Key Finding
The U.S. dual banking system is under threat from a new breed of technology-driven monetary institutions
Abstract
The United States is the only country in the world in which both federal and state governments possess independent and yet overlapping authority for bank chartering, regulation, and supervision. The roots of this unique “dual” banking system can be traced back to the Constitution: written almost a century before banks rose to the apex of the financial system and became the dominant source of money. Beginning with the landmark Supreme Court decision in Maryland v. McCulloch, this system has been a wellspring of jurisdictional conflict. Yet over time this hotly contested and highly fragmented system has also produced strong federal oversight and a financial safety net that protects bank depositors, prevents destabilizing runs, and promotes monetary stability.
This system is now under stress. The source of this stress is a new breed of technology-driven financial institutions, licensed and regulated almost entirely at the state level, that provide money and payments outside the perimeter of both conventional bank regulation and the financial safety net. This Article examines the rise of these new monetary institutions, the state-level regulatory frameworks that govern them, and the nature of the threats they may one day pose to monetary stability. It also examines the legal and policy cases for federal supremacy over the regulation of these new institutions and advances two potential models: one based on complete federal preemption, the other more tailored to reflect the narrow yet critical objective of promoting public confidence and trust in our monetary system.
