The United States is now politically divided into red and blue states, and increasingly it seems to be breaking up into cryptocurrency-friendly and crypto-cautious areas too. On February 21, it was announced that San Francisco-based Ripple Labs had registered as a Wyoming company. Wyoming is arguably the blockchain and cryptocurrency-welcomed state in the United States.
Meanwhile, a few days later, the New York State attorney general announced an agreement on the bureau’s longstanding investigation into crypto trading platform Bitfinex for illegal activity. As a result, Bitfinex and its Tether affiliate are required to pay $ 18.5 million in damage to New York State and undergo regular reporting of their reserves.
Wyoming and New York – with the exception of the crypto regulatory spectrum – both made industry headlines in the same week. The irony was not lost on Timothy Massad, former chairman of the U.S. Commodity Futures Trading Commission and now a senior fellow at Harvard University at the Kennedy School, the Cointelegraph told:
“Federal regulation of crypto assets is like Swiss cheese – full of holes – and that has led to a smorgasbord at the state level as Wyoming actively attracts crypto companies and the New York attorney general takes aggressive enforcement actions like we did this week at Tether and have seen Bitfinex. “
Whether this “smorgasbord” is a good thing is controversial. Crypto ports like Wyoming can be centers of innovation and further advance a potentially revolutionary technology, as recently-elected US Senator Cynthia Lummis pointed out in a Chamber of Digital Commerce panel discussion with Miami’s Mayor Francis Suarez, another crypto enthusiast, this week .
A complex material
But it also creates regulatory uncertainties that lead entrepreneurs to high blood pressure. Stephen McKeon, Associate Professor of Finance at the University of Oregon, told Cointelegraph, “Our regulatory system is a complex set of agencies at both state and federal levels.” He added that “they focus on the issue of crypto assets have to vote because this asset class is not properly coordinated with the existing regulatory structure “.
When asked if Ripple and others were making a wise move from a business perspective toward registering in crypto-warm states like Wyoming with higher levels of regulatory security and freedom and lower taxes, McKeon added, “Corporations are striving to regulate reduce uncertainty. If moving to Wyoming helps achieve that goal, then this is a wise move. “
Others could follow Ripple. Zachary Kelman, managing partner at Kelman Law, told Cointelegraph: “Many crypto projects fled New York after the onerous BitLicense was introduced in 2015. I expect more projects to be relocated in Wyoming as well as other crypto-friendly states like New Hampshire. ”
Wyoming caused a stir in 2019 when its legislature approved the creation of SPDIs (Special Purpose Depository Institutions) that can receive both deposits and custody items, including cryptocurrency. The state’s banking division itself acknowledged that “it is likely that many SPDIs will focus heavily on digital assets such as virtual currencies, digital stocks and utility tokens,” although they could look at traditional assets as well. However, SPDIs cannot lend like traditional banks.
Kraken Bank was the first company to receive a Wyoming SPDI Bank Charter in September 2020, followed by Avanti Bank and the Trust in October. There are “three more [SPDIs] in preparation, ”said Lummis at the Chamber of Digital Commerce event on February 25th. Avanti founder and CEO Caitlin Long had previously suggested that the Wyoming SPDIs may be “a solution to the #BitLicense problem” that crypto companies are facing because “New York law is banning national banks from the BitLicense exempt “.
Although the SPDIs in Wyoming are state-chartered institutions and not national banks, “federal law continued the parity of national banks and state-chartered banks,” Long continued, using this logic to conclude that SPDIs were “a passport for about 42 people represented US states without an additional state [crypto] Licenses. “
An accident waiting to happen?
However, not everyone is enthusiastic about Wyoming’s new specialist banks. The Bank Policy Institute suggested that the Wyoming SPDIs could be an “accident waiting to happen.” The BPI noted in September that Kraken was “the first digital asset company in US history to receive a federal and state-recognized banking charter,” but warned that its business model was “inherently unstable under stress is “since the new bank is funded by uninsured, claimable retail deposits” and relies on a pool of assets such as corporate bonds, munis and longer-term government bonds to fund redemptions under stress. “
David Kinitsky, CEO of Kraken Bank, said in an interview with Cointelegraph that he believed the BPI blog post was “from a lobbying group that is funded by and works for the largest banks in the world” and “on one.” Series of errors is based on “assumptions”, adding:
“[It’s] It’s weird and hypocritical that they should think that their partial reserve model, along with its complete reliance on asset exposure and the interest rate environment, is less risky than a full reserve custodian that does not lend and has a variety of related sources of income. “
Others argue that innovation centers like Wyoming are merely filling the void left by the federal government, which is not yet adopting a coherent stance on the burgeoning crypto market. Benjamin Sauter, attorney at Kobre & Kim LLP, told Cointelegraph: “Wyoming shows that individual states can play a significant role in creating a coherent legal framework for the crypto / blockchain industry – particularly with regard to state taxes, as well as commercial and some banking problems. ”
In comparison, the US federal government has “made no real effort to create such a framework and this has created a lot of regulatory inefficiencies and general confusion”.
Innovator or loophole?
So what about the idea that Wyoming merely created a means for its new banks to attract businesses and investors based in more regulated states like New York? Speaking to Cointelegraph, Kelman said, “Many institutions have businesses around the world, not just in the US. New York is responsible for New Yorkers – but not a company affiliated with any company that operates there. ”
“Wyoming can and will become a hub for crypto business and innovation,” Kinitsky told Cointelegraph, adding, “Certainly there are similar examples of financial services like the credit card industry in South Dakota and ILC banks in Utah across the country and with similar frameworks international activity. “
McKeon agreed that Wyoming was following the South Dakota game book: “South Dakota introduced favorable laws for banks on interest rates and fees in the 1980s and now has one of the highest concentrations of banking assets in the United States.”
“By creating an environment in which crypto projects can operate with a higher level of regulatory security and freedom, Wyoming is likely to attract a similar shift within crypto.”
Will others join in?
Of course, other states could follow Wyoming’s lead. Kelman said, “I also expect larger states like Florida to be more crypto-friendly, especially following the overtures of Miami Mayor Francis Suarez to the crypto community.” He went on to stress, however, that “given Wyoming’s small size and relative obscurity, I don’t know if it will remain an industry haven like Delaware has for business creation and governance.”
As reported, Mayor Suarez is trying to develop some of the “most advanced crypto laws” and to propose innovations in his area of responsibility, such as paying city workers’ wages in Bitcoin (BTC) and buying BTC for the treasury. Senator Lummis welcomed the mayor’s initiatives on the Chamber of Digital Commerce’s panel, calling on him to “see and build upon the Wyoming legal framework” by developing new bitcoin components, including a retirement plan for Miami workers which also owns Bitcoin – something Suarez is researching.
Several innovative centers like Miami and Wyoming could drive technological advancement across the board, she suggested. For his part, Suarez said, “One of the things we want to do is mimick Wyoming’s very successful integration of crypto into their community.”
Meanwhile, Avantis Long remains a passionate booster for their state: “Why should crypto companies redomicile to Wyoming?” She rhetorically asked about the news on Feb.21 that Ripple Labs had registered as a limited company in Wyoming, adding:
“No state corporation tax, no franchise tax, crypto exempt from property and sales tax, our trade laws clarify the legal status of crypto, crypto-friendly banks to open soon, access to crypto-open government / legislators / US Senators – all laws open source. ”
Is Wyoming good for BTC adoption?
What exactly do these tech-friendly states and cities mean for the introduction of cryptocurrencies? Sauter was cautiously optimistic: “It is possible that Wyoming’s efforts will have some impact if the federal government ever works together.” He went on to explain that there is also a major risk as companies “are lulled into a false sense of security and potentially conflict the Wyoming regime for federal compliance”.
Kinitsky told Cointelegraph that the convergence between crypto and banking, as is happening in Wyoming, “marks an important step towards mainstream adoption,” while McKeon added that crypto users “are primarily concerned with access to products and features Better products lead to increased adoption. “If Wyoming-type legislation allows crypto projects to” provide new and desirable functionality by reducing regulatory risk to providers, it will be a positive force for widespread adoption. ” .
However, many still seem to be standing on the water until the federal government acts to give the nascent blockchain and cryptocurrency industry a legislative / regulatory structure. According to Sauter, “There is only so much a state can do as Wyoming’s recent actions are great and encouraging.” Massad also said to Cointelegraph:
“This regulatory confusion leads to higher costs and uncertainties. There is still a lot of money and talent going into crypto innovation in this country, but we need more regulatory clarity to ensure investor protection, financial stability and responsible innovation. “