> and the exchange repaid it with customers' deposited cash
Then in this scheme depositors would be able to see that straight away, and force bankruptcy and asset recovery on the exchange while those assets still existed. This would (presumably!) stop the exchange repaying debts with customer deposits, because those customers would know straight away and could seek legal recourse against the bank and the exchange.
This is explicitly addressed in the article: use stable coins for that. I'm very much a crypto-skeptic, but I do think this particular solution will provide some level of increased safety for coin-heads.
If you trust the solvency of the likes of Tether and Luna, certainly.
Seems to me the problem of solvency at the boundary between the worlds of fiat and cryptocurrency is always present, and shuffling it around doesn't make it disappear.
But that's a choice for customers to make, at the end of the day. The exchange says "we're holding dollars in Tether and we can prove it" and if customers aren't happy with that, then they can not store fiat on the exchange.
Then in this scheme depositors would be able to see that straight away, and force bankruptcy and asset recovery on the exchange while those assets still existed. This would (presumably!) stop the exchange repaying debts with customer deposits, because those customers would know straight away and could seek legal recourse against the bank and the exchange.