July 25, 2018 Reading Time: 4 minutes

The exclusion of Iran from the global payments system is about to begin anew. Come November, Donald Trump will require that U.S. banks cease providing payments services to any foreign bank that facilitates sanctioned Iranian payments. This isn’t a novel policy, but a reinstatement of Barack Obama’s monetary censorship of Iran from 2010 to 2015. Obama’s effort to cut Iran off from the international banking system eventually drove Iran to throw in the towel and accept limitations on its nuclear program.

Exclusion from the U.S. banking system is a powerful threat. A foreign bank needs to have a connection to a U.S. bank if it wants to conduct cross-border U.S. dollar payments. Given the choice between not doing any business with Iran, a relatively small actor in the global scheme of things, and losing access to the massive dollar payments system, international banks will almost always choose to end relationships with Iranian entities. This has the inevitable effect of severing Iran from the international banking system. With no foreign banks willing to serve it, Iran can no longer buy imports nor sell its lifeblood, crude oil.

The Iranian monetary blockade is a large-scale example of monetary exclusion. Smaller-scale examples include the banking blockade against Wikileaks by Bank of America, Visa, MasterCard, PayPal, and Western Union. (Here is a good explanation) A less well-known but equally illustrative example is the banishment of Huntingdon Life Sciences from the UK’s payments system in 2001. Animal-rights activists successfully lobbied the company’s bank to close its account because of concerns that it was engaged in animal testing. Because other banks were afraid to take on Huntingdon’s business, the Bank of England, the UK’s central bank, had to step in and offer to conduct Huntingdon’s business. 

Or take the example of UK-based NGO Interpal. After Interpal was accused of facilitating Palestinian terrorism by the U.S. Treasury, families of victims of suicide bombings in Israel launched a U.S.-based lawsuit against Interpal’s bank, Natwest. In response, Natwest dropped Interpal as a customer in 2007. Subsequently, Interpal’s account with the Islamic Bank of Britain (IBB), a UK-based bank, was suspended when the IBB’s clearing bank, Lloyds TSB, said it could no longer offer clearing services to IBB as long as Interpal remained a client. Lloyds TSB is one of the UK’s big-four clearing banks. The NGO was forced to rely on cash donations rather than debit and credit cards. 

Because of a tendency for monetary systems to be monopolistic, monetary exclusion can be incredibly powerful. Once organizations have been targeted, not many options remain. There are two reasons for the lack of competition. Like languages, monetary systems are characterized by strong feedback effects. When everyone in the room is speaking English, it’s hard to switch to French. Likewise, once everyone is using the dollar, it is difficult for anyone to break with this tradition and turn to an alternative. The second reason is that banking and payments are highly regulated, making it difficult for new competitors to enter the field. 

Given that censorship can be so devastating, it is important that there be due process before barring someone from the monetary system. In Interpal’s case, the Charity Commission for England and Wales, a government department that regulates registered charities, cleared Interpal three separate times of the accusations that had been leveled against it. As for the lawsuit that had been filed against Natwest, it was later thrown out. But Interpal still could not regain its banking connection. The takeaway is that the targets of monetary exclusion do not necessarily deserve to be removed from the system, and may have no means to seek redress.

In the long term, systems that engage in too much exclusion are dooming themselves to failure. Though it is difficult to compete with the incumbent system in the short term, new monetary alternatives will eventually emerge to provide services to the growing ranks of the excluded. Those who fear being excluded by the incumbent will secretly open accounts with the upstart, as a backup plan. As these new systems grow, threat of exclusion from the not-so-dominant incumbent system will cease to have the same pernicious effects it used to. 

In the case of Wikileaks, it famously turned to Bitcoin. In Iran’s case, it has a potential out: the euro. While the U.S. payments system is certainly the world’s largest, the euro-based system is a close second. To prevent the full exclusion of Iran from the global payments system, all Europe needs to do is to allow the European Central Bank (ECB) to continue to allow specialist banks that facilitate Iranian payments to remain connected to the ECB’s interbank settlement system. (I described how this would work here.) All of Iran’s purchases and sales, the majority of which had previously been conducted in dollars, would thenceforth be conducted in euros. 

Whether Iran deserves to be re-embargoed is a complicated matter: Trump seems to think so, but the rest of the world, including Europe, is not convinced. What we know for sure is that those who are eager to use the dollar’s dominant role in the global payments system to exclude others will eventually pay a price: the dollar will lose its privileged position.

J.P. Koning


J.P. Koning is a financial writer and blogger with interests in monetary economics, economic history, finance, and fintech. He has worked as an equity researcher at a Canadian brokerage firm and a financial writer and publisher at a large Canadian bank. More recently, he has written several papers for R3, a distributed ledger company, on the topics of central bank cryptocurrency and cross border payments. He founded the popular blog Moneyness in 2012. He designs economics and financial wallcharts at Financial Graph & Art.

Koning earned his B.A. in Economics from McGill University.

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