Wyoming’s first cryptocurrency bank could usher in a new era in US cryptocurrency regulation.
Wyoming unleashed the octopus.
In 2020, Kraken, a platform for exchanging cryptocurrencies such as Bitcoin, became the first cryptocurrency company in the US to secure a banking charter, signifying the growing mainstream adoption of the cryptocurrency industry. Krakens Bank is also an advancement in Wyoming’s efforts to become the US hub for cryptocurrency companies. New laws are intended to position the state as a “silicon prairie”.
The US federal government has not yet created a clear framework for cryptocurrencies. In the absence of federal regulation, states like Wyoming, despite their digital, borderless nature, have independently turned to regulating cryptocurrencies.
In 2019, a new law in Wyoming established Special Purpose Depository Institutions (SPDI) that enable cryptocurrency companies to create financial institutions that are similar to custodians and focus on holding assets for customers. Wyoming legislature drafted the SPDI bill with cryptocurrency companies in mind, highlighting the “rapid innovation of blockchain technology” that underlies many cryptocurrencies and most “federally insured financial institutions” cannot hold cryptocurrencies.
SPDIs operate in a variety of conditions that other banks typically don’t. SPDIs cannot offer loans. You must have sufficient liquid funds to cover 100 percent of the deposits and an additional 2 percent of the deposits as a contingent account “for unexpected losses and expenses”. And before an SPDI becomes operational, shareholders must fund the SPDI with at least $ 5 million and set up a surplus fund to cover “three years of estimated operating costs.”
These stringent requirements can reassure regulators and potential customers that SPDIs will remain solvent despite high volatility in cryptocurrency prices compared to traditional assets such as real estate or stocks.
However, not all are convinced. For example, the Bank Policy Institute claims that Krakens Bank is “an accident waiting to happen”.
Despite these concerns, SPDIs can become an attractive option for cryptocurrency companies.
Most states require new banks to purchase Federal Deposit Insurance Corporation (FDIC) insurance, which covers certain U.S. dollar accounts but does not protect other assets such as stocks or cryptocurrencies. This insurance requirement usually prevents cryptocurrency companies from offering banking services. But Wyoming now allows SPDIs to work without FDIC insurance, replacing the substantial reserve requirement instead. (However, Wyoming law allows SPDIs to apply for FDIC insurance later if it ever becomes available for cryptocurrencies.)
The ability to offer banking services as SPDI provides relief to cryptocurrency companies that have not had access to regular banking partners in the past. Cryptocurrency companies in the US have traditionally banked with a handful of cryptocurrency-friendly banks or otherwise turned to smaller, sometimes less skilled, intermediaries. For example, after Wells Fargo stopped processing Bitfinex transactions to exchange cryptocurrencies, Bitfinex reached out to a Panamanian company that later allegedly lost $ 850 million in Bitfinex funds. If Bitfinex had been “properly banked” it might have avoided this mishap.
Traditional banks’ attitudes towards cryptocurrency companies could change – large banks like JPMorgan, who once labeled Bitcoin a scam, are now taking cryptocurrency exchanges as customers. However, cryptocurrency companies still have several reasons to run their own banking business.
For example, they may prefer to persecute SPDIs over working with third party banks that they may later de-platform in response to political pressure. Such concerns persist after Operation Choke Point, in which President Barack Obama’s Justice Department pressured banks not to serve legal but politically unsavory businesses like payday lenders.
Integrating cryptocurrency companies into existing regulatory and financial systems can also reassure hesitant potential customers. Krakens SPDI is overseen by the Wyoming Division of Banking. The state’s SPDI law allows businesses to apply to join the Federal Reserve System to bring them closer to larger payment networks.
Additionally, being a bank in a growing industry could prove profitable for cryptocurrency companies. In particular, if other such companies rely on third parties to process payments and convert between cryptocurrencies and dollars, offering banking services through a company’s SPDI could provide faster service than the competition.
Although the predictions for cryptocurrency activity vary widely, optimists predict massive growth for this decade. The opportunity for cryptocurrency companies to offer banking services provides an opportunity to capture some of that growth.
That optimism underpins the Wyoming SPDI Act. The state hopes to emerge as a hub for cryptocurrency companies. SPDIs must be chartered in Wyoming but may be able to offer their services in the United States.
In addition to the SPDI bill, Wyoming has passed a dozen other laws to encourage cryptocurrency companies to move into the state. For example, the Financial Technology Sandbox Act provides “supervised, flexible regulatory oversight” for cryptocurrency companies to test innovation in a “welcoming business environment”.
Meanwhile, Wyoming’s Digital Asset Act classifies cryptocurrencies as property under applicable laws and makes it clear that the Unified Commercial Code applies to cryptocurrencies, which gives users more regulatory clarity in business. Wyoming even set up a new registrar’s court that, like that of Delaware, focuses on business disputes.
Just as Delaware generally captures an overwhelming proportion of US companies, supporters of the Wyoming cryptocurrency regime claim that Wyoming will become the “Delaware” of cryptocurrency companies.
Other jurisdictions also compete for this coat. Over a dozen states introduced bills in 2020 to regulate or investigate the regulation of cryptocurrencies. New York’s early attempt to regulate cryptocurrency companies – the BitLicense – preceded Wyoming’s efforts. So far, however, New York has attracted few applicants who instead have earned a reputation for being a state with tough regulatory hurdles.
More recently, the Mayor of Miami, Florida, has proposed adding Bitcoin to the city’s investment portfolio and paying municipal workers in Bitcoin to help make Miami a hub for innovation in the technology industry.
The regulatory competition for cryptocurrency also extends internationally. The Swiss district of Zug has set up a Crypto Valley with a “business-friendly legal framework”, and Singapore has positioned itself as a regional cryptocurrency hub.
Despite Wyoming’s efforts, the lack of a coordinated federal approach in the US could push cryptocurrency innovators to other countries.
Wyoming’s approach could ultimately sway a federal strategy, however, as recently-elected U.S. Senator Cynthia Lummis (R-Wyo.) Was reportedly the first female senator to own bitcoin. Senator Lummis has hired a key figure behind Wyoming’s cryptocurrency regulations for her staff, and reports have plans to introduce the Senate on bitcoin and improve the Senate’s understanding of bitcoin.
Meanwhile, Wyoming has already approved its second SPDI. More SPDIs seem to be driving into town.