Wyoming wants cryptocurrencies to have a new home on the range.
The state recently accepted its first cryptocurrency banking application under its Special Purpose Depository Institution charter, allowing a new type of custodial bank in the state meant to house digital currencies and securities like bitcoin. Wyoming is the first state to offer a charter for crypto banks.
"Wyoming wants to become 'Silicon Prairie,'" said Albert Forkner, Wyoming Banking Commissioner, in an interview.
Forkner described the state's efforts as being similar to South Dakota's push to attract credit card banks in the 1980s by removing the state's interest rate cap. In both cases, regulatory changes were made to cultivate a financial services industry. The Wyoming legislature enacted a law in 2019 establishing the SPDI charter for cryptocurrency custodial banks, which would be prohibited from lending and be required to hold 100% of customers' deposits in cash and thus would not need federal deposit insurance. These banks would provide an on-and-off ramp between fiat and digital currencies, custodial services for blockchain assets and other services.
Cheyenne, Wyo.-based Kraken Financial, a subsidiary of Payward Inc., is the first bank to be granted an SPDI charter, Forkner said. Another cryptocurrency-focused banking startup based in Cheyenne, Avanti Financial Group Inc., hopes to begin operating under the charter.
Kraken has provided cryptocurrency trading and a platform for exchanging digital assets into national currencies since 2011. With the bank charter it will be able to expand its offerings and no longer need to partner with third-party banks for certain services, the proposed bank's CEO, David Kinitsky, said in an interview. Kraken's goal is to promote the adoption of digital assets, Kinitsky said.
"This is a key tool in that, because this bank ... allows us to provide seamless integration between the traditional banking system and digital assets," he said. "We can start serving folks who maybe are more mainstream, and offer digital banking services and then, hey, if they want, they can access digital assets."
Kraken believes digital assets, fintech and traditional financial services are converging and redefining what mainstream banking looks like. The bank will be "modular," which will let it serve both Kraken's existing cryptocurrency trading user base and new customers who are not yet interested in digital assets, Kinitsky said.
But before it can open, Kraken has more steps to complete, including obtaining a Federal Reserve master account, which will allow it to store deposits at the Fed. The bank plans to open in the first quarter of 2021, Kinitsky said.
Kinitsky expects the master account will be granted despite the new nature of the bank, as the Wyoming regulator has worked closely with the Fed in creating the new charter.
"We're confident that we are buttoned-up enough, and professional enough and good stewards of the national payments infrastructure to a degree that the Fed should see it the same way," he said.
The emergence of the new charter in Wyoming could pique existing financial institutions' interests. But the question of whether bank holding companies outside Wyoming could open subsidiaries that use the new charter is still open, Forkner said.
"While the SPDI is a bank under state and federal law, it's not a bank under the Bank Holding Company Act because it doesn't lend," he said. The FDIC has yet to address that issue, he added.
A major concern for cryptocurrency-related companies is compliance with Bank Secrecy Act and Anti-Money Laundering laws. Wyoming is in the process of creating a new examination manual for SPDI-chartered banks to ensure they meet requirements, using guidance from the Federal Financial Institutions Examination Council as a starting point. The manual is expected to be completed in October, Forkner said.
The regulator has partnered with a private company for independent transaction monitoring to help ensure the bank is complying, Forkner said.
Kinitsky said that the assumption that crypto banks are less safe is misguided. A crypto company operating at scale like Kraken is under additional scrutiny from regulators and therefore has a particularly robust compliance program already, Kinitsky said.
"It's something of a misunderstanding that crypto companies operate in the Wild Wild West," he said. "We're already operating at near-bank level compliance."
Forkner expects more states to introduce these banking charters, saying he has heard from 10 or 12 other states inquiring about the process. But often other laws and infrastructure for digital companies must be put into place before an institutional charter can be created and accept applications.
"Wyoming right now has the clearest laws regarding the custody of digital assets," said Forkner.