Banking and Butterflies: Digital banks aren’t welcome in America, at least not right now. Asset prices tell us that FTX is behind us. But policymakers and investors alike have butterflies in their stomachs, an anxious feeling that lingers from the shock – understandably. US regulators emphasized key risks earlier this month, leading with the threat of “fraud and scams among crypto-asset participants.” Since then, regional banks servicing the digital ecosystem are retrenching, and the Fed rejected access to its services to a new digital bank. Decentralized rails are being shunned from bridging to the mainstream of banking, implicitly favoring centralized CBDC infrastructure. But there’s a problem – decentralized rails are already miles ahead in that tech race, having proven concept and resilience. Central banks won’t close the innovation gap. Today’s policy choices are as subtle as the flapping of a butterfly’s wings – and a tsunami of innovation will be looking for a home. Classic butterfly effects. So worried about repeating a recent mistake, we make small missteps today that build to new, grand shocks tomorrow. It’s common. Cross-currency swaps were created to provide USD liquidity to foreign banks desperate for dollars but without a lender of last resort. This emergency policy tool is now permanent. But why was it needed? Well, policy choices that started in the 1950s drove the US dollar financing market offshore, skirting the tireless tightening in US regulation. Needing a new tool wasn’t a shock – the massive USD offshore market demanded it. And we are living with the implications of these choices today, with zombie banks across rich countries. Make no mistake – digital finance is entering the global mainstream. Where it calls home is the question. And today’s regulatory steps matter to that outcome.