A credit theory of anti-credit money: How the cryptocurrency sphere turned into a shadow banking system

Abstract

Cryptocurrencies were designed to function as money without banks. How, then, could they run into a banking crisis in 2022? We argue that the evolution of the crypto sphere into a credit based system is driven by its inherent contradictions: Bitcoin and other cryptocurrencies only became money-like when centralised exchanges began to create credit claims on crypto tokens, thus providing liquidity and elasticity to crypto markets. Stablecoins connect the crypto sphere to the conventional banking system, thereby securing indirect sovereign backing. Both centralized exchanges and stablecoin issuers are functionally equivalent to shadow banks. Stablecoins additionally fulfil the defining criteria of shadow money. The contemporary cryptocurrency sphere comprises an internal hierarchy of credit that is firmly integrated into the conventional monetary system. The emergence of ‘crypto shadow banking’ can be understood as the latest chapter in the long and turbulent history of unregulated private monetary innovation. Our analysis not only explains the 2022 crisis, it also demonstrates that credit theories of money can, counterintuitively, account for the anti-credit project of cryptocurrencies.