At the start of October, Wyoming opened the floodgates to a new type of financial institution that represents a shift bigger than the one from banks to credit unions. While legislators and many businesses welcome the change and see it as an opportunity, some in the banking industry are none too happy, and others even see it as a financial threat.
Going in headlong
As of mid-September, Caitlin Long – a member of the Wyoming Blockchain Coalition – expected five new financial Special Purpose Depository Institutions to apply on the Oct. 1 opening of the chartering process. The opening day marked the beginning of a new kind of financial institution in the United States.
An institution not backed by the FDIC, but instead by liquid assets in-house. An institution that can deal in cash or virtual currency. An institution not bound by the typical bureaucracy behind the banking industry.
“Intricate obligations have resulted in many financial institutions in Wyoming and across the United States refusing to provide banking services to blockchain innovators and also refusing to accept deposits in United States currency obtained from the sale of virtual currency or other digital assets,” read the text of Wyoming House Bill 74, the 2019 bill that allowed for SPDI banks.
The bill goes on to state: “Authorizing special purpose depository institutions to be chartered in Wyoming will provide a necessary and valuable service to blockchain innovators, emphasize Wyoming’s partnership with the technology and financial industry, and safely grow this state’s developing financial sector.”
The bill also requires each charter to start up with at least $5 million in capital stock. And it bars them from working directly with consumers.
Still, the five companies that expressed their intention to apply for a charter in Wyoming, Long said, will probably contribute $4 million in tax revenues in the first year. As the state struggles to make ends meet with its floundering budget, that’s welcome news for lawmakers, who voted for the bill “despite serious opposition from local bankers” who saw it as a bad idea.
“The legislators are all taking heat from bankers back home, so it was a courageous vote!” Long wrote on Twitter when the bill passed.
Feeling the squeeze
“I think it’s a great opportunity,” Wyoming State Rep. Shelly Duncan, R-Torrington, said in a phone interview. She pointed out that SPDI banks will serve companies in new territory like blockchain and cryptocurrency that many think are high-risk. Simultaneously, though, the SPDI banks offer “ordinary, profitable businesses” a place to bank if the Federal Deposit Insurance Corporation forces a standard bank to shut down its accounts.
The kind of shutdown Duncan is referring to hearkens back to “Operation Choke Point,” an Obama-era rule at the Justice Department. Choke Point sought to kick “out of favor” industries like paycheck lenders, coal companies, pawn shops, firearms dealers and blockchain businesses out of FDIC-insured banks. The operation even forced some out of business, since IRS regulations require withholding taxes to be paid via a bank account.
“Choke Point consisted of bureaucrats in several independent federal agencies taking it upon themselves to shut legal businesses – such as payday lenders and firearms dealers – out of the banking system,” wrote Forbes contributor Norbert Michel in a 2018 article. “Given the nature of the U.S. regulatory framework, this operation was easy to pull off.”
While the operation has since been reversed legislatively, many remaining in the industries foresee more banking problems in FDIC-insured banks. That opens a need for an alternative, some posit. And Wyoming now allows for that with SPDI banks.
“They’re at risk of not meeting payroll because the federal government decides they’re high-risk,” Duncan said, referring to industries like coal companies and firearms businesses – both of which have a strong footprint in the state.
SPDI charters don’t require backing by the FDIC, instead relying on a 100% cash reserve for any and all “depository liabilities,” whether they be cash or other assets like the well-known, but less widely understood, bitcoin.
Duncan voted for the bill that allowed for SPDI banks. At the time, she was hearing from banks who didn’t want the so-called SPDI banks referred to as banks. So, on the books, they are “institutions,” despite the vernacular now used to describe them.
“The only feedback I got was from bankers,” Duncan said. “The comment I got was, ‘Remember, we got the same pushback from bankers when credit unions were formed, because change is hard.’”
She didn’t elaborate on the banker feedback she got beyond that.
But one proposed amendment coming from Rep. Dan Furphy, R-Laramie, tried to eliminate the ability for SPDI banks to refer to themselves as banks at all.
“A special purpose depository institution may not advertise itself as a bank,” the proposed amendment stated.
The language now used reads, “No person or entity shall advertise, issue or circulate any paper or exhibit any sign using any of the terms ‘bank,’ ‘banker,’ ‘banking,’ ‘special purpose depository institution,’ or words of similar import, or use the name of any other financial institution … until they have fully complied with this act.”
In other words, terminology like “SPDI banks” is likely to stick once the SPDI chartering process is completed. That process is likely to take nine months, Long said.
The most prominent of the companies applying to set up a SPDI bank is Kraken, a cryptocurrency exchange from San Francisco. Company officials didn’t respond to an emailed list of questions prior to press time after missing a phone interview window to talk about coming into the state.
One reason virtual currencies haven’t achieved full acceptance is their ties to the underbelly of society. Drug dealers and others with seedy reputations use bitcoin, et al, to launder money from dirty operations. This practice has brought a federal crackdown in the space, including laws pertaining to money laundering, customer identification and beneficial ownership. These laws, the legislation points out, will need to be followed by SPDI banks.
Beyond that, every SPDI bank will be required to have a physical footprint in the state. This measure was designed to bring in new jobs to the state while also fighting the tendency for Wyoming to be used as a “shell home” for businesses across the U.S.
“It’ll bring new industries and employees to the state,” Duncan said, including a projected 55 employees at WYo Financial, where she now sits on the board.
Duncan joined the board of WYo Financial after receiving much of her blockchain education from its founder while trying to decide whether to allow it into the state. One thing led to another, and WYo Financial needed a real-estate expert on the board to pursue opportunities in that direction. Duncan’s day job is running Double D Real Estate & Associates in Torrington.
Duncan said she attended the Wyoming Hackathon recently, and there saw the possibilities for Wyoming’s open-arms policy when it comes to digital currency and blockchain industries, including the SPDI banks. She said she’s seen the number of people getting excited about the potential and talking about starting something new in Wyoming, which has already been attracting big players in the virtual currency world like billion-dollar player Cardano.
“We’ve never been considered for the digital industry before, so that’s exciting,” Duncan said. “Rather than being Denver, Seattle, Salt Lake City, they’re looking, engaging and talking with us here in (Wyoming).”
One of those people is the founder of WYo Financial, Jeremy Drzal, who has already moved to Cheyenne from Austin, Texas, as he begins the chartering process. The company’s website, little more than a landing page currently, calls it “the innovators bank.”
Drzal has a 25-year background in the financial technology space. His global consulting firm ended up vetting the roadmaps to incorporating blockchain into transformation strategies. As such, he had a lot of investment opportunities in the space as he helped others design and launch token-based enterprises. Tokens are a digital representation of a physical asset or service being used increasingly to sell things on blockchain technology.
“The biggest challenge we found is a proper jurisdiction to domicile and get banking services,” Drzal said in a phone interview. “We went to Cayman, Bermuda, Malta, Singapore – the usual places.”
But Wyoming’s law brings it back home.
“I was directed to look at Wyoming’s activities and came to Casper for the Minerals Committee,” Drzal said. “I was amazed at the passion the state had and the knowledge legislators had and how fast they were able to move.”
When Wyoming’s landmark blockchain laws, including the SPDI bill, passed in the 2019 legislative session, he saw an opportunity behind a framework he believes will advance the technology and blockchain services in general far beyond the banking industry.
“We’re bringing in the traditional financial services world with the blockchain world and bridging the gaps between the two,” he said. “It’s being able to enable.”
Innovation, he said, should follow as entrepreneurs, startups and enterprise providers start to jump on board with SPDI banks, which aren’t allowed traditional banking customers.
He said he hopes the changes Wyoming has put forth will transition the blockchain landscape from the “Wild West” to “widely accepted.”
“There was the Wild West a few years ago, but the players that didn’t weather the storm of the last 12 months or so are now ready for the next phase of this, and [banking] is a big missing space,” Drzal said.
As Duncan said, change is hard in any industry. And for some, that means opposition to this new territory Wyoming is staking a claim in.
“Why digitize?” Jackson doctor Kathryn Sobieski asked in an email to the Business Report in response to an article detailing Wyoming’s plans to tokenize and digitize real estate purchase and even identities. “Simple is easier to control.”
In her point of view, the tokenization of assets has already occurred in the physical realm with things like titles and deeds, making it a moot point in the digital realm.
“The average person can understand an institution or a central record office holding their asset,” Sobieski said. “They cannot grasp the nebulous spread of it on multiple computers.”
She added that many successful people she knows lost hundreds of thousands of dollars in the cryptocurrency craze, which she said seemed “Darwinian,” or survival of the fittest.
“The human condition has always been to look and to move forward,” she wrote. “With this, there is often the one step back involved. Maybe some side excursions, too.”
She sees Wyoming’s path forward toward the digital industries like blockchain and virtual currency as “a dearth of skepticism and high-level critical thinking.”
But Wyoming and stakeholders in SPDI banks are seeing the path forward as little more than a boon, as of now.
“What Wyoming has done has been to put a stake in the ground not just for the state and the U.S., but for the industry,” Drzal said.
At the state level, optimism runs high that the steps forward will outweigh any inadvertent steps backward.
“I’m really excited about all the opportunities this gives Wyoming,” Duncan said.