the better option. By expanding its borrowing from its non-professional lenders and using the proceeds to cancel its debts to professional lenders, Starbucks can make an immediate profit.

But there's more. As I pointed out in the following tweet, don't forget breakage. Bond and note holders are pros. They don't forget about debts. But customers aren't so exact. They are sloppy, or busy, or forgetful, which means that many gift cards and balances will go unspent:

Few companies can get that much free financing. But don't forget breakage—balances that will never be redeemed. In 2018 Starbucks recorded breakage of $155 million,~10% of all card balances.

So the true rate at which customers are lending to Starbucks is probably closer to -10%. pic.twitter.com/hRaN7LGoEf

— JP Koning (@jp_koning) August 11, 2019

Each year Starbucks recognizes that a portion of its stored value liabilities will be permanently lost. This is known as breakage. Starbucks recognizes this amount as profit. In 2018 the company recognized $155 million in breakage, around 10% of all stored value balances. Wow! Starbucks already pays just 0% on its debts to customers, but add in breakage and that equates to a roughly -10% interest rate!

On Twitter, Wayne points out to me that I need to add back the impact of Starbucks rewards. App users receive stars on each purchase which can be saved up for free coffee. This functions as a form of implicit interest that Starbucks pays to its customers.

I earn about 50% equivalent interest per year on my Starbucks card. 2 Americanos per week earns me a free one about once every 3 months. Roughly $12 per year in free purchases. I keep between $10-$25 balance on the card. Earning $12/year on a $25 investment is a good return.

— Wayne Culbreth (@wayne_culbreth) August 11, 2019

That's a good point. But if were going to bring rewards into our calculation, then there are other non-pecuniary flows that need to be added in too. Keep in mind that each payment made through the Starbucks app is a payment that isn't made by credit card. Since each credit card payment will cost Starbucks 1-2% in interchange fees paid to the card networks and banks, the company saves a lot of money by guiding customers to its payments app. As for Wayne, while he may earn an implicit interest return in the form of Starbucks points, by forgoing a card payment he's giving up on the associated cash-back or airline points.

Another flow that needs to be accounted for is data. By capturing the customer's wallet, Starbucks is getting loads of free but valuable personal information that would otherwise be lost, or for which it would have to pay. Any customer who pays with cash forgoes rewards, but at least they get to retain their information. 

Adding all of this up, (0% interest + breakage - rewards + interchange savings + customer information), Starbucks's stored value liabilities are a terrific liability to have.

More generally, I think this calculation demonstrates how providing financial services to a retail customer base is a great business. Retail customers don't seem to be too fussy about the return they get. And they are busy and distracted and sloppy and forgetful. Take central banking, for instance, which serves a retail clientele. People are pretty happy to hold banknotes that pay 0%. But you never see businesses or professional investors hoarding banknotes. They quickly return the cash they take in during the course of the day to their bank so that they can harvest interest. Commercial banking is also a good example. Like Starbucks, banks are able to borrow from their retail customers at a measly rate approaching 0%. But professionals who lend to banks by purchasing their bonds require a much higher rate. To top it off, retail customers unnecessarily sign up for high-fee products and avoid changing banks when there is a cheaper option.  

Why doesn't every retail chain try get into this game? By borrowing as much as they can from the non-professional public, they'd steal plenty of profitable business from central banks and retail banks. Well they do. Gift cards are a big business. And if you think about it, retailers are perfect candidates for providing monetary services to the masses. Like banks, they already have a network of physical stores. But none of them have been successful at it as Starbucks. Walmart is much bigger than Starbucks, for instance, but it has just as many gift card balances outstanding:

Starbucks is really good at harvesting seigniorage.

Walmart's annual sales are 20x larger than Starbucks sales (~$500b vs $25b). But Walmart only has $1.9 billion in unredeemed gift card balances, not much more than Starbucks. Source: https://t.co/LBs6DE1cGq pic.twitter.com/wtJltMt26L

— JP Koning (@jp_koning) August 11, 2019

Perhaps Starbucks's success has to do with the regularity and homogeneity of Starbucks purchases? And so customers are willing to preload a dedicated account? I'm not sure.

In any case, there are probably a few Starbucks executives who'd love to grow the amount of negative yielding liabilities that the firm issues. Why stop at $1.6 billion in stored value liabilities? Why not grow the program to $5 billion, $10 billion, or $100 billion? It would be a terrific business line to get into.

The problem here is that Starbucks only sells coffee. Coffee is great, but the demand for dollars that are only useful for buying coffee will always be limited. To really grow the amount of stored value liabilities it issues, Starbucks would have to increase the usefulness of Starbucks dollars. One way to do this would be to open up the Starbucks app up to other stores. If consumers could also buy Big Macs with the balances on Starbucks App, this would increase the demand for Starbucks balances. To secure McDonald's cooperation, Starbucks would have to share the savings, breakage, and data. Maybe companies like Home Depot and Costco would join the Starbucks-McDonald's alliance. (And other chains, say Kroger and Burger King, might join the competing Walmart Pay alliance).

Sure, each of these companies could simply pursue their own independent stored-value liability programs. But wouldn't an alliance be better? From the customer's perspective, balances held in a single payments app that can be spent at Starbucks, McDonald's, Home Hardware, or Costco would be far more useful then dollars held in four separate and walled-off apps. And so collectively these stores should be able to get the public to hold more stored value card liabilities than they could individually. Which means more breakage, free loans, and data for everyone (and less for the banks, card networks, and central banks).

Who knows if it would be successful. And it might not even be possible from a regulatory perspective. But it would be tempting, no? In a world where most debtors have to pay interest, being  a debtor who earns interest is pretty hard to beat.

---

*I believe that current portion of deferred revenue is equal to around $174 million. This comes courtesy of the current portion of an up front royalty payment from Nestlé. So the stored value card liability is actually closer to $1.46 billion. Still pretty high. 

Stigmatized money

Some payments systems are so awkward they scare away the average user. The only people with the patience to stick around must have a motivation for doing so. These include ideologues with an ax to grind, hobbyists who happily embrace complicated features, and criminals/weirdos who are shut out of everything else.

Here are a few examples of awkward payments systems:

-Local Exchange Trading Systems, or LETS
-Bitcoin/Dogecoin
-Labor notes
-Stamp scrip

When usage of a payments system is confined to a narrow group of like-minded individuals, this may stigmatize these systems, scaring away mainstream users. Stigmatization only compounds the initial awkwardness. After all, if fewer venues accept the stigmatized payments option then it becomes harder for the small band of users to make purchases. A vicious circle has been created. Initial awkwardness leads to stigma which leads to more awkwardness etc.

While this vicious circle is the death knell for a payments system, it is less of a problem for other products. You can make a decent living by targeting a small niche of consumers, say communists who eat vegan food. Every big city needs a communist vegan restaurant. But a payments network is only as good as the size of the payments pathways that it facilitates. A payments entrepreneur won't get very far by building a platform that only allows communist vegans to pay other communist vegans. 

How to evade the awkwardness-stigma spiral? What is needed is a frictionless, non-awkward payments system. With little to learn, everyone—not just nerds and those with an ax to grind—can quickly start using it. Think M-Pesa or Visa or Octopus.

Even the haters will get onboarded. Gold bugs and bitcoiners may rail against banks and fiat money. But because everyone else is using these relatively simple systems, the bugs and the bits have no choice but to go along. By bringing the vast hoard of normies on board along with the weirdos, these systems avoid all connotation. They are safe for broad consumption. No stigma can attach to them. And so the vicious awkwardness-stigma circle I described gets sidestepped.

I'd argue that LETS are an example of a system that suffer from the awkwardness-stigma spiral. LETS are a pain to use. This article on the famous Comox LETS and its founder Michael Linton, an earlier proponent of LETS, explains some of the problems. And so the only people who use LETS will be those willing to put up with the awkwardness: folks who self-identify as leftist with anarchic views. Those who don't share those views might feel weird joining a LETS. So LETS remain small and fragile, or as Linton says, they're like "sandcastles on the beach."

You see the same awkwardness-stigma cycle at play in bitcoin. Bitcoin is an awkward payments medium. The stuff is so volatile that retailers don't like to accept it. Risk averse consumers don't want to hold it. So only a subset of the population will ever feel comfortable using bitcoins for payments.

This subset has developed its own norms and codes. Bitcoin steak dinners are a good example. A large group of predominately male bitcoiners will get together to eat meat while avoiding vegetables, then broadcast it on Twitter:

Thank you @pierre_rochard for organizing the Bitcoin Steak Dinner last night! It was a pleasure and a blast meeting with so many bitcoiners! Tag yourselves so we can connect on Twitter 😎☇ pic.twitter.com/UzD40SNqF6

— Gustavo J. Flores E. (@GustavoJ_Flores) March 10, 2019

I'm sure it's a lot of fun. But these sorts of traditions will inevitably be perceived as weird by the majority. And so the majority will go out of their way to avoid bitcoins for fear of being tarred as an oddball. Other niche groups who can't sympathize with male carnivores, say lesbian vegans, will avoid bitcoin payments on principal. This stigma cuts down on the potential pool of bitcoin payees, which only makes bitcoin more annoying to use.

Mastercarders don't have their own set of traditions. For instance, you won't see Mastercard users setting up meetups to eat organic food and talk about the latest development in tokenization technology. The Mastercard/Visa user-bases are devoid of culture and character. This lack of a class consciousness is one of the features that makes them such effective  payments networks. Systems without norms and traditions never face the risk of falling into the stigmatization hole.

Facebook's Libra has attracted plenty of attention over the last few months. But Libra risk encountering the same awkwardness-stigma cycle as Bitcoin and LETS. Unlike other social media-based  payments tools (Wechat, Kakao, Line etc), Libra's architects have chosen to create a new unit of account rather than marrying Libra tokens to existing units like the dollar or euro.

But as I suggested in a previous post, it's a pain to learn a new unit of account, just like it's a hassle to learn a new language. So only a certain type of motivated person will bother using Libra, just like only motivated people—language nerds—learn Esperanto. This weirdo factor could stigmatize the system. Hey, look at those Libra-using elitists! What snobs! By crowding out normies (and the massive number of potential payment pathways they bring to the table) Libra runs the risk of never self-actualizing as a payments system. Better to take the safe and boring route of linking Libra to dollars and yen and whatnot. 

The vicious awkwardness-stigma cycle has already started to hit cash. In places like Sweden, cash is being stigmatized. When the middle and upper class are convinced that only the poor and criminals use coins and banknotes, many of them will go out of their way to avoid using cash. Cash becomes "grungy and unsexy," as Brett Scott puts it. Unfortunately, an ever narrower base of cash users will only make the stuff more expensive for retailers to handle, leading to a rise in cashless stores (especially ones that cater to the rich), leading to more awkwardness and stigma, leading to less users, etc.

David Birch has an interesting parable from William Gibson's Count Zero that illustrates what happens when this stigmatization is brought to its logical conclusion. Basically, cash is still around in Gibson's imagined future, but it has disappeared from "polite society". And so the story's protagonist, Bobby Newmark, describes it as unspendable:

William Gibson imagined a future where 'polite society' won't accept cash. From 'Count Zero' ht @dgwbirch pic.twitter.com/Bh9ZKVDmJz

— JP Koning (@jp_koning) October 3, 2016

If cash is to avoid a Gibsonian future, it needs to be de-stigmatized. But this requires that it re-attracts many of the people and businesses that have deserted it because it is no longer convenient. In a post  at the Sound Money Project (and earlier on this blog) I suggested paying interest on cash. Thus individuals and businesses would be compensated for the relative inconvenience of note storage and handling. And with a wider range of people using notes, any stigma that they have attracted would dissipate.

Stigma is dangerous for a payments system. A system will become stigmatized if it attracts a clique rather than a broad group of users. Cliques kill a payments system since they suppress the system's connectiveness. To avoid the potential for clique-ization, systems should try to be as easy to use and accessible as possible.

Prepaid debit cards. The other anonymous payments method

When it comes to financial privacy, good old fashioned banknotes and privacy cryptocurrencies like Zcash & Monero get all the attention. But as I recently wrote for the Sound Money Project, let's not forget about prepaid debit cards.

Having written a bunch of posts over the last two years about financial privacy, I recently decided that it was time to step up my own personal financial privacy game. A few months ago I walked into my local pharmacy and bought my first non-reloadable prepaid debit card (i.e. gift card), a Vanilla card.

You've probably seen the rack of prepaid cards near the front of pharmacies and department stores. Some of them are closed-loop cards. They can only be used to buy things at the issuer, say Tim Horton's or Starbucks. But some of them, like my new Vanilla Prepaid card, are open-loop cards. That means they can be used wherever Visa or MasterCard are accepted. In Canada, Vanilla cards are sold in denominations from $25 to $250.

The Vanilla card that I bought doesn't have my name on it, nor did I have to show any ID to buy it. I paid for it in cash. This means that whenever I use my card, my identity won't be associated with the purchase. My card is backed by dollars held in a pooled account at Peoples Trust Company, a Canadian bank. It gives me the right to anonymously route my portion of the pooled funds along the MasterCard network to a retailer who operates a MasterCard terminal.

Given that authorities and banks have spend decades constructing a vast financial surveillance apparatus (the Bank Secrecy Act, FATF, AML, CFT, suspicious transaction reporting etc), it seems odd that this small window for accessing the digital payments system anonymously would have remained intact. To comply with Canadian anti-money laundering requirements, card-issuing banks require that the prepaid card seller (my pharmacy) collect the buyer's personal information if the face value of the card exceeds $1000. For amounts below that, due diligence is waived. The same practice is followed in the U.S. This regulatory exemption is why I didn't have to give up my anonymity when I bought my card.

The idea motivating the sub-$1000 exemption is that small amounts of anonymity can't easily facilitate criminal activity, but larger amounts can. (Note that I can convert my non-reloadable Vanilla card into reloadable format—i.e. a card that I'll be able to add money after the first batch is used up—but I'll have to register and forfeit my information. Only non-reloadable cards below the $1000 cap are exempt from due diligence.)

I'm not obsessed with privacy. I still use my information-laden credit card for a big chunk of my day-to-day purchases. But from time-to-time I want to have the option of shielding my data from outside observers. Cash is good for that. I already use banknotes and coins to pay for about half of my face-to-face purchases. This is usually for the sake of convenience, but sometimes it's because I'd prefer not to give up too many of my personal details to the retailer (especially small shops I've never been to before).

By adding a non-reloadable prepaid debit card to my wallet, I've gained an extra degree of protection. Say that I've used up all of the cash in my wallet, or I need to make a purchase in a place that doesn't accept cash, or I want to buy something online—well, a prepaid gift card offers me a way to make a transaction while still protecting my data.   

Law abiding citizens who are conscious of their financial privacy are a pretty small demographic. Sellers of non-reloadable prepaid cards have much larger markets in mind, specifically: 1) people looking to buy convenient gifts for friends and family or; 2) the unbanked and underbanked, i.e. those who don't have bank accounts or have them but don't use them. By allowing people to buy prepaid cards without identification, those without formal credentials such as driver's licenses, social insurance numbers, or credit scores can still make digital payments. Think the homeless, children and teenagers, immigrants, and refugees.

The post-9/11 brigade of security-at-all-costs zealots would love for regulators to shut the prepaid anonymity window. They worry that terrorists and money launderers will abuse prepaid cards. The anonymous prepaid window has only stayed open because these zealots have been countered by a collection of banking lobbyists who want to keep doing business with the unbanked and politicians who care about the disadvantaged.

I'm neither unbanked nor underbanked. I've got several bank accounts that I often use. Nor am I buying these cards as gifts. So I'm not really the target market for non-reloadable debit cards. My ability to get anonymous access the digital payments system is really just a by-product of the wider effort to make it easy for the unbanked to plug in. This is a precarious position for a privacy-conscious individual to be. In the U.S., where only ~93% of the population is banked, the constituency for anonymous prepaid access is relatively large. But in places where the banked population is approaching 100% (Canada, Finland, Germany, Netherlands, Denmark, Belgium, Sweden, UK), there is probably diminishing political support for providing anonymous access to the banking system.

In Europe, for instance, the window for anonymous access to digital payments seems to be closing. When the EU's 4th Anti-money laundering directive was passed in 2015, up to €250 in electronic money (the EU's term for prepaid instruments that reside on a device, say a card or a phone) could be bought without being asked to give up personal information. With the passage of the 5th Anti-money laundering directive in 2018, this amount has been reduced to just €150. And a new ceiling on online purchases of €50 was introduced. As I wrote in my recent Breakermag article, such a tiny amount of anonymity just isn't that useful.

One thing I've noticed about prepaid financial anonymity is that it is expensive. My first Vanilla card had a face value of $25. But I had to pay an onerous $3.95 to activate it. Buying higher value cards defrays this expense, but it still costs $7.50 to activate a card with a face value of $250. That's a 3% levy. Keep in mind that when I use an anonymous prepaid card not only am I paying the activation fee, I am also forgoing 2% cash back that my not-so anonymous credit card would otherwise provide me with.

Think about it this way. Let's say I decide to buy my groceries anonymously using a prepaid card. My $250 only gets me $242.50 worth of goods ($250 less the $7.50 activation fee). With my credit card, I can get $255 worth of food ($250 plus $5 cash back). That's an extra $12.50 in spending power if I decide to go the non-anonymous route. Sure, by using a prepaid card I've prevented my grocery store from being able to collect information about my eating habits. But is the $12.50 I've given up worth it? (Incidentally, this calculation also indicates how costly it is to be unbanked!)

While prepaid anonymity is handicapped by a low ceiling and high fees, the drawbacks don't stop there. Non-reloadable prepaid debit cards are great for buyers who want small amounts of privacy, but they don't help out retailers who want to shield themselves. In a recent article, privacy advocate Timothy May made a great distinction between buyer privacy and seller privacy:    

I like the distinction that Tim May draws between "buyer anonymity" and "seller anonymity."

As consumers we tend to focus on the former. But anyone who is selling a controversial product (i.e. birth control information) also needs protection from tracking https://t.co/2cFguzsn6G pic.twitter.com/6NHf3x46zf

— JP Koning (@jp_koning) October 20, 2018

If someone is selling a controversial product (May uses birth control information as an example), they must always be wary of snitches who make a purchase only to "out" the seller, either by reporting the transaction to the authorities or posting it to social media. Controversy-wary payments providers will quickly cut the seller off. To protect themselves, sellers need a payments method that doesn't leave a paper trail. They also need a payments system from which they can't be censored. Cash is a good example—it doesn't leave a paper trail and is censorship resistant. So are privacy-friendly cryptocurrencies. But prepaid cards don't cut it. The seller can easily be reported to the network and banished.

The last drawback of non-reloadable prepaid debit cards is that they can't be used to make anonymous person-to-person payments. As far as I know, there is no technical reason that I shouldn't be able to use my Vanilla debit card to anonymously send $100 to anyone else with a Visa card, just by inputting their card number and clicking send on a website. In theory, this payment should get pushed across the Visa network.

But there are regulatory reasons that I can't do so. In the U.S., the Financial Crimes Enforcement Network (FinCEN) prohibits anonymous debit cards from offering person-to-person capabilities, and I believe the same rule applies in Canada. Meanwhile, cash and privacy-friendly cryptocurrencies do allow for anonymous person-to-person payments.

In sum, non-reloadable prepaid debit cards allow for a small extension of one's financial privacy. But in an age where the ability to make payments without someone snooping is getting increasingly rare, I suppose we have to take whatever crumbs we can get.