Wyoming’s first cryptocurrency bank may herald a new era of U.S. cryptocurrency regulation.
Wyoming has unleashed the Kraken.
In 2020, Kraken, a platform for exchanging cryptocurrencies such as Bitcoin, became the first cryptocurrency company to secure a bank charter in the United States, signifying the cryptocurrency industry’s growing mainstream acceptance. Kraken’s bank also represents a step forward in Wyoming’s efforts to become the U.S. center for cryptocurrency companies, with new laws designed to position the state as the “Silicon Prairie.”
The U.S. federal government has yet to establish a clear framework for cryptocurrencies. In the absence of federal regulation, states such as Wyoming have independently approached regulating cryptocurrencies, despite their digital, borderless nature.
In 2019, a new Wyoming law established Special Purpose Depository Institutions (SPDI) that permits cryptocurrency companies to create financial institutions resembling custodian banks, which focus on holding assets for clients. Wyoming legislators designed the SPDI Act with cryptocurrency companies in mind, highlighting “the rapid innovation of blockchain technology” that underpins many cryptocurrencies and that most “federally insured financial institutions” cannot hold cryptocurrencies.
SPDIs operate under several conditions that other banks typically do not. SPDIs cannot offer loans. They must hold enough liquid assets to cover 100 percent of deposits while also maintaining an additional 2 percent of deposits as a contingency account “for unexpected losses and expenses.” And before an SPDI begins operating, Wyoming requires that shareholders fund the SPDI with at least 5 million dollars and set up a surplus fund to cover “three years of estimated operating expenses.”
These stringent requirements may reassure regulators and potential customers that SPDIs will remain solvent despite high volatility in cryptocurrency prices when compared to traditional assets such as real estate or stocks.
Despite these concerns, SPDIs may become an attractive option for cryptocurrency companies.
Most states require new banks to obtain 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 normally hinders cryptocurrency companies from offering banking services. But Wyoming now allows SPDIs to operate without FDIC insurance and instead substitutes its significant reserve requirement. (Wyoming law, however, permits SPDIs to apply later for FDIC insurance if it should ever become available for cryptocurrencies.)
The ability to offer banking services as an SPDI offers relief to cryptocurrency companies that have historically lacked access to normal banks as partners. Cryptocurrency companies in the United States have traditionally banked with a handful of cryptocurrency-friendly banks or otherwise turned to smaller, sometimes less capable intermediaries. For example, after Wells Fargo stopped processing cryptocurrency exchange Bitfinex’s transactions, Bitfinex turned to a Panamanian company that later allegedly lost $850 million worth of Bitfinex funds. If Bitfinex “had been properly banked,” it may have avoided this mishap.
Traditional banks’ attitudes toward cryptocurrency companies may be shifting—big banks such as JPMorgan that once called Bitcoin a fraud now take cryptocurrency exchanges as clients. But cryptocurrency companies still have several reasons to pursue their own banking operations.
They may, for instance, prefer to pursue SPDIs over working with third-party banks that could later de-platform them in response to political pressures. Such concerns linger following Operation Choke Point, in which President Barack Obama’s