The Miner of Last Resort: Digital Currency, Shadow Money and the Role of the Central Bank

Cryptocurrency arose, and grew in popularity, following the financial crisis of 2008 built upon a promise of decentralizing money and payments. An examination of the history of money and banking the United States demonstrates that stable money benefits from strict controls and commitments by a centralized government through chartering restrictions and a broad safety net, rather than decentralization. In addition, financial crises happen when government allows money creation to occur outside of official channels. The U.S. central bank is then forced into a policy of supporting a range of money-like assets in order to maintain a grip on monetary policy and some semblance of financial stability. In addition, this chapter argues that cryptocurrency as a form of shadow money shares many of the problematic attributes of both the privately issued bank notes that created instability during the “free banking” era and the “shadow banking” activities that contributed to the 2008 crisis. In this sense, rather than being a novel and disruptive idea, cryptocurrency replicates many of the systemically destabilizing aspects of privately issued money and money-like instruments. This chapter proposes that, rather than allowing a new, digital “free banking” era to emerge, the better alternative is a public model. Specifically, it argues that the Federal Reserve should use its tools to improve public payment systems, enact robust utility-like regulations for private digital currencies, and limit the likelihood of bubbles using macroprudential measures.