Disrupting Shadow Banking or Crypto Shadow Banking

Abstract

Abstract A general question about the cryptoeconomy and decentralized finance (DeFi) is whether these new ecosystems rely on different mechanisms or are rather an imitation of the existing traditional economic and financial paradigms. In trying to answer this question, this chapter proposes the new label of crypto shadow banking. This chapter analyses the main characteristics of crypto shadow banking and identifies specific commonalities with the shadow banking system, specifically at the level of financial institutions and financial products. Finally, this chapter considers the systemic risks associated with crypto shadow banking and posits some policy considerations to address such risks. In particular, this chapter concludes that a better understanding of crypto shadow banking is essential to design some ex ante policy response, based on the problems experienced with traditional shadow banking. These ex ante measures may be helpful to mitigate the risks related to potential financial shocks and financial crises.