Ending the penny won't lead to more nickels

Donald Trump has ordered the U.S. Mint to stop producing the penny because it is unprofitable, costing 3.69 cents to produce each one.

In response, the lobbyists that earn big profits from the ongoing existence of the penny have come out in full force with dubious arguments for why the penny is still vital. Their newest bit of disinformation is that removing the penny will increase reliance on the nickel, which costs 13.74 cents to produce, thus putting the U.S. public in a worse position than before. This shift-to-nickels claim is wrong, but all sorts of media sources [CNN | Bloomberg | ABC News | TIME ] are repeating it without challenging it.

While it's true that the nickel is unprofitable to produce, usage of the nickel will *not* increase when the penny is removed. I'm going to show why shortly, but first a quick comment on the general idea of ending the penny.

For long-time penny critics like myself, Trump's idea is tragically undeveloped, even clumsy. All serious minds agree that the U.S. penny is pure monetary pollution and needs to be abolished. It's too small to be meaningful, yet society is forced to continue counting in pennies because the political mechanism for improving America's coinage system is broken, having been captured by the coin lobbyists and conspiracy theorists. (I wrote about the coin lobby in Pennies as state failure.)

However, to liberate society from the hassles of the penny the U.S. government can't just stop minting it, as Trump seems to think, because this doesn't prevent the existing stock of pennies that has accumulated over the last century or two from continuing to pollute Americans' economic lives. To solve this, the government must establish a rounding rule for individuals and retail establishments. When paying for goods at the checkout counter, all amounts owed must be rounded to the nearest five cents in order to prevent already-existing pennies from infiltrating day-to-day shopping experiences. 

What would this rounding rule look like? Say that your grocery bill comes out to $10.87. You pay the cashier $11 in cash. Instead of getting 13 cents change (a dime and three pennies) your bill would now be rounded down to $10.85, and you'd get a 15 cents in change instead—a nickel and a dime.

If your bill came to $10.88, it would be rounded up to $10.90, and you'd get 10 cents change instead of 12 cents.

Voila, the penny-infiltration problem is solved. No annoying one-cent pieces required in day-to-day economic life.

Now that we've got rounding out of the way, we can tackle the big penny-to-nickel lie that the coin lobbyists are circulating. Mark Weller, director for the lobby group Americans for Common Cents, was quoted in CNN last week:

"Without the penny, the volume of nickels in circulation would have to rise to fill the gap in small-value transactions. Far from saving money, eliminating the penny shifts and amplifies the financial burden."

Weller goes on to caution that the U.S. Mint may be forced to make in the range of 2–2.5 billion nickels a year if it stops producing pennies permanently, far higher than its normal run-rate of 1.0–1.6 billion over the past decade. The implicit threat here is that it's better for America to have their throats slit by the penny than be mauled by the nickel. Keep in mind that Weller and his lobbying group are sponsored by Artazn LLC, the firm that sells coin blanks to the U.S. Mint for eventual stamping into pennies.

The idea that more nickels will be required in day-to-day transactions if the penny disappears is superficially seductive, but it's wrong. That's because the removal of pennies does *not* require that nickels do any more transactional work than before. 

First, let's rebut it with a real-life example. In 2012, Canada abolished its one-cent piece and implemented five cent rounding. No nation is more similar to the U.S. than Canada, so it serves as a great foil. Did Canada experience a doubling or tripling in nickel production in order to fill the gap left by the penny? Below is the Royal Canadian Mint's nickel production from 2005 to present:

No, the amount of nickels didn't jump in 2013 or 2014, the year after the penny's abolition. In fact, since the penny ban in 2012, Canadian nickel production has remained well-below its pre-2012 level of 200 million to 250 million.

Having rebutted Weller's fill-the-gap claim by working through an example, now we'll rebut it mathematically.

Let's take a look at all retail transactions that end in 1 cent to 99 cents, and how these transactions differ in a penny and post-penny world. A store will want to have enough change on hand to facilitate each of these one hundred transaction types. In the table below, I’ve listed all one hundred transactions and, assuming the customer pays with the next whole-dollar amount (e.g., if $40.71 is due, they pay with $41), how much coin change is required.

First, let's look at the yellow half of the table, which shows how much change must be returned to the customer when the penny is still in circulation. In total, 200 pennies will be required for all one hundred transactions, with the one-cent piece showing up in 80% of all transactions. As for the nickel, a total of 40 nickels will be required, with the customer getting a nickel back in 40% of all transactions.

Now let's remove the penny and introduce rounding to the nearest five cents. Will more nickels be required to "fill the gap" left by the penny, as alleged by the coin lobby? 

Take a look at the orange area, which shows the shopping experience in a post-penny world. In the first column, I provide the rounded amount that the customer must pay. The demand for pennies has obviously fallen to zero in this world, as the policy intended. But the total amount of nickels required in our one hundred transactions remains at 40, as before. Nothing has changed. Note that the total number of dimes and quarters required also stays constant in both worlds, at 80 and 150 respectively, with 60% and 70% of all transactions needing these larger coins as change.

What is happening? If you look more closely, you'll see that certain transaction amounts that didn't require a nickel in change before, like $0.96, now require a nickel (since the amount due is rounded down to $0.95.) But other amounts that once required a nickel, like $0.92, no longer do (since the amount is rounded down to $0.90, for which dimes are the most efficient change.) In short, for every amount owed by the customer that now requires a nickel in change, another amount owed no longer requires a nickel. 

So when lobbyists like Mark Weller say that "the volume of nickels in circulation would have to rise to fill the gap," their math is flat out wrong: the removal of the penny does not require more nickels as change. 

In real life, these one hundred transactions may not be entirely random or uniformly distributed; shopkeepers may have certain preferred prices points, thus skewing the amount of coins required as change. But I doubt the effect is very large, as suggested by the Canadian example.

So both mathematically and empirically, Americans shouldn't be afraid of dropping the penny because they'll be saddled with even more awful nickels. That's just lobbyist propaganda. In a post-penny America, you get all the benefits of zero pennies with no extra nickels required.

The end of El Salvador's bitcoin payments experiment

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

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

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

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

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

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

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

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

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

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

The evidence of failure

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why the failure, and what have we learned?

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

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

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

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

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

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

Trump claims US banks can't open in Canada—US banks disagree

In what seems to be an effort to extort Canada for additional benefits, Donald Trump complained yesterday on social media that CANADA DOESN'T EVEN ALLOW U.S. BANKS TO OPEN OR DO BUSINESS THERE. And so according to Trump, Canada doubly deserves to be disciplined with tariffs.

Well, if it's true that U.S banks aren't allowed to do business in Canada, then why in god's name is one of the U.S.'s largest banks doing business in downtown Toronto?

Citigroup Place, 123 Front St. West, Toronto, Ontario, Canada

Citi has been operating in Canada since 1919 and currently has 1,700 Canadian employees. According to OSFI, Canada's bank regulator, the bank earned C$35 million in Canada in the first three quarters of 2024 and has C$5.49 billion in Canadian assets as of September 30, 2024. 

In short, Trump was either lying, misinformed, crazy, or some combination of those three.

Canada allows foreign banks to enter our banking industry by requiring them to set up a domestic subsidiary and applying for a Schedule II banking charter. Schedule II banks can operate in all of the same lines of business as mainstay Canadian banks (i.e. Schedule I banks) like Royal Bank or Bank of Montreal. There are 16 Schedule II banks in Canada, three of which are American. (In addition to Citi, the other two are Amex Bank and JP Morgan.)

Some folks on social media tried to reinterpret Trump's complaint: "But JP, what Trump really meant to say is that Canada doesn't allow U.S. banks to serve retail customers." As proof they cited the fact that if you walk into a Citi office in Canada, Citi won't allow you to open a personal chequing account.

The reason that Citi won't give you a personal chequing account isn't because the rules prevent them from doing so. Rather, Citi (along with Amex and JP Morgan) have chosen not to enter the Canadian retail banking market, preferring to focus instead on other types of Canadian banking, like commercial and investment banking. If Citi, for instance, wanted to set up a retail branch network, it could. In fact, Citi once had a small five-branch retail banking network in Vancouver and Toronto, offering personal chequing and savings account, term deposits, loans, mortgages, mutual funds and RRSPs. But it sold out in 1999 to Canada Trust, which was ultimately bought by TD Bank.

Other foreign banks have also set up Schedule II banks with a retail presence, only to sell out to domestic banks. HSBC Canada, owned by its British parent, became Canada's seventh largest bank—one that was notably successful in offering mortgages to retail customers—but was recently offloaded by its parent to Royal Bank, a Schedule I bank. ING Canada, owned by Dutch-based ING Bank, created one of Canada's most popular discount retail banks, ING Direct, but sold it to Scotia Bank in 2012, which rechristened the discount bank Tangerine Bank.

The lone Schedule II foreign bank I'm aware of that still serves retail customers is ICICI Bank, which is owned by its Indian parent.

Why are U.S. and foreign banks reticent to compete in Canada's retail banking market? Contrary to perceptions that Canadian banking is slow and lazy, it's actually quite difficult to make much headway in Canada. The Big-5 banks, plus National Bank, which counts as half a big bank, have built strong retail branch networks that span the entire country. They compete rigorously for consumer deposits, offering higher interest rates than U.S. banks offer to Americans, suggesting a more cut-throat market than south of the border. In short, U.S. banks don't have the cojones to cross the border and compete head-to-head against Canada's more competitive behemoths. Citi already tried. It gave up.

By contrast, the U.S. is an easier market for a foreign bank to enter because its banking industry is more fragmented. And many Canadian banks have entered, with TD Bank and Bank of Montreal occupying 10th and 13th spot respectively on the list of largest U.S. banks. This fragmentation is the residue of the U.S.'s refusal (until recently) to allow banks to set up branches across state lines. By contrast, Canada has always had fairly permissive rules about establishing cross-country banking networks. The irony here is that Trump's complaints about lack of openness best apply to the U.S., historically the culprit when it comes to tamping down the spread of banking.

Canadian banks' U.S. and international exposure has increased over time. A recent Bank of Canada study finds that our banks now have more foreign liabilities (i.e. deposits) than domestic liabilities. (See chart below). More precisely, 57% of all Canadian banks' liabilities are now foreign. As for our banks' asset mix, foreign assets are poised to surpass domestic assets in the next year or two, if trends continue.

Rising Canadian bank exposure to the rest of the world. Source: Bank of Canada

The reason for this outward migration is clear. Canada's saturated retail banking market offers few opportunities for growth, but other parts of the world are less saturated, and so these jurisdictions offer Canadian banks ideal avenues for acquisitions and growth.

This gives us an additional vantage point for viewing Trump's absurd comments about Canadian banking. He may not be saying that Canada's banking system is closed, but that the U.S. banking system is now effectively shut off to additional acquisitions by Canadian banks, as part of some sort of America First banking policy. This implicit threat of a foreign banking blockade may explain, in part, why the price of Canadian bank stocks fell so much more than the broader Canadian market yesterday. Their avenues for growth may have just narrowed.