The global market size for cryptocurrency is expected to jump from $754 million in 2019 to $1.758 billion by 2027, according to a Fortune Business Insights analysis.
Heeding those projections, Wyoming lawmakers placed the state in a prime position to capitalize on the digital asset market by passing a series of laws that paved the way to bring the nation’s first digital asset bank to Wyoming. With so many pivoting to this class of digital investments, the services provided by a digital asset bank, more formally known as a Special Purpose Depository Institution (SPDI), will be vital.
A number of individuals and investment firms already own digital assets like cryptocurrency, though they have to control and manage those assets themselves, similar to keeping cash in a drawer, rather than a bank. As things are now, most vendors don’t accept cryptocurrency as payment, so such investors need to liquidate their crypto assets on third-party exchanges in order to make a purchase.
But with two Cowboy State SPDIs having already been approved – the only two in the nation – Wyoming is offering a solution to both those issues going forward.
“This is the first example in U.S. history of digital assets like Bitcoin being brought into the U.S. banking system. That’s the reason there was a bit of an earthquake when we did it,” Wyoming Banking Division Attorney Chris Land said.
Cryptocurrencies like Bitcoin are bought on exchanges run by third parties, similar to the New York Stock Exchange. But in order to use Bitcoin for spending in America, it would need to be converted back to U.S. currency through the exchange, though some businesses like PayPal already offer options to pay with cryptocurrency.
Steve Lupien, the director of University of Wyoming’s new Center for Blockchain and Digital Innovation, said he expects the approved SPDIs to offer more traditional banking services for cryptocurrencies down the line, including debit cards or checking accounts that will increase the ease of use for this class of digital assets.
Because of federal regulations, crypto exchanges aren’t able to carry out any of those services. But the Wyoming SPDI legislation ensures digital asset banks will carry out such services with the same level of security as traditional banking institutions.
“Exchanges are generally not regulated; they’re private businesses. ... Banks are different. They have to prove to a regulator that their systems are secure,” Lupien said.
Though they can’t issue loans like a traditional bank, SPDIs are still required to meet the high standards of a traditional institution: 100% of their digital assets must be backed by reserves in order for the assets to remain liquid, and they must provide the state with $15 million upfront, in order to make customers whole if the digital asset bank were to go under.
Of Wyoming’s two approved SPDIs, Kraken will focus more on the individual consumer, while Avanti will address the needs of the institutional investor.
Kraken currently runs a crypto exchange, which Lupien said is one of the most secure in the world. Its expansion into banking follows suit with such high levels of security, where consumers on the exchange will also be able to utilize banking features.
While Kraken’s SPDI won’t necessarily change the crypto offerings for the average consumer, institutional-focused Avanti will open a new class of investment for things like university endowments and pensions. Without digital asset banks, institutional investors wouldn’t be able to invest in digital assets, since a third party is required to oversee investments over a certain level.
With no traditional bank having the authority to invest digital assets, Avanti will fill that niche.
“This is a legitimate asset class for institutional investing, and without a third-party custodian, these companies are limited to how much they can invest in this class,” Lupien said.
While banks do have the authority to have custody of digital assets, Lupien said the Federal Deposit Insurance Corporation, or FDIC, won’t insure banks that choose to take that route, which leaves a big hole for SPDIs to fill.
Industry pioneer Caitlin Long – a Laramie native and Avanti founder – previously told the Wyoming Tribune Eagle that the FDIC didn’t want to expose traditional depository institutions like banks and credit unions to the volatility and risks of digital assets.
But both Long and Lupien said that isn’t necessarily a bad thing for the state of Wyoming, especially as the state looks to capitalize on the technology industry, given the decline of oil and gas.
“The way I look at it is we have a multi-year head start on other banks, because they will be prohibited from pursuing this while Wyoming’s digital asset banks are getting up and running,” Long said.