Shadow Central Banking

Abstract

Private entities have recently attempted to invade the realm of central banking activities. This Article identifies this activity as “Shadow Central Banking,” and draws analogies with the previous emergence of “shadow banking” more generally. The “shadow banking” system emerged as a network of new and often non-regulated entities, that gradually entered the business of banks. Shadow banking‘s development depended on specific causes and responded to specific needs of the financial system. This transformations ultimately led to the creation of a far more complex and interconnected financial system, which ultimately collapsed amidst the Financial Crisis in 2008. The similarities between shadow banking and Shadow Central Banking are clear when analyzing the circumstances of their emergence, their pathologies, and the regulatory response.

After a brief analysis of the shadow banking system, this Article focuses on the evolving roles of central banks and private initiatives, as their activities have led to the rethinking of central banking activities and the form of money in modern capitalism. This Article proposes that this disruption of traditional central banking activity stems from a new interpretation of the concept of money, one that defyies the classic dichotomy of “central bank money” vs. “commercial bank money”. This Article then analyzes the main characteristics of Shadow Central Banking and identifies specific commonalities not only with the shadow banking system, but also with historical systems that pre-existed the modern central banking framework. Finally, this Article considers the systemic risks, systemic conflicts of interest and opaque corporate governance mechanisms associated with Shadow Central Banking and posits some policy considerations to address such risks.

Keywords: Shadow Banking, Central Banks, Payment Systems, Blockchain, Fintech, Central Bank Digital Currencies (CBDCs), Libra, JPMCoin, Bitcoin, Ethereum, Stablecoins, Initial Coin Offerings (ICOs), Clearing, Market Infrastructures, Free Banking

JEL Classification: K20, K22, K23, K33, L43, L5, O1, O31, O32, O33, O38