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Currency substitution in the shadow economy: International panel evidence using local Bitcoin trade volume

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  • Marmora, Paul

Abstract

While mainstream adoption of cryptocurrency as a replacement for traditional fiat money has yet to be realized, anecdotal evidence suggests that such substitution is more pervasive in the shadow economy. I test this hypothesis by exploiting cross-country shadow market variation and exogenous shocks to darknet marketplaces used exclusively for illegal transactions in 28 emerging market economies. I find that Bitcoin trade volume generated by underground activity reacts much more strongly to inflation expectations than Bitcoin trade volume among the general population, providing direct evidence that shadow market participants substitute away from cash and towards cryptocurrency to conduct anonymous transactions. This effect is particularly strong among countries experiencing high annual inflation.

Suggested Citation

  • Marmora, Paul, 2021. "Currency substitution in the shadow economy: International panel evidence using local Bitcoin trade volume," Economics Letters, Elsevier, vol. 205(C).
    • Handle: RePEc:eee:ecolet:v:205:y:2021:i:c:s0165176521002032
    DOI: 10.1016/j.econlet.2021.109926
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Yokoyama, Kazuki, 2023. "Whispers of Chaos: Intervention on the Mexican Dollar Quotes in Japan, 1869-1885," MPRA Paper 118586, University Library of Munich, Germany.
    2. Aziz N. Berdiev & Rajeev K. Goel & James W. Saunoris, 2024. "Global cryptocurrency use, corruption, and the shadow economy: New insights into the underlying linkages," American Journal of Economics and Sociology, Wiley Blackwell, vol. 83(3), pages 609-629, May.
    3. Piotr Dybka & Bartosz Olesiński & Marek Rozkrut & Andrzej Torój, 2023. "Measuring the model uncertainty of shadow economy estimates," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(4), pages 1069-1106, August.
    4. Joebges, Heike & Herr, Hansjörg & Kellermann, Christian, 2024. "Crypto assets as a threat to financial market stability," IPE Working Papers 233/2024, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    5. Kyohei Shibano & Gento Mogi, 2022. "An analysis of the acquisition of a monetary function by cryptocurrency using a multi-agent simulation model," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-30, December.
    6. Lompo, Miaba Louise & Ouoba, Marie Madeleine, 2022. "How they hide money? An investigation on tax evasion of large corporations and wealthy taxpayers," MPRA Paper 113410, University Library of Munich, Germany.
    7. Foued Hamouda & Imran Yousaf & Muhammad Abubakr Naeem, 2024. "Exploring the Dynamics of Equity and Cryptocurrency Markets: Fresh Evidence from the Russia–Ukraine War," Computational Economics, Springer;Society for Computational Economics, vol. 64(6), pages 3555-3576, December.
    8. Lompo, Miaba Louise & Ouoba, Marie Madeleine, 2022. "How they hide money? An investigation on tax evasion of large corporations and wealthy taxpayers," MPRA Paper 114235, University Library of Munich, Germany.
    9. Goel, Rajeev K. & Mazhar, Ummad, 2024. "Cryptocurrency use and tax collections: Direct and indirect channels of influence," Journal of Financial Stability, Elsevier, vol. 72(C).
    10. Baş Tuğba & Özaydın Orhan & Dura Yahya Can, 2023. "Does Bitcoin Affect Term Deposits? Evidence from MINT Countries," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 17(1), pages 1-13.

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    More about this item

    Keywords

    Bitcoin; Shadow economy; Currency substitution; Inflation expectations;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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