When legislation was approved in 2020 establishing Wyoming-chartered special purpose depository institutions (SPDI) to provide banking services to those involved in digital assets, proponents envisioned the state becoming a financial hub for the worldwide cryptocurrency sector.
But there were delays, first by the American Bankers Association (ABA) in issuing routing numbers, and then by the Federal Reserve Bank of Kansas City in approving master accounts for two of the state’s first SPDIs, Kraken Bank and Custodia Bank (formerly Avanti Bank and Trust). That has stakeholders upset and concerned about whether it is holding back Wyoming's crypto industry, according to recent interviews with Wyoming Business Report.
Now, more than a year after approval for SPDI charters from the Wyoming Division of Banking, both Kraken and Custodia banks have been issued routing numbers in what is an essential first step toward eligibility for federal master accounts. And the wait continues for what industry proponents had assumed would be an administrative function, but instead has become a process mired in uncertainty.
“Wyoming applicants have been significantly mistreated by both the Federal Reserve and the American Bankers Association,” said Caitlin Long, founder and CEO of Custodia Bank. “They both have subjected Wyoming entities to disparate treatment relative to other applicants.”
The Fed's application for a master account when Custodia applied stated, “Process may take 5-7 business days,” she said.
“It has been nearly 18 months and counting since Custodia applied,” Long said.
Since Custodia and Kraken applied, the “5-7 days” language has been removed from the application, she added. Similarly, Long said, the ABA routing number application still states that the application will take two weeks to process.
“In Custodia’s case, it took 15 months to process, and in Kraken’s case, it took 17 months,” Long said of the routing number approval.
While the delay has impacted the SPDIs by limiting their operations, Long said there has been a greater impact on the state.
“This is a shame, because many household-name financial technology companies are seriously considering a move to Wyoming if Custodia and/or Kraken can break through with the Federal Reserve,” Long said. “The revenue potential to the state would be significant if those companies move to Wyoming. It’s worth fighting for.”
Discussing her concerns over political influence in decisions made by the Fed under the Biden administration in an April 1 opinion piece for Americanbanker.com, Sen. Cynthia Lummis, R-Wyo., was critical of the delay faced by Wyoming SPDIs.
"My home state of Wyoming has also suffered from a Federal Reserve that has consistently failed to follow the law and has frustrated responsible innovation,” Lummis wrote. “Wyoming’s special-purpose depository institutions are the first attempt to responsibly integrate digital assets into the U.S. banking system and are entitled to access to the Federal Reserve’s payment system as a matter of law. Even though Congress has imposed a one-year deadline on all Fed applications, nearly two years later, Wyoming institutions are still awaiting approval to access the payment system." (Lummis had no further comment for this article.)
In his January confirmation hearing before the Senate Banking Committee, of which Lummis is a member, Fed Chairman Jerome Powell discussed the reasons for the denial of master accounts for Wyoming SPDIs.
Powell said in studying the SPDIs closely, there may be “good arguments” for granting non-Federal Deposit Insurance Corp.-insured SPDIs Fed master accounts. He added that the Fed is taking time to consider the SPDI applications because approval would be precedent setting. (The Federal Reserve Board of Governor's office had not responded to a request for comment or a status update on the Wyoming SPDI applications as of press time.)
“We start granting these, there will be a couple hundred of them pretty quickly, and we have to think about the broader safety and soundness implications,” said Powell.
State Sen. Chris Rothfuss, D-Laramie, was among the legislators who wrote the SPDI legislation. He said legislators carefully wrote the charter law to ensure it met federal regulations and with strict oversight by the Wyoming Division of Banking.
While SPDIs don’t qualify for FDIC insurance required for Fed master accounts, Rothfuss said recently that SPDIs are required to have liquid assets valued at least 100% of their depository liabilities. This was discussed with the Fed as the legislation was developed, he added.
“It seems like we're being played,” Rothfuss said. “We tried to come into this discussion honestly with the intent of finding a reasonable approach, having sufficient regulatory oversight and doing all of our due diligence. But the Federal Reserve has certainly not upheld their responsibilities.”
At this point, Rothfuss said he regrets that a clause that would have required the state to file a lawsuit against the Fed in this kind of circumstance was removed from the legislation to avoid friction with the agency.
Other state officials are also concerned about the situation.
The state attorney general and the governor’s office have expressed displeasure with the slow movement on the SPDI applications and have encouraged their approval, said Michael Pearlman, spokesperson for Gov. Mark Gordon.
“The governor continues to have conversations with both the Federal Reserve Bank of Kansas City and the Federal Reserve, really pressing for answers as to why these delays have been occurring,” Pearlman said. “His biggest frustration is how this is disadvantaging Wyoming businesses.”
He said Wyoming Attorney General Bridget Hill sent a letter last December to the Federal Reserve Bank of Kansas City, urging approval of the SPDI master account applications and seeking clarification as to the reasons for the delays, especially as legislators had consulted with the Fed in developing the charter legislation.
Hill noted that federal regulators appear to have allowed higher-risk competitors in digital asset banking to have master accounts with less stringent reserve requirements. Hill wrote that the state’s position is that SPDIs meet all the requirements for master accounts, and says the Fed doesn’t have discretionary power to deny issuing them to Kraken and Custodia. She asked that any concerns should be communicated to the state and applicants.
“We relied on your previous interactions with our Legislature and other officials in crafting our law and believe our law to be within the bounds of federal law and regulations,” Hill wrote. “My office and the people of Wyoming are obviously concerned that SPDIs, validly chartered under Wyoming law, be treated fairly.”
At press time, Hill said that there had been communications with the Fed since the letter, and that issues presented in the letter were still "open."
Speculation that the SPDI application process is being slowed due to concern over the volatility of cryptocurrency; fear that SPDIs could lead to fractioning of financial regulatory structures and the status of the U.S. dollar; the desire of traditional banking to get the same considerations as SPDIs, or states hoping to diminish Wyoming’s lead in digital asset banking is just that – speculation, said professor Julie Hill of the University of Alabama School of Law.
Transparency isn’t something that the Fed practices when it comes to actions like master account applications, said Hill, an expert on financial institution regulation.
“Transparency in banking broadly is something of a balancing act,” Hill said. “Of course, we want bankers to understand that if they share with their regulators their trade secrets, that regulators aren't going to turn around and tell those trade secrets to their competitors and undercut them. So, in some sense, it's good that regulators want to keep bank confidential information somewhat confidential.”
But in the case of the SPDI applications, she thinks that confidentiality “just goes way too far.”
“When you apply for a bank in Wyoming, or if you apply for a nationally chartered bank, at least part of your application is public,” Hill said. “The public gets to see the process in Wyoming. You get to have a public hearing, and you can go watch it, if you want to. There's typically also some sort of public decision on who got the charter. So, there's a list of actions I can go look at.”
There’s not a similar structure with the Fed, she said, which makes it hard for everyone involved to feel like they’re getting a fair shake.
“There's no list of who they give master accounts to, at least not that the public can get to easily,” Hill said. “Bankers have an easier way of finding it out, but there's no list. There's no list of people who are denied an account. There's no public understanding of why. They don't even tell people when it’s decided that they're legally ineligible."
Hill said if the Fed did tell Wyoming what the problem with the SPDIs is, “it might be that Wyoming could think of a better, safer way to do it.”
Editor's note: Professor Julie Hill's husband is a cousin of Wyoming Attorney General Bridget Hill. Professor Hill also noted that she is not related to Drake and Cindy Hill (the latter of whom was a former state superintendent of public instruction) or William Hill (the former Wyoming Supreme Court justice).