Money and Federalism

There is a ticking timebomb at the heart of the U.S. monetary system. The explosive material is an ever expanding universe of new monetary institutions like PayPal, Cash App, and so-called “stablecoins” that reside outside the perimeter of conventional bank regulation and the modern financial safety net. But the fuse was lit more than two hundred years ago in Philadelphia, where the delegates to the Constitutional Convention failed to clearly specify the division of regulatory responsibility between the federal government and the states over money and monetary affairs.

As a direct consequence of this failure, the United States is today the only country in the world in which both the federal and state governments possess independent and yet overlapping authority for bank chartering, regulation, and supervision. Beginning with the landmark Supreme Court decision in Maryland v. McCulloch, this unique “dual banking” system has been a wellspring of jurisdictional conflict. Yet over time it 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 monetary institutions licensed and regulated almost entirely at the state level. 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.