Cryptocurrency’s Wild West is in Wyoming

Representations of cryptocurrencies Bitcoin, Ethereum, DogeCoin, Ripple, Litecoin are placed on PC motherboard in this illustration taken, June 29, 2021. REUTERS/Dado Ruvic/Illustration

WASHINGTON, July 7 (Reuters Breakingviews) – U.S. cryptocurrency businesses are riding out to the Wild West of Wyoming. The cowboy state has revamped financial rules to attract bitcoin startups, putting it ahead of the Federal Reserve and other D.C. regulators. But the measures for bitcoin banks are untested, making it the venue for crypto’s first big rodeo.

Wyoming is trying to diversify beyond old school industries like coal, oil, and gas. In 2019, it came up with a charter for banks that deal mainly in digital assets called a special purpose depository institution. So far the state has approved three applications, including one to bitcoin trading platform Kraken Bank and another last month to Wyoming Deposit & Transfer.

The charters allow banks to have two parts. First, there’s the traditional aspect: Customers can make cash deposits. Then there is the bitcoin part, where customers can store or transfer cryptocurrencies that may be traded on Kraken’s exchange. They can also deposit the winnings, if those exist, into the bank after it is converted into U.S. dollars.

The latter allows customers to more seamlessly put converted bitcoin into an account without tapping a middleman like JPMorgan (JPM.N), and the additional fees that come along with that. The Wyoming charter also gives banks the right to hold the bitcoin “key,” or the unique code that allows bitcoin owners to access their digital assets.

The trouble is that the bank itself doesn’t have the full backing of traditional banks. Because of the cryptocurrency aspect, fiat deposits aren’t backed by the Federal Deposit Insurance Corporation though the firm has to retain liquid assets that fully cover those holdings. And it’s unclear if the bank will get typical privileges with the U.S. Federal Reserve, which allows the bank itself to not only safely park deposits at the central bank but transfer money in an efficient way.

And while bank charters should enable Wyoming authorities to check up on the security of a network, the digital currency market will have unforeseen challenges. Unlike a bank that stores a social security number, say, and has several steps before an account can be drained, it isn’t hard to imagine a situation where a hacker gets her hands on several bitcoin codes and leaves depositors with empty accounts.

Still, the U.S. government isn’t exactly organized on the matter. Agencies are squabbling about who should take control of the banking aspect of cryptocurrencies. Becoming the John Wayne of the digital currency market is an unusual look for Wyoming, but someone has to have a pioneering spirit.

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– Wyoming-based Kraken Bank, the first digital currency business to receive a U.S. state banking charter, hopes to launch in the second half of 2021. It is waiting for a response from the Federal Reserve Bank of Kansas City on its application for access to a central bank master account and payment services.

– Wyoming revamped its rules in 2019 to establish a new kind of bank charter called the special purpose depository institution. Firms that deal mostly in digital currencies can apply for such a charter, which requires them to be fully reserved and generally prohibits lending using customer deposits of fiat currency.

– For previous columns by the author, Reuters customers can click on

Editing by Lauren Silva Laughlin and Amanda Gomez

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