Do cryptocurrencies resemble ‘shadow money’?

Bitcoin may be the first and the largest cryptocurrency in the market, however, in the decade since its launch the market has grown substantially which has in turn cemented a spot for digital assets in the global economy. The past few years have also been notable, as cryptocurrencies have been able to attract a more diverse audience and have also seen significant strides in terms of regulations being developed for digital assets.

While this may seem like crypto’s success story, there are still many concerns when it comes to decentralized currencies which are not regulated by governmental institutions. A recent paper published by a researcher from the Stanford Graduate School of Business sheds light on how cryptocurrencies can act as “shadow money” and share many of the problematic attributes of privately issued banknotes that created instability during the “free banking” era. The paper argued that,

“The Federal Reserve allows shadow money creation to proliferate through a permissive approach to its three core functions of monetary policy, bank supervision and regulation, and payment system oversight.”

Out of the 2008 financial crisis, cryptocurrencies emerged as an alternative form of money and payments with its decentralized nature the most prominent stand-out feature. In the past few years, the digital assets ecosystem has been on overdrive with many of the world’s central banks and corporations like Facebook planning to enter the market.

Even in the case of the Libra project, the study pointed out that, the major critique surrounding it remained around the fact that, “implications for privacy, consumer and investor protection and inclusion, and money laundering concerns.” and that,

“Less attention has been paid to the broader systemic implications of digital currency for money and banking, at least in policy spaces.”

However, while rampant developments regarding CBDCs have been the narrative in the past year, it also enabled greater crypto-awareness to a certain degree. In a recent interaction, The Bank of England’s Michael Kumhof argued that CBDCs do have a role to play in creating a safer financial system, he noted,

“CBDCs are now on the drawing board on a number of central banks. It was just an idea 7 years ago. It is now a concept and people are discussing it. Building a safer financial system is the main theme here.”