The end of El Salvador's bitcoin payments experiment

Back in 2021, El Salvador became the first country in the world to require its citizens to use bitcoin for payments. Last month, four years later, it notched another record: it became the first country to rescind bitcoin's status as required tender. This backtracking was the result of the IMF's threat to pull billions of dollars in assistance if El Salvador didn't put an end to bitcoin's special status.

What have we learnt from El Salvador's four-year bitcoin experiment? I would suggest that it definitively proved that bitcoin is not destined to be money. As far as making payments goes, bitcoin will always be an unpopular option, even when the government gives it a helping hand. And don't blame the IMF for this; bitcoin sputtered-out long before the IMF pressured El Salvador to drop it, as I'll show.

The original motivation behind El Salvador's Bitcoin Law was to harness bitcoin as a means for reaching the unbanked, those without bank accounts, who in El Salvador make up the majority. Cash is still by far the dominant payments choice in El Salvador, but it was believed that an electronic form of cash might complement that. Another goal was to make remittances cheaper by sponsoring a new bitcoin remittance route—few countries are as dependent on remittances from family living overseas as El Salvador. 

President Nayib Bukele made the announcement at a major bitcoin event and El Salvador’s Congress ratified the Bitcoin Law a few days later. Bitcoiners literally cried for joy. For longtime Bitcoin watchers like me, it seemed like an awful idea. But at least it was going to be a fantastic natural experiment.

Satoshi Nakamoto, bitcoin's founder, saw bitcoin as electronic cash, but his dream generally hasn't come to fruition. In practice, 99% of bitcoin adoption is about gambling on its volatile price, with payments being a niche 1% edge case. Bitcoin disciples who continue to believe in Satoshi's electronic cash dream often blame what they see as government meddling for the failure of bitcoin to gain widespread usage as a payments medium. For instance, they say that capital gains taxes on bitcoin makes it a hassle to pay with the orange coin, since it leads to a ton of paper work anytime one buys something with bitcoin. Or they criticize legal tender laws that privilege fiat currency. 

But here was a government that was going to champion the stuff, nullifying all of the headwinds against bitcoin in one stroke! The government meddling hypothesis would be put to test.

The Salvadoran government used a combination of sticks and carrots to kick-start adoption. First, let's list the carrots. The capital gains tax on bitcoin was set to zero to remove the hassle of buying stuff with bitcoin. The government also built a bitcoin payments app, Chivo, for all El Salvadoreans to use. (Chivo also supports U.S. dollar payments.) Anyone who downloaded Chivo and transacted with bitcoin would receive a $30 bitcoin bonus—that's a lot of money in El Salvador. Gas stations offered $0.20 off of a gallon of gas for customers who paid with the app. People could also use Chivo to pay their taxes with bitcoin.

The biggest carrot was zero-transaction fees. Any payment conducted with Chivo was free, as was converting bitcoins held in the Chivo app into U.S. dollars and withdrawing cash at Chivo ATMs. These Chivo ATMs were rolled out across El Salvador and in the U.S., too, to encourage the nascent U.S.-to-El Salvador bitcoin remittance route. Bitcoin ATMs are usually incredibly pricey to use, but in El Salvador the government would eat all the transaction fees. What a fantastic deal.

As for the stick, Bukele introduced a forced-tender rule. Beginning in 2021, businesses were required to accept the orange coin or be punished. This was costly for them to comply with. They would have to update point of sale software, signage, train employees, and set up new processes for handling bitcoins post-sale.

By all rights, this combination of sticks and carrots should have led to a flourishing of bitcoin payments. But it didn't.

The evidence of failure

The first incrimination of the experiment is Figure 1, below. In the Bitcoin Law's initial months, remittances carried out by cryptocurrency wallets exploded, accounting for an impressive 4.5% of all incoming remittances to El Salvador. Not bad! People were actually using the Chivo app to send bitcoins to relatives back home. 

Figure 1: Data from El Salvador's central bank shows that cryptocurrency remittances from wallets like Chivo have steadily shrunk over time from 4.5% of all remittances to 0.87% of all remittances in 2024.

But instead of continuing to gain market share, crypto-linked remittances steadily deteriorated over the next four years to 0.87% of the total by December 2024—hardly a sign of success.

The data for this chart comes from the Banco Central De Reserva (BCR), El Salvador's central bank. The BCR is coy on how precisely it collects this data, but it is almost certainly dominated by Chivo-related transactions. (My note at the bottom explores the data more.)

The second indictment of El Salvador's bitcoin effort comes from survey data compiled by economists Alvarez, Argente, and Van Patten in their 2022 paper, Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador. The authors carried out a survey of 1,800 Salvadoran households to get insights into their use of the Chivo Wallet. This wasn't a lazy online survey, but an in-person survey.

The survey found that just over half of Salvadoran adults had downloaded Chivo, which is impressive (see Figure 2, below). Most hardly used it, though. While over 20% of the population continued to interact with Chivo after spending their $30 bitcoin bonus—which isn't a bad adoption rate for an app—the majority of Chivo usage was only occasional, the median Chivo user reporting no bitcoin payments sent or received in any given month, and just one payment per month in U.S. dollars. Payments tools like apps and cards are supposed to be used a few times each week; not once every two or three months.

Figure 2: While awareness of Chivo was high, most Salvadorans did not use Chivo's bitcoin functionality after receiving their $30 bitcoin bonus. Source: Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador [link]

The dominance of the app's dollar functionality over its bitcoin functionality also stands out. Chivo was supposed to be a bitcoin payments app, after all, not another version of PayPal of Venmo. For instance, the survey found that of all households who had downloaded Chivo, only 3% had ever received a bitcoin remittance via Chivo, while 8% had received a U.S. dollar remittance via the app (see Figure 3 below). If Chivo was primarily being used for fiat payments, and not bitcoin, then why go through with the whole effort of changing the law for bitcoin's sake?

Figure 3: When Salvadorans did use Chivo for remittances, they preferred it for U.S. dollar remittances over bitcoin-based ones. Source: Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador [link]

Moreover, those few citizens who did continue to use Chivo regularly were not the unbanked majority that the Bitcoin Law had originally targeted. The survey found that they were most likely to be from the already-banked minority, young, educated, and male.

By mid-2022, downloads of Chivo had pretty much dried up. Using blockchain tracing, the economists found that $245,000 per day worth of bitcoins were flowing into the Chivo app, which sounds like a lot, but in the payments business, that's peanuts.

It's also worth considering how businesses treated bitcoin after the passing of the Bitcoin Law. Despite the requirement that all businesses  accept bitcoin, just one-in-five actually did so. The survey found that acceptance was driven by large businesses—i.e. McDonald's, Starbucks, Pizza Hut and Walmart—presumably because they couldn't easily evade the consequences of ignoring the law. Bitcoin was not popular with these businesses; the survey found that of those that received bitcoin from their customers, 88% quickly converted them into dollars.

This is problematic. For bitcoin to become money, a circular economy must be kickstarted as the bitcoins spent by consumers are re-spent by businesses on inventory and salaries, which gets re-spent by consumers, and on and on. This wasn't happening.

With just 20% of the population using the app, and mostly for an occasional U.S. dollar transaction, the entire bitcoin experiment can hardly be seen as a wild success. Businesses were not keeping the bitcoins they received, and consumers who were using the app regularly were not the unbanked originally targeted by the Bitcoin Law.

The third and last bit of evidence of the experiment's failure comes from an annual survey from José Simeón Cañas Central American University (UCA) entitled La población salvadoreña evalúa la situación del país. In 2021, the survey began asking Salvadorans whether they had ever used bitcoin to buy or pay for something. This question is more open-ended than the one asked by the three economists, who focused more narrowly on bitcoin transactions conducted via Chivo. 

Figure 4: According to a survey from the UCA, while over 25% of survey participants reported using bitcoin (and not just Chivo) for payments in 2021, only 8.1% used bitcoin for payments just three years later in 2024.

In the first year of the Bitcoin Law, 25.7% of respondents said they used bitcoin for payments. That's a fantastic result, although the $30 Chivo bonus no doubt drove that large number. But over the next three years, bitcoin's usage for payments crumbled, with only 8.1% of Salvadorans reporting that they'd paid with bitcoin by 2024. This is the same downward pattern that we saw in the CBR's remittance data. That's not adoption. That's giving up on bitcoin.

The UCA survey found that the 8.1% who reported using bitcoin for payments in 2024 were not using it for day-to-day payments. Of this group of bitcoin payors, 55% used bitcoin just 1-3 times in 2024. Only 8% made bitcoin payments on a weekly or bi-weekly basis. (See Figure 5 below). I really want to highlight this last data point: in 2024, just 1 in 200 Salvadorans paid for something each week or second week with bitcoin.

Figure 5: In a 2024 survey by UCA, 8.1% of Salvadorans reported using bitcoin for payments that year. This group was then asked how often they used it, with the responses visualized in the above chart. Most used bitcoin just once in 2024, with 55% using it one to three times. 8% used it 20 or more times, which would suggest that almost no one is using bitcoin for day-to-day payments, despite that being the goal of El Salvador's 2021 Bitcoin Law.

Summing up these three pieces of evidence, despite a potent combination of subsidies and coercion, the adoption of bitcoin for payments hasn't occurred. Bitcoin usage in El Salvador is, if anything, regressing. Now that required acceptance of bitcoin is being rescinded, I suspect that it's only a matter of time before all the large businesses that introduced bitcoin payments, like McDonald's and Walmart, drop that option. With the government no longer coercing them to accept bitcoin payments, there's no commercial incentive to continue down that path.

It was IMF pressure on Nayib Bukele that finally got him to give up his bitcoin experiment. But the IMF was doing Bukele a favor, really, because the whole thing was already a failure, as I've explained with the charts above. Cancelling it outright would have been embarrassing to Bukele, but now he can deflect attention from himself and blame the IMF.

Why the failure, and what have we learned?

There is a very big hurdle that has prevented El Salvador's one-two punch of subsidies and coercion from working: bitcoin is intrinsically ill-suited to perform as money. 

The stuff is innately volatile, and so risk-shy individuals don't dare hold it or use it for payments. Risk-seekers can tolerate that volatility, but they expect to be rewarded by a dramatic price rise, and so they refuse to use their bitcoins for payments because they could miss out on the jump. The net result is that no one, neither society's risk-seekers nor its risk-avoiders, ends up paying with bitcoins. Only a tremendous amount of subsidies and coercion will ever overcome their natural preferences, but no sane government would ever try to bring those levels of coercion to bear. (And speeding things up with options like Lightning doesn't change this equation.)

The saddest thing about El Salvador's bitcoin experiment is that all sorts of time and resources have been wasted. El Salvador is not a rich country. The money spent on building and operating Chivo, compliance by businesses, bitcoin signage, and subsidies could have been better deployed on more important things like health and education.  One hopes that other countries learn from this experience and avoid going down the same route that El Salvador did. Brazil, which deployed its wildly popular PIX payment system around the same time as El Salvador launched its Bitcoin Law, provide helpful guidance.

More broadly, I'm hoping that El Salvador's failure finally kills off Satoshi's very misguided dream of bitcoin as electronic cash. I once was a believer in that dream, but for all the reasons I wrote in December, I've long since given up on any chance of bitcoin becoming a widely-circulating currency. But a lot of people continue to sacrifice their careers, time and resources to following Satoshi. Many of these are brilliant people. We want them to be creating valuable things for society. Alas, despite all sorts of evidence that bitcoin payments are a dead end, they continue to hit their heads against the wall, using excuses like government interference. 

Guys, Satoshi's dream is a mirage, a delusion, a hallucination. A government just flexed its muscles for four long years to get bitcoin into circulation, and that still didn't work. The lesson here: bitcoin is a bad payments tool and will never become widely-used electronic cash. It's time to move on.

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*The BCB won't say how it collects this data -- according to the Salvadoran press there are legal limits on how much it can disclose -- but it describes the series as being compiled from administrative records that it receives from "cryptocurrency digital wallets." Reading between the lines, this probably includes Chivo data and any other regulated cryptocurrency service that stores customer crypto and reports to the BCB. (Because Chivo allows both U.S. dollars and bitcoins to be transferred, the BCR's data may be a mix of the two units, muddying the waters.) I think it's safe to assume that the BCR data does not include bitcoin remittances made via non-custodial services, say like Muun wallet or Blue wallet. However, since most of the governments carrot's (i.e. no fees) require the use of Chivo, it's probably a safe assumption that the average Salvadoran uses Chivo for bitcoin transfers, so the BCR data--which almost certainly includes Chivo--is fairly representative of overall usage.

Are central banks too reliant on SWIFT for domestic payments?

Central bank settlement systems are the the tectonic plates of the payment system: they are vitally important to our lives, but we never see them in action. All of a nations' electronic payments are ultimately completed, or settled, on these systems. If they stop working, our financial lives go on pause, or at least regress to older forms of payment.

In this post I want to introduce readers to a crucial feature of these payments tectonic plates: their reliance for domestic settlement on SWIFTNet, a financial messaging network used by banks and other financial institutions to communicate payments information. Think of SWIFTNet as a WhatsApp for banks, but exclusive and very secure. 

This reliance – or over-reliance – is best exemplified by a recent decision by the European Central Bank. The Target2 settlement system has long been the bedrock layer of the European payments universe. All domestic payment ultimately get tied-off on the system. Since it was introduced in 2007, Target2 has been solely reliant on SWIFTNet for sending and receiving messages. 

When the European Central Bank replaced Target2 with T2 earlier this year, it modified the system to have two access points: it kept SWIFTNet but added a competing messaging network, SIAnet, to the mix. As one commentator triumphantly put it, "SWIFT’s monopoly for access to the T2/T2S system is broken."

SWIFTNet is owned by the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, which is structured as a cooperative society under Belgian law and is owned and governed by its 11,000 or so member financial institutions. Whenever SWIFT gets mentioned in conversations, it tends to be associated with cross-border wire payments, for which its messaging network is dominant. However, for many jurisdictions, including Europe, SWIFT is also integral to making domestic payments. It's this little-known local reliance that I'm going to explore in this post.

The dilemma faced by central banks such as the European Central Bank is that SWIFTNet is an incredibly useful messaging network. It is ubiquitous: most banks already use it for cross-border payments. And so the path of least resistance for many central banks is to outsource a nation's domestic messaging requirements to SWIFT, too. However, this reliance exposes national infrastructure to SWIFTNet-related risks like foreign control, sanctions, snooping, and system outages.

Financial messaging 101

Before going further, we need to understand why financial messaging is important. For a single electronic payment to be completed, a set of databases owned by a number of financial institutions, usually banks, must engage in an intricate dance of credits and debits. To coordinate this dance, these banks need to communicate, and that's where a messaging network is crucial.

Say, for example, that Google needs to pay Apple $10 million. Google tells its banker at Wells Fargo to make the payment. Wells Fargo first updates its own database by debiting Google's balance by $10 million. The payment now has to hop over to Google Apple, which banks at Chase. For that to happen the payment flow must progress to the core of the U.S's payments system, the database owned by the Federal Reserve, the U.S.'s central bank.

Along with most other U.S. banks, Wells Fargo has an account at the Federal Reserve. It communicates to the central bank that it wants its balance to be debited by $10 million and the account of Chase to be credited by that amount. Once Chase's account at the Federal Reserve is updated, Chase gets a notification that it can finally credit Apple for $10 million. At that point Apple can finally spend the $10 million.

This entire process takes just a second or two. For this "dance of databases" to execute properly, the Federal Reserve, Chase, and Wells Fargo need to be connected to a communications network.

The sort of messaging network to which the central bank is connected, and the stewardship of that network, is thus crucial to the entire functioning of the economy.

Proprietary messaging networks or SWIFTNet? 

The Federal Reserve is somewhat unique among central banks in that it has built its own proprietary messaging network for banks. All of the 9,000 or so financial institutions that use the Federal Reserve settlement system, Fedwire, must connect to the Fed's proprietary messaging network to make Fedwire payments. To make international payments, however, U.S. banks must still communicate via SWIFTNet.  

Let's flesh the story out by trekking north of the border. Whereas the Federal Reserve has no reliance on SWIFTNet, Canada's core piece of domestic settlement infrastructure, Lynx, relies entirely on SWIFTNet for messaging.

For example, if Toronto Dominion Bank needs to make a $10 million to Scotiabank, it enters this order into SWIFTNet, upon which SWIFT forwards the message to Lynx, which updates each banks' accounts by $10 million and sends a confirmation back to SWIFTNet, which tells Scotiabank that the payment has settled.

For payments nerds, this network setup is called a Y-copy topology. The network looks like a "Y" because the originating bank message is relayed from the sending bank via SWIFTNet, the pivot at the center of the Y, down to the settlement system, and then back up via SWIFTNet to the recipient bank. It is illustrated below in the context of the UK's payment system, with the CHAPS settlement system instead of Lynx, but the idea is the same.

A Y-copy network topology for settling central bank payments in the UK [source]

The upshot is that the Federal Reserve controls the messaging apparatus on which its domestic settlement depends, whereas Canada outsources this to a cooperative on the other side of the ocean.

Many of the world's small and middle-sized central banks have adopted the same Y-copy approach as Canada. This list includes Australia, Singapore, New Zealand, Nigeria, UK, Sweden and South Africa. However, some members of this group are starting to have second thoughts about fusing themselves so completely to SWIFT.

Removing the single point of failure

The European Central Bank is at the vanguard of this group. Prior to 2023, the European Central Bank was in the same bucket as Canada, relying entirely on SWIFTNet to settle domestic transactions. 

With its upgraded T2 system, Europe doesn't go quite as far the Fed's model, which is to build its own bespoke messaging network. Rather, European banks now have the option of either sending messages to T2 using SWIFTNet, or they can use SIAnet, a competing network owned by Nexi, a publicly-traded corporation. SIAnet stands for Societa Interbancaria per l'Automazione, a network that originally connected Italian banks but has now gone pan-European.

The reason for this design switch is that European Central Bank desires "network-agnostic connectivity." This dual access model will make things more complex for the European Central Bank. If a commercial bank originates a SIAnet message, the central bank will have to translate this over to a SWIFT message if the recipient bank uses SWIFTNet. Nevertheless, the European Central Bank believes this dual structure will offer more choice to domestic banks.

The ECB also hints at the enhanced "information security" that this new setup will provide, without providing much detail. The UK's recent efforts to update its core settlement layer sheds some extra insights into what these security improvements might be. Right now, the UK's core settlement system, CHAPS, can only be accessed by SWIFTNet, much like in Canada, so that all domestic UK payments are SWIFT-reliant.

In its roadmap for updating CHAPS, the Bank of England is proposing to allow banks to access the system via either SWIFTNet or a second network, which doesn't yet exist. The idea is to enable "resilient connectivity" to the core settlement layer, especially in periods of "operational or market disruption." Should SWIFTNet go down there would be no way for financial institutions to communicate with CHAPS, and the entire domestic economy would grind to a halt. A second network removes the "single point of failure" by allowing banks to re-route messages to CHAPS.

The Bank of England also highlights the benefits of competition, which would reduce the costs of connectivity.

This sounds great, but there are tradeoffs. Using a a single network for both domestic and international payments is valuable to the private sector because it offers standardization and efficiencies in banks' processing. Adding a second option will also complicate things for the Bank of England, since it will have to design and build a system from scratch, much like the Fed did, which could be costly. Either that or it will have to find another private option, like the ECB did with SIAnet. This second network may not be as good as SWIFTNet which, despite worries about resiliency, has been incredibly successful.

When CHAPS went down earlier this year for a few hours, for instance, it wasn't SWIFT's fault, but the Bank of England's fault. The same goes for a full day outage in 2014. 

Comparing a V-shaped network topology to Y-Copy in an Australian context [source]

The type of settlement topology that the UK is proposing is known as "V-shaped," since all messages are sent directly to the central bank settlement system for processing via any of a number of messaging networks, and then back to the recipient bank. The difference between a V-shaped topology and Y-copy is visualized in the chart above in an Australian context, but the principles apply just as well to the UK.

Sanctions and "the SWIFT affair"

The decision to make domestic payments less dependent on SWIFTNet is much more easy to make for outlier nations like Russia. SWIFT is based in Belgium and is overseen by the Belgian central bank, along with the G-10 central banks: Banca d’Italia, Bank of Canada, Bank of England, Bank of Japan, Banque de France, De Nederlandsche Bank, Deutsche Bundesbank, European Central Bank, Sveriges Riksbank, Swiss National Bank, and the Federal Reserve. That put SWIFT governance far out of Russian control.

You can see why this could be a problem for Russia. Imagine that only way to settle domestic Russian payments was by communicating through SWIFTNet. If Russia was subsequently cut off from that network for violating international law, that would mean that all Russian domestic payments would suddenly cease to work. It would be a disaster.

Needless to say, the Central Bank of Russia has ensured that it doesn't depend on SWIFTNet for communications. It has its own domestic messaging network known as Sistema peredachi finansovykh soobscheniy, or System for Transfer of Financial Messages (SPFS), which was built in 2014 after the invasion of Crimea. Prior to then, it appears that "almost all" domestic Russian transactions passed through SWIFTNet – a dangerous proposition for a country about to face sanctions.

Mind you, while Russia has protected its domestic payments from SWIFTNet-related risk, it can't do the same for its international payments. SWIFTNet remains the dominant network for making a cross border wire. There is no network the Russians can create that will get around this.

I'm pretty sure that most larger developing states and/or rogue nations have long-since built independent domestic financial messaging systems to avoid SWIFTNet risk. I believe China has done so. Brazil has the National Financial System Network, or Rede do sistema financeiro nacional (RSFN). India also has its own system, the Structured Financial Messaging System (SFMS), built in 2001. India is even trying to export SFMS as a SWIFT competitor.

The Japanese were typically way ahead on this. The Bank of Japan built its messaging network, the Zengin Data Telecommunication System, back in 1973, several years before SWIFT was founded.

The last SWIFTNet risk is snooping risk. This gets us into the so-called SWIFT affair. After 9/11, the U.S. intelligence agencies were able to pry open SWIFT through secret broad administrative subpoenas. They had the jurisdiction to do so because one of SWIFT's two main data centres was located in the U.S.

To ensure data integrity, SWIFT had been mirroring European data held in its data centre in Belgium at its U.S. site. That effectively gave U.S. intelligence access to not only SWIFT's U.S. payments information, but  also information on foreign payments sourced from Europe or directed to Europe. Worse, it also provided spooks with data on domestic European payments. Recall that the European Central Bank's Target2 settlement system, which settles all digital domestic payments in Europe, was entirely reliant on SWIFTNet for communications.

When the U.S.'s snooping arrangement was made public by the New York Times in 2006, it caused a huge controversy in Europe. SWIFT tried to placate Europe by building a third data warehouse in Switzerland to house Europe's back-up data. But the precedent was set: SWIFT is not 100% trustworthy. And that may be part of the reason why the European Central Bank chose to downgrade its reliance on SWIFTNet when it introduced its new system, and is surely why other nations want to entirely hive their domestic systems off from it.

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In sum, central banks face a host of complicated decisions in how to bolt on messaging capabilities to their key settlement systems. SWIFTNet is a top notch network. However, too much SWIFT-related risk may be perceived as having negative implications for national security. For large nations with extensive banking industries, building a proprietary domestic messaging alternative seems to be the preferred option. It also seems to be the default choice for rogue states like Russia.

Another alternative is to fallback on using multiple independent networks for access, of which one is SWIFTNet, and thus mitigating exposure to SWIFT-related problems. This is the approach taken by Europe and the UK.

For smaller nations that comply with the global consensus, like Canada, the calculus is different. Building an alternative communications network is likely to be costly. The risk of sanctions and censorship are negligible while the benefits of using a high-quality ubiquitous network for both domestic and foreign payments messaging are significant. Given these factors, it may be worthwhile to bear all SWIFT-related risks and adopt the Y-copy model.

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.

Comparative cross-border payments: Wise vs USDC

image via Guy J. Abel and Stuart Gietel-Basten

 A popular response to my recent tweet about remittance company Wise went like this: "but JP, stablecoins are better for remittances; they're instant and cheap!" In this post I want to talk about comparative remittance costs. The problem with most of the responses to my tweet is that they incorrectly compare the cost of making a plain-vanilla stablecoin transfer to a traditional cross-border payment.

Can't do that folks! That's an apples-to-oranges comparison.

A traditional remittance, say like those offered by banks or transfer companies such as Wise, is made up of a bundle of four services. By contrast, a stablecoin transfer (I'll use USDC as my example) offers just one service. To accurately compare USDC to a remittance platform like Wise, you've got to add back the three missing services, and their associated costs.

Here are the four bundled services that Wise offers when you make a cross-border transfer:

1) verification and on-ramping: first, a sender must pass a series of Wise checks so that they can use Wise's platform. Think of this as Wise justifying your money to regulators. Next, Wise pulls your funds from your bank and onto its platform.
2) the transfer itself: once your funds have arrived at Wise, a lattice of databases moves your funds across Wise's platform towards their final destination.
3) a foreign exchange conversion: along the way, Wise converts the sender's currency to the recipient's currency.
4) off-ramping: Wise takes the funds off its platform and deposits them to the recipient's bank account.

By contrast, USDC offers just one of these services; the transfer itself (#2). In order to be verified and onramp into USDC (#1), convert from U.S. dollars to local currency (#3), and offramp back into spendable fiat (#4), both the sender of USDC and the recipient will need to use a third-party, most likely a cryptocurrency exchange. Alas, crypto exchanges extract their pound of flesh.

As an example of how to do an apples-to-apples comparison, I recently looked into the economics of a USDC remittance to see if that option made sense for me. I often sell stuff in U.S. dollars and need to repatriate my funds and convert them into Canadian dollars to pay for living expenses.

Here's what my own personal USDC calculation looks like:

Say someone in the United States owes me US$2,000 for services rendered. As payment, they offer to transfer me 2,000 USDC. I provide them with an address at my crypto exchange, BitBuy, and they send the payment. 

Next, I'll have to do a foreign exchange swap on BitBuy, trading out of USDC and into Canadian dollars. Alas, BitBuy's USDC-to-Canadian dollars market isn't very liquid, and the best rate I could get when I checked yesterday was 1.3569 (compared to the institutional rate of 1.3598). The loss from a loose bid-ask spread is called slippage, and it represents an implicit but very real C$6 fee.

On top of that I'd have to pay a 2% trading fee to BitBuy, or C$54. (If I was a high-volume trader, the fee would be much lower, but I'm not.) Next, I have to move my Canadian dollars off the exchange and into my bank account. Alas, BitBuy charges a 1.5% withdrawal fee, so that adds another C$40.

All those fees works out to C$100. That's not cheap, basically eating up 3.7% of the entire transfer. My current remittance route, which uses a U.S. dollar bank wire and a uniquely Canadian kludge called Norbert's Gambit (buying a ETF with US dollars and selling it for Canadian dollars) is significantly cheaper.

Some Canadian crypto exchanges offer better rates. With NDAX, for instance, I'd be paying around $10 on USDC-to-Canadian dollar slippage, $5.60 on trading fees, and $5 to withdraw to my bank, for a total of $20.60. That's an improvement.

However, keep in mind that what I'm describing (i.e. using BitBuy or NDAX to convert USDC to Canadian dollars) represents just the second leg of the entire remittance route. I haven't even included the fees that my U.S. sender must incur to onboard into USDC, nor have I accounted for any on-chain fees. By contrast, Wise will do both legs of this transfer for just US$14. That's tough to beat.

Your own personal estimation for whether to go with a traditional remittance or stablecoins will differ from mine, of course, depending on how cheap your local cryptocurrency exchange is (as well as that of your counterparty), and the availability and price of options like Wise or Western Union. Just make sure you include all stablecoin-related fees so that you're not mistakenly comparing apples to oranges. Stablecoins don't work for me, but they might for you.

The trucker convoy and "choking off" their funding

Look, I don't support the so-called "Freedom Convoy." Of the two big demonstrations currently going on in Canada – the Freedom Convoy and the Fairy Creek protests  – I'd pick the Fairy Creek protestors (who want to stop logging of old-growth trees in B.C.).

But I think some critics are going too far in calling for a "choking off" of the money that finances the convoy, as Mark Carney recently did. Carney went on to describe anyone sending money to the convoy as "funding sedition" and wants to "identify and thoroughly punish" the convoy's foreign funders. Meanwhile, Jagmeet Singh's NDP Party has launched a petition calling on the government to contact Joe Biden and "shut down funding coming from the US".

What Carney and Singh have in mind is probably the convoy's massive crowdfunding campaign. Initially launched on U.S.-based GoFundMe, the campaign was frozen last week citing police reports that the demonstration had become an "occupation". The convoy has since switched to a so-called "Christian" crowdfunding site called GiveSendGo. Funds raised via GiveSendGo now clock in at almost $8 million. Presumably Carney and Singh want this $8 million stopped.

I agree with the majority of Canadians (65%, according to Leger) who see the convoy as representing a "small selfish minority." This minority want to lever Canadians' Covid fatigue into a funnel for importing toxic Trumpism into Canada. 

However, Canadians have a right to protest. Any demonstration, whether it be Fairy Creek or the Ottawa trucker convoy, is inevitably going to involve some degree of disruption to the regular flow of life. That's how protestors attract attention and change minds. Protesters often need money, especially well-organized protestors. And crowdfunding sites, both domestic and foreign, offer them the ability to connect with donors.

We have rules about how far this disruption can go. Once this point is reached, an Ontario court will issue an injunction ordering an end to the protest, at which point the convoy must disband. Those who continue to gather are doing so illegally and can be arrested.

As far as I know, the Freedom Convoy has not been declared illegal by a judge. And so GiveSendGo is probably in its rights to host a fundraiser for the convoy. Until the protest has definitively crossed the line into illegal territory, talk of "choking off" funds is premature, indeed irresponsible – it amounts to calling for the state to censor Canadians' ability to protest.

Nor does the fact that Americans are major contributors to the convoy justify a government-led choking-off of funding. The proper trigger for freezing funding isn't the nationality of a protest's financial contributors. The proper trigger is when the court deems the protest illegal, and whether law enforcement believes that its enforcement strategy requires a blocking of funds.

By the way, these same principles would apply if the Conservative Party's Andrew Scheer had called for a choking-off of funds to the Fairy Creek protestors. As long as Fairy Creek protest is legal (more on that later) the funds should be allowed to flow freely, even if lefty Americans are donating.

In the next few days things could get interesting. Imagine an Ontario court issues an injunction ordering the protest to end... but the protesters do not leave. The police begin to enforce the injunction by  removing illegal protestors, but the whole thing explodes into a riot. At this point one would expect GiveSendGo to pull the plug on the $8 million campaign. According to its own terms of service, GiveSendGo doesn't allow campaigns that "violate any law, statute, ordinance or regulation."

Spurned on by wingnuts on the American right, GiveSendGo could very well choose to ignore its own terms of service. Let's say that it keeps on hosting the convoy's now-illegal campaign. 

Is Canada helpless to stop the funds raised on a U.S. based platform from reaching the illegal protestors? Jagmeet Singh seems to think so, suggesting that we must contact the US administration to shut down funding.

Relax. Canada already has all the tools necessary to uphold the law. Before the funds can be spent by the convoy, GiveSendGo will have to wire the $8 million from its U.S. bank account to the Canadian bank account of Freedom 2022 Human Rights and Freedoms, the non-profit representing the protestors. Law enforcement can ask the non-profit's bank – maybe Royal Bank or CIBC – to freeze the convoy's account, should it deem this step necessary. Problem solved.

Incidentally, the Fairy Creek protestors in B.C. continue to raise funds on the Fundrazr crowdfunding platform. (Like the trucker convoy, GoFundMe froze Fairy Creek's first campaign, forcing it to pivot to an alternative platform.) The Fairy Creek protester's Fundrazr campaign hasn't been halted despite B.C. courts having issued and renewed an injunction restraining "unlawful interference by protesters," and Fundrazr's terms of service prohibiting the violation of "any applicable local, province, state, national or international law."

It could be that the Fairy Creek campaign's lawyers are being very careful about how they spend the funds. Or maybe the police's enforcement strategy doesn't yet extend to freezing the protester's funding sources.

But ultimately, sustaining the rule of law is vital (as Brian Lee Crowley so ably describes here). If putting a halt to illegal activities requires the extreme step of removing funding supporting those activities, then that's a justifiable step to take, whether that be the dollars raised by the Freedom Convoy or the protesters at Fairy Creek.

---

PS: A few hours after I posted this the Ontario government successfully petitioned the Superior Court to freeze the convoy's GiveSendGo funds based on the allegation that it is "offence-related property." Here are the relevant sections of the code. Unfortunately the government has given no indication of what the offence is.

Those 70s ACH payments

Here is Facebook's David Marcus, who has been involved in rolling out Facebook's much-touted Libra/Novi/Diem payments system:

I often make the parallel between money and communication networks. Unfortunately money still moves at the pace of the early 70s (ACH), and for the most part at the same price. Unacceptable. https://t.co/beNCtCD3To

— David Marcus (@davidmarcus) July 9, 2021

By ACH, Marcus is referring to automated clearinghouse payments. If you want to pay your phone bill, the payment gets sent to a clearing house, which batches your payment together with many other payments and then settles it the next day. These systems were built in the 60s and 70s.

I don't want to pick on Marcus, since he isn't the only one with this view. But modern money no longer moves at the pace of early 70s ACH. His critique would have made sense maybe 6 or 7 years ago, and only in the US. But that's not the case in 2021.

The speeding up of modern payments is a great success story. Let me tell you a bit about it.

To begin with, central banks and other public clearinghouses have spent the last 15-or-so years blanketing the globe with real-time retail payments systems. Europe has TIPS, UK has Faster Payments, India has IMPS, Sweden has BiR, Singapore FAST. There must be at least thirty or forty of these real-time retail payments system by now. 

The speed of these new platforms get passed on to the public by banks and fintechs, which are themselves connected to these core systems. In the UK's case, for example, consumers can bypass the slower ACH system, BACS, which takes three days to settle, by choosing to make their bank payment proceed via the Faster Payments system.

The U.S. is lagging. The Federal Reserve's FedNow retail payment system, which will facilitate real-time retail payments, won't be in place till 2024, more than 15 years after UK's Faster Payments was introduced. So Marcus's tweet could just be a function of having a U.S.-centric viewpoint.

However, the Fed's private competitor, The Clearing House, has had a real-time settlement system in place since 2017, the Real-Time Payments (RTP) network. Roll-out has been slow, but as of July 2021 The Clearing House claims that RTP reaches 56% of U.S. checking accounts. 

The US is inching towards ubiquitous instant P2P payments. Here is the coverage map for the US's only real-time retail payments settlement system, The Clearing House's RTP network, introduced in 2017.

RTP now reaches ~56% of US demand deposit accounts. https://t.co/xvAKknwaE2 pic.twitter.com/GojH6oR885

— John Paul Koning (@jp_koning) July 9, 2021

RTP illustrates that it's not just central banks that are facilitating real-time payments. Private players are too. Visa and MasterCard, for instance, built their own proprietary real-time person-to-person payments platforms, Visa Direct and MasterCard Send, on the back of their debit card networks.

As Arturo Portilla points out, Visa Direct and MasterCard Send don't actually settle payments in real-time. They only clear them. From the perspective of the consumer, however, it makes little difference. Ned can send Jenny $100 using a Visa Direct enabled account, and Jenny can then spend that $100 within moments of receiving it. (Ned and Jenny's banks settle up the next day.)

In 2017 U.S. banks debuted Zelle, a now ubiquitous instant person-to-person bank payments option. Zelle was built using the Visa Direct and MasterCard Send networks. And now Zelle is being connected to The Clearing House's RTP network, too. Which means that settlement can be done in real-time.

Perhaps Marcus's ACH critique is limited to non-domestic transactions. But even cross-border payments are also going quicker.

Remittance companies like Western Union and MoneyGram are leveraging Visa Direct and MasterCard Send to do instant cross-border transfers. As of late 2020, Western Union was facilitating real-time payouts to 80 countries. MoneyGram recently announced that 575 corridors from 25 countries in Europe would go instant thanks to an integration with Visa Direct, complementing its existing instant payments options from the US.

Remember when everyone was poking fun at Western Union for its slow remittances? It now does real-time payouts in 80 countries, up from 50 earlier this spring, and is targeting 100 countries by the end of 2020: https://t.co/oSiihGCwvs pic.twitter.com/ovRKZMMH8y

— John Paul Koning (@jp_koning) October 28, 2020

Transferwise, another global remittance company, is dispatching up to 38% of its remittances instantly. Whereas Western Union and MoneyGram are building on top of Visa Direct and MasterCard Send, my understanding is that most of Transferwise's success in speeding up remittances comes from integrating with the new retail real-time payments systems I listed above, like Singapore's FAST and UK's Faster Payments.

Let's not forget SWIFT gpi, which is bringing a new speed standard to corporate cross-border payments.

Even the ACH network that Marcus criticizes is upping its game. ACH payments have typically not settled till a day or two after origination, which meant consumers have had to wait for salaries and bill payments to settle. But in 2017, same-day ACH was introduced. It's taken some time for this option to gain adoption. As of the first quarter of 2021, only 2% of all ACH transactions are done on a same-day basis.

But same-day ACH is getting better. In 2020, the limit for same-day payments was raised from $25,000 to $100,000. Just this year a third window for clearing and settling same-day ACH payments was introduced, 6:30 PM EST, making same-day ACH even more convenient for Californians and others in later time zones. Next year, limits will be raised from $100,000 to $1 million.

Lastly, Marcus maligns slow in his tweet. But remember, slow can be a good thing, too. Slowing down transactions allows us to batch them together and cancel out reciprocating payments, thus reducing the amount of work our payments systems must do. And this makes our payments systems cheaper. (I've written two articles on this topic, here and here.)

The ideal payments ecosystem isn't slow or fast. It provides a combination of slow, medium, and fast options. The Libra/Diem/Novi project project that David Marcus is working on will fit in somewhere on this spectrum. The more options, the better off are consumers. But 70s ACH is no longer a very realistic way to describe modern money.

Stablecoins as a route into Venezuela?

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

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

Breakthrough use-case for $USDC -- with US Govt permission, we partnered with the exiled govt of Venezuela (@jgauido) and Airtm @theairtm to distribute aid to people and healthcare workers in Venezuela. Stablecoins now a tool of US foreign policy -- https://t.co/50NoXNMJCz

— Jeremy Allaire (@jerallaire) November 20, 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For a modern blueprint of how people try to cope with hyperinflation, look to Venezuela. Locals have adopted Zelle, an Arizona-based app that facilitates instant US$ bank transfers.

"Supermarkets have dedicated lines for customers paying with Zelle." ⬇️https://t.co/XacNlZ5KNl pic.twitter.com/V4PXyCasww

— John Paul Koning (@jp_koning) November 16, 2020

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

Transferwise, why so fast?

This post explores some of the technological advancements that have allowed remittances to be completed in seconds rather than days.

If you follow me on Twitter, you'll often see me retweeting folks who have just made really fast remittances using Transferwise, a company that specializes in cross-border payments. Like this one:

Australia to Thailand, less than a minute.

Remittance providers can achieve speeds like this by stitching together domestic 24x7 real-time payment systems, in this case Thailand's PromptPay and/or Australia's New Payments Platform. https://t.co/6UCdcVMFyO

— John Paul Koning (@jp_koning) February 17, 2020

No, I'm not a paid shill for Transferwise. I'm providing a public service. By shining a light on these quick remittances, I'm hoping to counteract two bad ideas. The first one, which goes back at least to 2011 or, is the idea that traditional fiat-based platforms can't do fast remittances. So we need either bitcoin or some sort of blockchain, say Ripple, to bring competence to the remittance space.

This idea was best captured in this meme from a few years back:

The second and related idea is that since banks or fintechs can't do fast remittances, we need some sort of government fix, specifically a central bank digital currency (CBDC), to expedite them. In a recent white paper, for instance, IBM and the Official Monetary and Financial Institutions Forum describe remittances as "cumbersome, expensive and slow," and suggest that CBDCs may ameliorate this problem. The Monetary Authority of Singapore justifies its experiments with CBDC by using the same two adjectives, "slow" and "cumbersome" for remittances.

But as the above Australia to Thailand remittance shows, it is possible to do instant cross-border payments without blockchain or CBDC. Which means that if central bankers want to justify building their own digital currency they'll have to come up with better supporting facts than private sector incapacity to facilitate fast remittances. And if bitcoin is going to take over the world, it'll have to compete on factors other than remittance speed.  

So without further ado, let's get to the main question: how does Transferwise get money from X to Y in ten seconds? After all, it isn't entirely wrong to poke fun at traditional remittance companies. Historically, it has taken a few days to move funds electronically from a bank account in one country to a bank account in another.

To figure out why remittances can go so quickly, we've go to unwind the technology of a money transfer.

The ABCs of a remittance

We can think of any national payment system as a stack of interconnected databases. For a payment to make its way from your account to mine, information has typically had to cascade down the stack of databases to the bottom-most layer and then flow back up. The speed of a payment is a function of both by how quickly each individual database in the stack can be updated, and the speed at which information gets relayed to the next layer in the stack.

Impressive. A 15-second Germany-to-India remittance.

No blockchain required, just good ol' centralized databases being rapidly updated on top of real-time central bank payment systems. https://t.co/NlLeiDk9jr

— John Paul Koning (@jp_koning) January 9, 2020

Say that Jill, who lives in the US, wants to transmit $100 to Tom in Singapore via Transferwise.

Jill sits at the top of the U.S. payments stack. She has an account at the First Bank of Boaz or, put differently, she occupies a spot in First Bank of Boaz's database. Transferwise also sits at the top of the US payments stack. It has a business account at Bank of America. In other words, Transferwise is represented by an entry in Bank of America's database.

Before Transferwise can pay Tom in Singapore, it has to wait for Jill's $100 to make its way through the US payments stack and land in its Bank of America account. But the $100 can't simply hop laterally from First Bank of Boaz's database to Bank of America's database. The payment information first has to plunge down to the next lower level of the payments stack.

The whole process begins with Jill asking the First Bank of Boaz to make the $100 payment. First Bank of Boaz adjusts its database by reducing Jill's balance by $100. This information gets relayed down to the next database in the stack.

First Bank of Boaz is a small bank. It has an account at the much larger Chase Bank. So it informs Chase about the $100 that it wants to send to Transferwise on behalf of its customer Jill. It is now Chase's turn to adjust its database. It reduces First Bank of Boaz's balance by $100.

Transferwise doesn't have the $100 yet, however. The payment information still has to be relayed to the bottom-most layer. Chase and Bank of America both have accounts at the Federal Reserve, America's central bank. Chase informs the Fed about the $100 transfer, upon which the Fed updates its database. It reduces Chase's spot in its database by $100 and adds $100 to Bank of America's entry. The banks have now 'settled' their payment. The most important payments layer, the bottom-most one, shows the switch has been made.

Information starts to flow back up the stack. The Fed notifies Bank of America about the $100 credit to its entry in the Fed's database. Upon which Bank of America updates its own database. It increases Transferwise's entry in its database by $100.

Phew. Transferwise finally owns the $100.

Now it can do the Singapore leg of the transaction.

The same down-and-up-the-stack progression that occurred in the US now plays out in Singapore. Transferwise tells its Singapore bank to transfer SG$140 to Tom at his bank. As before, the payment can't just hop from one bank database to another bank database. The information first cascades down to the bottom-most database, the one maintaind by the Monetary Authority of Singapore. Only after MAS updates its database will the information flow back up the stack to Tom's bank. At which point Tom's bank updates its database.

The remittance is now complete. Tom has an extra SG$140 and is free to spend the funds or withdraw cash.

OMG!!!! @TransferWise You are awesome!!!! 5 seconds to send money from Spain to México. The last time it was like 1 day.

— Javier Camacho 🇲🇽🇪🇺🇪🇸 (@fjccorp) February 11, 2020

In the old days of two or three day remittances, one of the biggest clogs in the system was the glacial speeds at which information flowed onto the base layer and the rate at which the base layer, usually operated by a central bank, was updated.

Rather than sending Jill's payment instructions individually to the central bank database, banks would typically batch her instructions together with millions of other instructions and send them to the central bank just before closing time. The next day the central bank would process these big batches, check for errors, and cancel offsetting payments. Only then would the central bank update its database by adding money to creditor banks (like Bank of America) and removing it from debtor banks (like Chase).

The updated information could now flow up to higher database levels. But by then the original payment instruction was already a day or two old. Remitters like Transferwise were left waiting for days to receive the originating customer's transfer.

The mirror image of this would occur on the other side of the ocean. If it took Transferwise a day or two to receive money in the U.S., it also took a day or two for Transferwise's Singapore dollar payment to land in the Tom's account. This combination of two sluggish central bank databases is why remittances used to flow like molasses.

Even worse, the central bank database was closed on the weekend. So anything that was sent to the central bank by Friday night would have to wait till Monday morning to be processed.

Not anymore.

The dawn of real-time retail payments systems

Much (though not all) of the speed improvements are due to new ways of operating the central bank's bottom-most database.

Instead of Jill's payment instructions being batched together with many other payments and sent to the central bank at the end of the day, banks will now send Jill's instructions individually and in real-time to the central bank. The central bank updates its database a moment later. Now instructions can flow up to Transferwise's account in the seconds that follow. Which means that Transferwise can quickly start working on the foreign leg of the transaction. As long as the foreign central bank's base layer is also capable of operating in real-time, then the whole cascade of database updates can occur in just a few seconds.*

Like this one:

11 seconds to get money from UK to Hong Kong.

Courtesy of the the Hong Kong Monetary Authority newly-built instant retail payments system: https://t.co/WbRhzkXgK8 Transferwise serves as a bridge between the HKMA's new rails and UK's existing instant retail system. https://t.co/1ga0oscZvA

— John Paul Koning (@jp_koning) May 3, 2019

These new core layers work at night and on the weekends too.Which means remittance providers like Transferwise can no now pay out 24x7.

Known as real-time retail payment systems, these newly-revamped layers have sped central banking up. They include UK Faster Payments in 2008, India’s IMPS in 2010, Sweden’s BiR in 2012, Singapore’s FAST in 2014, and Australia’s NPP in 2018.** Brazil's PIX is the newest one.

All of these developments may give the impression that Transferwise is just a passive beneficiary of improvements elsewhere in the payments stack. But Transferwise has had to design its own internal mechanisms for ensuring that it can harness these improvements. Automation and AI no doubt have a big roll to play. But I don't work at Transferwise, so I can't shed much light on this. I'm sure it has used some neat tricks.

So we don't really need CBDC or blockchain to get faster. If we want policies that can speed up remittances even more, the best thing is for central banks to continue the process of setting up real-time retail payment systems, until the whole world is blanketed. Then stand aside and let innovators like Transferwise complete the task of linking these disparate systems up.

But if there was one adjustment that could be made to go even faster, it would be this: let remittance companies like Transferwise hold accounts directly at the central bank.

Most jurisdiction only allow their central bank to interact with banks. But this forces Transferwise and other specialized payments companies to seek out banking intermediaries in order to access the central bank's database. And this extra layer may slow them down. By interfacing directly with the central bank's core layer, Transferwise may be able to optimize the interconnection in order to squeeze a few extra seconds out of each remittance.

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*There are variations on this theme. UK's Faster Payments scheme uses batching but is still able to process payments in real-time. (I explained how here). US's same-day ACH also speeds up the domestic payments system, but also uses batching. By submitting batches before certain cutoff times during the day, the Fed promises to update its database that same day rather than waiting till the next day. 

**By the way, there are other tricks to make the whole series of database updates go quite fast that don't involve speeding up the bottom-most layer. MasterCard and Visa both run real-time communications networks over which debit card-enabled accounts can communicate. And these networks can be used to skip the previously-described trek to the bottom-most (and slowest) layer and back.

For instance, using the Visa Network the First Bank of Boaz tells Bank of America that Jill wants to move $100 to Transferwise's account. Bank of America quickly credits Transferwise the $100 while First Bank of Boaz debits Jill $100. Transferwise can now do the Singapore leg of the remittance. First Bank of Boaz and Bank of America will settle up with each other the next day on the Federal Reserve's database.