Even more than legislation supporting digital assets in the future of finance, it may be Wyoming’s culture that attracts fintech to this state.
“The underlying values of Bitcoin and digital currencies really align well with American values. And those are values that Wyoming cherishes,” said Kraken Financial CEO David Kinitsky, who moved his family to Wyoming in 2020.
In mid-September of 2020, Wyoming’s State Banking Board approved Kraken’s special purpose depository institution charter, making Kraken the first cryptocurrency bank in the United States. Wyoming has spent the last three years developing expertise in digital assets and the future of finance, according to U.S. Sen. Cynthia Lummis’ office, and in 2019, the Wyoming Legislature passed HB 74, which created SPDIs as a new custodial bank charter to “responsibly integrate digital assets into the U.S. financial system.”
“Things like individual liberty, freedom of speech, assembly and property rights; those things do not exist on the internet or in the digital world,” Kinitsky said. “Cryptocoin is the first tool we have to instill those American, Western values in the cyber world. Those types of things resonate with Wyoming, more so than in other states. Kraken very much aligns with individual liberty in finance, and financial freedom.”
For those new to the cryptocurrency world, fintech is simply a combination of two words: finance and technology, and cryptocoin, the most widespread version being Bitcoin, is a decentralized digital currency. It can be bought, sold and exchanged directly, without an intermediary like a traditional bank or financial institution. Launched in 2009, one bitcoin was selling for $50,000 in the spring of 2021, although Bitcoin is not issued by or backed by any bank or government.
Its growth indicates digital currency is likely here to stay.
“Cryptocurrency … will it last?” Albert Forkner, commissioner of the Wyoming Banking Division, said. “I think so. We are already fairly digital in our transactions anyway, if you think of how many people just don’t use cash that much.”
Cryptocurrency is a digital asset without an intermediary, he said.
“Right now, if you take a credit card or a debit card, there is still a central bank behind that. Whereas digital assets break that down,” Forkner explained. “It’s not tied to one specific country’s currency, like the dollar, the Euro … I do think that will eventually take over, although I don’t think it has quite found its footing yet.”
While decentralization may be behind the cryptocoin push for some users, regulation, oversight and direction is still necessary. In May, the United States Federal Reserve announced the opening of a comment period for proposed “Account Access Guidelines for the Reserve Banks,” a critical step toward approval of Wyoming-chartered SPDIs like Kraken. SPDIs are custodial banks for digital assets that provide safekeeping and on- and off-ramps to the capital markets.
Wyoming’s digital asset framework is the first comprehensive set of digital asset regulations in the U.S., according to Lummis. Wyoming’s guidelines address issues like custody, Bank Secrecy Act/sanctions compliance, valuation, capital management and information technology risk.
The state’s granting of Kraken’s SPDI was “one of the main drivers” of Kraken Financial’s move to Wyoming, Kinitsky said.
“We are a fintech and crypto company, and the fact of the matter is that the U.S. has not provided clear or appropriate regulatory and licensing frameworks. Wyoming moved to fill that gap, and this is just the type of charter that we needed,” he said. “It addresses exactly what a crypto- and fintech company does, and the nation needs that clarity.”
Wyoming’s new bank charter is really a blending of digital assets into traditional financial services, Forkner said.
“People use the term cryptobank, which is not quite right. It facilitates an on- and off-ramp into the crypto space, but our SPDI is still a bank charter,” Forkner said. “The deposits it takes are in fiat, or U.S. dollars.”
What Wyoming has done, he continued, is create a custody system for digital assets.
“People can open an account and put $1,000 in deposit, tell the SPDI to go out and buy Bitcoin and hold on to the private key. That is the custodial relationship,” he said.
Traditional banking activities aside, the Banking Division has created a framework for focusing on safety and verification of digital assets.
“Wyoming has said, ‘If you’re going to take custody of digital assets, here’s how you do it.’ If it is in an SPDI, a bank we regulate, we would start examining to make sure they are following the law,” Forkner said. “We put out regulations to ensure they are abiding by the regulations, and we actually created a whole new examination manual that hadn’t existed anywhere in this country to lead our examiner through the digital assets activity examination.”
Many digital currencies have morphed into investment opportunities, as opposed to currencies, in that they have a better stored value, rather than value as a means of exchange.
“There are two camps. Some would say, ‘Not your keys, not your coin.’ That means that if you are not interested in holding on to the private key yourself, and the private keys are the access to that (currency), do you own it?” he said. “But other people are like, ‘I don’t want to hold onto that because maybe I will lose it,’ or some people are getting into hedge funds or retirement and diversifying their portfolio and using digital assets.”
For that, investors need what is called a qualified custodian, or a firm like an SPDI with strong security and reporting standards, regulated by an agency like the Wyoming Banking Division.
“That is a different purpose than some people want cryptocurrency to be. There are people who want to hold on to digital currency. They are not going to Walmart and buying things with their Bitcoin, although there are ways you can do that. Right now, this idea of custodians holding onto and protecting that on behalf of clients is what Wyoming is doing,” he said.
When it comes to the two schools of thought, Kinitsky said they’re not really all that different.
“They really are the same side of the same coin. We only exist because we are serving customers and consumers, and empowering them to control their own financial freedom,” he said. “That is our business, and that’s why we are a fast-growing business differentiated from traditional banks, who are the middle man, who control where your money is, who you can send it to and when. Our business model is giving customers more choice and more freedom.”
Wyoming’s move to become a cryptocurrency hub is similar, Forkner said, to what South Dakota did in the early 1980s, attracting the credit card industry to a rural state.
“These large banks that were headquartered in New York, South Dakota made it attractive to where credit card companies wanted to set up operations there and created a niche market. This is similar, to provide an opportunity for digital assets to look at Wyoming,” Forkner said. “What kind of revenue will we get? I don’t know. It is hard to tell at this point.”
Kraken is headquartered in Cheyenne with a physical office, and the company is looking to expand, Kinitsky said.
“We’re looking to build and invest in the community. In addition to jobs within, we’re hiring local attorneys and local tax people, local contractors and local consultants. We’re looking to build an ecosystem here, and we have sponsored events like the UW Hackathon,” he said.
“We are trying to attract other institutions here,” Kinitsky said, “because it is in our interest, as well as Wyoming’s interest, to build the talent pool and build the economy for crypto-financial services.”