Money in Shadow Banking and the Crypto Economy: A Chartalist Perspective

As instructors of Money and Banking, we regularly confront enduring questions: What is money? Is gold money? More recently, students ask whether shadow money, Bitcoin, or stablecoins qualify as money. These inquiries reflect a deeper puzzle: why do rational agents exchange valuable goods and services for seemingly intrinsically useless tokens? How do paper notes, bank deposits, and digital instruments retain value without commodity backing? Such questions have gained renewed urgency amid financial innovation, shadow banking expansion, and the rise of decentralized finance. This paper revisits these foundational issues and extends the analysis to blockchain-based tokens and shadow banking liabilities. Rather than defining money by its functions, we adopt a Chartalist perspective that conceptualizes money as a negotiable financial instrument whose value rests on an issuer's promise to redeem it at par. These characteristics establish criteria for evaluating monetary status. Once identified, instruments are assessed according to their degree of general acceptance and exposure to credit risk, which depend on issuer authority, issuance and redemption mechanisms, regulatory structure, and the nature of underlying assets. Methodologically and pedagogically, the paper emphasizes schematic balance sheets as a tool for determining whether an instrument qualifies as money and for clarifying the credit risks it entails. Overall, the analysis underscores a central Chartalist insight: whether physical, electronic, or tokenized, the authority, credibility, and commitment of the issuer remain the cornerstone of any effective monetary instrument—and of any durable monetary system.