The regulatory landscape for US financial institutions is notoriously complex, a complicated web of overlapping federal agencies and state authorities. The need to comply with so many rule makers is frequently cited as a reason the US lags in financial innovation. Sometimes it takes a bold, borderline crazy move to jumpstart the process. And we may have just seen one in- of all places- Wyoming.
The Cowboy State, a longtime free market stronghold, last year went public with its desire to become a player in blockchain technologies. The aspiration reached a milestone this summer when Wyoming issued the nation’s first crypto bank license- technically, a Special Purpose Depository Institution (SPDI) state charter. The recipient is Kraken, the San Francisco-based cryptocurrency exchange. The Kraken, a mythical sea creature, was also recently chosen as the name for Seattle’s expansion NHL hockey team; can a co-marketing campaign be far behind?
A scan of state chartered banks reveals that the Wyoming Banking Division has direct supervisory experience for only 25 institutions- among the bottom fifth of state regulators’ portfolios. It’s certainly possible its staffers will develop the necessary expertise, but it’s a curious outpost for a cutting-edge discipline with potentially far-reaching effects. Acting Comptroller of the Currency Brian Brooks has expressed interest in issuing similar special purpose licenses on a national level- which would be subject to OCC overview- but has been slowed by legal challenges from state commissioners. Wyoming’s move forces the issue.
Wyoming seems focused on establishing itself as a haven for blockchain enterprise- much as Delaware has done for articles of incorporation. Given US law, however, a license to operate in one state can provide nationwide benefits- bear in mind that many credit cards are issued from South Dakota banks for similar reasons.
So what exactly does Kraken’s crypto bank charter mean? It’s not yet clear. As a state chartered institution Kraken is eligible to apply for both FDIC deposit insurance and access to the Federal Reserve borrowing window. It’s far from certain that either such request would be approved, and in the FDIC case would probably be a red herring since FDIC coverage explicitly excludes digital assets. For now, Wyoming claims state law provides adequate safeguards for depositor assets.
The next step is to watch how Kraken elects to deploy its charter. Odds are good that once Kraken sets up shop in Wyoming and puts its charter to use, some party will claim legal standing and file a challenge. Such proceedings can be slow and painful, but at least they should generate some much-needed clarity. It’s a story worth following, as digital assets will play a future role in banking services in one way or another.
(Bonus points for anyone who figures out the somewhat obscure reference in this blog title- contact me at glen.sarvady@154Advisors with your answer.)
(Forbes has done solid ongoing coverage of this topic; you can find their interview with Wyoming’s state commissioner here: https://www.forbes.com/sites/jasonbrett/2020/10/02/an-inside-look-at-wyoming-state-regulators-prepping-for-first-crypto-bank-examinations )