Wyoming might seem like an unlikely capital for crypto in the US. It is the least populated state with only 577,737 people and isn’t a place where one can find an abundance of national headquarters for banks or tech startups. However, the state’s government has a track record of enacting legislation that is favorable to businesses.
This has continued into 2019. Earlier this year, Wyoming enacted 13 crypto-friendly laws, one of which allows fully-reserved fiat banks to become a custodian for crypto assets. Under the new law, institutions can apply to be designated as Special Purpose Depository Institutions (SPDIs). This landmark decision doesn’t just impact Wyoming. It could challenge existing laws in some states and set a precedent for crypto legislation in others.
Special Purpose Depository Institutions (SPDIs)
According to Wyoming officials, SPDIs could change the entire landscape of cryptocurrency regulations in the United States. Chris Land, general counseL of Wyoming Division of Banking said on November 12, “We are fairly confident that the Wyoming SPDI will be able to operate in New York without a BitLicense.” As of November 20, the New York Department of Financial Services (NYDFS) has yet to respond to this statement.
Since BitLicense was introduced in the state of New York in 2014, only 18 licenses have been granted. Companies that deal with cryptocurrencies have found it notoriously difficult to operate in New York. In October 2018, for example, IDEX decided to blacklist all New York residents from using its exchange. Other states are also impacted by regulations or lack thereof. Binance, which was previously available in all US states, shut down availability on its main website in September 2019. It also opted to open up a US-specific exchange website, but services are still unavailable to residents in eleven states as of November.
Caitlin Long, the gubernatorial appointee to the Wyoming Blockchain Task Force, is confident that Wyoming would be able to win if a legal battle with the state of New York were to occur. She has said,
“The Wyoming SPDI would need to apply to NYDFS to open a branch in New York and NYDFS would need to approve the application, but there’s a lot of favorable case law precedent. So if NYDFS denies the application, I think it would go to litigation and the Wyoming bank would likely prevail.”
Banks Consider Moving to Wyoming
An article from the Northern Wyoming Daily News reported that five new “blockchain banks” could bring as much as $20 billion in assets into Wyoming by summer 2020. These companies are expected to contribute around $4 million in tax revenues. While the names of all of the interested institutions haven’t been released, Kraken is said to be the most well known in the group. Ultimately, it will take time to establish SPDIs. The chartering process is expected to take about nine months. Additionally, two of the institutions have asked for technical corrections to the law, including defining phrases like “business of banking.”
SPDIs will operate differently than most financial institutions in the US. They won’t have to be backed by the Federal Deposit Insurance Corp. Rather, they will be required by law to have 100% cash reserves for securing all cryptocurrency assets. Wyoming state law makes fractional reserve banking/lending illegal.
History Repeats Itself
It’s not unprecedented for banks to move their operations to a state that isn’t traditionally known for its financial services sector. In 1981, South Dakota was able to attract Citibank, which moved its credit card business there. Back then, the main benefit for Citibank was that South Dakota eliminated the cap on interest rates and fees to woo the credit card industry. Although this might have been bad for borrowers across the US, it did have a positive impact on the state’s economy, creating 16,000 jobs. This number is even more impressive given the fact that South Dakota only had a population of 690,615 that year. This move also made South Dakota the largest state by banking assets at $2.5 trillion.
Wyoming officials hope the SPDI law and other crypto-friendly laws will similarly benefit its economy for 2020 and beyond. Unlike Citibank’s move to South Dakota, SPDIs establishing in Wyoming appears to be more about creating regulatory certainty and not related to raising fees on customers. Wyoming’s SPDI law applies to custodial services for institutional investors and doesn’t impact retail investors.