Noah Smith writes a provocative article about memecoins as a novel mechanism for bribery payments. A foreign dignitary looking to gain influence over Donald Trump would like to pay him a giant bribe, but doing so directly is prohibited by all sort of laws. Luckily, Trump has just issued his own memecoin, TRUMP, of which Trump owns 80% of all coins. So why not just buy the TRUMP token, thereby pushing its price up and gifting Trump with even more wealth, in return gaining a degree of influence over policy? The best part is that no money actually changes hands, so it's probably less risky from a legal perspective. The dignitary can just plead "I thought it would go up!", says Noah. Now, I'm not so sure that crypto is ushering in anything unique here. Consider that Donald Trump also owns shares of Trump Media & Technology Group Corp (DJT), which are NASDAQ-listed "tradfi" shares that predate crypto. Why not just buy DJT shares, pump their price higher, and collect favors from Trump? No crypto involved.  In fact, a year before Noah wrote his article about memecoin bribery, Robert Maguire of Citizens for Responsibility and Ethics in Washington (CREW), worried about precisely such a scenario. Any entity wanting to "cozy up" to Trump need only buy a bunch of DJT shares on the NASDAQ, enough that they "get Trump’s attention, but low enough that it doesn’t break the five-percent threshold that triggers SEC disclosure." Consider that Donald Trump and family members hold a 59% ownership stake in DJT equity, which isn't too different from the 80% of TRUMP that they own. Both assets have market caps of around $7 billion. So pushing up the price of DJT will certainly enrich Trump just as much as trying to nudge TRUMP higher. So here's my question: What's the best way to bribe the current President of the United States of America, by pumping the TRUMP memecoin or pumping old-school DJT shares? Before answering it, I want to pause for a moment to reflect. The fact that I am even writing a blog post on the topic of bribing an American president shows how far along a certain financial-apocalyptic timeline we have gone. Back to the timeline. I see two reasons why the memecoin probably presents a better pseudo-bribery option than the tradfi stock.  The first reason is that it's safer to pull off. DJT is listed on just one exchange; the NASDAQ. And the NASDAQ exists in the U.S., which has the most robustly-regulated and well-trusted securities markets in the world. One duty the government requires of NASDAQ is that it surveil transactions in real-time for abusive trading behaviour. Any sketchy DJT purchases could be reported by NASDAQ to the authorities. Furthermore, to get access to NASDAQ-listed shares, a brokerage account is required, and that'll require the would-be briber to pass through the brokerage's identity checks.   On top of that, systems like the Consolidated Audit Trail, a government-mandated system tracking U.S. equity and options trades, gives regulators themselves a means to monitor market activity and investigate potential misconduct. So a foreign dignitary is taking a bit of a risk if he or she goes the DJT route. By contrast, the TRUMP memecoin is hosted on a blockchain, basically a borderless and open decentralized database, not a carefully-guarded database confined to the U.S. The result is that TRUMP can be listed anywhere, including at shady offshore crypto exchanges like ByBit or KuCoin, which surely aren't checking customers for pumps. To boot, these offshore exchanges perform only cursory identity checks, if any. To further protect him or herself, a would-be briber can initiate the pump by sending funds from an offshore exchange, say KuCoin, to a decentralized exchange, or DEX, and only then push the price of TRUMP higher. DEXes are even more hands-off than offshore exchanges; they don't perform any surveillance or identity checks. The riposte to this is that all blockchain transactions are public and observable, so a bribe conducted on a DEX could be traced. Ok, sure. But while blockchain transactions are visible, they aren’t directly tied to real-world identities. Blockchains are pseudonymous. It's a bit like going to a masked ball. Everyone can see who the dancers are, but as long as everyone has their mask on a degree of anonymity is preserved.      So to safely get away with bribing Trump, it sure seems that his memecoin is the better option than NASDAQ-listed DJT. Now for the second reason why the memecoin is better for bribery: it packs more punch per dollar. A memecoin lacks what equity researchers refer to as fundamental value. Its price is solely a function of Sam's expectations of what future buyers like Jill will pay for it, with Jill's expectations conditioned on what she thinks Sam will pay. They are pure balls of speculative energy. As I've referred to them in other posts, memecoins are decentralized ponzi games, zero-sum lotteries, or Keynesian beauty contests. By contrast, DJT is a stock, and stocks provide their owners with a claim on the underlying firm's 1) profits and 2) its assets in case it is eventually wound-up. There is a "something" that buyers and sellers can coordinate on, so that unlike a memecoin, a stock is more than a pure nested expectation games. That's not to say that stocks don't have a big "meme" component (think Gamestop), but the degree to which this guessing game is played is unlikely to ever reach that of a memecoin. The existence of fundamentals makes pumps less effective. As a pump begins to drive the price of DJT higher, the underlying fundamentals will start to give certain existing investors a reason to sell (i.e. "it's now too expensive relative to earnings"), and that selling will dull the pump. Since there are no fundamentals for TRUMP memecoin buyers to latch on to – any price is as good as another – a memecoin pump never gets throttled by fundamental sellers. To sum up, someone who has $10 million to bribe Donald Trump will want to demonstrate to the President that their purchases drove the price of the target asset higher: it'll be far easier to demonstrate this by pumping the frictionless memecoin than the burdened-by-fundamentals stock. Now, if you've gotten this far and think this post is actually about how to bribe Trump, it's not. It's about the often fascinating differences (or not) between crypto and traditional finance. In my view, they aren't really so different. Crypto fans may think there's a financial revolution going on, but there's nothing new under the sun. You might wonder: is the frictionlessness of a memecoin, its lack of fundamentals, and the ensuing incredible ease by which it can be bribe-pumped a new feature that crypto has brought to the table? Not really. There's no technical hurdle preventing the NASDAQ from listing a non-blockchain version of the TRUMP memecoin on its own old-fashioned Oracle database. People could buy and sell this meme-thingy instead of that blockchain version of TRUMP. But securities law gets in the way. Listing an unadulterated ponzi game on a national stock market has never been legal, at least not in my lifetime. Why putting one up on a blockchain is legal is beyond me, but look over there, the President just did it. At the speed we are leaving the sanity train station and heading to financial silly land, I suspect listing pure ponzis on the NASDAQ will soon be an accepted thing. Memeassets everywhere! Bribes for everyone!

We Canadians are overwhelmingly pro-Ukraine and anti-Putin, so when the CBC published an expose last week about "banned Russian oil" sneaking into Canada, it was read in despair by most of us. What an awful failure of Canadian sanctions policy.  As with a lot of sanctions coverage, I saw things a bit differently: "Not bad. We're doing our part!" That's because if you add some more context to the CBC article, the data that it presents can be read as good news. The article takes issue with 2.5 million barrels of refined oil products made from Russian-produced crude that have been indirectly imported into Canada since the start of Putin's invasion of Ukraine in 2022. Given that around 1,000 days have passed since the invasion, that works out to roughly 2,500 barrels per day of Russian-linked refined oil products arriving on Canadian shores. (Analyzing oil flows on a per-day basis is industry standard and also makes it easier for our brains.) In the grand scheme of things, 2,500 barrels per day is a drop in the bucket. Canada consumes around 1.6 million barrels of refined oil products per day, according to CAPP, which includes stuff like gasoline, diesel, and jet fuel. So just 0.1% of our consumption is Russia-tainted. Even so, every barrel matters, and we should strive to avoid any contribution to Putin's war chest. But there's more context. 2,500 barrels per day of Russian refined oil products is far less than what we imported prior to the war. According to the Canada Energy Regulator (CER), between 2017 and 2022 Canada was regularly importing around 10,000 barrels per day of refined petroleum products directly from Russia (see chart below). After banning imports of Russian crude and refined oil products, Canada's direct imports fell to zero in 2023. Into this void, indirect imports of 2,500 barrels per day of Russian-linked refined products, the flows that the CBC spotlights, have emerged. A 75% decline from 10,000 barrels per day to 2,500 barrels per day is not too shabby. Canada's direct imports of Russian refined petroleum products, which hit zero in 2023. Source: CER 2,500 barrels is still not zero. But we can also take comfort from the fact that those barrels are not as profitable for Russia as they used to be. In the pre-war era, Canada was importing refined petroleum products directly from Russia, but in the post-war era we are importing Russian oil indirectly via a third-party, India. More specifically,  oil in its raw form -- crude oil -- is being shipped all the way from Russia to India by tanker, where it is upgraded by Indian refineries, and only then is it onshipped to Canada. This new workflow is a big downgrade for Russia. Before it can be used, crude oil has to be converted into pricier consumable types of fuel like gasoline for cars and jet fuel for planes. Upgrading crude oil creates extra profits for whoever does it. Russia's refineries used to capture the entire upgrading margin. They refined the raw oil after it was pulled out of the ground and then regularly sent 10,000 barrels per day of the final product to Canada. But now India is capturing those extra profits on the 2,500 barrels per day that are sent to Canada. So not only has the quantity of Russian-linked refined products imported by Canada shrunk by 75% since the war began, but thanks to the interposition of Indian refiners at the expense of Russian ones, the quality of Russia's revenue stream has been downgraded: pound-for-pound, Russia's indirect exports to Canada are a far less lucrative for Putin than they were back in 2021, because his refining margin has disappeared. Compounding Russia's woes is the much more circuitous route that its oil must now take. Prior to 2022, Russian refined oil exports were loaded onto boats in Russian ports like Saint Petersburg and shipped via the Baltic Sea to Canada, around 4,000 nautical miles away. That's a 15-day voyage according to Sea-Distances. These days, that 15-day voyage has tripled, even quadrupled. First, Russian crude oil must travel from the Baltic to India, a 7,500 nautical mile journey that can take 30 days. That's if it goes through the Suez canal. Passing around the southern tip of Africa amounts to a 12,000 mile trip taking up to 50 days. Once refined in India, the product must travel another 8,000 miles from India to eastern Canada.  What an incredible amount of travel to get a barrel of Russian refined oil to Canadian markets! A good way to visualize these new transportation frictions is provided by the Kyiv School of Economics, which charts the volume of Russian oil being transported by oil tankers over time. Thanks to the forced rerouting of crude to less efficient routes as countries like Germany and Canada close their borders to Putin, Russia's oil on water is 163% higher than the pre-invasion average. Record volumes of Russian oil on water is not a good thing for Putin. It mean higher transportation costs. Source: KSE The extra transportation and insurance costs that "oil on water" entails inevitably eat into the final price that Russia can negotiate with buyers like India for its barrels of crude. For these long distances to be financially worthwhile for Indian businesses, they will only buy Russian crude at a discount to the going world price. According to the Dallas Fed, the Russia discount regularly clocks in at around $20 below the market price. This constitutes a big step down for Russia -- prior to the war it was receiving the full world price. The upshot is that Canadian imports of Russian oil are down, and even though some Russian refined petroleum products are indirectly making their way to Canada, this is only after we've extracted our pound of flesh from Putin by forcing him to give up his refining margin and by obliging him to accept a crude oil price discount on account of distance traveled. So let's take some pride from that. Does that mean we shouldn't do anything about our indirect imports of Russian oil product? I want to clarify that Canada isn't importing "banned" products or breaking Russian sanctions. For better or for worse, the coalition's sanction on Russian crude oil have been designed to allow crude to continue to flow around the world, the intent being to avoid a big spike in oil prices while still hurting Russia. The 2,500 barrels of indirectly-refined refined oil we get each day are fair game.    But that doesn't mean Canadians should do nothing. The CBC article is a good effort to name-and-shame certain Canadian importers that are accepting Russian-linked crude from third-parties, including Everwind Fuel's Point Tupper oil storage facility in Nova Scotia. C'mon, Everwind. Why not choose better trading partners, ones who aren't acting as go-betweens for Putin? However, the best step we can do to counter Russia is to focus on producing more renewables, crude oil, and other commodities, as well as to find reliable ways to get these resources to market.  Unlike Europe and the U.S., which have plenty of economic and financial heft, Canada doesn't have any sizable economic chokepoints that we can lever to hurt Russia. We could cut down on the 2,500 barrels per day of Russian-linked oil imports, but as laudable as that might be it doesn't constitute a genuine chokepoint. Canada's edge is that our economy is remarkably similar to Russia. Both of us extract a bunch of resources. The more we compete with Putin in resource extraction, the more we reduce the prices he relies on, thus impairing his ability to fund his invasion of Ukraine.

Source: Better Business Bureau The daily news is filled with personal stories about bad experiences with banks. Here’s a recent example. In November 2024, a charity inadvertently accepted a fake check from a would-be donor. The charity's bank allowed the charity to deposit the check, crediting it with the funds. A few days later the bank discovered the fake, but only after the charity had transferred some of the "donated" funds back to the donor, a scammer. The bank then raided the charity’s bank account for the full amount, leaving the charity out of pocket. Readers will find this story disturbing. Banks are supposed to protect scammed customers, not kick them while they are down, especially charities. Many of us will wonder if the payments system needs to be fixed.  But payments systems are complex organisms that have evolved over many centuries. When viewed from afar, what appears to be a glitch is often actually an element of a balanced whole. Solving the problem of fake check scams would upset this balance, introducing new complications further down the payments process. Let’s look a bit more closely at the scam.    The anatomy of a fake donation scam Approached be a stranger who wanted to donate money, Motorcycle Missions – a Texas-based charity that helps helps veterans and first responders with post-traumatic stress disorder – was sent a $95,000 paper check in the mail. Motorcycle Missions proceeded to deposit the check at its bank, Chase, which immediately credited the charity for the full amount. A few days later, the stranger asked for some of the money back. His assistant had made a mistake, the stranger claimed, and the check was supposed to be for just $50,000. So Motorcycle Missions helpfully wired $45,000 to the stranger's account. But it was a scam. The check, donation, and donor were all fake. Unfortunately, the $45,000 that flowed out of Motorcycle Missions's account and into the account of the scammer was very real. Chase promptly seized $95,000 from the charity’s savings account as compensation for the amount of money that it had created upon accepting the fake check. Because it had paid out $45,000 to the scammer, the charity was left $45,000 out of pocket. Unjust? It seems so. Charity gets tricked by scammers only to have his fat cat banker, the one who processed the check, refuse to help him. Unfortunately, scams like this are all too common. Exploiting the check timing gap In addition to exploiting the constant need of charities for funding, fake donation scammers exploit a weakness in the check payments system. Specifically, they target the timing gap between a bank’s initial crediting of funds to a depositor’s account and the point at which a check’s authenticity is finally verified. When someone accidentally brings a scammer's fake check to the bank, banks will do their best to catch it. But some fakes sneak through. This is where the timing gap opens up.  The amount indicated on the face of the fake check is credited to the depositor’s bank account. The customer can then spend it (or be duped into paying off their scammer). But behind the scenes the actual processing and settlement of the fake check grinds on. A few days or even weeks later the check’s true nature is eventually discovered. But, by then, the sneaky scammer has already received their electronic payment. So why don’t we just fix things by removing the timing gap? The tradeoff between speed and security The payment system is a combination of tradeoffs and sacrifices. We can remove the check timing gap, but this means introducing other weak spots into the checking system. For instance, we could easily put a quick end to all fake donation scams by stipulating that banks only credit funds to depositors’ accounts after the paper check has been irrevocably confirmed to be legitimate. In that case, if Motorcycle Missions were to accidentally deposit a fake check, it needn’t worry. The check will eventually be caught and the charity won’t be hit with a $45,000 charge. Knowing that the system has a perfect defence, scammers would stop check scamming. But there are consequences to fixing the timing gap. All of us check-users would now be required to wait days, even weeks in some cases, before we can spend our money.   Speed is an important feature of any payments system. Because Motorcycle Missions was probably a longtime and trusted customer, Chase allowed the charity to use the amount printed on the face of the check immediately, even though the check hadn’t definitively settled. In bank-speak, banks will lend or grant provisional credit to their check-cashing customers.  This service is important to us. We may have bills due two days from now. We can’t wait weeks for our checks to be 100% settled. In fact, check speed is considered so important that according to U.S. law, specifically Regulation CC, all checks deposited must be made available for withdrawal by the business day after the day of deposit. Since the only way for banks to meet these standards is to grant provisional credit, the timing gap is legally baked into the system.  And into this gap scammers stream. We accept these chinks in the check system because we want the overall process to move more quickly. Who bears the costs of speedy checks? If society has decided to tolerate the fake check problem in order to get more speed out of the check system, someone has to bear the extra credit risk of these fakes. Which unfortunate party is held responsible? Commercial law places this risk squarely in the lap of bank customers. (See also). When a bank puts money in a customer’s account upon deposit of a check, it is lending to them. As with any loan, the lender can collect should the borrower default (say, because the check was fake).  That’s exactly what happened with Motorcycle Missions. It was granted $95,000 in provisional credit after depositing a fake check, only for the loan to be called when the fake was discovered. We might not think this is fair. Surely banks are better at evaluating whether a check is fake or not than customers. So why not shift the burden of absorbing the cost of fake checks onto banks and away from the public?  We could certainly design a payments system along these principles. Now when Motorcycle Missions deposits a fake $95,000 check, and its bank credits it the amount, Motorcycle Missions's bank must absorb the $45,000 expense when the fake is discovered. In this system, not only would banks make check payments go fast by offering provisional credit. They would also take on all of the risk of fake checks. What a win for bank customers! We’d get maximum speed and complete safety.  But it’s not that easy.  To absorb the costs of extra credit risk, banks would probably increase monthly checking account fees. Rather than passing on the costs of fake checks exclusively to the scammed customers, as in the current system, every customer would bear part of the burden in the form of higher fees.  This spreading-out of costs is a win for vulnerable customers who, given the precariousness of their business or personal lives, are more likely to fall for fake check scams and be hurt by associated penalties. But the rest of the bank’s customers may not be as thrilled, preferring charges fall on those who make mistakes.  In sum, what happened to Motorcycle Missions is unfortunate. But solving the problem of fake checks isn’t as easy as one might think. Changes to a tightly-wound system like the check system involve tradeoffs. You don’t get something for nothing. [A version of this article was originally published at the AIER's Sound Money Project.]

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 under 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 in 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 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, much like how 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. More precisely, for the purposes of making payments, one stablecoin is not as good as another one, just like how dirham media of exchange 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. That's inconvenient. PayPal USD 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 is not a top-ranked stablecoin, 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 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 isn't a game they should 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 join the virtuous loop that Tether and (to a lesser extent) Circle benefit from.  (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.

There's a chart that has been circulating for a while now on social media that shows payments traffic on SWIFT, a key global financial messaging network. Below is a version from the Economist, but I've seen other versions too. Source: The Economist When banks make cross-border payments between each other, say euros to dollars, they need to use a communications network to coordinate the debiting and crediting of accounts, and SWIFT is the dominant network for doing so. Think of it as WhatsApp for banks. Here's the problem. The main conclusion that pundits are taking away from the chart is the wrong one. Most of them seem to think that the chart illustrates an erosion in the euro's global popularity (i.e. de-euroization) and a simultaneous dollarization of global trade.  Today I'm going to show you why that's the wrong conclusion; there is no SWIFT-related de-euroization. The reason for going through this effort isn't just because it's fun to dunk on wrong folks. It can also teach us some interesting things about the massive bits of unsung payments infrastructure that underlie our global economy, including not only SWIFT but also Europe's T2 and the U.S.'s Fedwire, two of the world's busiest financial utilities. Let's dig in. The problem with trying to analyze charts of SWIFT messages across various currency jurisdictions is the data isn't necessarily comparable. As I said at the outset, commercial banks around the world use SWIFT to coordinate cross-border payments with other banks, and that is what people are hoping to measure with the SWIFT chart at top. But muddying the waters is the fact that in the EU, banks also use SWIFT for domestic payments. Here's how: The most important bit of payments infrastructure in both the U.S. and EU are their respective central bank's large-value payments (or settlement) systems. When commercial banks make crucial domestic payments with each other, typically on behalf of their customers, these payments are settled in real-time using each commercial banks' respective account at their central bank, in the U.S.'s case the Federal Reserve, and in Europe's case the European Central bank, or ECB. The ECB's mechanism for settling payments is known as T2 (and previous to that, Target2.) The Fed uses Fedwire. To coordinate this "dance of databases," the central bank and participating commercial banks need to communicate clearly and rapidly with each other, and that's where financial messaging networks come in. Fedwire doesn't use SWIFT for this. It comes fitted-out with its own proprietary messaging network for member banks. But the ECB has chosen a different setup. Up until 2023 the ECB had outsourced all messaging to SWIFT, a bank-owned cooperative based in Belgium. Now you may be able to see why comparing the amount of euro payments made using SWIFT messages to dollar payments made using SWIFT is an apples to oranges comparison. Both data sets include cross-border payments, but the EU dataset also includes a large amount of domestic payments. The U.S. dataset doesn't. This means that the variations in the amount of euro payments messages that get captured in the chart at top may not reflect dramatic geopolitical shifts like "de-euroization, but may be linked to more banal things like changes in local EU payments habits. And indeed, I'm going to show why domestic and not international factors explain the 2023 drop in the euro share of SWIFT messages.  In 2023, the ECB replaced its Target2 settlement system with a new system called T2. Two key upgrades were introduced with T2 that ultimately affected SWIFT message flows.  The first of the upgrades was a new language for constructing messages, with the ISO 20022 messaging standard replacing the legacy MT messaging format. (I wrote about ISO 20022 in an article entitled The Standard About to Revolutionize Payments.)  This change in payments lingo has had a big effect on the sum of SWIFT data displayed in the chart at top. Both the ECB and SWIFT provide explanations for this, but here is my shorter summary. Prior to the 2023 changeover, a type of euro payment known as a liquidity transfer was regularly captured in the SWIFT data. A liquidity transfer occurs when a European commercial bank, which often has several accounts at the ECB, must rebalance between its accounts when one of them is running low. These within-bank liquidity transfer messages aren't terribly interesting and have nothing to do with global payments, but were included in the SWIFT dataset nonetheless up until 2023, thus fudging the results.  With the arrival of ISO 20022, messages related to euro liquidity transfers are now conveyed using a new type of message. Thus the big decline in the euro's share of SWIFT messages in 2023 — liquidity transfers have effectively dropped out of the chart. This is a good thing, though, since the omission of these relatively unimportant within-bank transfers means we're getting a cleaner and more accurate signal. The second upgrade introduced in 2023 was the opportunity for European commercial banks to choose among multiple messaging networks for accessing T2. Under T2's predecessor, Target2, banks only had one access choice: the SWIFT network. With T2, European banks can also use SIAnet, owned by the Nexi Group. (I wrote about this upgrade here, in which I described T2's switch from an older Y-copy topology to a network agnostic V-shaped topology.) In that older post, I suggested that adding additional access points was a healthy step for Europe, since it meant more resilience should one network suffer an outage. And in fact, Europe is already reaping the benefits. When SWIFT failed for several hours on July 18, 2024, the ECB issued the following alert: "T2 is operating normally. However, due to an ongoing SWIFT issue, some incoming messages do not reach T2 immediately. Similarly, some T2 outgoing messages might not reach the receiver immediately... There is no impact on traffic sent or received via NEXI. Participants may continue sending new instructions and queries to CLM/RTGS/CRDM. Updated information will be provided at the latest by 16:30." Whereas an outage of SWIFT in 2021 or 2022 would have seriously slowed down Europe's financial activity, the addition of Nexi's SIAnet to the mix in 2023 limited the damage caused by the 2024 SWIFT outage. By contrast, the UK's central bank, the Bank of England, remains entirely reliant on SWIFT for messaging, and so the 2024 outage caused more disruption for the Bank of England than the ECB, according to the Financial Times. Unfortunately, I have no idea how many European banks have actually chosen to shift their messaging over to Nexi. But I'd imagine that it isn't negligible, given that Nexi's SIANet is already being used by banks to access other key bits of Europe's payments architecture including STEP2, a pan-European automated clearinghouse. And so some non-negligible portion of the drop in the euro's share of SWIFT messages in the top chart is due to a shift away from SWIFT. So if the SWIFT chart at top doesn't mean what people think it means, what is the euro's status as a global trading currency? A 2024 article from the ECB clears this up. The euro's international role hasn't eroded over the last few years. The de-euroization memes are all wrong. The irony of all of this is that the rather than reflecting a decline in Europe's status, the SWIFT chart illustrates the opposite. A bunch of healthy advances are driving the euro's share of SWIFT payments down, including a more accurate classification of financial messaging data thanks to a better messaging language, combined with a much needed de-SWIFTication of European messaging flows. It's not as juicy as euro critics make it out to be.