Global cryptocurrency use, corruption, and the shadow economy: New insights into the underlying linkages

Abstract

The recent prevalence of digital currencies has challenged policymakers as they try to control the supply of money and rein in clandestine activities. Corruption and shadow economy are widely prevalent illegal/unobserved activities that have been hard to eliminate worldwide. These longstanding and entrenched activities have possibly found a new avenue to thrive and evade detection/punishment. So disentangling the nexus between corruption, shadow economy, and digital currencies is important. Using recent cross-country data, this paper analyzes the interrelationships between corruption, shadow economy, and cryptocurrencies. We argue that a large underground sector in a nation provides a mechanism through which corrupt government officials use cryptocurrencies to conceal their unauthorized earnings. Employing formal mediation analysis, our results show that the positive nexus between corruption and cryptocurrency adoption is mediated by the shadow sector. Quantitatively speaking, three-fourths of the correlation between corruption and cryptocurrency usage is mediated by the shadow economy. The primary implication of our findings is that effective monitoring of cryptocurrencies should pay attention to policies to control both corruption and the shadow economy.