Digital payments and regulatory intermediaries in the shadow economy

The fight against illicit transactions relies heavily on pushing money flows from cash to the financial system, where financial intermediaries are subject to anti-money laundering (AML) rules. Since the irruption of Bitcoin, academics and policy-makers have long considered how decentralized cryptocurrencies may represent an attractive replacement for cash in the underground economy. Much less attention, however, has been paid to the role of digital but centralized and regulated payments offered by fintech firms in facilitating illicit transactions. The paper documents how the digital payment revolution in emerging economies is transforming interactions in the AML regime. Empirically, the paper relies on in-depth interviews with regulators, intermediaries, and targets in Argentina (2019-2023). The adoption of digital payments in the shadow economy is illustrated with ethnographic evidence and interviews with participants in illegal (drugs) and informal (counterfeit garments) markets. The paper seeks to engage with two disconnected literatures. First, research on illegal economies often overlooks the tensions in the regulatory environment in which illegal market participants operate. Their decisions are nevertheless fundamentally guided by the perceived risk of detection, which is shaped by the combined behaviour of public and private actors. Second, studies on regulatory intermediaries have only grasped how conflicting incentives and interactions between regulators and intermediaries affect enforcement (Abbott et al., 2017). In particular, those studies have rarely considered illegal markets and emerging economies. The focus in Argentina, where digital wallets have become immensely popular, allows to examine regulatory intermediation under intensified challenges in terms of conflicting policy goals (i.e., financial inclusion vs integrity), state capacity, and control over new fintech payment providers.