We Must Protect Investors and Our Banking System from the Crypto Industry

93 Pages Posted: 15 Feb 2023 Last revised: 19 Sep 2023

See all articles by Arthur E. Wilmarth

Arthur E. Wilmarth

George Washington University Law School

Date Written: May 31, 2023


The crypto boom and crash of 2020-22 demonstrated that (i) cryptocurrencies with fluctuating values are extremely risky and highly volatile assets, and (ii) cryptocurrencies known as “stablecoins” are vulnerable to systemic runs whenever there are substantial doubts about the adequacy of reserves backing those stablecoins. Crypto firms amplified the crypto boom with aggressive and deceptive marketing campaigns that targeted unsophisticated retail investors. Scandalous failures of prominent crypto firms accelerated the crypto crash by inflicting devastating losses on investors and undermining public confidence in crypto-assets.

Federal and state regulators allowed banks to become significantly involved in crypto-related activities during the past few years. Several FDIC-insured banks that provided financial services to crypto firms experienced major problems during the crypto crash. The failures of three of those banks in March 2023 threatened to unleash a systemic banking crisis. Meanwhile, stablecoins issued by nonbanks and uninsured depository institutions have become a hazardous new form of “shadow deposits,” which could undermine the integrity of our banking system and require costly future bailouts.

This article presents a three-part plan for responding to the risks posed by fluctuating- value cryptocurrencies and stablecoins. First, policymakers must protect investors by recognizing the Securities and Exchange Commission (SEC) as the primary federal regulator of most fluctuating-value cryptocurrencies. Federal securities laws provide a superior regime for regulating such cryptocurrencies. The SEC has broader powers, a more robust mandate to protect investors, and a stronger enforcement record than the Commodity Futures Trading Commission (CFTC).

Second, federal bank regulators must protect the banking system by prohibiting FDIC-insured banks and their affiliates from investing and trading in fluctuating-value cryptocurrencies, either on their own behalf or on behalf of others. In addition, federal bank regulators should bar FDIC-insured banks and their affiliates from providing financial services to crypto firms unless those firms are registered with and regulated by the SEC and/or the CFTC.

Third, Congress should mandate that all issuers and distributors of stablecoins must be FDIC-insured banks. That mandate would ensure that all providers of stablecoins must comply with the regulatory safeguards governing FDIC-insured banks and their parent companies and other affiliates. Those safeguards provide crucial protections for our banking system, our economy, and our society.

Keywords: Cryptocurrencies, investor protection, shadow banks, stablecoins, systemic risk

JEL Classification: E44, E53, E58, F30, G18, G20, G21, G23, G28, G50, G51, K20, K23, N20

Suggested Citation

Wilmarth, Arthur E., We Must Protect Investors and Our Banking System from the Crypto Industry (May 31, 2023). 101 Wash. U. L. Rev. 235-326 (2023) , GWU Legal Studies Research Paper No. 2023-07, GWU Law School Public Law Research Paper No. 2023-07, Available at SSRN: https://ssrn.com/abstract=4360175 or http://dx.doi.org/10.2139/ssrn.4360175

Arthur E. Wilmarth (Contact Author)

George Washington University Law School ( email )

2000 H Street, N.W.
Washington, DC 20052
United States

HOME PAGE: http://https://www.law.gwu.edu/arthur-e-wilmarth-jr

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