The $250,000 Crypto Question
This case explores the role of deposit insurance in financial stability, including the importance of risk-adjusted insurance premiums and the complementarity between capital requirements and deposit insurance when risk is imperfectly measured by the insurer. The case is intended to follow a class on maturity transformation (e.g., as presented in ""The Economics of Maturity Transformation"" [UVA-GEM-0191]). It begins with a fictional cryptocurrency exchange, Koble, which proposes to conduct maturity transformation outside of the current purview of the Federal Deposit Insurance Corporation (FDIC). The chair of the FDIC, Jelena McWilliams, now faces a huge normative question: should deposit insurance be extended to Koble? Her answer could change the trajectories of both the FDIC and the cryptocurrency market. The case reviews the history of deposit insurance in the United States and concludes with a series of questions for McWilliams to ponder, specifically questions that connect Koble to the historical lessons.