October 29, 2020

In 2009, the pseudonymous Satoski Nakamoto created the first Bitcoin, the seminal cryptocurrency. Just over a decade later, in September, Kraken became the first cryptocurrency exchange to obtain a bank charter. Many cryptocurrency adopters and supporters—and perhaps even Nakomoto himself—once saw crypto as a way to completely disintermediate the financial system and remove banks from the equation. Ultimately, Kraken’s bank charter marks a pivotal point for the future of crypto, however different it may be from that vision.

The Wyoming Legislature enacted a 2019 law authorizing the state Division of Banking to charter special purpose depository institutions or “SPDIs.” The Wyoming SPDI is a new kind of state bank. It may take deposits and engage in other activities incidental to banking, including custodying cryptocurrency and other digital assets, but it is prohibited from making loans. As per the statutory requirements, the Wyoming SPDI must keep liquid 100% of its cash deposits but therefore does not even have to obtain FDIC insurance.

The OCC issued interpretive guidance in July, reinforcing Wyoming’s determination that digital assets are considered within traditional asset classes and banks may therefore custody them just the same as traditional assets. The OCC’s guidance clarified that a cryptocurrency exchange may partner with banks to custody their customers’ assets.

The Wyoming SPDI charter resembles a custody bank, which traditionally focuses on asset storage and control, trust accounts, wealth management, and providing onramps and offramps between securities and commodities markets and customer bank accounts. An SPDI is able to offer deposit accounts, online and mobile banking services, wire transfers and ACH payments, and many other competitive bank products.

Although the Wyoming SPDI is itself pretty unique, an SPDI will be supervised no differently than any other state bank whose primary regulator is the Wyoming Division of Banking. If a Wyoming SPDI additionally obtains membership with a Federal Reserve Bank, it will have all the benefits of a Fed account and will also be regulated by the Fed.

Like Bitcoin was for crypto itself, Kraken will be the seminal crypto bank. As the market landscape continues to evolve—and pending a decision from the U.S. Court of Appeals for the Second Circuit on the constitutionality of the OCC’s own special purpose national bank charter for fintech firms—Kraken is leading the way forward for the future of crypto.

While Kraken presents a strong use case for the Wyoming SPDI, the chartering process is no easy feat. Kraken is a well-established crypto exchange with experienced officers and a focus on regulatory compliance. A successful Wyoming SPDI application will have to consider everything it needs to obtain proper regulatory approvals, licenses, and supervision. The successful applicant will maintain robust operational and technical procedures and controls, have a focus on safety and soundness, comply with a myriad of both state and federal banking and consumer protection regulations, and consider and mitigate the risks it may pose to the U.S. and global payments systems.

 FS Vector encourages any fintech firm that is considering pursuing an SPDI or other bank charter to reach out for advice.