If it's crypto it's not money laundering

It appears to be official now. According to the U.S. Department of Justice, when illicit activity is routed via crypto infrastructure, then it no longer qualifies as money laundering.

Earlier this week the Department of Justice's deputy attorney general Todd Blanche sent out an internal staff memo saying that the digital asset industry (read: crypto) is "critical to the nation’s economic development." (Editor's note: it's not.) As such, staff have been instructed to stop targeting crypto platforms such as exchanges, mixers like Tornado Cash and ChipMixer, and offline wallets for the "acts of their end users." 

What does "the acts of their end users" mean? Further clarity arrives deeper into Blanche's memo. It helpfully draws attention to how cartels operating in the fentanyl trade often use digital assets. This is well known. Tether, for instance, is a popular payments platform in the fentanyl trade. (See here, here, and here). And yet, the Department goes on to explain that while it will continue to pursue cartels, terrorist organizations, and other illicit enterprises for their financial crimes, it "will not pursue actions against the platforms that these enterprises utilize to conduct their illegal activities."

This marks a radical departure from long-established financial law on Planet Earth, where financial institutions are generally held responsible for the "acts of their end users," and are pursued when criminals use them to "conduct their illegal activities." It's what's known in law as money laundering.

Money laundering is a two-sided crime. There's the first leg: a criminal who has dirty money. And there is the second leg: the criminal's counterparty, a financial intermediary (a bank, crypto exchange, remittance platform, money courier, or helpful individual) who processes the dirty funds. Both legs are prosecutable. That's precisely what happened to both TD Bank and its cartel-linked customers when they were charged last year. Financial providers are held liable for the crimes of their users.

The same two-sidedness goes for sanctions evasion. There is the sanctioned party and there is the financial platform that facilitates their evasion. Both are indictable.  

If, as Blanche suggests, digital asset platforms are no longer to be targeted for the "acts of their end users," that's effectively saying that the second leg of a money laundering or sanctions violation is no longer a violation, at least not when a crypto platform is involved. So if cartel deposits dirty money at an exchange like Binance which facilitates their crypto transactions, the exchange won't be pursued. Only the cartel will be.

In effect the entire technology has been handed a get-out-of-money-laundering-jail-free card. A detached observer could safely assume that crypto platforms will respond by easing up on their compliance measures—they won't be indicted, after all—which, in turn, will allow more bad actors to make use of their services.

The memo provides more details. It's quite likely that both the ongoing Tornado Cash case (which I've written about extensively) and the ChipMixer case will be dropped, as the memo explicitly states that the Department will no longer target mixing and tumbling services. Tornado Cash, a smart-contract based mixer, operates with a large proportion of its infrastructure running through automated code, whereas first-generation mixers like ChipMixer are entirely human-operated. The latter had mostly disappeared thanks to a series of successful criminal convictions, but will spring back into action as the threat of indictment recedes—leading to more anonymity for the entire system, including for criminals.

The memo's prohibition against Department lawyers targeting "offline wallets" likely refers to "unhosted wallets," which presumably applies to stablecoins—a highly popular type of crypto token pegged to national currencies. Stablecoin users can either hold balances of a stablecoin like Tether or USDC in unhosted format, within their personal crypto wallets, or hold them with the issuer for redemption into actual dollars, in which case they become "hosted." The implication seems to be that if unhosted stablecoins are used by bad actors, the issuers themselves won't be targeted. It's a fantastic policy—if your goal is to encourage fentanyl cartels to use stablecoins.

This decriminalization of crypto money laundering is a ratification of how much of the crypto ecosystem already operates. Just last week, for example, I wrote about stablecoin issuers like Tether and Circle allowing Garantex, a sanctioned Russian exchange, to hold balances of their stablecoins. The issuers seem to believe that providing access to illicit end users like Garantex is legal. And now, it seems, the government has confirmed their view by no longer targeting unhosted wallets for the "acts of their end users."

Now that we've explored some of the immediate legal and technical consequences of this decision, it's worth asking: who on earth benefits from this sudden shift in policy? Because clearly most people will be made worse off. 

I'm only speculating, but here's who this policy may be designed to appease and/or reward:

• Trump-voting libertarians who have arrived at the odd belief that money laundering shouldn't be a crime.
• San Francisco crypto entrepreneurs who want to create financial platforms on the cheap, without the burden of building expensive compliance programs to prevent criminals usage. These entrepreneurs also want their crypto platforms to have access to bank accounts, but banks have been hesitant due to the high risk of crypto-based money laundering. Now that crypto has immunity, banks no longer have to worry. Crypto entrepreneurs voted for Trump, funded him, and are a big part of his administration. This is their payback.
• Trump himself who seems intent on building a murky authoritarian system of bribery and patronage à la Putin or Orban. This system requires money laundering-friendly financial infrastructure, and the Department's memo may be an early step to creating it. (The Trump family, with its many crypto-based entrepreneurial efforts, is also part of the second group.)

In the long term, banks and other traditional providers may benefit, too. With crypto-based finance now unburdened of a major law, every single financial provider operating outside of this crypto-friendly zone, such as traditional banks and fintechs, will be incentivized to switch their database infrastructure over to crypto in order to qualify for this loophole. That means shifting your Wells Fargo U.S. dollar savings account over to a blockchain-based dollar saving account. Doing so will allow banks and fintechs to cut compliance costs and increase their profits.

Once the entire financial sector has migrated through the loophole, it will no longer be a crime to launder funds for criminals. And with mixers no longer being charged by the Department of Justice, that means blanket anonymity for everyone.

As far as the public's welfare goes, the memo is awful. Like theft and fraud, money laundering is immoral and should be punished. Giving one stratum of society a free pass from any law, whether that be money laundering or theft or murder, erodes trust in government and the financial-legal system.

More broadly, society's money laundering laws are a key defence against all types of other crimes. The so-called predicate offences to money laundering such as robbery, human smuggling, and corruption become much more tricky to carry out when, thanks to money laundering laws, the financial system does its best to shut them out. The dissuasive effect engendered by this effort stops many would-be criminals from ever leaving the licit economy. Take away those laws and the case for becoming a criminal becomes much more persuasive.

Why sanctions didn’t stop Russia's Garantex from using stablecoins

Stablecoins, a new type of financial institution, are unique in two ways. First, they use decentralized databases like Ethereum and Tron to run their platforms. Secondly, and more important for the purposes of this article, they grant access to almost anyone, no questions asked. 

I'm going to illustrate this openness by showing how Garantex, a sanctioned Russian exchange that laundered ransomware and darknet payments, has enjoyed almost continual access to financial services offered by stablecoin platforms like Tether and USDC throughout its six year existence, despite a well-known reputation as a bad actor. 

Last month, law enforcement seizures combined with an indictment and arrest of Garantex's operators appear to have finally severed Garantex's stablecoin connection... or not. Evidence shows that Garantex simply rebranded and slipped right back onto stablecoin platforms.  

Stablecoins' no-vetting model is a stark departure from the finance industry's default due diligence model, adhered to by banks (such as Wells Fargo) and fintechs (such as PayPal). We all know the drill—provide two pieces of ID to open a payments account. Requirements for businesses will probably be more onerous. Anyone on a sanctions list will be left at the door. Banks and fintechs must identify who they let on their platforms because the law requires it.

By contrast, to access the Tether or USDC platforms, the two leading U.S. dollar stablecoins, no ID is required. Anyone can start using stablecoin payments services without having to pass through a due diligence process. Sanctioned customers won't get kicked off, as Garantex's long-uninterrupted access shows. Regulators seem to tolerate this arrangement—so far, no stablecoin operators have faced penalties for money laundering or sanctions evasion.

A quick history of the Tether-Garantex nexus

Garantex became notorious early on for its role in laundering ransomware payments. Russian ransomware gangs hacked Western firms, extorted them for bitcoin ransoms, and cashed out at Moscow-based exchanges like Garantex. Garantex also became a popular venue for laundering darknet-related proceeds, particularly Hydra, once the largest darknet market. Reports allege that the exchange's shareholders have Kremlin links and that terror groups Hezbollah and Quds Force have used it.

Founded in 2019, Garantex was connected to Tether's platform by August 2020. We know this because an archived version of Garantex's website from that month show trading and payment services being offered using Tether's token, USDT.

Archived Garantex.org trading page from March 2024 with USDT-to-ruble, Dai-ruble, and USDC-ruble markets [link]

This connection to Tether allowed Garantex's customers to transfer their Tether balances to Garantex's Tether wallet, in the same way that a shopper might use their U.S. dollar account at PayPal to make payments to a business with a PayPal account. This allowed Garantex's users to trade U.S. dollars (in the form of Tether) on its platform for bitcoins or ether, two volatile cryptocurrencies, and vice versa. The Tether linkage also meant that Garantex could offer a market for trading ruble-USD.

By April 2022, Garantex's bad behaviour had caught up to it: the exchange was sanctioned by the U.S. Treasury's Office of Foreign Asset Control (OFAC). U.S. individual and entities were now prohibited from doing business with Garantex. Out of fear of being penalized, most non-Russian financial institutions would have quickly severed ties with it. Yet Tether, based in the British Virgin Islands at the time, permitted its relationship with Garantex to continue without interruption. Archived copies of Garantex's trading page from mid-2022 and 2023 show that Tether-denominated services were still being offered.

The Wall Street Journal reported in 2023 that around 80% of the exchange’s trading involved Tether, despite sanctions being in place. The net amounts were not small. According to Bloomberg, an alleged $20 billion worth of Tether had been transacted via Garantex post-sanctions. A 2024 Wall Street Journal report revealed that sanctions-evading middlemen used Tether to "break up the connection" between buyers like Kalashnikov and sellers in Hong Kong, with Garantex serving as their venue for acquiring Tether balances. 

Finally, analysis from Elliptic, a blockchain analytics firm, alleges that Garantex offered USDT trading services to North Korean hacking group Lazarus in June 2023. This transaction flow is illustrated below:

The Garantex/Tether nexus in 2023: Elliptic alleges that North Korean hackers stole ether from Atomic Wallet, converted it to Tether using a decentralized exchange 1inch, and then sent Tether to Garantex to trade for bitcoin. (Click to enlarge.) Source: Twitter, Elliptic

Tether's excuse for not off-boarding sanctioned entities such as Garantex? A supposed lack of government clarity. 

When Tornado Cash was sanctioned in 2022, for instance, the company said that it would "hold firm" and not comply because the U.S. Treasury had "not indicated" whether stablecoin issuers were required to ban sanctioned entities from using what Tether refers to as "secondary market addresses." Translating, Tether was saying that if bad actors wanted to use Tether's platform to transact with other Tether users (i.e. in the "secondary market"), it would let them do so. Tether's only obligation, the company believed, was to stop sanctioned users from asking Tether itself to directly cash them out of the platform into U.S. dollars (i.e. the "primary market").

This is quite the statement. Imagine if PayPal allowed everyone—including sanctioned actors—to open an account without ID and send funds freely within its system, only intervening when bad actors asked PayPal to cash them out into regular dollars. That was Tether's stance. Or if Wells Fargo let sanctioned actors make payments with other Wells Fargo customers, but only stopped them from withdrawing at ATM. Banks and fintechs can't get away with such a bare bones compliance strategy; they must do due diligence on all their users. But Tether seemed to believe that a different set of rules applied to it.

In December 2023, Tether reversed course. It would now initiate a new "voluntary" policy of freezing out all OFAC-listed actors using its platform, not just "primary market" sanctioned users seeking direct cash-outs. This brought Tether into what it described as "alignment" with the U.S. Treasury. Soon after, Tether froze three wallets linked by OFAC in 2022 to Garantex.

However, this action was largely symbolic. By the time Tether froze those wallets, Garantex had already abandoned them and opened new ones, thus allowing the exchange to maintain access to Tether's platform. Tether's no-vetting model permitted this pivot. Archived versions of Garantex's trading page show that it continued offering Tether services throughout 2024 and early 2025.

The U.S. Department of Justice recently confirmed Garantex's tactic of replacing wallets in its March 2025 indictment of the exchange's operators. It alleges that Garantex frequently cycled through new Tether wallet addresses—sometimes on a daily basis—to evade detection by U.S.-based crypto exchanges like Coinbase and Kraken, which are legally required to block customer payments made to sanctioned entities.

That the relationship between Tether and Garantex continued even after Tether's supposed 180 degree turn to "align" itself with the U.S. government is backed up by several reports from blockchain analytics firm Chainalysis. The first, published in August 2024, found that a large purchaser of Russian drones used Garantex to process more than $100 million in Tether transactions. The second describes how Russian disinformation campaigners received $200,000 worth of Tether balances in 2023 and 2024, much of it directly from Garantex. In a March 2024 podcast, Chainalysis executives allege that "a majority" of activity on Garantex continued to be in stablecoins.

After years of regular access to Tether's stablecoin platform, a rupture finally occurred earlier this month when Tether froze $23 million worth of Garantex's USDT balances at the request of law enforcement authorities. The move came in conjunction with a seizure by law enforcement of Garantex's website and servers. 

Garantex's website was seized in March 2025 by a collection of law enforcement agencies.

In a press release, Tether claimed that its actions against Garantex illustrated its ability to "track transactions and freeze USDt." But if Tether was so good at tracking its users, why did it connect a sanctioned party like Garantex in the first place, and continue to service it for over four years? Something doesn't add up.

Not just Tether: other stablecoins offered Garantex access, too

Tether doesn't appear to have been the only stablecoin platform to provide Garantex with access to its platform. MakerDAO (recently rebranded as Sky) and Circle Internet may have done so, too.

Circle, based in Boston, manages the second-largest stablecoin, USDC. When OFAC put Garantex on its sanctions list in April 2022, Circle was quick to freeze one of the designated addresses. It did no hold any USDC balances. However, like Tether, Circle's no-vetting policy means that it doesn't do due diligence on users (sanctioned or not) who open new wallets, hold USDC in those wallets, and use them to make payments within the USDC system. Circle only checks the ID of users who ask it to cash them out. Thus, it would have been a cinch for Garantex to dodge Circle's initial freeze: just open up a new access point to the USDC platform. Which is exactly what appears to have happened.

On March 30, 2022, Garantex used its Twitter/X account to announce that it was offering USDC-denominated services. Beginning at some point in the first half of 2022, close to the time that the U.S. Treasury's sanctions were announced, Garantex began to list USDC on its trading page (see screenshot at top). The exchange's trading page continued to advertise USDC-denominated financial services through 2023, 2024, and 2025 until its website was seized last month. 

Tether, Circle's competitor, proceeded to freeze $23 million worth of USDT on behalf of law enforcement authorities, as already outlined. However, respected blockchain sleuth ZachXBT says that Circle did not itself interdict Garantex's access to the USDC payments platform, alleging that "a few Garantex addresses" holding USDC had not been blacklisted.

MakerDAO is a geography-free financial institution that maintains and governs the Dai stablecoin, pegged to the U.S. dollar. Archived screenshots show that Garantex added Dai to its trading list by September 2020, not long after the exchange had enabled Tether connectivity. According to blockchain analytics firm Elliptic, Russian ransomware group Conti has used Garantex to get Dai-denominated financial services. Garantex is able to access the Dai platform because MakerDAO uses the same no-vetting model as Tether. In fact, MakerDAO takes an even more hands-off approach than the other stablecoin platforms: it didn't seize any of the original 2022 addresses emphasized by OFAC. That's because Dai was designed without freezing functionality.

Not vetting users is lucrative

Providing financial services to a sanctioned Garantex would have been profitable for Tether and competing stablecoin platforms managed by Circle and MakerDAO. 

All stablecoins hold assets—typically treasury bills and other short term assets—to "back" the U.S. dollar tokens they have issued. They get to keep all the interest these assets generate for themselves rather than paying it to customers like Garantex. If we assume an average interest rate of 5% and that Garantex maintained a consistent $23 million in Tether balances over the 34 months from April 2022 (when it was sanctioned) to March 2025 (when it was finally frozen out), Tether could have earned approximately $3.2 million in interest courtesy of its relationship. 

Not only does their no-vetting model mean that stablecoin platforms get to earn ongoing income from bad actors like Garantex, this model also seems... not illegal? Stablecoin legal teams have signed off on the setup, both those in the U.S. and overseas. Government licensing bodies like the New York Department of Financial Services don't seem to care that licensed stablecoins don't ask for ID, or at least they turn a blind eye. (Perhaps these government agencies are simply unaware?) Nor has the U.S. Department of Justice indicted a single stablecoin platform for money laundering, sanctions violations, or failing to have a compliance program, despite it being eleven years now since Tether's no-vetting model first appeared. The model seem to have legal chops. Or not?

Banks and fintechs are no doubt looking on jealously at the no-vetting model. Had either PayPal or Wells Fargo allowed Garantex to get access to their payments services, the punishment would have been a large fine or even criminal charges. Sanctions violations are a strict liability offence, meaning that U.S. financial institutions can be held liable even if they only accidentally engage in sanctioned transactions. But more than a decade without punishment suggests stablecoins may be exempt.

This hands-off approach benefits stablecoins not only on the revenue side (i.e they can earn ongoing revenues from sanctioned actors). It also reduces their costs: they can hire far fewer sanctions and anti-money laundering compliance staff than an equivalent bank or fintech platform. Tether earned $13 billion in last year with just 100 or so employees. That's more profits than Citigroup, the U.S.'s fourth largest bank with 229,000 employees, a gap due in no small part to Tether's no-vetting access model. 

The coming financial migration?

Zooming out from Garantex's stablecoin experience, what is the bigger picture? 

I suspect that a great financial migration is likely upon us. Financial institutions can now seemingly provide services to the Garantex's of the world as long as the deliver them on a new type of substrate: decentralized databases. If so, banks and fintechs will very quickly shift their existing services over from centralized databases to decentralized ones in order to take advantage of their superior revenue opportunities and drastically lower compliance costs. 

This impending shift isn't from an inferior technology to a superior one, but from an older rule-bound technology to a rule-free one. PayPal recently launching its own stablecoin is evidence that this migration is afoot.

The argument many stablecoins advocates make to justify the replacement of full due diligence with a no-vetting access model is one based on financial inclusion. Consumers and legal businesses in places such as Turkey or Latin America, which suffer from high inflation, may want to hold digital dollars but don't necessarily have access to U.S. dollar accounts provided by local banks, perhaps because they don't qualify or lack trust in the domestic banking system. An open access model without vetting solves their problem.      

What about the American voting public? Do they agree with this migration? The last few decades have been characterized by a policy whereby the government requires financial institutions to screen out dangerous actors like Garantex in order to protect the public. Forced to the fringes of the financial system, criminals encounter extra operating dangers and costs. The effort to sneak back in serves as an additional choke point to catch them. To boot, the additional complexity created by bank due diligence serves to dissuade many would-be criminals from engaging in crime. Is the public ready to let the Garantexes back in by default? I'm not so sure it is.

Tether is available at Grinex, a Garantex reboot. [link]

Garantex's stablecoin story didn't end with last month's seizures and indictment. According to blockchain analytics firm Global Ledger, the exchange has been renamed Grinex and continues to operate. Tether services are already available on this new look-alike exchange, as the screenshot above reveals. Global Ledger says that $29.6 million worth of Tether have already been moved to Grinex as of March 14, 2025. 

This is the reality of an open-access, no-vetting financial system: bad actors slip in, eventually get cut off, and re-enter minutes later—an endless game of whack-a-mole that seems, for now at least, to be tolerated. It will only get larger as more financial institutions, eager to cut costs, gravitate to it.

Stablecoins are non-fungible, bank deposits are fungible

On Twitter/X, I recently suggested that the network effects of the stablecoin market are massive. Tether, which has four times more wallets than all other stablecoins, is locked-in as the stablecoin lingua franca, just like English has been locked-in as the global language of business. 

In case you've missed the trend, stablecoins are fiat money (primarily U.S. dollars) that are issued on a new type of database called a blockchain. The total value of stablecoins in circulation has grown from $0 to over $200 billion in a decade, with Tether dominating at $138 billion.

When I said at the outset that the stablecoin market is governed by network effects, what I meant is that a positive feedback loop exists whereby the value that a network (i.e. languages or stablecoins) provides to users increases as more users join the network. Once a given stablecoin has entered into this virtuous loop, other issuers cannot join in, and will have troubles competing. It's a winner take all market that Tether and its stablecoin USDt (and perhaps smaller competitor USDC, issued by Circle) have already won.

Larry White, a monetary economist who I've mentioned a few times on my blog, asked me why I think network effects are present in the stablecoin market. We don’t see network effects with other U.S. dollar payment media like checkable deposits, Larry points out (and I agree), so it's not clear why we should see this with stablecoins.

Here's my logic.

Stablecoins aren't fungible, bank deposits are

The key is that while U.S. dollar stablecoins—Tether's USDt, Circle's USDC, PayPal USD, etc—are pegged to the dollar, and thus seem to be alike, they are not actually completely alike. That is, they are not fungible with each other. 

Fungibility is one of my favorite words, and I write about it quite often on this blog. It means that members of a population are interchangeable, or perfectly replaceable with each other. All grams of pure raw gold are interchangeable. Not all grams of pizza are alike—pizza is non-fungible.

U.S. dollar bank deposits (say Well Fargo dollars and Chase dollars) are fungible with each other. Rather than being independent, they are fused together as homogeneous and singular U.S. dollars. A Chase dollar is just as good as a Wells Fargo dollar for the purposes of making payments.

That's not the case with stablecoins, which are like pizza. Or better yet, in the same way that Chinese yuan and UAE dirham are pegged to the dollar but remain independent currencies, each U.S. dollar stablecoin is pegged to the dollar but functions as its own distinct non-fungible currency. For the purposes of making payments, one stablecoin is not as good as another one, just like how dirham balances aren't perfect replacements for yuan.

The reason behind this difference is that U.S. banks cooperate with each other by accepting competitor's money at par on behalf of their customers. For instance, I can take a Wells Fargo check to my Chase branch and Chase will accept it 1:1 even though it represents a competing bank's dollar. Or I can send an ACH payment directly from Wells Fargo to Chase, and Chase will accept that Wells Fargo dollar at par and convert it into a Chase dollar for me. 

The effect of this reciprocal acceptance is that all U.S. banking dollars are tightly knit together, or interchangeable. A fungible standard has been created.

I can't perform these same actions with stablecoins. I can't send 100 USDC to Tether to be converted into 100 USDt, nor send 100 USDt to Circle, which issues USDC, to be converted into 100 USDC. Stablecoins issuers are loners. They've chosen to avoid banding together to weave a unified U.S dollar stablecoin standard.

This lack of standardization explains some weird things in the stablecoin market, like why there are so many markets to trade USDt for USDC (see below). Notice that the clearing price in these stablecoin-to-stablecoin markets is never an even $1, but always some inconvenient price like 0.991 or 1.018.

Some of the multiple markets for trading USDt for USDC, all at varying prices Source: Coingecko

 

There is no equivalent trading market for Chase-to-Wells Fargo balances or TD-to-Bank of America dollars. These banks' dollars are perfectly compatible and don't require such markets.

The advantages of a single dollar standard

Harmonization is useful. Anyone can walk into a McDonald's and purchase a Big Mac for $5.69 with whatever brand of bank dollar they want. Money held at small banks is just as useful as money at massive ones: the Bank of Little Rock may only have five branches, but its dollars are accepted at McDonald's all across the world, on par with those of Chase, America's largest bank.

McDonald doesn't accept stablecoins, but if it did, it would have to offer multiple prices for a Big Mac: i.e. 5.73 USDt and 5.68 USDC. Each stablecoin serving as its own particular unit of account is inconvenient, both for McDonald's and its customers. PayPal USD probably wouldn't even be accepted at McDonald's: it's too small.

The lack of standardized stablecoin market becomes even more awkward in asset markets. If you want to buy $1 million bitcoins on, say, Binance, there's a whole array of different U.S. dollar stablecoin markets available, including bitcoin-to-USDt, bitcoin-to-USDC, and bitcoin-to-FDUSD. (FDUSD refers to First Digital USD, a medium sized stablecoin.)

The table above shows the prices of bitcoin and ether on Binance, the world's largest crypto exchanges. Notice that liquidity in both Binance's bitcoin and ether trading market is compartmentalized into different stablecoins rather than being fused into a single homogeneous US dollar-to-bitcoin market. Source: Coingecko

You can forget about easily buying bitcoins with PayPal USD stablecoins. No crypto exchange offers that trading pair; PayPal USD is too small to be worth the hassle.

This has the effect of fragmenting the liquidity of the stablecoin market into different buckets. Instead of stablecoins-in-general having a certain level of marketability, each individual stablecoin has its own distinct liquidity profile in asset markets.

In contrast, the liquidity that a Wells Fargo dollar, a Bank of Little Rock, or a Chase dollar provides to their owner in the context of asset markets has been unified into a collective whole. If you want to buy shares of Blackrock's iShares Bitcoin ETF, there isn't a separate market for Wells Fargo-to-bitcoin or Chase-to-bitcoin. As for Bank of Little Rock dollars, they are just as fit for bitcoin purchases as its much largest competitors.

A winner-takes-all market

Now we can understand why network effects dominate the stablecoin market.

If you want to start using stablecoins to trade crypto or buy stuff, you will always be arm-twisted by market logic into choosing the largest most liquid stablecoin. And your decision to go with the largest one makes that stablecoin a little more liquid, thus solidifying its pole position.

Selecting a smaller stablecoin like PayPal USD makes little sense. McDonald's will never accept it, and there are many crypto assets that you won't be able to buy with it. Even when certain PayPal USD trading pairs are available, the bid-ask spreads will be wide, imposing much larger costs on you than if you simply went with a larger stablecoin. Thus network effects, working in reverse, repel uptake of PayPal USD.

The unsafe stablecoin is the largest

Tether remains the largest stablecoin, despite being one of the most unsafe stablecoins. (USDC does not get top marks for safety, either.) Network effects explain this.

Stablecoin rating agency Bluechip awards Tether a D rating, noting that it is "less transparent and has inferior reserves... USDT is not a safe stablecoin". Under normal conditions (i.e. those not characterized by network effects) the safest stablecoins would have long-since displaced Tether from its leading spot. But in stablecoin markets, the safest stablecoins—Gemini USD, PayPal USD, and USDP, all rated A or A- by Bluechip—remain insignificant players. The virtuous circle in which Tether is locked dominates all other factors.

These are the best-ranked fiat stablecoins according to Bluechip. But they are also tiny, with market capitalization below $1 billion. There appears to be no point trying to be a safe stablecoin, since the network effects arising from liquidity completely dominate any safety concerns that users might have.

Eyeing Tether's profits, new competitors are entering the stablecoin market. But this is a game they probably shouldn't bother playing. PayPal arrived last year with PayPal USD, but to date it remains mostly irrelevant, despite huge growth in the overall stablecoin market over the same period. Ripple and Revolut are also slated to bring out their own products. They're also destined to mediocrity, because they're too late to make the jump into the virtuous loop that Tether and (to a lesser extent) Circle occupy. 

(There is one caveat. Should one of the two leaders eventually be shutdown for money laundering offenses or sanctions evasion, one of these also-rans could be vaulted into their spot.)

Might the stablecoin sector eventually migrate over to the unified fungible standard that characterizes banking deposits? 

No, that's probably not going to happen. For a fusion to occur, Tether and runner-up Circle, which issues USDC, would have to start accepting their competitors' stablecoins at par. But they won't go down this path, since that would kill off the network effect that gives them their unrivaled dominance over the rest of the pack. No, it's in the interests of the leaders for chaotic non-fungibility to continue. 

Alas, this lack of standardization may limit the stablecoin sector's broader potential to serve as a cohesive global payment alternative to the better-organized banking standard. Sometimes a bit of cooperation trumps competition.

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

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

An early bitcoin optimist

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

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

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

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

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

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

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

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

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

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

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

The "zero problem"

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

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

My growing disillusionment

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

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

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

The dollarization of bitcoin

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

Searching for Bitcoin-inspired alternatives: Fedcoin and stablecoins

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

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

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

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

If not money, then what is bitcoin?

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

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

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

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

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

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

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

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

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

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

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

Bitcoin is innocuous, don't ban it

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

A vandalized 'Bitcoin accepted' sign in my neighborhood

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

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

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

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

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

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

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

So when does bitcoin get dangerous?

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

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

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

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

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

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

How my views on financial privacy have evolved over a decade

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

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

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

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

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

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

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

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

So what changed?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Stablecoins – a digital version of Swiss bearer savings books

Before anti-money laundering laws arrived in Switzerland, anyone could walk into a Swiss bank and open an account without showing any ID. The bank would then issue you something called a bearer savings book, otherwise known as inhabersparheften or livrets d'épargne au porteur. Ownership of the savings book was considered by the bank to be proof of ownership of the underlying funds in the account. The person who opened the account could keep the book or, if they wanted to, pass it on to someone else without notifying the bank, at which point this second person was now entitled to the underlying funds, who could pass the book on to a third person, etc.

In essence, Swiss banks were issuing their very own version of cash.

As time passed and society's awareness of money laundering grew, usage of Swiss bearer savings books accounts was circumscribed by law. In 1977, banks were required for the first time to identify the initial customer to open the account. Also, anyone who wanted to withdraw over CHF 25,000 had to be identified by the bank. But the savings books still enjoyed a significant degree of anonymity. After account opening and prior to withdrawal, books could continue to circulate without identity checks.

In 2003, the issuance of new bearer savings books was prohibited by the Swiss government. Banks were now required to cancel existing savings books when they were presented to a bank's physical desk. Existing bearer savings books could continue to circulate anonymously from hand to hand, like cash, but thanks to steady cancellations they represented just 0.002% of the total assets held in Swiss bank accounts by 2019.

And so ended the Swiss bearer savings book. In the meantime, however, a similar financial instrument has arrived: the stablecoin.

To get some stablecoins, you need to deposit funds with the issuer, which will identify you upon deposit, but after that the stablecoins are free to circulate in the wild without any sort of checks. You can send them to a friend, and she can send them to a relative overseas, and that relative can transfer them to a drug dealer, and none of these subsequent owners need to show their IDs to the issuer. Stablecoin issuers, much like Swiss banks that once issued bearer savings books, often have no idea who they are dealing with.

So if Swiss bearer savings books have long been prohibited, why are stablecoins allowed to proliferate?

This is exactly the point made last month by FINMA, Switzerland's financial regulator, when it indicated that it will no longer tolerate the anonymous transfer of stablecoins. New guidance states that the identity of anyone holding a stablecoin must be "adequately verified by the issuing institution." So not only yourself, but your friend, her relative, and the drug dealer in the above transaction chain will be required to provide their ID.

To justify its new policy, FINMA appeals to the idea of technological neutrality. My take on technological neutrality is that just because a financial product—in this case a payments product—appears on a novel medium, or substrate (i.e. a blockchain) doesn't mean it is exempt from the same rules that already apply to equivalent products like bank savings books, which are issued on older substrates. Same function, same regulations.

Up till now, stablecoin issuers like Tether have tried to dodge these identification requirements with the legal fiction that only primary holders of stablecoins (i.e. those who originally deposited funds to get stablecoins) are their customers, and so it is only to this batch of holders that they have a due diligence obligation. Secondary, tertiary, and subsequent holders are not "customers", and so the issuers say they don't need to identify them.

But FINMA isn't buying this argument, and rightly so. All holders, not just primary ones, have a "permanent business relationship" with the issuer, says FINMA, and so everyone must be identified. You can certainly understand why FINMA wants to get ahead of this problem. If regular Swiss banks all see that stablecoins are enjoying special treatment, then they'll all join in on the party by switching over to the new substrate.

FINMA's guidance may not seem like a big deal. There are only two Swiss franc stablecoins to which it applies, and they are both tiny. Bitcoin Suisse's XCHF has under 1 million CHF in circulation, and Centi's CCHF doesn't appear to have much more. (Facebook may have run into an earlier informal version of this rule when FINMA assessed initial versions of its Libra stablecoin.)

But as a respected part of the global regulatory fabric, FINMA could very well be copied by other regulators. More importantly, FINMA is a member of the  Financial Action Task Force, or FATF, an umbrella organization representing the anti-money laundering authorities of 38 major nations. FATF promotes global anti-money laundering standards by blacklisting countries that fail to adopt them. If FINMA's policy on stablecoins is indicative of an emerging FATF approach to stablecoins, then expect it to spread.

The shocking thing to me is that it has taken this long for a major global regulator to issue a concrete ruling on the issue of stablecoin anonymity. It's about time. Standard anti-money laundering practice requires financial institutions to verify who is using their platform. Stablecoin issuers shouldn't get a free ride.