Caitlin Long on Bitcoin, Repo Fiasco, Blockchain And Rehypothecation (#GotBitcoin)

Leaders Series: Caitlin Long at the Wyoming Blockchain Coalition. Caitlin Long on Bitcoin, Repo Fiasco, Blockchain And Rehypothecation (#GotBitcoin)

Caitlin Long on Bitcoin, Blockchain And Rehypothecation (#GotBitcoin?)

Caitlin Long is the Co-Founder of the Wyoming Blockchain Coalition

 While president of Symbiont she jointly led its index data project with Vanguard.

Related:

Caitlin Long Reveals The ‘Real Reason’ People Are Selling Crypto

Texas Crypto Law Proposal Has One Major Flaw In Regards To Bitcoin Loans/Liens Says Caitlin Long, CEO

Ultimate Resource On Stablecoins

Flight To Money Funds Is Adding To The Strains On Banks

California Legalizes Public Banking!!!!

Caitlin is a Wyoming native, and recently launched the Wyoming Blockchain Coalition which helped pass five bills into law. These bills are laying the foundation to make Wyoming the epicenter for cryptocurrency firms and blockchain technology companies.

How Did You Get Into The Crypto / Blockchain Industry?

In 2012 I came across bitcoin in Austrian School economics circles. But I didn’t act on it right away, just as most people don’t when they first hear about bitcoin. It’s bewildering at first, and it takes time and repetition to sink in. Then, in February 2013, I was flat on my back for days recovering from surgery when an article by Jeffrey Tucker hit my inbox. It contained some “how to” advice about bitcoin, and I remember thinking “it’s finally time to figure this thing out.” That day I set up my first wallet.

What Did You Do Before You Got Sucked Down The Blockchain Rabbit Hole?

Before jumping to blockchain full-time in 2016, I’d spent 22 years on Wall Street in various senior roles (most recently as head of Morgan Stanley’s pension business). Initially I felt pressure to keep my bitcoin interest quiet, as a manager inside an investment bank — but gradually felt more comfortable and started participating in an internal bitcoin forum. Morgan Stanley’s CTO saw that, and out of the blue in 2014 he called to ask me to join his blockchain working group. From there it wasn’t long before I had one foot out the door to pursue blockchain full-time — it was a gradual process, but by 2016 I was all-in.

What Was Your Motivation In Starting The Wyoming Blockchain Coalition, And Why Do You Feel Passionate About This?

My passion is honest ledgers. That must sound odd and tremendously boring to your readers. But most folks don’t realize that the financial system’s ledgers are not honest. When I figured this out, it was like a betrayal — a punch to the gut — that made me question my chosen profession. But it’s true. We do not have a fair and honest financial system. One reason is that Wall Street’s accounting systems are rarely in sync with each other and smart actors have figured out how to exploit these inconsistencies to their advantage. Some of this is nefarious, but much of it is just systemic sloppiness. We will only have a fair financial system when we restore property rights back to the owners of assets in the financial system, and account for them using honest ledgers.

I witnessed some of these issues first-hand, but publicly can point to the Dole Food case as one of many examples. In February 2017 a Delaware court case detailed how 49.2 million valid claims were filed for Dole Food shares in a class-action lawsuit, but there was a problem: only 36.7 million Dole Food shares existed! All 49.2 million claims were backed up by valid brokerage statements proving that the shareholders owned the shares, but there were only 36.7 million shares outstanding. When the financial system can create 12.5 million real claims to phantom shares that don’t exist, it’s the same as if your county clerk issued someone else a valid deed to your house. It’s dishonest and shocking.

Here’s another example. The vote tally in the 2017 Procter & Gamble proxy fight was laughably inaccurate, three times, and no one really knows who won because the parties simply agreed to stop fighting and settle. The first count found P&G won by 6.2 million votes. The second count found the challenger, Nelson Peltz, won by 42,780 votes. The third and final count found P&G won by 498,312 votes. Do these wildly different vote counts give you confidence that Wall Street keeps accurate track of the securities in your brokerage account? The Wall Street Journal’s headline captured the exasperation,: “P&G Concedes Proxy Fight, Adds Nelson Peltz to Its Board,” even though P&G actually won that latest count!

All of this inaccuracy is unacceptable to me, as it should be to anyone who believes in free and fair markets. Wall Street’s ledgers are not honest. Blockchain can make them so!

What’s Been The Most Inspiring Experience You’ve Had In Blockchain-Land Thus Far?

By far the most meaningful project on which I’ve worked was the Wyoming Blockchain Coalition’s passage of five blockchain bills in 2018 that make Wyoming a crypto haven. This was a purely volunteer project and was a labor of love for me, as I was born and raised in Wyoming and care deeply for my native state. Had someone been paying us for the time we spent on the ground in Cheyenne making it happen, they would have paid a fortune! But for me it was a service project, both for my native state and the blockchain community. The opportunity came at the right time for Wyoming, and fit the state’s needs like a glove. It was the most intense and gratifying project I’ve worked on in years — and I hope everyone in the community can find and make a similar contribution during their careers!

What Are Some Ideas You’re Excited About In The Blockchain Ecosystem?

I’m most excited by the idea of making securities markets a lot fairer to regular folks by issuing and trading securities on a blockchain. This idea was originally that of Symbiont, my former company — and it’s a great one. The insight is that if a company registers its shares on a blockchain at its genesis moment — which is when it registers with the Secretary of State in its state of incorporation — then its stock ledger will be accurate, honest and tamper-proof. No more phantom shares of Dole Food or inaccuracies in the P&G proxy vote! Blockchains can clean this up.

We Always Overestimate What Will Happen In Five Years And Underestimate What Will Happen In Twenty. Where Do You See This All Going?

I believe we will all be using bitcoin for payments in 20 years. I’m a bitcoin maximalist, but believe it will take 20 years for bitcoin to become pervasive.

Unfortunately, I believe the financial system will crack hard when the West hits the proverbial debt ceiling and our lenders stop lending to us — no one knows exactly when that will happen — and that’s when the rubber will hit the road for cryptocurrencies. Bitcoin used to be countercyclical (e.g., it rose during the financial crisis in Cyprus), but recently its trading pattern has been procyclical (i.e., it rises when stock markets rise) as institutional money flows into it. But I believe it will eventually prove to be powerfully countercyclical again.

I used to worry about the instability of the traditional financial system — but bitcoin makes me optimistic about the future because it provides a viable alternative!

Thanks to Caitlin for participating! Connect with her on LinkedIn or Twitter.

What Is Unique About The City Of London’s Laws Regarding Rehypothecation?

Good question – except there aren’t any. There aren’t any laws about rehypothication in the City of London. The City of London is an 
‘offshore’ jurisdiction with regard to regulation (the so-called “Euromarkets”)

As you know rehypothication (simplified) is the ability to re-use and re-use assets as collateral ad infinitum…  Many Wall St. banks have established subsidiaries there, to shift assets off their books.

The reports below indicate that this was the main reason behind the demise of MF Global, Lehman, AIG, etc..

IMF: The Nonbank-Bank Nexus and the Shadow Banking System

Reuters: http://newsandinsight.thomsonreu…

Zerohedge: Why The UK Trail Of The MF Global Collapse May Have “Apocalyptic” Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Elseand Shadow Rehypothecation, Infinite Leverage, And Why Breaking The Tyranny Of Ignorance Is The Only Solution and Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?

Naked Capitalism Blog: Revisiting Rehypothecation: JP Morgan Markets Its Latest Doomsday Machine (or Why Repo May Blow Up the Financial System Again)

Dole Food Had Too Many Shares

It’s enough to make you wish for a blockchain.

In 2013, tropical-fruit tycoon David Murdock, who was the chairman, chief executive officer and biggest shareholder of Dole Food Co., took it private for $13.50 a share. A lot of shareholders felt that that price was way too low, and that Murdock had sandbagged the shareholders by driving down the value of the company so he could buy it cheaply for himself. 

So they sued, and they won. In 2015, the Delaware Chancery Court ordered Murdock to pay shareholders another $2.74 a share, plus interest. There was a class action on behalf of shareholders, covering 36,793,758 shares, and after the court ruled in their favor, the class lawyers informed the shareholders and asked them to submit a form to claim their $2.74 a share.

They got back claims from 4,662 shareholders for a total of 49,164,415 shares. “That figure substantially exceeded the 36,793,758 shares in the class,” Delaware Vice Chancellor Travis Laster drily noted in an opinion Wednesday. Oops! Somehow shareholders owned 33 percent more Dole Food shares than there were Dole Food shares.

Huh. So. The simple explanation would be “a quarter of those people were lying,” but nope. Almost all the claims were valid, 2  or at least, “facially eligible.” So the lawyers sheepishly went back to Vice Chancellor Laster to explain what happened and ask what to do about it.

What Happened? Two Things. The First One Is Just A Pure Pointless Mess. Essentially The Way Everyone Owns Stock Is:

1. Cede & Co., a nominee of the Depository Trust Co., owns all the stock in all the companies.
2. DTC keeps a list of its “participants” — banks and brokers — who “really” own that stock, and how much each of them own.
3. The participants, in turn, keep lists of “beneficial owners” — people and funds — who really really own the stock, and how much each of them own.

So if you own stock, what you really have is an entry in your broker’s database, and your broker in turn has an entry in DTC’s database, and DTC (well, Cede) has an entry in the company’s database of shareholders of record.

If you sell the stock, your broker takes it out of your account (at your broker), and DTC takes it out of your broker’s account (at DTC), and DTC adds it to the buyer’s broker’s account (at DTC), and the buyer’s broker adds it to the buyer’s account (at the buyer’s broker). As far as the company is concerned, Cede owned the stock the whole time.

If this all makes your head hurt, you are not alone. Sometimes it makes DTC’s head hurt too, and it needs to lie down for a while in a dark room and listen to soothing music. DTC calls this a “chill.” I am not kidding. 3  

So when there’s a merger that’s about to close, it’s too crazy for DTC to both keep track of trades and deal with getting the merger payment to shareholders. So DTC will place a chill on the stock, and just not record trades for the three days leading up to the closing. From Wednesday’s opinion 4 :

DTC placed “chills” on its records for its participants’ positions in Dole common stock as of the close of business on November 1. A “chill” restricts a participant’s ability to deposit or withdraw the security. Once DTC initiated the chills, the participants’ positions in Dole common stock were locked in and could not change.

Nov. 1, 2013, Was The Closing Date, 5 But The Chill Effectively Covered The Three Previous Days:

DTC’s centralized ledger did not reflect all of the trades in Dole common stock on the day of the merger or during the two days preceding it. Under the current standard of T+3 for clearing trades, DTC did not receive information about all of the transactions that took place on October 30, October 31, or November 1. 

This doesn’t actually mean that you couldn’t trade Dole stock in the three days leading up to the merger closing. You could, and lots of people did. About 32 million shares traded in those last three days. 6 It just means that DTC doesn’t want to hear about it. DTC was chilling. Instead:

The DTC participants who facilitated transactions that had not yet cleared when the merger closed were responsible for properly allocating the merger consideration among the parties to the transactions.

As far as DTC was concerned, whoever owned shares as of the close on Oct. 29 owned the shares at the time the merger closed. If you sold your shares after that time, your broker and the buyer’s broker — the DTC participants — had to sort that out themselves.

You can see why this would be a problem for the current Dole lawsuit. If you owned a share of Dole stock as of Oct. 30, DTC thinks you owned it at closing. If you sold the share to me on Oct. 31, my broker (and your broker) thinks that I owned it at closing. It’s just one share, but it has turned into two shares as far as “facially eligible” claims go. 7 

This is a weird problem: If you owned the stock on Oct. 30, and then sold it before the closing, you’re kind of a jerk for submitting a claim pretending that you owned the stock at closing. 8  But this all happened a pretty long time ago and maybe you forgot.

Fortunately this problem is solvable. The solution is simultaneously trivial and extremely difficult. The key thing to realize is that those trades in the last three days happened, and somehow the original merger consideration — the $13.50 a share paid on Nov. 4, 2013 — found its way to the people who really owned the stock at the end of Nov. 1.

DTC might not have had a complete and up-to-date list of them, but DTC’s participants had mechanisms to get the money to the right place. (Intuitively: If Broker A sold shares to Broker B on Oct. 31, DTC would send the merger money to Broker A on Nov. 4, and Broker A would pass it along to Broker B, etc.)

Whatever voodoo they did back then, they could probably do again. The problem of distributing the $2.74 can be reduced to a previously solved problem, the problem of distributing the $13.50. So it is trivial.

It’s also kind of hard, in that the brokers have to go back and figure out who actually owned the shares at the time, but that’s their problem. 

The Delaware vice chancellor concludes that for him to figure out who actually owned the shares, or for the lawyers to figure it out, “would be lengthy, arduous, cumbersome, expensive, and fundamentally uncertain,” and “functionally impossible” to do “in a practical or cost-effective manner.” That sounds hard! So the lawyers suggested, and the judge approved, letting the brokers figure it out instead:

Under this method, it will be up to the DTC participants and their client institutions to resolve in the first instance any issues over who should receive the settlement consideration. Shifting the burden to them is efficient because they already had to address these issues for purposes of allocating the merger consideration.

If new issues arise, the DTC participants and their client institutions have access to their own records, and they have visibility into the terms of their contractual relationships, such as the terms on which shares are borrowed.

Any ensuing disputes are between the beneficial owners and their custodial banks and brokers. Those disputes should be resolved pursuant to the contractual mechanisms in the governing agreements or, if necessary, through a judicial proceeding limited to the parties.

There might be lots of issues, but they won’t be the court’s problem. Good solution.But there is another problem that created extra Dole shares. This is also a mess, but not a pointless one. It’s a real economic issue, and also one that people seem to get emotional about. It is: short-selling.

Some Quick Background. The Way Short-Selling Works Is:

1. Mr. A owns a share of stock.
2. Mr. B borrows Mr. A’s share of stock.
3. Mr. B sells the share to Mr. C.

But now Mr. A and Mr. C each own one share of stock. Where there was only one share, now there are two. A “phantom share” has been created. Well, not really. The trick to balancing the books is to remember that Mr. B owes Mr. A a share of stock. So Mr. B now owns negative one share of stock. There’s a total of one share: one for A, and one for C, and negative one for B. One plus one minus one is one. It’s no problem. 9

“But what if …,” you start to ask, and I reply: Shh, shh. It just works. What if the company pays a dividend? Well, Mr C. physically possesses the share — don’t think too hard about that metaphor — so the company pays the dividend to Mr. C. But Mr. A also owns the share, and he wants the dividend too.

But it’s OK, because Mr. B owns negative one share, so he has to pay a dividend. So he pays the dividend to Mr. A. 10 In practice, this is all intermediated through brokers, and Mr. A is unlikely to ever find out that his share was borrowed or that he got his dividend from Mr. B. For Mr. A, the whole thing just works quietly and seamlessly. It’s magic.What if the company is acquired in a management buyout for $13.50 in cash? Same thing. 

The company sends $13.50 to Mr. C. Mr. B sends the $13.50 to Mr. A. The two owners of the one share of stock each get the full $13.50 merger price for that one share of stock. Mr. B, who is short one share of stock, pays one merger price. Everything works. 11  It just works. It’s still magic.

What if the company is acquired in a management buyout for $13.50 in cash and then, three years later, a court adds another $2.74 in cash to the merger price? Same … wait. I have no idea. The magic might break down here. As the court points out:

The shorting resulted in additional beneficial owners who received the merger consideration, who fell within the technical language of the class definition, and who could claim the settlement consideration.

Meanwhile, the lenders of the shares, not knowing that the shares were lent, also could claim the settlement consideration.

This is another means by which two different claimants could submit facially valid claims for the same underlying shares.

That’s basically true of the original merger consideration, too. There, brokers would owe merger consideration to people who owned more shares than actually existed, and they’d go get that extra consideration from the short sellers. Everything balanced out. Maybe that will happen here too. But it’s harder. If you were short Dole Food stock on Nov. 1, 2013, you were doing it in an account with a broker. You posted collateral in that account.

When it came time to collect the $13.50 from you, the broker had no problem collecting it. But that was three years ago. If the broker comes back to you now for the extra $2.74, you might feel entirely within your rights to reply “new phone who dis?” You might not have an account with that broker any more.

You might not even exist any more. (People die; hedge funds close.) You certainly haven’t been posting collateral against your Dole Food short position for the last three years. That position was closed out ages ago.

Anyway This Could Account For Millions Of The Phantom Shares:

As of October 31, 2013, traders had shorted approximately 2.9 million shares of Dole common stock. Because the price of Dole common stock traded above the merger price through closing, it is likely that traders shorted additional shares on November 1, resulting in even more shares in short positions as of closing.

So that’s a fun one! I don’t know how the brokers will deal with this problem, but I will just quote the court and say: “Any ensuing disputes are between the beneficial owners and their custodial banks and brokers.” Let us wash our hands of them.

Isn’t this such a delightful muck? As Vice Chancellor Laster writes:

This problem is an unintended consequence of the top-down federal solution to the paperwork crisis that threatened Wall Street in the 1970s. Through the policy of share immobilization, Congress and the Securities and Exchange Commission addressed the crisis using the 1970s-era technologies of depository institutions, jumbo paper certificates, and a centralized ledger.

It’s enough to drive even a sensible vice chancellor to talk about blockchains 12 :

Distributed ledger technology offers a potential technological solution by maintaining multiple, current copies of a single and comprehensive stock ownership ledger. The State of Delaware has announced its support for distributed ledger initiatives.

I want to push back on that a little. There are two problems in this case. One is mechanical: figuring out who actually owned Dole stock as of the closing date three years ago. A blockchain would presumably solve that problem, without requiring the court and the lawyers to embark on a “lengthy, arduous, cumbersome, expensive, and fundamentally uncertain” dive through the records to figure out who owns what. But the current system also solves the problem, without requiring the court and the lawyers to do anything arduous or expensive. They just send the problem off to the current ledgering system — DTC and the custodian brokers and so forth — and that system deals with it. It’s like a blockchain, only it’s made up of hundreds of humans and computer systems at dozens of banks, glued together in a way that somehow more or less works. It’s not even expensive. “DTC advised class counsel that this process is feasible and requires payment of a base fee to DTC of $2,250, with the potential for additional consultation fees if difficulties arise.” 13  That’s like 0.002 percent of the amount being distributed. It does seem like a half-competent blockchain would be faster and cheaper and more transparent. But the idea that the current system can’t solve this problem is wrong. The current system can solve it fine. Just not in a way that any individual human can see or understand. The solution is, let’s say, distributed.

The other problem is economic: People owned more Dole shares than actually existed, because they bought them from short sellers, and now if you want to pay off all the owners, you have to track down the short sellers to make them pay up. That problem is hard, and it seems like the current system might have real problems with it: If the short sellers died, or went out of business, or closed their accounts, or just really don’t want to pay some extra merger consideration three years after the fact and yell a lot when their brokers ask them to, then the brokers will have a hard time finding all the money. Would a blockchain fix this? I don’t know. A blockchain would make it easy to identify the short sellers, three years later. (That’s what blockchain immutability is good for.) But then what? They could still have died, or closed their accounts, or yell.

But, sure, Delaware, and Vice Chancellor Laster, are not wrong that a distributed ledger system to keep track of who owns what shares in real time would make all of this a lot easier. 14 And I can see why Delaware is thinking about it. This is not the first time we have talked about the antique goofiness of the current system, and how it messes with mergers. Dell Inc. also did a management buyout, and a Delaware court also found that its shareholders should have gotten paid more. But some of those shareholders who should have gotten paid more didn’t, because of two separate failures to grapple with the convoluted registry system. (Some of them failed to own their shares the right way. Others failed to vote them the right way. Neither was entirely the investors’ fault.) That system has worked pretty well for 40 years. But it is starting to show its age. There are little cracks that give us brief glimpses of the abyss below. Why not cover them up with a fresh, cool coat of blockchain?

1. I’m eliding some details here. The 2015 decision combined class action and appraisal claims for a class including all of the Dole shareholders other than Murdock and his affiliates. That was a total of about 54.1 million shares. “This decision likely renders the appraisal proceeding moot,” the vice-chancellor found then. But the subsequent class-action settlement excluded the appraisal claimants, who had their own lawyers and took care of themselves separately. They had about 17.3 million shares. The other 36.8 million shares, covered by the class action, are what we’re talking about here. Their payout comes to about $115.8 million, including interest (but before deducting attorneys’ fees).
2. They did kick out 48,758 shares after double-checking.
3. I mean, I am about the lying down in a dark room with soothing music. But not about the “chill.”
4. Citation omitted.
5. It was a Friday; the merger consideration was paid out on Monday, Nov. 4.
6. Most of them in the last two days. By comparison, the average daily volume over the previous year was about 1.3 million shares.
7. From the opinion:For purpose of the settlement, multiple owners could submit claims for shares involved in trades that had not cleared. A DTC participant who continued to hold the shares as reflected on DTC’s records could submit a claim, but so could the beneficial owner who was a client of the DTC participant that acquired the shares and therefore owned them as of closing. Both claims could appear facially valid even though they involved the same underlying shares.
8. Though I mean I see your point. Murdock paid $13.50 in cash in the merger; the court ultimately found that he should have paid $16.24. If I owned the stock at the closing, I got $13.50, and am now entitled to get the extra $2.74. But if I bought it from you the day before the closing, I paid you about $13.55 (the closing price on Oct. 31). The extra $2.74 (or $2.69) is kind of a windfall to me. You, on the other hand, might have been a long-term shareholder who thought Dole was destined for great things, who voted against the underpriced merger, and who finally sold in disgust the day before it closed. In a real sense Murdock’s underpayment harmed you, not me. But, whatever, the deal is that the people who owned stock at closing are the ones who get the extra payment. And to be fair that was priced in: The stock closed at $13.55 the day before the merger closed, and a whopping $13.65 the Friday of the closing. And then the next Monday all those buyers got cashed out for $13.50, as they knew they would be. Presumably they only paid over the merger price because they thought they might get a second chance in court.
9. People sometimes complain about “naked short selling” creating “phantom shares,” which they demonstrate by pointing to the fact that people own more shares of Company XYZ than there are shares outstanding. But this is no problem at all, is true of every company,  and has nothing to do with naked short selling. “Naked” short selling means selling stock short without borrowing it. That is mostly illegal. It would indeed create “phantom shares.” But so does regular, clothed short selling. Either way, the trick is that the person doing the short selling — naked or otherwise — now owns a negative number of shares, which precisely balances out the “phantom shares” that the short selling creates.
10. This is covered by Section 8 of the Master Securities Loan Agreement. But for our purposes let’s just pretend it happens by the operation of magic.
11. This also seems to be covered by Section 8 of the MSLA, though … less clearly? Everyone seems to think it works, though.Again this all happens through DTC, brokers, etc. Like realistically what happens is:
    1. There are like 1000 shares outstanding.
    2. The company pays $13,500 to Cede & Co.
    3. DTC looks at its books and sees that Broker X owns 100 shares.
    4. Cede pays $1,350 to Broker X.
    5. Broker X looks at its books and sees that it has customers who own 150 shares, and other customers who are short 50 shares.
    6. Broker X bills those short customers for $675.
    7. Broker X takes that $675 from the shorts, and the $1,350 from Cede, and gives it to the long customers.
    8. Everything checks out.
12. Albeit in a footnote.
13. The lawyers “have budgeted $10,000 for additional consultations.”A de- centralized ledger to keep track of who owns what shares in real time would solve these issues.  (The move to T+2 settlement will also help) The key thing is updating the share registry in real time on the blockchain.

Updated: 9-30-2019

Caitlin Long: New Wyoming Law Will Protect Privacy of Wallet Keys

Wyoming Blockchain Coalition president Caitlin Long hinted at two new prospective state laws she believes will be highly popular among cryptocurrency developers and owners.

In an interview during Peter McCormack’s podcast on Sept. 27, the 22-year Wall Street veteran and cryptocurrency activist reflected on the pioneering crypto legislation already passed — and reportedly planned — in her home turf, the United States state of Wyoming.

New laws would protect blockchain developers as well as privacy of wallet keys
According to Long, the first of the two new laws to reportedly be proposed will state that:

“Anyone in the state of Wyoming cannot be compelled in a criminal or civil or administrative or legislative hearing or anything, any other proceeding to disclose [their] private keys.”

The second, she continued, would bolster protections for open-source developers and ensure that they cannot be prosecuted solely on the basis of misuse of the code they have written.

She underscored that if the law passes, developers will not be “criminally prosecuted solely for having written code” nor be held liable for others’ use of their code, malicious or otherwise.

A Potted History Of Wyoming’s Crypto Legislation

As previously reported, America’s least populous state has approved a steady stream of proactive blockchain and cryptocurrency-related legislations.

At the end of January, Wyoming Senate passed a bill — later passed by the House on Feb. 14 — that allows for cryptocurrencies to be recognized as money. The bill places crypto assets into three categories:

Digital Consumer Assets, Digital Securities And Virtual Currencies.

Also in January, Wyoming passed a bill defining certain open blockchain tokens as intangible personal property, as well as a bill pertaining to the creation of a fintech regulatory sandbox.

This February, Wyoming passed two further blockchain-related bills on tokenization and issues with compliance.

In early 2018 both the Wyoming Senate and House of Representatives passed a bill that relaxed securities regulations and money transmission laws for certain tokens offered via an initial coin offering (ICO) in the state.

A separate house bill regarding the exemption of virtual currencies from the Wyoming Money Transmitter Act was passed by the Wyoming state legislature in March 2018, as well as a house bill exempting virtual currencies from state property taxation in February. Yet, further pro-crypto and blockchain senate and house bills had already been passed into Wyoming law.

Earlier this month, Long responded to the recent unrest in the money markets with an analysis of the systemic fragility of the traditional financial sector as compared with Bitcoin (BTC).

Updated: 10-24-2019

PODCAST: Caitlin Long On Bitcoin As Insurance Against Financial Collapse

“To me, it’s an insurance against instability in the mainstream financial industry,” said Caitlin Long, one of the most experienced Wall Street professionals to defect to the crypto space.

“I think about, ‘What’s the probability that the mainstream financial industry goes poof?’” she continued, adding:

“That’s how I think about the asset allocation to bitcoin in my own portfolio. Specifically, what I mean by that is it’s the settlement system risk that’s the issue. I’m not talking about price risk. Obviously, bitcoin’s more volatile than most traditional financial assets, but bitcoin is less volatile from a systemic perspective than I think the traditional financial industry is.”

Long spoke with CoinDesk for one of the inaugural episodes of Bitcoin Macro, a pop-up podcast featuring the speakers and themes of CoinDesk’s upcoming Invest: NYC conference on Tuesday, Nov. 12.

Listen to the podcast here or read the whole transcript below.

The last six months have seen a growing dialogue between the bitcoin industry and the larger global macro community. No longer written off as some ignorable niche, increasingly people are asking: Is bitcoin a macro asset? Is it a safe-haven asset? How will it perform in the next recession?

After 20 years in corporate finance, Long began going to bitcoin meetups, eventually falling all the way down the rabbit hole and coming to provide a vital bridge for colleagues in both spaces. In particular, her leadership in Wyoming blazing a trail for pro-crypto, pro-innovation regulations serves as an example around the country and beyond.

In This Episode Of Bitcoin Macro, Nolan Bauerle Sat Down With Long To Discuss:

Why she believes her early interest in bitcoin could have gotten her fired from Morgan Stanley.
Why bitcoin is a macro asset, but only for a very small niche (and why it isn’t ready for mainstream institutions just yet).
Why bitcoin isn’t likely to represent a safe haven asset in short-term blips – but could be powerful in the context of a major shock.
Why more traditional financial institutions are dipping their toes in, but only through VC and other risk structures (not through self-custody).
Why Wyoming is poised to do for the crypto industry what South Dakota did for the credit card industry.
Emerging issues with bitcoin lending.
Why the most interesting chart to Long is the bitcoin hashrate and the spread between household net worth and non-financial sector debt in the United States.
Nolan Bauerle: Welcome to Bitcoin Macro, a pop-up podcast produced as part of CoinDesk’s Invest New York Conference in November. I’m your host, Nolan Bauerle. Both the podcast and the event explore the intersection of bitcoin and the global macroeconomy with perspectives from some of the leading thinkers in finance, crypto and beyond.

For this podcast, we’re trying to do things a little bit differently, where we’re going to create a series of questions for each of our speakers to really capture one of our themes and to highlight some of the subjects that will be on stage in November. This year’s theme really is around bitcoin, how bitcoin is behaving in the world today given all of these circumstances that we’re seeing in the global economy. Today, I’m joined by Caitlin Long, one of the most famous Wall Street defectors, refugees, I’m not sure what to call it.

Caitlin Long: Yep.

Nolan Bauerle: But certainly one of the most famous names to first enter the industry. So Caitlin Long is now in Wyoming doing important work over there to create, I think, a jurisdictional arbitrage I suppose we could call it for everyone in America to know that there is at least going to be one state that has exercised its rights to welcome this new form of finance into its borders. So, Caitlin, welcome. Thank you.

Caitlin Long: Thank you. It’s great to be here.

Nolan Bauerle: Well, we’re really excited. I mean, I have this idea that you can kind of get a sense of the history of Bitcoin by the human capital that started to be attracted to this industry. So, of course, it was the cypherpunks to start because this had been their project for a long time. And then there was a political slant. A lot of, let’s say, libertarians or anarchocapitalists came along, and they were sort of generation two. The third generation, as far as I can tell that really jumped in two feet first, was Wall Street. It really was the first sort of non-sentimental group that joined. There wasn’t really a large end game other than this trades, this is interesting, this is a finite digital resource, we can do stuff with this. I’ve never quite understood where you fit in that. So when and how was it that you turned towards this?

Caitlin Long: I think it was that second group. I found it through Austrian school economics circles even though I was working on Wall Street at the time. I kept my head down for fear of being fired at Bitcoin meetups and the like that I went to on my own time and dime after hours and on weekends. I learned a lot, but also just kept it very quiet that I was running a business at Morgan Stanley. I just didn’t want that to break into the press at the time. That probably would’ve gotten me fired.

Nolan Bauerle: And a significant business at Morgan Stanley?

Caitlin Long: Well, yeah, it’s a pension solutions group. I dealt with a lot of company plan sponsors of big pension funds, helped a lot of them settle, did big transactions for GM, and Verizon, and Bristol Myers Squibb, Motorola, et cetera. Through that, I got to really understand where the problems are in the mainstream financial system. I encountered them myself directly and figured out, not immediately… It took a little while for me to realize that this technology called blockchain was actually going to be the solution to a lot of those problems.

Eventually, I popped my head up and the chief technology officer of Morgan Stanley called me because he saw me on a Bitcoin forum. That was about 2014, so almost five years ago or so, and started working together to vet all of the startups that we’re calling Morgan Stanley at the time. What was fascinating about it is he’s a huge skeptic, and it was really helpful to me to work with somebody like that because it pushed me to become a better person in my own arguments. So far, we’ve both been right. Bitcoin hasn’t died. It has become something. Institutions are coming into it, but he’s also been right that this was all a lot slower than I think many of us anticipated in the early days.

Nolan Bauerle: Well, it sounds like the anti-fragility aspects of this technology that we love were added to your own understanding of it. So nothing wrong with being challenged and understanding how to solve other people’s problems when they become your own when you understand more of them, when people bring them up. So to jump in now to the questions, we’re really focused on how Bitcoin is behaving in today’s global economy. So the first question is, is Bitcoin a macro asset?

Caitlin Long: Yes. But for a very small niche. It’s uncorrelated. It has obviously very high volatility. It’s not ready for prime time for big institutions just yet.

Nolan Bauerle: So the way I’ve been trying to frame this is we’ve got sort of the main stage of global finance, or global economics, and all the changes that we’re seeing around us. So we’ve got this main stage. We’ve got people waiting in the wings to come onto the main stage and maybe some chorus singers in the background from the main part of the stage. Where would you put Bitcoin right now? Is it in the wings waiting to enter the main stage in global finance? Or is it a core singer who’s already on stage, but we don’t know what they’re going to do yet?

Caitlin Long: Oh, it’s definitely waiting in the wings. There’s some very basic issues that I spotted as a former ERISA fiduciary. ERISA, as you may know, is the highest standard of care for institutional asset managers. ERISA fiduciaries have personal liability. I was personally sued as a fiduciary of Morgan Stanley’s pension fund, named personally in a lawsuit. When that’s your standard, you have to be very, very careful. Some of the basic things about Bitcoin need to be ironed out before it’s ready for a ERISA prime time. For example, what’s the exact legal status of the asset? Do I know I actually have clear legal title when I buy a Bitcoin? Obviously, if I have private keys, I know I possess it, but is a judge can recognize that?

And then obviously all of the custody issues surrounding it as well. It’s not a security so there are a lot of folks, like Fidelity for example when it got into the custody business, did not pay homage to the phrase qualified custodian because only securities need to be held by a qualified custodian. But the reality is that the vast majority of investment managers are using custodians for everything. They’re not set up to self-custody assets, so custody is a huge part of what needs to get solved before we start getting ERISA-level investors into this asset class, which I think is coming but we’ve got a few steps to get there first.

Nolan Bauerle: When you were talking about the ERISA aspect of it, I was unaware there was much skin in the game for a lot of people managing money on Wall Street. But apparently, this is an example of it.

Caitlin Long: Oh yeah. ERISA’s a process statute. You have to ask the questions. It doesn’t hold you, the fiduciaries, liable for the outcome. What it does is hold them liable for having examined all of the options. It’s a process statute.

Nolan Bauerle: Got it. Got it. Got it. Within the context of some of the more volatile countries that we see in the world today, so we’re even seeing that volatility come back to the renminbi with the recent devaluation. Is Bitcoin a safe-haven asset?

Caitlin Long: I think so. Obviously, Cyprus is the example of that where you see a so-called left-tail event, you see a real run on the financial system. That’s the place where Bitcoin can really shine. I think that’s coming in multiple iterations, but we’re not there yet. We’ve just experienced the repo market meltdown related to the end of the third quarter for the big financial companies that have trouble funding themselves over the September 30th date. You know, Bitcoin actually traded down in the face of that. So it’s not exhibiting in the short-term for what is probably a minor blip that’s not going to be the big one, so to speak. Bitcoin isn’t trading as a safe-haven asset, but if we hit a big one, that’s when I think its day will really come.

Nolan Bauerle: When more of this modern monetary theory sort of takes hold and even more mistakes are made, perhaps that’s the opportunity?

Caitlin Long: Yeah, absolutely. To me, it’s an insurance against instability in the mainstream financial industry. I think about, “What’s the probability that the mainstream financial industry goes poof?” That’s how I think about the asset allocation to Bitcoin in my own portfolio. Specifically, what I mean by that is it’s the settlement system risk that’s the issue. I’m not talking about price risk. Obviously, Bitcoin’s more volatile than most traditional financial assets, but Bitcoin is less volatile from a systemic perspective than I think the traditional financial industry is.

When we buy treasury bonds in our brokerage account, we don’t own the treasury bonds. We own an IOU from our broker-dealer. So it’s really the settlement risk that’s the issue, and that’s where I see there’s tremendous instability. The left-tail risk is higher than we all think it is in the traditional financial sector. The severity, if it goes bust, is also extraordinarily high. So when I compare that to Bitcoin where I can own my asset outright taking 20% price volatility as an insurance policy to me doesn’t feel like a bad trade-off at all.

Nolan Bauerle: Especially when you look at the, let’s say there’s much more of this coming. We’ve seen Argentina recently, so there we’ve already seen Bitcoin behave as a safe-haven asset simply because the options were so limited. In the United States, we saw this sort of liquidity crunch already before the 2008 meltdown. When these same signs were coming forward in 2006, there was these similar liquidity crunches. People were not able to get the kind of liquidity they required and very similar things were going on.

Of course, Satoshi Nakamoto, I’ve always believed that the Japanese pseudonym was really to have the kind of experience or authority to say to America that, “What happened in Japan is now on your shores.” So where do you see some of those? What I mean by that, what happened to Japan in the last decade, they really are now addicted to quantitative easing. They’re never going to get out of it. It doesn’t look like they’ve got their demographic crunch going on, and Abenomics are just going to be the thing there. So I’ve always had it in my mind that what we were really hearing from, through the pseudonym, Satoshi Nakamoto, was kind of a finger wag to say to America that, “You actually broke your monetary policy leavers. Their broken. You can’t use them anymore.” Do you see that continuing, and do you see Bitcoin being able to really thread the needle on this?

Caitlin Long: Oh, yes. The system broke in 2008, and we’ve been band-aiding it ever since then. In fact, actually this repo episode we were just talking about is the fourth such episodes since 2008. Now, the vast majority of people didn’t even understand that because they’re not watching the plumbing of the financial system. But it’s very obvious that the plumbing in the financial system has been fundamentally broken since 2008, and the only reason that the system hasn’t hit a wall yet is because it’s been drugged with continued injections of liquidity, which is essentially just the central banks socializing losses, which is a problem because profits are privatized and losses are socialized in the traditional financial system. A lot of people have the right intuitive feel that that’s unfair, and it is.

But I think that the challenge is that we don’t know when this is going to come to a head. I look at one really important data point, which is, “What’s the household net worth in the United States relative to the total amount of non-financial sector debt?” Right now, there’s a spread between the two of several trillion dollars. That tells me that basically there’s still balance sheet left in the United States for debt to still be piled onto the United States economy. That’s why we haven’t seen the financial system hit the wall yet. That’s why interest rates are still higher in the U.S. and they are in other countries. When you see negative interest rates, it means there’s no balance sheet left in that country. The only reason they haven’t totally hit the wall yet is because the financial system is global and so interconnected, and the U.S. is carrying the rest of the world. But that U.S. balance sheet is going to get used up at some point, and that’s likely when we see a regime change.

Nolan Bauerle: When I think of Bitcoin’s behavior over the past few days, of course, this breaks the narrative a little bit. It’s always been expected that Bitcoin, given these circumstances, would just perform. We’ve got a lot of rumors of or whispers of a recession. The same idea, there’s a certain conviction that Bitcoin will behave well in a recession. In your opinion, what happens to Bitcoin in a recession given what we’ve seen in the past few days?

Caitlin Long: I think it totally depends on the severity of the recession. If it’s just a blip… Like, we just talked about this is the fourth such repo episode, we didn’t see Bitcoin correlate to strong performance in the previous ones because frankly, only financial market participants who were paying attention and the issues in the money markets didn’t spill over into the mainstream economy. They are spilling into the mainstream economy now. But yet, as we start to see that this is the most severe such repo market episodes since 2008, will it come close to 2008? We don’t know yet. It’s not over at least in the short-term.

We’re taping this on the Friday before quarter-end, before September 30th. It doesn’t look like you’re going to see a bank hit a wall before September 30th but to be clear, this was a pretty important, pretty painful episode. There was clearly a bank, or two, or more out there that wasn’t going to be able to fund themselves past the end of the third quarter without an emergency bailout from the Fed, which is exactly what happened. Banks are supposed to be well-capitalized, right? The Fed, just in June, came out and talked about the resilience of the financial system and let all the big U.S. banks buy back stock and pay dividends. Now, three months later, the Fed’s having to come to the rescue to inject cash into the system. It’s obvious to me that the banks are under-capitalized still. I’ve known that for years, but we’re just seeing yet another example playing that out.

Nolan Bauerle: It is a funny image, the idea of these large banks basically asking for overdraft protections from their bank. You can imagine the scene, it looks pretty ridiculous.

Caitlin Long: Yeah. Obviously, the Fed knows who it is. There are a lot of rumors in the marketplace, but at this point, the bank lived to fight another day and it doesn’t necessarily mean that it’s going to hit a wall at some point. But you can look at the stock prices, particularly of the big European banks, where interest rates are negative and have been for quite some time. It’s pretty obvious who some of the logical candidates are for funding problems. At some point, the balance sheet of the United States is not going to be able to carry the entire world on its shoulders.

Nolan Bauerle: Mm-hmm (affirmative). Mm-hmm (affirmative). Yeah. That’s an original take. I haven’t heard that yet, but I see it the moment you mentioned it. Moving on to the next question, you’re somewhat removed I would say from Wall Street these days given that you’re committed to that wonderful project out in Wyoming. But I’m still curious if you’ve been able to pick up if the narrative around Bitcoin has changed within the main mainstream financial world over the last six months?

Caitlin Long: Sure. I still talk to a lot of folks on Wall Street, very much in touch with friends over the years. The answer is yes, but it’s still folks who are dipping toes and getting off zero, as Pomp likes to say, are doing it in their venture portfolio allocation. This is high-risk stuff. This is not even any sort of significant allocation in portfolios. It’s just a small allocation within the venture allocation, which is typically not that big anyway. So we’re seeing toes dip into the water so far because of the timing of when some of those small pension funds got in that the returns have been amazing. But it’s still not a mainstream thing, and it’s all being done through VC structures. I’m not aware of any of the big pension funds that are directly buying in self-custody in Bitcoin. So far, that’s only been hedge funds, and it’s still not even that mainstream among hedge funds.

Nolan Bauerle: That, to me, sounds a lot like the, let’s say, behavior of Bitcoin in mainstream financial world. Has there been any change in the way they might think about it? So that’s not even about the commitment of any capital allocation. But if they said, “Oh yeah, look, we saw this trade war between America and China erupt. Oh look, there was a lot of flow out of China in the OTC desks towards Bitcoin. Oh, I get it. That makes sense. There’s this a way to hedge the devaluation over there in capital controls.” Is there stuff like that that people have said, “Oh, it clicked”?

Caitlin Long: No. But I’ll tell you what, they’re doing for the personal portfolio. Again, when you’re in a fiduciary asset management status, the asset managers don’t have personal liability like an ERISA fiduciary does but they’re fiduciary for their customer’s assets. It’s just not ready for prime time yet. I can’t underscore enough how those basic issues that I mentioned earlier, being able to know definitively that you got clear legal title to the asset. That sounds so basic, but to be honest, the vast majority of law all around the world doesn’t recognize digital assets and it doesn’t fit into the traditional categories of commercial law. Commercial law is what I refer to as the base layer of the legal system. It tells you what the rights and obligations of parties to a commercial transaction are, and it gives a judge a roadmap for handling disputes.

Until you have that clarity, the vast majority of institutional investors just can’t touch it from a fiduciary perspective. This is why Wyoming has done something really important because we’ve clarified those things, and we’ve also set up a digital asset custody regime that respects how Bitcoin works rather than trying to force it into the status quo of custody, which is… I’ve had all kinds of problems with it in my pension business. We can talk about if you’re interested in hearing, but the gist is Wyoming’s actually solving these basic issues and it’s the only place within the United States.

My personal bet, part of the reason I moved back here from the New York area this summer, is we’re going to end up in Wyoming what South Dakota is to the credit card industry. South Dakota grabbed the entire credit card industry away from New York State in the early 1980s because New York had a very low cap on its usury rates under New York law that it was not willing to change. South Dakota, when interest rates and short-term rates went to 21% in under the Volcker Fed, South Dakota said, “We’ll take our usury law cap off. Come out and head to South Dakota. You’re welcome here.” Forty years later, we’ve got in South Dakota, 16,000 jobs. That’s the same is going to be true in Wyoming if this plays out the way I hope and actually think it will. This is going to be the home of digital-asset custody.

Nolan Bauerle: Yeah. When you mentioned that point about the law, what I find so strange is that the purpose of common law really is that people are free to contract. I’m free to say this thing has value, and you’re free to come up with a price. That’s all are just basic rights. It does become strange that this isn’t easily recognized. Even stranger still, when I was looking at some of the way the Chinese… I mean, I would never recommend anything about how the Chinese regime has dealt with Bitcoin. However, when it came to the OTC trades, they said something interesting. They said, “Look, this is property and a person is free to destroy their own property and do what they wish with their property.” They said, “Therefore, we cannot stop any OTC trading of a thing that we recognize as property.” It’s funny that of all places, China came up with probably the most common law interpretation of Bitcoin. I find that remarkable for the strangest reasons.

Caitlin Long: Yeah, that’s interesting. I didn’t realize that, but Wyoming did something similar. It’s logical. This is property. But, how do you fit it into existing categories of property? Is it money? Is it a security? Is it something else? Is it a commodity? So the point is until you actually have mapped these assets, specifically Bitcoin, to exist in commercial law categories, you don’t know definitively in a dispute how it’s going to be treated. I’ll tell you, one of the biggest compliments that I got for the work we’re doing in Wyoming was from a big institutional investor who reached out and said, “We aren’t touching Bitcoin until we know definitively that we’re not going to end up in a lien mess.”

The issue is that when people are lending Bitcoin, which, of course, is happening right and left now… We’ve got a number of coin-lending companies that are basically paying interest for people to deposit their Bitcoin. How are they doing that? Because, obviously, there’s no interest. But in the Bitcoin system, it’s because they’re lending it out for a spread on the other side. Right? So the issue is that there is a lien being created on that asset, and how do you know when you buy it that you’re buying it free and clear of any other liens because you can’t track the liens on the Bitcoin blockchain?

In fact, in the OTC markets, the Coinbase coins that comes directly from the miners trade at a premium. I think there are two reasons for that. One is that they’re clear from an anti-money laundering and OFAC-type perspective and you know that they’ve never got to [inaudible 00:23:31] or a sanctioned country like North Korea for example. But I think the other one is this point that we’re talking about. No one likes to talk about it because it’s boring and it makes your head explode, but it’s a really important point.

It gets back to this issue of, “How do I know I have clean title? How do I know that somebody’s not going to come back to me and say, ‘The coin lending company sold you that Bitcoin that was subject to a lien? It’s mine.’” A judge is going to look at that and they’re going to say, “Yeah, that lien was valid and you have to give it up.” This is why an institution cannot afford to take risks like this. Until they know they have a jurisdiction where it’s clear that they are able to take clean title… Believe it or not, there’s litigation in Wyoming already. There have been a couple of court cases. We’re starting to get some of the legal clarity, not just with the statute, but also the litigation in Wyoming that’s going to give institutional investors comfort to come in here.

Nolan Bauerle: Yeah, I really never had considered the full depth of an obstacle that liens would have with all the lending. That is true.

Caitlin Long: Oh, yeah.

Nolan Bauerle: There’s large volumes, over a billion in 2018, the last time I saw a full-year resume of what had gone and I’m sure it’s more this year. So that’s an important part of the industry already. Interesting.

Caitlin Long: The person who reached out to me was from a significant hedge fund, and this was five years ago. So they had identified this five years ago as an issue and stayed out of it for that reason.

Nolan Bauerle: Wow. Wow. Interesting stuff.

Caitlin Long: Yeah.

Nolan Bauerle: Well, you brought us to our last question, a chart, or a data point, or a trend that illustrates your current belief in Bitcoin’s behavior in this market?

Caitlin Long: Well, the highest correlation of Bitcoin price is to its hash rate, and we continue to see the hash power coming into the network. As long as that’s up and to the right, the general price trend for Bitcoin is going to continue to be up and to the right. Obviously, there are daily fluctuations, but that’s the chart that I pay the most attention to. At a macro level, if I could throw in one other, it’s the chart I referred to earlier which is the spread between household net worth and non-financial sector debt in the United States. As long as that stays positive, then interest rates are likely to continue to be above zero in the U.S. and we still have balance sheet to carry the rest of the world. But we’re adding another $2.5-3 trillion a year on financial sector debt in U.S. dollars, and we’re eating into that spread pretty rapidly.

Nolan Bauerle: That is a large amount. Yeah, you bring up the hash rate and it certainly did a signal this week’s price dip. That really crashed on Monday. I noticed that and hadn’t really tied the two together in my mind yet. But thanks for doing that.

Caitlin Long: It is fascinating though because that was not a withdrawal of hash rate. The way that that’s calculated is it’s probability-based in the sense that when you have a very long time to propagate a block, the hash rate looks like it’s crashing even though the hash power in the network hasn’t been withdrawn. That incident was entirely within the probability of Bitcoin. I haven’t seen an analysis of how many standard deviations around the 10-minutes average block appending time. But it was an unusual situation, but it was not a flaw in the Bitcoin network. It’s just one of those low probability but entirely foreseeable events.

Nolan Bauerle: Like, what you’re saying is basically the hash rate was wrestling with the difficulty rate more than it had been over the last little while?

Caitlin Long: Yeah. And I’m not the right person to–

Nolan Bauerle: Therefore, propagating time’s a little higher.

Caitlin Long: If propagation time was higher, yeah. I’m not the right person to explain it. Luckily, I was around some core developers who were talking about it. This wasn’t a cause for alarm, no question, but yet the press reported it as if it were. This was something that was entirely foreseeable. Bitcoin, as you know, is a probability-based system so when you get something that’s a several standard deviation event, you can’t say that that wasn’t foreseeable and you can’t say that that there are fundamental problems in the system. It’s going to happen periodically, and it has happened before. It just hasn’t happened with as many people looking at it as happened this week.

Nolan Bauerle: Interesting stuff, Caitlin. Thanks a ton for your time. For all those listeners out there, you’re going to hear a lot more of this quality content coming from Caitlin and our other fine speakers in November in New York City at Invest. Thank you for your time.

Caitlin Long: Thanks, Nolan.

Nolan Bauerle: Thank you, Caitlin.

Updated: 10-25-2019

Colorado Could Be Next In the Race To Bank Crypto (And Cannabis)

The Takeaway:

Colorado’s Office of Economic Development & International Trade has begun the process of creating special-purpose banking legislation to cater to crypto companies.
The aim is to get a bill in front of Colorado lawmakers by December.
Additionally, Colorado is exploring the option of extending crypto-specific banking laws (similar to those passed in Wyoming) in order to cater to the underbanked cannabis industry.
Colorado is proposing a joint initiative with Wyoming, New Mexico, Arizona and others to bring blockchain legislation to the attention of federal lawmakers.

Colorado could be the next Wyoming.

Following the Cowboy State’s passage of 13 blockchain-friendly laws earlier this year, its neighbor to the south is now looking to help crypto companies get bank accounts.

Earlier this month, Colorado’s Office of Economic Development & International Trade (OEDIT) hosted the first meeting of a working group focused on legislation to authorize the creation of special-purpose banking institutions in the state.

To some degree, the proposed bill will likely emulate the Special Purpose Depository Institutions (SPDI) law passed in Wyoming. Indeed, thanks to Wyoming’s work on blockchain legislation, Colorado (and other U.S. states) can save time and effort by perusing 200 pages of legislation, chock-full of banking complexity.

Colorado’s new special banking working group, convened by the OEDIT, continues the work done over the last 12 months by the Colorado Blockchain Council. In March, Colorado signed its Digital Token Act, also similar to Wyoming’s token law.

To be sure, Colorado’s proposed crypto-banking bill has some lawmaker support. Backing the initiative, State Sen. Jack Tate told CoinDesk in an email:

“My sense is that we will continue to support blockchain industry growth in the Colorado economy while at the same time look within our own government sector for practical blockchain applications that warrant funding.”

Off To The Races

The enactment of multiple state laws around crypto is good for everyone, but clearly there’s a bit of competition between states.

One attendee at Colorado’s first SPDI group meeting said his impression was it might “steal Wyoming’s thunder.”

The Colorado banking group’s roadmap was set out with military precision, according to Joseph Pitluck, CEO of FreeRange, which helps banks and trust companies manage digital assets. He told CoinDesk:

“I think Wyoming is going to be surprised. Colorado has a pretty impressive timeline for the SPDI to try and get everything lined up by December. It was less an informal discussion and more like invasion plans being drawn up, like a D-Day landing or something. They are very organized and pretty serious contenders.”

New Mexico is also looking at ways to get SPDI legislation to pass as quickly as possible, said Pitluck. New Mexico’s Legislative Council is busy drafting a version of the Wyoming bill with a view to having a hearing in mid-November, according to New Mexico House Commerce Committee chair Antonio Maestas.

In the case of Colorado, Eric Kintner, a partner at law firm Snell & Wilmer and the co-chair of Colorado’s SPDI working group said they had to “boil it down to a bi-weekly schedule to get a marker down by December.”

In terms of timelines, Kintner told CoinDesk:

“The legislature then meets for five months and this may have to go through a couple of committees because it involves banking. So we would be looking at about the end of next year.”

Not So Fast

However, former Wall Street executive Caitlin Long, the gubernatorial appointee to the Wyoming Blockchain Task Force, pointed out that it took Colorado two, 120-day legislative sessions to pass its utility token law.

The SPDI is a much heavier lift, she said, particularly when factoring in the incumbent banking system. Long told CoinDesk:

“I wish Colorado luck but I am very skeptical that they will be able to pull it off. A big reason is the incumbent banking system, which was a big obstacle to us in Wyoming and is much stronger in Colorado than it was in Wyoming.”

Kintner said he was “cautiously optimistic” when it comes to the state’s bankers. The Colorado Bankers Association has been attending Blockchain Council meetings, Kintner said.

“They have concerns that will have to be addressed,” he said, “but I don’t have a sense that they are completely opposed to it.”

Stepping back, there are various cultural and economic factors at play here. In contrast to Colorado, Wyoming is a small state with less in the way of taxes to collect. Wyoming also has a history of blazing a trail with commercially focused and innovative laws, such as the Limited Liability Company Act back in the late 1970s. Some in Wyoming feel the state lost out to other states like Delaware on LLC innovation and are keen to retain a lead with blockchain.

“Maybe they [Wyoming] need to find ways to raise revenue and they view crypto as maybe a cottage industry that might set up shop there,” said Kintner. “Maybe that works and maybe that doesn’t; I don’t know. But I don’t view this process as necessarily having to be competitive one where only one state will benefit.”

Looking ahead, Kintner even suggested a joint initiative among the likes of Wyoming, New Mexico and Arizona, to pull together with a view to being heard at the federal level.

Said Kintner:

“One of the areas that we are focused on is trying to convene kind of regional conferences where like a front range conference, so Congress will realize Wyoming and New Mexico and Arizona and Colorado all have this so why don’t we look at it at more federal level.”

Cannabis economy
Colorado has experience when it comes to creating a concerted push for federal law changes with its flourishing cannabis industry. And at the state level, the SPDI group is exploring whether it can service both the unbankable crypto realm as well as its chronically underbanked cannabis industry.

OEDIT Program Director Jana Persky Told CoinDesk:

“We are specifically asking for industries like cannabis to get involved in this working group. Right now it’s hard to say what the actual solution will be, but we are actively working to bring members of the cannabis industry into the conversation to try and find a solution that benefits as many people as possible.”

Similar to crypto, cannabis companies inhabit a regulatory lacuna and struggle to get banking services. Colorado’s cannabis industry has been hamstrung between state and federal law for some years now, and has evolved to the point that over 30 banks and credit unions quietly provide services to the multibillion-dollar industry, according to the Colorado Bankers Association.

Meanwhile, the Secure And Fair Enforcement (SAFE) Banking Act, designed to legally bank cannabis companies at the level of federal regulation, has been passed by the U.S. House and lobbyists expect there is a good chance it will go through the Senate and be signed by the end of this year.

On the subject of cannabis and blockchain potentially overlapping, Tate, the state senator, told CoinDesk:

“It’s not necessarily overlap – it’s just that those two industries face similar circumstances. … I think there is a general intellectual curiosity as to how the marijuana industry is challenged as compared to blockchain businesses, but ultimately our group is focused on blockchain technology.”

The cannabis industry is not only more mature than crypto, but the financial stakes are also higher, said Kintner.

“On the face of it,” Kintner said, an SPDI bill like the one created in Wyoming for crypto might work for cannabis too. But another consideration on the table for Colorado is lending, which would be a very different animal from the Wyoming SPDI: the latter is non-lending and not FDIC insured, requiring crypto businesses to hold reserves of cash equal to 100 percent of their deposits.

“We are not sure whether it should be something like Wyoming has done or something totally different,” said Kintner. “It’s an open question right now whether this [cannabis] fits within what we are trying to do or whether it should be separate or whether the current landscape is such that we don’t need to do anything further.”

The official position held by Colorado banks is that there needs to be a change to Federal law. Amanda Averch, a spokeswoman for the Colorado Bankers Association told CoinDesk:

“From day one, we have said the solution to the conflict of state and federal law regarding cannabis in this state is an act of Congress. I can’t really speak to blockchain and crypto which seem to be a whole set of different challenges.”

Wyoming’s Long agreed that marijuana was probably a logical motivation for Colorado to proceed with an SPBI initiative, but added:

“I don’t think the impetus for Colorado to try and copy Wyoming is marijuana. I think it’s that many people in the industry know what’s about to happen, which is about $20 billion of assets are about to come into Wyoming.”

Updated: 11-12-2019

Wyoming Unveils First-Ever Crypto Custody Rules for ‘Blockchain Banks’

The United States’ state of Wyoming has unveiled a series of opt-in custody rules for its so-dubbed “blockchain banks,” covering areas such as forks, airdrops and staking.

The rules were announced during the Fordham Law Blockchain Regulatory Symposium in New York on Nov. 11, according to a thread of tweets published by Wyoming Blockchain Task Force president Caitlin Long.
“First-ever” regulatory provisions for crypto custodians in many areas

Wyoming’s “blockchain banks” — legally known as “special purpose depository institutions” (SPDIs) — were approved by the Wyoming state legislature in February of this year and were introduced to serve those businesses unable to secure FDIC-insured banking services due to their dealings with cryptocurrency.

In her tweets, Long — a 22-year Wall Street veteran and cryptocurrency activist — indicated that the newly-released custody rules include what she claims are the first-ever regulatory provisions for digital asset custodians in many areas — including forks, airdrops, staking, customer notice requirements and so forth.

As regards airdrops, the rules state that all proceeds defined as ancillary/subsidiary — i.e. those earned via forks, airdrops, staking gains — automatically accrue to the customer, not the custodian, unless otherwise agreed in writing.

The rules also proscribe SPDIs from authorizing or facilitating the rehypothecation of crypto assets under its custody.

According to Long, the document was reviewed by four crypto sector Chief Technical Officers, alongside multiple Chief Operating Officers and dozens of attorneys.
Wyoming’s impressive crypto-legislative activity

As Cointelegraph has extensively reported, America’s least populous state has approved a steady stream of blockchain and cryptocurrency-related legislations.

In January, Wyoming’s Senate passed a bill — later passed by the House on Feb. 14 — allowing for cryptocurrencies to be recognized as money.

That same month, Wyoming passed a bill defining certain open blockchain tokens as intangible personal property, as well as a bill to establish a fintech regulatory sandbox.

This February, Wyoming passed two further bills on tokenization and industry compliance — the latter establishing SPDIs.

In 2018, the Wyoming Senate and House of Representatives passed a bill relaxing securities regulations and money transmission laws for certain tokens offered via an initial coin offering in the state.

A separate house bill exempting cryptocurrencies from the Wyoming Money Transmitter Act was passed by the state legislature in March 2018, as well as a house bill exempting them from state property taxation in February.

Yet, further pro-crypto and blockchain senate and house bills had already been passed into Wyoming law.

Updated: 11-15-2019

Wyoming’s New Crypto Banking Law Could Defang New York’s BitLicense

There’s a way cryptocurrency businesses can get around New York’s notoriously hard-to-get BitLicense, and it runs through Wyoming.

At least, so say members of the team that drafted the 13 crypto-friendly laws enacted by the Western state this year. One of those laws allows Wyoming to charter Special Purpose Depository Institutions (SPDIs), a new type of fully-reserved fiat bank that can also custody crypto assets.

With an SPDI, crypto exchanges and other startups could operate in New York without going through the state’s licensing rigmarole, under the same legal principles that exempt banks from needing state money transmitter licenses, Wyoming advocates said.

“We are fairly confident that the Wyoming SPDI will be able to operate in New York without a BitLicense,” Chris Land, general counsel of the Wyoming Division of Banking, said Tuesday at CoinDesk’s Invest: NYC event in New York.

The New York Department of Financial Services (NYDFS), which created the BitLicense in 2014, did not answer requests for comment by press time.

The BitLicense was one of the earliest regulations specially crafted for the blockchain industry. But many firms have complained that it is onerous and has driven entrepreneurs and innovators away from New York, the U.S. financial capital.

Only 18 BitLicenses have been granted in the rule’s five years of existence. Getting hold of one is known to be a slow and expensive process, and that’s if you are in full compliance with all the requirements, which amount to a heavy-duty version of a money transmitter license. Some companies that fell short of NYDFS’ expectations have publicly bemoaned the process.
Banking balm

In addition to addressing the BitLicense problem, an SPDI could ease a longstanding pain point for crypto businesses: the difficulty of obtaining banking services.

Once approved for the charter (the statutory minimum capital requirement to apply is $5 million), firms would have master accounts with the Federal Reserve and the own ability to clear their own wires.

In other words, they could literally be their own banks, to use a familiar motif from crypto-land.

“Some companies might choose to partner with unaffiliated SPDIs and others might choose to create their own affiliated SPDI,” Caitlin Long, the gubernatorial appointee to the Wyoming Blockchain Task Force, told CoinDesk.

“The significance is that crypto companies won’t need to rely anymore on the few traditional banks that have been willing to bank the industry,” she said.

The handful of crypto-friendly banks in the U.S. includes Silvergate in California and Signature and Metropolitan Commercial in New York. Long said one of the best-known of these banks (she wouldn’t say which one) employs 65 compliance officers, making the whole business very expensive.
History repeats

If the Wyoming SPDI works out as suggested, it could be seen as an interesting parallel to the way Citi found a clever way to sidestep New York’s tough usury laws. The bank made a landmark decision in 1981 to move its credit card operation to South Dakota, where legislators were won over by Citicorp’s promise of jobs if that state lifted its usury ceiling.

And as part of the “far-reaching impact” of the SPDI, Long said she is optimistic the NYDFS will view the bank charter as trumping the BitLicense since banks have higher capital and regulatory requirements than money transmitters do.

“The Wyoming SPDI would need to apply to NYDFS to open a branch in New York and NYDFS would need to approve the application, but there’s a lot of favorable case law precedent,” said Long, a former Morgan Stanley executive. “So if NYDFS denies the application, I think it would go to litigation and the Wyoming bank would likely prevail.”

Long also sounded optimistic about lawyering up if need be. After she spoke alongside Land on Tuesday’s panel, she said, “multiple New York attorneys came up to volunteer pro bono to help the Wyoming Banking Division litigate if it ever comes to that.”

Updated: 12-12-2019

Kraken Job Ad Hints At Plan To Build Special-Purpose Wyoming Bank

Kraken appears to be preparing to open a limited-purpose bank in Wyoming that would let it store customers’ fiat deposits – and possibly operate in New York without a BitLicense.

The cryptocurrency exchange has opened up a position for an operations director to oversee a Wyoming special-purpose depository institution (SPDI). The job includes building out an operations team, developing systems and operational processes to be an SPDI and integrating that entity into the exchange’s platforms.

The director would also ensure the functionality of the different capabilities that come with being an SPDI bank, including access to Fedwire, Fed Master Accounts, the Automated Clearing House and correspondent banking.

It’s unclear whether Kraken has applied yet for an SPDI from Wyoming. While it and other firms have expressed interest in pursuing the charter, none have announced doing so. Kraken did not respond to request for comment by press time.

Created under Wyoming’s new blockchain-industry friendly laws, an SPDI would, in theory, solve two longstanding problems for any crypto exchange.

At CoinDesk’s Invest: NY conference last month, Wyoming officials touted the charter as a potential end-run around New York’s notoriously strict BitLicense, which the Empire State is in the process of revising.

Kraken CEO Jesse Powell has previously said his company stopped serving New York customers several years ago because of the BitLicense’s requirements, which he considered overly burdensome.

However, even Wyoming boosters acknowledge that a court fight may be necessary to cement the SPDI’s status as a path around the BitLicense. More immediately, chartering an SPDI (which is not FDIC-insured) would allow an exchange to rely less on the handful of crypto-friendly banks to hold and transfer dollars.

Kraken is looking for someone who’s been a senior leader in a bank or regulated financial services firm and understands payments, trust services, the Bank Secrecy Act, anti-money-laundering regulations and capital markets.

Having senior banking experience on staff would help the firm get through the application process. The chartering process resembles that of a traditional community bank, according to a spokesperson at the Wyoming Division of Banking. SPDIs must have procedures, officers and directors and capital requirements in place before applying.

Updated: 2-24-2020

Blockchain Pioneer Caitlin Long To Build Crypto Bank In Wyoming

The U.S. may soon get its first dedicated bank for digital assets.

A Wyoming corporation founded by blockchain legislative champion and Wall Street veteran Caitlin Long is preparing to apply for a special purpose depository institution (SPDI) charter with the state’s division of banking. The future bank is called Avanti, which means “forward” in Italian, and will be focused solely on providing regulated services for digital assets, Long announced Monday.

The company, formed on Jan. 6, has already raised $1 million in seed funding. Avanti will provide payment, custody, securities and commodities activities for institutional customers using digital assets.

While the company has yet to submit its application, it already has eight products in its pipeline that are not currently available in the U.S. market – the only named one being custody for security tokens. Because trust companies cannot custody securities under U.S. law, SPDIs are uniquely positioned to fill the gap.

Avanti’s balance sheet is planned to hold more assets under administration than deposits, and profits will be generated by providing services to institutional clients, similar to large traditional custody banks such as State Street, Bank of New York Mellon and Northern Trust. Long described the business as a “money warehouse.

The firm will custody digital assets without any change in the ownership of those assets, like a valet takes care of your car without being given its legal title, Long said.

Blockstream Partnership

Under Wyoming state law, SPDI banks must keep all of customers’ fiat demand deposits as liquid assets and cannot lend. However, these entities get to operate under the regulatory oversight of the crypto-friendly Wyoming Division of Banking instead of the U.S. Federal Deposit Insurance Corporation (FDIC).

Avanti is partnering with bitcoin and blockchain technology startup Blockstream, which will provide bitcoin applications, as well as the software and hardware needed to custody digital assets. “Blockstream brings software for the bitcoin protocol. … Avanti brings a regulated delivery vehicle to deliver it into the USD markets,” Long said in an email.

With Blockstream’s Liquid – a “sidechain” or parallel network sometimes used to move money between exchanges – the company will able to develop a “one-stop shop” for digital asset custody, said Blockstream CEO and cofounder Adam Back.

With Blockstream, Avanti can build adjacent blockchain application programming interfaces (APIs) and conventional banking APIs, Back said. The first might look like an API that initiates multi-signature transactions; the second is usually an API that transfers money between traditional banking ledgers.

Long, who pushed for the creation of the SPDI charter, said she didn’t plan on forming an SPDI bank until last Christmas when she was visiting Rome. Prior to her trip, a group – which Long would not name – approached her about creating such an entity.

Because of the high capital level required to start an SPDI – around $25 million – many potential applicants have been slow to seek approval, even though the regulatory door been open since last October. Currently, the Wyoming Division of Banking has only received two applications, which the regulator is working with applicants to refine.

In Rome, Long had been talking to Back on the phone when she became convinced to start Avanti. (Back is a well-known cryptographer who regularly talked with Satoshi Nakamato during bitcoin’s (BTC) early days and was cited in Nakamoto’s bitcoin white paper for having created Hashcash, a predecessor technology that inspired the first cryptocurrency.)

When In Rome

The setting was appropriate. While they spoke, Long walked between the Imperial Forums and the Roman Forums. There she saw for the first time a rostra, a large platform for delivering speeches. “A symbol of decentralized power where citizens gathered to debate and engage in commerce voluntarily during the Republic,” she said.

With Back, she talked about the need for big money – pension funds, endowments, foundations, corporations and sovereign wealth funds – to have a regulated partner to deliver services around bitcoin.

“It’s a $300 billion asset class and they can’t ignore it anymore,” Long said. “Their existing service providers aren’t able to help them.”

That night she landed on the name Avanti.

“It’s a fitting name for a bank that’s moving ahead, while also anchored in the history of sound money and clear property rights,” she said.

Seeking Perfection

Having finalized the requirements for applications, the Wyoming Division of Banking is now developing the policies and procedures for SPDI banks and defining how the regulator will perform its yearly examination and supervision processes. To do this, the regulator is speaking to other state banking regulators to ensure the charter can transport to other states.

“Wyoming is integrating digital assets into the U.S. banking system for the first time,” said Chris Land, general counsel at the state’s banking division. “The first applications that go through the process literally have to be perfect because many of the top financial industry officials in the country will be following the process. Perfection, like art, takes time.”

With “a lot of trust placed in us by very important people,” Land said that the process will not be rushed. “Wyoming is a leader in responsible financial innovation, so we have to get this right,” he added.

The Wyoming legislature has several blockchain initiatives coming up later this year, including bills that would expand the blockchain task force into a select committee, provide First Amendment protections to code (as long as it isn’t written in a malicious way), and extend the SPDI charter’s field of service to include retail customers.

“It’s going to take a little while for folks to get their arms around all that we’ve done,” said Tyler Lindholm, a Wyoming state representative and chairman of the Wyoming Blockchain Task Force. “Blockstream being able to partner with Caitlin Long is a big win for them. Ms. Long knows the charting process. She knows financial regulation inside and out.”

Updated: 4-30-2020

Caitlin Long On Banking Backdrop, Stifled Regulation To Serve Crypto

Speaking to Cointelegraph during Virtual Blockchain Week, Caitlin Long predicted an oncoming wave of institutional investment.

During Virtual Blockchain Week, Cointelegraph spoke with Caitlin Long — the founder and CEO of the upcoming “crypto bank” Avanti Bank & Trust as well as the driving force behind regulatory changes in the state of Wyoming for allowing financial institutions to handle both crypto assets and fiat currencies.

A Wall Street veteran, Caitlin Long ran Morgan Stanley’s pension solutions for a decade after holding a number of senior roles at Credit Suisse prior to transitioning to focus on the blockchain and crypto sector.

Caitlin shared her perspective on the impact that the lack of crypto-friendly financial institutions has had on the development of the digital asset ecosystem, the intersection between mainstream and decentralized finance, and her prediction that major institutional investors will soon enter the crypto space.

Cointelegraph: How does a lack of access to financial services impact the development of the crypto ecosystem?

Caitlin Long: It was the lack of traditional banking services that actually prompted the creation of stablecoins. Necessity is the mother of all inventions. When the big banks stopped allowing crypto exchanges to have fiat on- and off-ramps, that’s when stablecoins got invented.

“So, the lack of availability of banking services has had a huge impact on this industry that few actually really recognize unless they really studied the history or were around that time and were watching.”

But the overhang of that continues. It has definitely been a challenge for the industry to continue to get traditional fiat on- and off-ramps. That’s especially true in the United States, but it’s not just true in the U.S., and Wyoming is attempting to solve that problem.

CT: What are some of the forces that have prevented banks from providing financial services to crypto companies?

CL: The vast majority of [crypto] banking services in the U.S. are provided by three, relatively small banks. Silvergate, Signature and Metropolitan are their names. The big guys like the JP Morgans and the Citis of the world have not touched it — and it is a function of regulation.

This overhang is something that the U.S. experienced called “Operation Choke Point,” which started in 2013 under the Obama administration. The FDIC targeted 30 different industries that were not politically favored. That’s the porn industry, the firearms industry, the gambling industry — you know, a list of the sort of “sin industries,” in some folks’ eyes. They were targeted.

It started with the payday lenders, and the regulators were giving […] a much higher risk assessment for banks doing business with these 30 industries that were deemed risky. And the crypto industry got caught up in that as well. So what it means is that the regulators in D.C., at the FDIC especially, were dinging the risk assessments, and therefore requiring higher capital from the banks.

“I think in the absence of that, the banks would love to serve this industry. and if we had the compliance regime of the 1970s, we wouldn’t be having these problems at all.”

CT: What are some of the major challenges facing the crypto industry right now?

CL: One of the challenges that this industry has is that we have a lot of unregulated companies that are trying to become regulated. And that’s difficult to do, especially because we’ve got a lot of people who don’t have experience working in the regulated financial services industry.

“That’s part of the charm of this industry, and that’s why this industry created stablecoins to solve the banking problem — that’s not something somebody who came from the traditional banking industry probably would have invented.”

But by the same token, it actually makes it hard for the unregulated businesses to become regulated. So one of the differences that you’re starting to see now is that there are a few businesses that are natively regulated from inception.

I think it’s just a smoother process when you’re not trying to convert a business that may have some past footfalls, and probably every crypto business that’s been around for several years has Bank Secrecy Act footfalls — where they weren’t monitoring their customer base as strictly as they as they would have, had they been regulated.

It’s a lot easier to deal with regulators when you are submitting to regulation from inception. We saw it with Fidelity, we saw it with Bakkt, we saw it with Ledger X, and Avanti just happens to be one of the bank examples of that.

CT: Can you tell us a little about what you have been working on in Wyoming?

CL: Full disclosure — after watching how many people tried to start a bank and realizing how you actually get over the finish line, I decided to step up and actually try to create what is an industry consortium bank.

There will be others who will be [launching crypto banks] in Wyoming as well. We created a special purpose depository institution — which is a special fintech bank charter that enables companies to both custody crypto assets and have direct access to the Fed through a master account.

So that takes a significant risk away from this industry where crypto custody and exchange have to be separated from the dollar piece of this business. You’re going to see custodians and exchanges now actually have their own banks, and that’s going to de-risk banking pretty substantially.

CT: What are some of the major trends within blockchain and crypto that you see the industry moving toward in the coming years?

CL: More adoption! I think there are going to be a lot more institutions — and that’s a word that very many people agree on the definition of.

“Most people look at it and say, ‘Well, gee, if a small hedge fund or a small venture capital fund is a crypto, that’s an institution.’ And that’s technically true.”

When I’m talking about institutions, I’m talking about the gigantic pension fund managers, the CalPERS of the world — in Australia, the superannuation funds; in Canada, the Ontario Teachers’ Pension Plans of the world — these are the institutions that actually own a decent percentage of all the financial asset value in the country. These gigantic institutional asset managers are also subject to fiduciary standards that smaller hedge funds and venture capital funds are not.

Traditional asset owners that have very high standards — we really don’t have very many of them in crypto right now at all. And if they come in, boy, the world will change pretty fast. Same thing with corporate treasurers.

“The big businesses are just not touching any of these assets yet, and I see a huge opportunity for them to come in. In the next few years, I think that’s where we’re headed.”

I think the big institutions are coming in — and that wave started with the more risk-taking institutions like hedge funds and family offices that we’re willing to look beside the fact that they didn’t know whether their counterparty was credit-worthy or not because they were just speculating, and willing to take risks. The big pension funds can’t take risks like that. And that’s part of the reason why I’m challenging the industry to up our game in that regard and prove our solvency.

Updated: 5-23-2020

Wyoming’s Congressional Blockchain Committee Holds First Meeting

After graduating from task force to select committee this week, the blockchain crew within Wyoming’s state legislature held their first meeting today.

On May 22, Wyoming’s Select Committee on Blockchain, Financial Technology and Digital Innovation technology convened in full for the first time, albeit virtually.

Initially announced on May 17, the new select committee evolved from the previous Blockchain Task Force.

Task Force To Select Committee: What Has Changed?

In Today’s Meeting, Chairman Chris Rothfuss Commented On The Committee’s New Powers:

“This is a select committee that is able to sponsor its own legislation. In the past, it was a task force that was not able to.”

However, like a task force, a select committee has a limited timespan.

Today’s Agenda

Speaking before the committee via Zoom were leaders of Wyoming’s Division of Banking and Secretary of State, as well as industry players like Marco Santori, who recently joined Kraken as chief legal officer.

The meeting broadly focused on digital property rights, but committee members saw broader goals, especially amid the COVID-19 pandemic. Representative Jared Olsen expressed interest in: “Anything that we can do as our emergency orders come out, to allow us to interact and interface with our government more easily”

Wyoming’s Role In Crypto Regulation

Wyoming is the least populous of the 50 states, but plays an outsized role in crypto regulation. Albert Forkner Commissioner of the Division of Banking commented on Wyoming’s role in the United States:

“At times Wyoming is a flyover state, and a lot of times I prefer that, because it gets us off the radar of federal bureaucracy.”

In the field of crypto, Wyoming has led United States regulators. Last spring, the state formally recognized cryptocurrencies as money — a contentious debate, federally.

The state also featured in Cointelegraph’s August rankings of most welcoming in the country.

 Updated: 6-6-2020

$1M Bitcoin Will Force JPMorgan to Wyoming For Safety — Caitlin Long

Major legal threats in the case of a big leap in Bitcoin price will see banks scrambling for support, the advocate forecasts.

JPMorgan would have to move to Wyoming to protect itself from million-dollar Bitcoin (BTC), one blockchain advocate has warned.

Speaking on financial news show the Keiser Report on June 6, Caitlin Long, who’s been appointed to the Wyoming blockchain committee, argued that the state was now far ahead of New York on Bitcoin support.

Long: $1M BTC Will Spark Lawsuits

In the future, she told host Max Keiser, Bitcoin may cost $1 million, which will bring new forms of legal problems for owners and financial institutions.

“There are people now finally starting to put leads on Bitcoin because Bitcoin is being lent out and that’s what lenders do — they put leads on collateral,” she said.

“We’re skating to where the puck is going to be and thinking about where the attack vectors are going to come from. And one of them could be that if Bitcoin costs $1 million, guess what? Now all of a sudden plaintiffs’ attorneys start coming after everybody and saying, ‘Hey, you bought a Bitcoin that somebody had a lead against and now it’s mine,’ and they try to take it away from you.”

Long is perhaps the best-known pro-Bitcoin voice in the U.S. regulatory arena. Wyoming has passed twenty laws facilitating easier commerce for cryptocurrency businesses and broader acceptance, an advantage she says will only become clearer with time.

In the future, big banks dealing in anything Bitcoin-related might even have to relocate to Wyoming in order to shield themselves from the U.S.’ infamous patchwork approach.

“To get that protection, [Jamie Dimon, CEO of JPMorgan] would have to come to Wyoming, he’d have to move JPMorgan to Wyoming,” Long continued.

Calm Before The Storm?

Dimon has made a name for himself as a Bitcoin skeptic, but in recent years has stopped short of outright dismissal of the cryptocurrency.

As Cointelegraph reported, 2018 saw Dimon deny his earlier criticisms of Bitcoin, along with pledging not to talk about it at all any longer.

Last month, JPMorgan settled a $2.5 million lawsuit from the same year, in which plaintiffs contested the bank charging extra fees for cryptocurrency purchases using its credit cards.

Updated: 10-27-2020

Why Wyoming’s Governor Supports the State’s Crypto Banking Law

It took two years of infrastructure building but on Sept. 16 the Wyoming Division of Banking finally landed a prominent pioneer.

That’s when Kraken Financial became the first entity to receive a special purpose depository institution (SPDI) charter in the Cowboy State, giving the cryptocurrency industry insight into roughly how long it takes to become a bank. It’s also the first newly chartered (de novo) bank the state has approved since 2006.

While Kraken Financial still has some hoops to jump through before it has a certificate of authority to operate, Wyoming is running to keep its lead in the digital asset space. And it’s a priority shared by the state’s top elected official, Wyoming Gov. Mark Gordon.

The biggest challenge going forward for the state’s lead in the blockchain space will be seeing how the federal government responds to the regulatory scheme the state is creating, Gordon told CoinDesk.

Wyoming’s SPDI charter could still be affected by the U.S. Office of the Comptroller of the Currency’s (OCC) future decisions on national banks safeguarding crypto, and by other decisions Congress makes in response to large projects like Facebook’s Libra.

“We don’t want to wait until an MIT or a Facebook does something,” Gordon told CoinDesk in an interview. “We really have the opportunity here.”

“I’m really thankful that Kraken looked past Los Angeles and really understood that a small state, business-friendly, great tax environment, that was the place to bring new innovation,” Gordon said.

The state and prominent Washington, D.C.-based consulting firm Promontory Financial are leveraging current Federal Financial Institutions Examination Council manuals such as the Bank Secrecy Act. That includes guidance for bank examiners on how to question banks that handle digital assets.

“While we knew early on that we had supervisory manuals available from federal agencies and our in-house procedures, no one had really blended the two together,” said Wyoming Banking Commissioner Albert Forkner. “It could push a 500-page document.”

After the first round of exams, the manual will be revised to ensure consumer protections without stifling innovation, Forkner added.

Wyoming’s Approach

Forkner said the Wyoming Division of Banking will work to ensure state law is not too dissimilar from what the federal government does in the future so that Wyoming doesn’t cause confusion for banks.

The level of exposure the SPDI charter is giving Wyoming is significant, Forkner said. The state has no foreign bank presence and not many branches from other state banks. Of the roughly 30 state-chartered banks in Wyoming, most of them are holding under $1 billion in assets.

“If you think about traditional banks, unless you’re a niche bank they all have similar activities,” Forkner said. “These companies have different markets and targets.”

Among traditional bankers, there’s not a lot of attention to the SPDI charter because it’s a special purpose institution, said Silvergate CEO Alan Lane. (Kraken has been a longtime customer of Silvergate.)

“It doesn’t get a lot of headlines because there’s no FDIC insurance behind it,” Forkner said of SPDIs. “Everyone who is interested in digital assets recognizes Kraken’s name, and Kraken has various licenses around the world.”

Having more banking options in the space will mean crypto investors and firms won’t have to worry about being de-risked in the future, Lane said.

“Access to the Federal Reserve wire system is one of the differentiators for banks and one of the reasons that fintechs and cryptocurrency exchanges need banking partners,” Lane said. “Most players in this ecosystem, especially if you’ve been in it for a while, they want to have diversity, they want to have redundancy in their banking partnerships.”

Limited Reach

SPDIs won’t compete on every level with Silvergate because of their inability to lend, Lane added. While the crypto industry will have fully reserved banks to turn to, Kraken and new entrants like Avanti won’t be able to offer products like SEN Leverage, a bitcoin-backed lending program that Silvergate just finished piloting.

As SPDIs wait for the Federal Reserve Bank in Kansas City to determine if it will provide the newly chartered banks with Fed master accounts, Silvergate is willing to work with the de novo banks on payments.

“A year or so ago we started a correspondent banking effort to work with other banks that are providing cryptocurrency-related banking services in other countries,” Lane said. “It’s certainly possible that we could help them get started.

Broader Aims

Wyoming’s SPDI charter could play a role in new financial innovation in the state at a time when the state has been economically depressed.

Gordon said he believes digital assets could play a role in financing environmental sustainability efforts. For instance, blockchain could offer a better venue for trading carbon credits, which are tokens that give companies the right to emit a certain amount of carbon.

“One of the challenges we saw on the West Coast this year is that energy markets started to break down a little bit as people got very possessive,” Gordon said. “There’s opportunity for [blockchain] innovation in a renewable world where you can start to sell energy and get energy back.”

 Updated: 11-9-2020

New Jersey Follows In Its Neighbor State’s Footsteps With Crypto License Bill

With a new Senate bill on the table, New Jersey is getting closer to introducing a state-level licensing framework for crypto firms.

The New Jersey Senate is set to consider a new bill that proposes the creation of a new, mandatory licensing framework for all cryptocurrency firms operating in the state.

Introduced on Nov. 5, the new Senate bill, or “Digital Asset and Blockchain Technology Act,” has been sponsored by the Democratic Party senator for New Jersey’s 35th Legislative District, Nellie Pou.

S3132 is now pending a referral to the Senate Commerce Committee. The Senate bill follows the introduction of the same legislation (to New Jersey’s General Assembly earlier this year, and the latter’s subsequent referral to the Assembly Appropriations Committee.

The bill proposes that all digital asset businesses must already be licensed, or at least have already filed a license application, in order to legally conduct business activities with, or on behalf of, a resident of the state.

Alternatively, digital asset business activities may be deemed legal in New Jersey if the business participants are already licensees in another state with which New Jersey has a reciprocity agreement.

The New Jersey license for crypto firms will mandate activities that include issuing digital assets, offering digital asset exchange services, borrowing and lending digital assets, and storing, holding, or maintaining custody of digital assets on behalf of others.

The latter licensing requirement excludes entities that are already regulated custodians in the United States, such as banks, trusts and broker-dealers.

Any person or entity that conducts activities without a license or pending license application would be liable to a penalty of $500 per day.

As previously reported, New Jersey’s neighbor state of New York is well-known for its controversial and exacting state-level licensing framework for crypto businesses. Known as the BitLicense, New York’s license is this year set to be updated for the first time in almost five years.

Updated: 12-20-2020

Why Bitcoin And Rehypothecation Don’t Mix

A reading of Jeffrey Snider’s latest essay and Caitlin Long’s companion tweet thread.

 Updated: 3-25-2021

Delaware And Texas Compete With Wyoming For Crypto-Friendly Industry And Biz Incorporation Dominance

Will Texas follow in Wyoming’s footsteps to become the next crypto-friendly U.S. state?

Everything is bigger in Texas, but when it comes to crypto-friendly legislation, this doesn’t seem to be the case… just yet. On March 12, 2021, Texas Representative Tan Parker introduced the Uniform Commercial Code, also known as UCC, amendment bill (House Bill 4474) to better adapt commercial law to blockchain innovation and digital asset regulations.

Specifically speaking, the Texas UCC amendment bill aims to recognize virtual currencies under commercial law. Lee Bratcher, president of the Texas Blockchain Council — an organization recently established as a trade association intended to make Texas a leader in national blockchain growth — told Cointelegraph that the Texas Blockchain Council worked closely with Texas legislators to draft this bill, noting that if passed, it would change the business law around the definition of digital currencies and the legal definition of control:

“The Texas Blockchain Council has been working with uniform law commission around the language of the UCC amendment bill, along with other stakeholders to make sure they are all comfortable with the language.”

Texas Aims To Rank Second To Wyoming, But Concerns Remain

According to Bratcher, HB 4474 is similar to what Wyoming is already doing with its Digital Asset Law, which was passed on Feb. 26, 2019, and put into effect on July 1, 2019. “If the UCC amendment Bill passes, Texas would solidify a leadership position alongside states like Wyoming that have already blazed a trail towards regulatory clarity,” commented Bratcher.

While notable, a few unaddressed challenges remain. Caitlin Long, chief operating officer and founder of Avanti Financial Group — a Wyoming bank formed to serve as a bridge between digital assets and the U.S. dollar payments system — told Cointelegraph that HB 4474 is similar to Wyoming’s law in one respect: It aims to define virtual currencies. Long stated:

“That’s a huge positive, because in most U.S. states, the legal status of Bitcoin is unclear, which means that judges have no roadmap to adjudicate disputes, and parties do not have clarity regarding their rights and obligations.”

Long further noted that if HB 4474 passes, then Texas will join Wyoming as the only U.S. state to clarify this critical area of the law. “Both the Texas and Wyoming laws do so in the right way, which is to recognize control of the virtual currency as the determining factor,” Long remarked.

However, Long pointed out a critical gaping hole in HB 4474. According to Long, the bill does not define how a lender can establish an enforceable lien on a virtual currency. “In the legal parlance, this is called, ‘how to perfect a security interest,’” she commented.

Long explained that she is worried that Bitcoin (BTC) owners will become “mired in a lien mess in the U.S.” because U.S. commercial law doesn’t clarify which liens on Bitcoin are enforceable. This has become even more worrisome for Long, as she pointed out that there has been a huge rise in lending secured by Bitcoin as collateral in recent years:

“I think a lien mess is already building in Bitcoin. Bitcoin owners are at risk of being hit with old, unknown liens on their coins, which they had no way of discovering before purchasing — and the higher the Bitcoin price goes, the greater the financial incentive that lawyers have to pursue such claims.”

Unlike HB 4474, Long noted that the Wyoming law clearly states how lenders can create an enforceable lien on Bitcoin while also providing for the cleansing of dormant liens. Unfortunately, HB 4474 has not done this just yet. Rather, HB 4474 clarifies that an innocent purchaser won’t be subject to such adverse claims, adhering to the “take free” rules.

Although this is the case, Long pointed out yet another concern, further questioning what would happen to valid liens that were in force before HB 4474 potentially becomes a law. “Would Bitcoin lenders no longer have a valid lien in Texas? And will this affect the willingness of Bitcoin lenders to lend to Texas customers?”

Texas Remains Positive Despite Concerns

Although some critical concerns remain regarding HB 4474, Bratcher remarked that more guidance will eventually be formed around the UCC amendment bill: “We are working to produce a framework that moves in the same direction of Wyoming, and we will be following up with additional legislation in the future.”

Meanwhile, some Texas-based crypto companies have already expressed excitement for HB 4474. Joseph Kelly, CEO of Unchained Capital — a Bitcoin native financial services company — told Cointelegraph that the firm does a lot of business locally and that having greater clarity around Bitcoin’s treatment under Texas statutes will help his company while encouraging other states to follow suit:

“As Texas and other states pass updates to their UCC that defines Bitcoin and spells out reasonable and commercial methods for perfecting a security interest in Bitcoin, it will help consumers and the industry avoid messy scenarios, lower average interest rates, and bring a greater proliferation of Bitcoin as acceptable collateral.”

The challenges around liens still remain, however. While the solution is still unknown, Long hypothesized that Texas may be taking an approach that explicitly favors institutional lenders at the expense of decentralized finance projects and other peer-to-peer lenders.

“Institutions have a way to perfect their security interests (by treating Bitcoin the same way that securities are treated under commercial law — as IOUs), but individuals and DeFi projects don’t have that option available to them,” Long commented. She further noted that she hopes Texas will be able to fix this in the same way that Wyoming did, as an amendment to the proposed law.

Regardless of the outcome, it’s notable that Texas has been taking measures to catch up to Wyoming in terms of crypto and blockchain regulations. In addition to HB 4474, Bratcher mentioned that three other blockchain bills were also being filed.

While Bratcher is aware that these bills do not go as far as Wyoming’s bills, he believes Texas will rank right under Wyoming if Texas’ blockchain legislation passes, adding:

“Texas is the second-largest economy in the United States, and our congressional delegation is 10 times the size of Wyoming. We have much more influence in D.C. We just want to affirm what Wyoming is doing and come alongside them with a big economy and congressional delegation.”

Blockchain-Friendly Wyoming Challenges Delaware’s Biz Incorporation Dominance

One business and law professor has argued that Wyoming’s liberal blockchain law could help the state compete with Delaware in the business incorporation arena.

Amid the patchwork of state and federal regulations for crypto and blockchain firms, Wyoming seems to have established itself as a more progressive jurisdiction for companies involved in the novel technology.

For Pierluigi Matera, professor of comparative law at the Link Campus University of Rome, these liberal blockchain laws could see the state chip away at Delaware’s preeminence in business incorporation in the United States.

In a paper published on Thursday, Professor Matera argued that Wyoming’s targeted blockchain-friendly approach could pose a significant challenge to Delaware’s dominance.

According to statistics from the Delaware government portal, 67.8% of all Fortune 500 companies are incorporated in the state with 1.5 million legal entities electing to be registered in the state.

In the absence of federal incorporation laws in the U.S., Delaware has established itself as a hub for business incorporation with liberal corporate governance laws.

In February 2018, Wyoming’s state legislature passed a bill exempting certain crypto tokens from securities regulations. Since then, state legislators have also enacted more laws to promote cryptocurrency and blockchain adoption within the state.

These attempts at creating a clear-cut legal framework for decentralized technology have cut across areas like regulatory sandboxes, state property tax holidays, and exemptions from money transmitter laws.

According to Professor Matera, Wyoming’s blockchain approach goes beyond corporate or tax law and extends to banking and securities regulations which are of significant importance to startups operating in the industry.

However, Matera who is also a professor of business and corporate law at LUISS – Guido Carli in Rome added that Wyoming would require specialization in other areas to establish and maintain any significant dominance in U.S. blockchain incorporation, stating:

“Wyoming should achieve a level of expertise that other jurisdictions could not easily replicate, such as specialised courts and a body of case law on blockchain and virtual currencies. In this respect, I argue that setting up a Chancery court dedicated to business and corporate matters is the right move.”

Matera also identified possible federal laws as another likely obstacle to Wyoming’s dominance of blockchain-related incorporation in the U.S. Several crypto-related bills are currently before Congress that could result in country-wide regulations for the novel technology.

Back in 2019, Wyoming rejected the U.S. Uniform Law Commission’s regulatory model for crypto and blockchain assets. This move forced the ULC to re-examine its approach to cryptocurrencies in its Uniform Commercial Code.

Updated: 6-14-2021

‘Bitcoin Is Not An Asset That Is Designed To Be Leveraged,’ Says Caitlin Long

The Avanti Financial CEO says Bitcoin shouldn’t be leveraged and that regulations for stablecoins are underway.

All eyes are on Bitcoin (BTC), with the largest cryptocurrency shooting up past $40,000 on Monday. Unsurprisingly, the price increase happened shortly after Tesla CEO Elon Musk tweeted that the electric-car company would potentially accept BTC payments once more miners confirm green energy initiatives.

Yet, while Musk’s tweet may have driven the price of Bitcoin up, some industry experts believe that Bitcoin is not a cryptocurrency that should be leveraged. For example, during an exclusive interview with Cointelegraph at Bitcoin 2021 in Miami, Caitlin Long, founder and CEO of Avanti Financial, said that unlike other cryptocurrencies, solvency matters more than leverage and liquidity when it comes to Bitcoin:

“Once you get into Bitcoin and you start losing money, I consider that to be really valuable tuition for really learning what Bitcoin is. We’ve got a lot of new people in this industry now who are going through those lessons, and hopefully, folks will learn from them. Especially in this bull market, there’s been so much leverage added to the system. For those of us who’ve been around a long time, we’ve learned these lessons a long time ago — you don’t leverage Bitcoin.”

A Regulatory Push For Bitcoin And Stablecoins

In addition to advising that Bitcoin shouldn’t be leveraged, Long mentioned that there are new regulations for Bitcoin coming out of Washington, DC — something she believes has been coordinated with other government bodies. “It was Ray Dalio who said that Bitcoin’s biggest threat is success — because that means the regulators are going to be cracking down,” said Long.

Although this may be, Long pointed out that regulations will not ban Bitcoin or other cryptocurrencies, as long as users comply. She said:

“The punchline is that if you pay your taxes and you get regulated, and you don’t take shortcuts, you’re going to be okay. Those that are trying to commit crimes, or defraud consumers, or not pay taxes and not comply with the law, then those people are not going to be okay.”

Long also noted that regulations around stablecoins are a priority for lawmakers. In particular, this will ensure that stablecoins don’t infect the U.S. dollar payment system with liquidity risk. To put this into perspective, Long mentioned the accidental hard fork that happened for a few hours on Ethereum during November 2020, saying:

“At the time, I was thinking, ‘What would happen if all the Ethereum ERC-20 stablecoins had to be redeemed within the span of minutes because they had to be burned on one fork and reissued on another?’ That is not a risk that the traditional financial system has been thinking about.”

Moreover, Long commented on the risks associated with stablecoins back in May, warning that the entire stablecoin market has the potential to bring down other tokens upon a credit market correction.

Updated: 7-5-2021

Wyoming Legally Recognizes First DAO In The United States

Wyoming is further solidifying its position as the most crypto-friendly state in North America.

The crypto-friendly state of Wyoming has approved the first legally recognized decentralized autonomous organization (DAO) in the United States.

The American CryptoFed DAO received notice from the Wyoming Secretary of State’s office on Tuesday recognizing it as a legal entity, according to a Sunday announcement.

Marian Orr, CEO Of The American CryptoFed DAO, Stated:

“Wyoming is the leading digital assets jurisdiction in the USA, and now with this DAO law, Wyoming is arguably the top blockchain jurisdiction in the world. What this means is that creating a true digital currency with mass acceptance is now possible.”

The Merchant Advisory Group (MAG), which represents 165 of the largest merchants in the U.S., expressed its support of the filing. John Drechny, CEO of the MAG, stated that the group has always advocated for more competition in the payment-acceptance space.

The American CryptoFed DAO was established by mobile banking solutions provider mSHIFT on July 1, 2021. The project describes its mission as promoting a two-token economy that is immune from inflationary or deflationary influences.

Orr emphasized that the DAO’s native algorithmic stable token, the Ducat, facilitates fee-free transactions. The Ducat is based on EOS, which uses a delegated-proof-of-stake (DPoS) consensus to achieve high-speed transactions at the expense of decentralization.

New tokens are issued through interest that is paid to Ducat holders and rewards issued to the network’s users. Ducat rewards and interest rates are adjusted dynamically by machine learning, with the Ducat intended to appreciate against the U.S. dollar by the amount of inflation the dollar experiences.

The DAO also issues its governance token, Locke, which is used to stabilize Ducat.

The governance token is issued in compliance with the Token Safe Harbor Proposal 2.0 outlined by Securities and Exchange Commission Commissioner Hester Peirce in April.

Wyoming has been at the forefront of pioneering permissive crypto regulations in the U.S. in recent years, with state regulators working alongside Avanti Bank & Trust’s Caitlin Long to develop a banking charter framework for crypto firms.

In September 2020, Kraken received a Wyoming bank charter, making it the first crypto business allowed to operate as a bank in the United States. Avanti followed suit in October.

In March of this year, Wyoming became the first state in the nation to pass legislation into law recognizing DAOs as a distinct form of limited liability companies.

Updated: 7-13-2021

Crypto Crackdown Targeting USD Access Points Has Begun: Caitlin Long

Avanti’s Caitlin Long expects the U.S. Federal Reserve to make it harder for crypto companies to access USD payment channels.

Caitlin Long, founder and CEO of the pioneering bank for the crypto sector Avanti Bank & Trust, has declared that the regulatory crackdown on crypto “has begun.”

In a lengthy tweet on Tuesday, the Wall Street veteran highlighted her thoughts on the current regulatory situation in the United States, predicting that authorities will not target Bitcoin (BTC) and Ether (ETH) directly, instead opting to go after “intermediaries” and “access points” for U.S. dollars into the sector.

“The issue isn’t Bitcoin, Ethereum, or other crypto protocols, they’re just fine. The risk comes from the banks’ operational processes.”

She also noted that Tuesday marked the “key event,” in which the comment period for the Federal Reserve’s proposed payment system access guidelines ended, arguing that the Fed’s guidelines were partially aimed at cryptocurrencies despite not mentioning the asset class directly.

1/ THREAD ABT REGULATORY NEWS in #crypto, which I’ve been chronicling on twitter since April. Seems crackdown has begun. I dunno how it’ll turn out but:
* it won’t impact #BTC #ETH etc directly. Base layers will keep addin’ blocks
* it’ll impact intermediaries & US$ access points

— Caitlin Long (@CaitlinLong_) July 13, 2021

The guidelines, proposed on May 5, outline the system that the central bank will use to evaluate requests to access the agency’s financial services. The proposal comes amid growing requests from fintech firms and financial institutions and providers to gain access to the payments system.

Long emphasized the importance of ensuring crypto firms are able to gain direct access to master accounts with the Federal Reserve, citing an example from 2017 when a number of banks carried out mass closures of bank accounts connected with crypto, stating:

“Didn’t matter whether biz was legit or scam–all were de-banked.”

Long emphasized that the same risks remain today, noting that leading U.S. exchange Coinbase had expressed the same concerns in its IPO prospectus.

“It’s important for our industry that law-abiding companies can gain direct US$ access on our own. It’s not just about cutting out layers of fees that many in our industry are incurring just to get US$ access,” she said.

Avanti, which received a bank charter in Wyoming in October 2020, has submitted its own 18-page comment letter emphasizing its concerns with the Fed’s proposed legislation.

Long, who co-founded the Wyoming Blockchain Coalition in 2017, was instrumental in establishing Wyoming’s permissive regulatory apparatus regarding crypto firms.

Updated: 2-2-2022

This State Is Becoming America’s Crypto Capital

Wyoming wants to be to blockchain startups what Delaware is to corporations.

Through dozens of new laws, Wyoming is trying to become America’s blockchain headquarters—a place that would attract companies from across the crypto sector.

Wyoming has long made its money from commodities, in particular atmosphere-warming fossil fuels. Now it’s pivoting to a new sector, albeit one with its own global warming problems. On this episode of Bloomberg’s System Shock, we head to the “cowboy state,” where everyone from the governor on down is racing to smooth the way for blockchain startups, and become for them what Delaware is for corporations.

Whether they show up though has yet to be determined.

Updated: 2-9-2022

Caitlin Long’s Wyoming Crypto Bank Takes A Step Toward Fed Membership

It’s no guarantee of Fed approval, but Avanti Bank now has a routing number through the American Bankers Association.

Wyoming-based crypto bank Avanti is one step closer to potentially acquiring a master account with the U.S. Federal Reserve.

Avanti Bank now has a routing number issued by the American Bankers Association (ABA), a key milestone in the process to receive a Fed account.

Routing numbers are used to identify banks for checks and other transactional purposes and are issued only to federal or state-chartered financial institutions that are also eligible to have a Fed account, according to the ABA’s website.

CoinDesk confirmed that a routing number was issued on the ABA website. An ABA spokesperson didn’t immediately return a request for comment.

A number of Wyoming special purpose depository institutions (SPDIs), including Avanti and Kraken, have long sought master accounts with the Fed. Any bank that has such an account is eligible to deposit funds at the Fed and tap the global payments system.

University of Alabama School of Law professor Julie Hill noted on Twitter that Avanti had received a routing number. A routing number in and of itself is not confirmation that a bank has a master account, however, she told CoinDesk.

Any bank trying to secure a master account needs to have a routing number. Often the ABA will ask for an opinion letter from the Fed confirming the entity in question is eligible, Hill said. Usually, that happens if the ABA “believes it is unclear” if the applicant is eligible, she said. Once the number is issued, the Fed will begin to process the application.

The Fed can still reject an application after a routing number is issued, Hill cautioned.

“I don’t think that just because Avanti has a routing number necessarily means they’ll get a master account, but it’s typically a first step. You have to have a routing number before you can get a master account,” she said.

In November, members of a Fed advisory council made up of executives from banks, thrifts and credit unions voiced concern about the prospects of institutions with novel charters accessing the Fed payments system.

“If the access is granted, these institutions may introduce increased risks to the financial system,” according to the minutes of the meeting. SPDIs, the document noted, “hold uninsured dollar deposits. The deposits will be backed by 100% reserves, and the funds on deposit cannot be loaned by the bank. This structure allows those SPDIs to avoid Federal Deposit Insurance Corporation (FDIC) and Bank Holding Company Act (BHCA) supervision.”

Caitlin Long, the founder and CEO of Avanti, said she is “optimistic that the Fed will grant its applications for a master account and membership” in a statement emailed to CoinDesk by a spokesperson.

“Avanti meets or exceeds the legal and prudential regulation requirements, and has been purpose-built to create a safe and sound bridge between the US dollar financial system and digital assets,” said Long, a Wall Street veteran who has lobbied to make her home state of Wyoming a blockchain industry hub.

Updated: 2-18-2022

Wyoming Lawmakers Introduce Legislation For State-Issued Stablecoin

Avanti Financial CEO Caitlin Long said the bill had its own pros and cons, but it was “definitely a conversation-starter” for lawmakers exploring stablecoins.

Four members of the Wyoming Legislature have sponsored a bill that would allow the state treasurer to issue a stablecoin.

On Thursday, Wyoming state Senators Chris Rothfuss and Tara Nethercott with House Representatives Jared Olsen and Mike Yin introduced Senate File SF0106, titled the “Wyoming Stable Token Act.”

If signed into law, the bill would authorize the treasurer to issue a U.S. dollar-pegged stablecoin redeemable for fiat held in an account by the state.

The state treasurer — Curtis Meier at the time of publication — would consult with the department’s Investment Funds Committee and have the authority to hire “accountants, auditors, consultants and other experts” to issue the coins, as well as stipulate limitations and rules.

State officials would have until Dec. 31 to issue the stablecoin, with the option of submitting a report by Nov. 1 if such an offering were determined to be “incompatible federal or state law.”

Caitlin Long, CEO of Avanti Financial — which is headquartered in Wyoming — weighed in on the legislation, saying there were pros and cons to the bill, but it was “definitely a conversation-starter” for lawmakers exploring stablecoins.

Long has previously described stablecoins as “very important bridges between crypto and the U.S. dollar” in need of regulatory clarity.

“It’s a mind-bender,” said Long in reference to the proposed stablecoin. “Akin to a muni bond that neither pays interest nor has a maturity date but is redeemable — except it isn’t exactly that bc, as a token, there would be big legal & structural/settlement differences.”

NEWS–bipartisan group of top #Wyoming legislators proposed a bill for State of Wyoming to issue a #stablecoin, 100% backed by USTreasuries, where the State keeps the float. I see pros & cons (didn’t know it was coming) but❤️that Wyoming continues to explore cool #crypto ideas! https://t.co/BXbELukUQE

— Caitlin Long ⚡️ (@CaitlinLong_) February 17, 2022

Rothfuss chairs Wyoming’s Select Committee on Blockchain, Financial Technology and Digital Innovation Technology, a group formed in May 2020 to examine crypto and blockchain developments that is able to sponsor related legislation.

Since taking office, Nethercott, Olsen, Rothfuss, and other Wyoming lawmakers have sponsored a bill suggesting cryptocurrencies be exempt from state property taxes and two others on tokenization and issues with compliance.

Wyoming has often been at the forefront of a state-centered approach to crypto regulation with many pieces of legislation seemingly favorable to the space and a U.S. Senator who holds Bitcoin, Cynthia Lummis.

Kraken became the first crypto business to receive a Wyoming bank charter in September 2020, with the State Banking Board later approving a charter for Avanti.

As of Feb. 17, the Wyoming Stable Token Act has been sent to the Joint Minerals, Business and Economic Development Committee.

Updated: 2-25-2022

Wyoming’s State Stablecoin: Another Brick In The Wall?

Stablecoins are another piece in the puzzle, like DAOs or digital identity. “And if we don’t have it just right at first, we’ll fix it.”

For a state with a small-town feel, Wyoming moves with big-city alacrity when it comes to things crypto. According to the bipartisan bill introduced into its legislature last week, a Wyoming stablecoin could debut before the end of 2022.

The announcement caught even Wyoming banker and cryptocurrency champion Caitlin Long by surprise.

“Didn’t know it was coming,” tweeted the Avanti Bank CEO.

It also raises some questions: Is a stablecoin really needed by Wyoming’s citizens? Is it feasible? Will it upset the state’s commercial banks including its recently chartered special purpose depository institutions (SPDIs) like Avanti which has issued a stablecoin-like product itself?

Moreover, is a state-issued stablecoin even constitutional? And, aren’t there enough stablecoins around already? Then again, maybe Wyoming is out ahead of the crypto pack again — at least in the United States — and other cities and states will soon jump on the stablecoin bandwagon?

“Given that regulators are still scrambling” to understand and deal with crypto, “anything a state like Wyoming does that is a new data point is going to have an impact.”

Rohan Grey, assistant professor at Willamette University College of Law, told Cointelegraph.

It would be “treated as part of the landscape,” something to which U.S. regulators and even Congress would have to respond, he said.

Senate Minority Leader Chris Rothfuss, one of the Wyoming Stable Token Act’s four sponsors, told Cointelegraph that many people in Wyoming, as well as beyond, are still reluctant to use stablecoins “because they don’t have confidence in the assets” that stand behind them. Will the token really be redeemable for United States dollars upon demand?

“It’s still a question-mark” in the minds of many people, Rothfuss said. With the Wyoming stablecoin, “they will know that they will be backed 100% by U.S. treasury bills.”

Wyoming has been a pacesetter in crypto’s breath-taking global expansion. It was the first U.S. state in 2020 to charter special purpose depository institutions, which are permitted to house cryptocurrencies along with fiat, and also the first U.S. state in 2021 to recognize decentralized autonomous organizations (DAOs) and afford them the same rights as limited liability companies.

Maybe Not This Year

Once Wyoming’s treasurer determines that a stablecoin is feasible, then that official will be required to “issue a Wyoming stable token not later than December 31, 2022,” according to the bill.

Does that mean we’re likely to see a Wyoming stablecoin before year-end, then? Passing the legislation this year “will be a bit of a challenge,” Rothfuss told Cointelegraph but, at a minimum “we’ll get feedback.” There is no question in his mind, however, that if the bill doesn’t pass this year, they will bring it back next year.

What about Wyoming’s private banks, might they have a problem with a state-owned entity competing for retail deposits or maybe even with their own stablecoins?

As noted above, Avanti Bank, Wyoming’s second SPDI after Kraken Bank (both were chartered in late 2020) already has a product called Avit, described on its website as a “tokenized, programmable US dollar,” which sounds a lot like a stablecoin.

Would A Wyoming Stablecoin Compete With Avanti Bank?

Rothfuss told Cointelegraph that he didn’t intend Wyoming’s stablecoin to be competitive with Avit, though he didn’t discuss his proposal beforehand with Long, either. “We’re not looking to capture independent business.”

The demand for digital assets is expected to grow exponentially in coming years, continued Rothfuss, and there is room in the state for both a state-issued token and a private bank(s) stablecoin.

In her tweet, Long also called the Feb. 17 bill a “mind-bender” that raises “lots of questions,” while adding she loved “that Wyoming continues to explore cool #crypto ideas!” Avanti did not respond to Cointelegraph’s request for comment for this story.

NEWS–bipartisan group of top #Wyoming legislators proposed a bill for State of Wyoming to issue a #stablecoin, 100% backed by USTreasuries, where the State keeps the float. I see pros & cons (didn’t know it was coming) but❤️that Wyoming continues to explore cool #crypto ideas! https://t.co/BXbELukUQE

— Caitlin Long ⚡️ (@CaitlinLong_) February 17, 2022

“Technology Neutral”

What about technology: Would the Wyoming stablecoin be built on the Ethereum platform, as have many but not all stablecoins?

“We’re technology neutral so far,” said Rothfuss. Wyoming could use the Ethereum blockchain or the Solana blockchain or another one.

What might be ideal is if the stablecoin could eventually operate on multiple blockchains, he added. It is still much too early in the process to be making technical decisions now, however.

Some have asked if a state-issued stablecoin would even be legal under U.S. law. Only Congress has the authority to regulate money in the United States, after all. Could a state-issued stablecoin be deemed unconstitutional?

“This is not a new currency — this is the tokenization of the U.S. dollar,” Rothfuss told us. As such, it shouldn’t violate Article I, Section 8 of the U.S. Constitution which provides that only Congress shall have the power to “coin money and regulate the value thereof.”

Not all are so sure, though. Because the Constitution mentions “money” specifically, “It is crucial to determine what constitutes money,” Max Dilendorf, partner at the Dilendorf Law Firm, told Cointelegraph.

“Traditionally, money has been defined as a medium of exchange and a store of value.

Whether state-backed stablecoins fall under Article I, Section 8 is a question that is yet to be answered by the Supreme Court.”

A Wyoming stablecoin could also impinge on Congress’ power to regulate interstate commerce, added Dilendorf. Because those individuals or entities exchanging cryptocurrency are unlikely to all be located in the same state within the U.S., “the cryptocurrency is likely sent across state lines and, therefore, subject to Congressional regulation as interstate commerce,” he said.

Congress could technically enforce the provisions of Article I using its Necessary and Proper Clause (NPC) powers to “prevent states like Wyoming from issuing stablecoins because this could tamper with existing regulations of interstate commerce,” added Dilendorf.

Overall, applying the latest Supreme Court logic from the United States v. Lopez (1995) decision and Congress’ plenary powers under the NPC, “it seems that Congress could regulate and put a stop to the issuance of state-backed stable coins,” Dilendorf concluded.

There are other questions, too. Even if a Wyoming stablecoin passed legal muster, would it eventually be superseded by a digital dollar? That is, would anyone want to use it?

“Even though federal regulators are talking about a digital dollar and a stablecoin co-existing, whether there would be as much public interest in a state-issued stablecoin once a digital dollar existed is a different question,” answered Grey.

Who’s Next?

If a Wyoming stablecoin were issued and began to gain traction, would other U.S. states or municipalities follow and issue their own stablecoins?

“The next likely place you’ll probably see this is at the city level, a place like Miami or New York City,” for example CityCoins, said Grey. Wyoming appears to be far out ahead of other U.S. states, but a second place “where it could happen is Texas,” he opined.

“I am not sure what the significance of the first U.S. state-issued stablecoin is,” said Dilendorf. “There are already Miami and New York coins facing similar federal questions of law.”

Grey, who helped draft the U.S. 2020 Stable Act that was introduced to Congress, has called for closer regulation of stablecoin issuers, requiring them to to be insured depository institutions, for example. He saw some positive aspects in the Wyoming proposal.

For one thing, a publicly issued stablecoin would probably have more “procedural transparency,” though even a state player might eventually migrate away from having 100% U.S. treasury-bill reserves. Still, “It’s unlikely that everything will happen behind closed doors” as occurs with privately issued stablecoins.

“I certainly have less of a problem with Wyoming’s stablecoin than the private ones,” said Grey, who further suggested that Wyoming’s proposal, which uses the language of the crypto world — not language used by those advocating for public banks, for instance — could also be meant to further “the normalizing of crypto in general.”

So, Wyoming might be fighting the good fight for crypto in its own way? “Yes, normalizing the language, normalizing the model — normalizing the whole sector,” said Grey.

Is that how Rothfuss sees it, i.e., Wyoming is using the process to make a sort of commitment to crypto’s future?

“It might be seen as a statement,” Rothfuss told Cointelegraph, “but, we’ve been talking about all this for five years now and this is really just another piece in the puzzle — like DAOs are a piece and digital identity is a piece — that has to be fitted. And, if we don’t have it just right at first, we’ll fix it.”

Updated: 6-8-2022

Crypto Bank Custodia Sues The Fed Over 19 Month Delay On Account Approval

Custodia wants to compel the Federal Reserve Board and its Kansas City branch to approve its application for a Fed master account within 30 days.

Wyoming based digital asset bank Custodia is suing the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City, claiming an “unlawful delay” in processing an application for its master account.

Custodia, formerly known as Avanti, was one of the first Special Purpose Depository Institutions (SPDIs), also known as “blockchain banks,” made under a Wyoming regulatory framework.

The bank was founded by Caitlin Long, an early advocate of Bitcoin (BTC) who established the institution in 2020 to provide accounts for crypto companies and serve as a bridge for them to the U.S. dollar payment system.

Custodia submitted an application for a Federal Reserve master account 19 months ago in October 2020. The account would allow Custodia to access the Federal Reserve payment systems without using a third-party bank.

Nathan Miller, A Spokesperson For Custodia Bank, Told Cointelegraph:

“Through this lawsuit, Custodia seeks to ensure that its Federal Reserve master account application receives the fair dealing and due process guaranteed to it by both federal statute and the U.S. Constitution. Custodia has satisfied every rule applicable to it, and has gone beyond by applying to become a Fed member bank.”

The suit claims the Federal Reserve violated a United Stated Code, which outlines a one-year deadline for processing the application, and says that it even states on the master account application that a decision takes five to seven business days.

The Fed’s Kansas City bank was ready to approve the account before the Federal Reserve Board asserted control over the process in spring 2021, thereby “derailing” the application, Custodia says.

Custodia states that the “black-box bureaucratic process” meant it had exhausted “all options short of litigation” and sought to compel the Federal Reserve and its Kansas City bank to approve its master account within 30 days.

Custodia plans to provide final settlement for U.S. dollar payments in digital asset transactions, along with providing digital asset custodial services. A key part of its service is to clear payments for its customers directly with the Fed, which it says will reduce costs, counterparty credit risk and delays in settlement.

The delay has postponed Custodia’s full entry to the market and forced the bank to partner with another bank that already has a master account. It says this is a “makeshift solution” that is “second best and far more expensive”.

If Custodia wins the suit or is granted a Fed master account, it will be the first digital asset bank in the country to secure one.

In December 2021, the Republican senator for Wyoming Cynthia Lummis claimed the Fed was “violating the law” with its unfair treatment of SPDIs like Custodia through delaying applications to receive master accounts.

SPDIs were created from a Wyoming regulatory framework for cryptocurrency custody introduced in late 2019 to serve businesses unable to secure Federal Deposit Insurance Corporation (FDIC) banking services due to their dealings with cryptocurrency.

Updated: 2-16-2023

Wyoming Lawmakers Pass Bill To Prevent Forced Disclosure Of Private Keys

If Wyoming Governor Mark Gordon signs the bill, from July 1 individuals in Wyoming will be protected from being forced to divulge their private keys, with one limited exception.

Wyoming lawmakers have passed a bill that will prohibit courts in the state from forcing someone to disclose their digital asset private keys, with one minor exception.

The bill was passed by a vote of 41-13 in the Wyoming House of Representatives on Feb. 15, a day after passing 31-0 in the Wyoming Senate.

If the bill is approved by Wyoming Governor Mark Gordon, the law will come into effect on July 1.

“No person shall be compelled to produce a private key or make a private key known to any other person in any civil, criminal, administrative, legislative or other proceeding[s]” in the state of Wyoming, the incoming law reads.

The law includes any private keys associated with digital assets, one’s digital identity or any other interests or rights to which the private key provides.

BIG STUFF–today the #Wyoming legislature passed a bill prohibiting compelled disclosure of private keys (w/ some exceptions), by a veto-proof majority! CONGRATS to @rothfuss @JaredSOlsen @itsmikeyin & special thx @ChristopherA. Next stop @governorgordonhttps://t.co/qu0OoWMzKO

— Caitlin Long ⚡️ (@CaitlinLong_) February 16, 2023

The minor exception involves when a public key is unavailable or is unable to disclose details of the digital asset, digital identity or other interest or right.

However, the act also states that the new law will not bar one from being compelled “to produce, sell, transfer, convey or disclose a digital asset, digital identity or other interest or right” that a private key could provide access to.

It also doesn’t prevent one from being compelled to “disclose information about the digital asset, digital identity or other interest or right.”

The new law — W.S. 34-29-107 — will be titled “Production of private keys; prohibition.”

The private keys legislation comes under Chapter 29 — Digital Assets which is a subset of Title 34 — Property, Conveyances and Security Transactions.

The passing of the bill comes as the private key law has been in the works since as early as September 2019.

Wyoming has long been touted as one of the most crypto-friendly states in the U.S.

It was the first state in the U.S. to declare a decentralized autonomous organization (DAO) as a limited liability company (LLC) in July 2021, and has previously considered a state-issued stablecoin in February 2022 — however, it appears that those endeavors haven’t progressed too much since then.

Updated: 3-14-2023

Wyoming’s Private Keys Bill Addresses Growing Threat To Rights And Assets

Wyoming’s new law ensures that courts won’t overstep their authority in requiring individuals to disclose their private keys.

Governor Mark Gordon of the United States state of Wyoming recently signed a bill preventing the forced disclosure of private keys in a move to protect the privacy of digital asset owners.

The incoming law reads, “No person shall be compelled to produce a private key or make a private key known to any other person in any civil, criminal, administrative, legislative or other proceeding[s].”

To pass as a private key under the law, it must be “held by a person, paired with a unique, publicly available element of cryptographic data, and, associated with an algorithm that is necessary to carry out an encryption or decryption required to execute a transaction.”

From the effective date, courts in Wyoming will no longer compel individuals to provide access to any private keys that grant access to their digital assets, digital identity or any other interests or rights to which the private key provides.

The only exception to this law applies when individuals are required to disclose the ownership or transfer of crypto during any lawful proceeding.

As the U.S. Congress struggles to put reins on crypto, there has been an uptick in the number of cases where courts force the disclosure of cryptographic private keys.

In many of these cases, courts force the disclosure of private keys as part of discovery or other pre-trial motions.

The forced disclosure of private keys by courts fundamentally contradicts how private keys are designed to work.

Private Keys Are The Wrong Tools To Use For Discovery

A private key is an alphanumeric code used to authorize transactions and prove ownership of a blockchain asset. Private keys are encrypted to protect a user from theft and unauthorized access to their digital assets or digital identity.

When a court requests the disclosure of a private key, they ultimately have access to the digital assets and identities protected by the keys.

Jon Callas, the director of technology projects at the Electronic Frontier Foundation — a nonprofit defending digital privacy, free speech and innovation — said the courts “don’t even want the key, they want the data.”

Mary Beth Buchanan, a former federal prosecutor offering her testimony in favor of Wyoming’s private-key disclosure law, said, “the court could order a disclosure or an accounting of all the digital assets that are held.”

In an essay, the Blockchain Commons, a nonprofit that advocates for open, interoperable and secure digital asset infrastructure, explained that U.S. courts are not ready to handle private keys.

Blockchain Commons explained that court staff lack the experience to protect private keys.

A single private key needing to pass through different hands during a case poses a greater threat to the security of private keys.
Wyoming seeks to protect privacy

U.S. Senator Cynthia Lummis, known for her ardent support of Bitcoin and push for clearer digital asset regulation within the country, has in the past said that privacy is a way of life in Wyoming.

Speaking to Cointelegraph on the bill, Senator Chris Rothfuss, co-chair of a digital asset committee in Wyoming, said that the bill aims to provide “clarity on the legal status of a private key and how it should be treated by the courts.”

“The intent [of the law] is to clearly protect the privacy interest and property rights of digital asset holders. It is to provide the right line guidelines for courts on the standing of private keys,” Rothfuss explained.

As a state, Wyoming has taken some of the most crypto-friendly approaches to regulate crypto in the United States. Although having the smallest population in the United States, in 2021, Wyoming became the first jurisdiction to acknowledge decentralized autonomous organizations as limited liability business entities.

Updated: 3-27-2023

A Look At The Fed’s Recent Custodia Bank Denial And The Central Bank’s Push Back Against Narrow Banking

Over the past century, the number of American banks has significantly decreased, dropping from 30,000 banks in 1921 to 4,997 U.S. banks in 2021, according to data from the Federal Reserve.

Recently, the U.S. central bank denied Custodia Bank of Wyoming, a financial institution that holds $1.08 for every dollar deposited by customers.

Although there appears to be a need for such a bank after the collapse of three major U.S. banks, the Federal Reserve stated that board members have “heightened concerns” about institutions with plans to focus solely on a narrow sector.

The Fed’s Explanation On Why it Denied Custodia Bank Highlights Adversity to Crypto-Asset Sector

Shortly before the collapse of Silvergate Bank, Silicon Valley Bank, and Signature Bank, the Cheyenne, Wyoming-based financial institution, Custodia Bank, was denied membership in the Federal Reserve System.

The Federal Reserve Board specified that the application submitted by Custodia was “inconsistent with the factors required by law.” This week, the Fed published its explanation as to why it rejected the Wyoming bank. Custodia would be distinct from the numerous banks currently in operation, as it holds a complete reserve and more to cover deposits.

A statement from Custodia published on March 24 highlighted the need for a bank that operates in this manner, following the collapse of several banks. “Historic bank runs in the last two weeks underscore the dire need for fully solvent banks that are equipped to serve fast-changing industries in an era of rapidly improving technology,” the company stated.

“That is the exact model proposed by Custodia Bank – to hold $1.08 in cash to back every dollar deposited by customers. Regrettably, the Federal Reserve did not pay enough attention and allowed bank run risks to accumulate at conventional banks.”

The Fed stated in its decision that it had “fundamental concerns” about Custodia’s application, including its “novel and unprecedented features.” One problem the Fed has with Custodia’s business model is its concentration on narrow banking and the provision of services to crypto clients.

“In general, the board has heightened concerns about banks with business plans focused on a narrow sector of the economy,” the U.S. central bank’s board stated.

“Those concerns are further heightened concerning Custodia because it is an uninsured depository institution intending to concentrate nearly solely on offering products and services connected to the crypto-asset sector, which raises greater concerns of illicit finance and safety and soundness risks.”

Could Narrow Banking Pose a Threat to the Current Fractional Reserve Model?

Narrow banking is a system that restricts lending activities to only safe, low-risk investments and maintains a 100% reserve requirement against these investments. It is sometimes called “100% reserve banking.”

However, as Bitcoin.com News reported in another article on fractional reserve banking, narrow banking is not a widespread practice these days, especially among the 4,997 banks in the United States.

The U.S. has not witnessed many narrow banking practices since the Suffolk System, a method developed by a group of New England-based banks in the early 19th century.

During the Suffolk System, member banks had to maintain 100% of their deposits in reserve with the Suffolk member banks, which issued a common currency that could be used by customers of any participating bank.

Despite its success in stabilizing the New England banking system, the Suffolk System was eventually replaced by fractional reserve banking.

The system is also believed to have functioned similarly to modern-day central banks, as one study indicates that the “private commercial bank also provided some services that today are provided by central banks.”

The International Monetary Fund (IMF) has published a paper on narrow banking, but the author of the report says that the “economic costs of narrow banking could be particularly significant in developing countries.” The IMF report also suggests that a core banking model would be a better alternative.

The U.S. Federal Reserve has been pushing back against narrow banking for quite some time, even before the Custodia denial. An editorial published by klgates.com in 2019 detailed how “the Board of Governors of the Federal Reserve System recently took action aimed at maintaining the status quo.”

The article noted that on March 12, 2019, the U.S. central bank issued an advance notice of proposed rulemaking (ANPR) to Regulation D. The authors, Stanley Ragalevsky and Robert Tammero Jr., detailed that the Fed ANPR came around the same time the Federal Reserve Bank of New York won a lawsuit against the financial institution TNB USA. The “nonbank” TNB sued the Federal Reserve in 2012 over its application to become a narrow bank in 2010.

At the time, TNB claimed that the Federal Reserve’s delay was motivated by pressure from traditional banks that saw TNB’s narrow banking model as a competitive threat.

TNB’s argument may just be the crux of the situation as the current modern banking model is entirely based on the fractional reserve model. At a time when banks are failing, a narrow bank or 100% reserve-based financial institution’s model could be very popular.

It could also encourage other banks to follow the trend, as outlier banks that copied member banks within the Suffolk System in the early 19th century benefited from the idea of full reserve banking. Counter-arguments against the Suffolk System suggest the bank was attempting to establish a monopoly.

However, with the number of banks decreasing by 83.34% over the last 100 years from 30,000 to 4,997, one could argue that there’s a monopoly over free banking practices.

Meanwhile, Custodia says it is taking its issues with the U.S. central bank to court. “The recently released Fed order is the result of numerous procedural abnormalities, factual inaccuracies that the Fed refused to correct, and general bias against digital assets,” Custodia explained in a statement on Friday.

“The recently released Fed order is the result of numerous procedural abnormalities, factual inaccuracies that the Fed refused to correct, and general bias against digital assets,” Custodia said.

“Rather than choosing to work with a bank utilizing a low-risk, fully-reserved business model, the Fed instead demonstrated its shortsightedness and inability to adapt to changing markets.”

CUSTODIA STANDS FIRM IN RESPONSE TO THE FED pic.twitter.com/xXWGjffU3I

— Custodia Bank ™ (@custodiabank) March 24, 2023

Custodia Added:

Perhaps more attention to areas of real risk would have prevented the bank closures that Custodia was created to avoid. It is a shame that Custodia must turn to the courts to vindicate its rights and compel the Fed to comply with the law.

What are your thoughts on the Federal Reserve’s stance towards the crypto-asset sector and narrow banking methods? Share your opinions in the comments section below.

Updated: 4-11-2023

Wyoming Defends Crypto-Friendly Bank Charter Regime In Custodia Bank’s Lawsuit With Fed

“The State of Wyoming believes that this changes the tenor of the suit and in turn questions the legitimacy and viability of the State’s statutory framework,” said Attorney General Bridget Hill.

The U.S. state of Wyoming has requested to intervene in the case between Custodia Bank and the Federal Reserve System, seeking to defend its framework allowing certain crypto firms to qualify as state-chartered banks.

In an April 10 court filing, Wyoming Attorney General Bridget Hill filed a motion to “intervene in the defense” of the state’s regulation of Special Purpose Depository Institutions, or SPDIs.

Custodia — called Avanti at the time — was the first financial institution to be approved for a bank charter under the SPDI framework, in October 2020.

Custodia filed a lawsuit against the Federal Reserve and its Kansas City arm in June 2020 for delays in approving the bank’s application for a master account, which facilitates an institution’s ability to make international transfers as well as other functions.

In January 2023, the Fed officially rejected the bank’s application, saying it was “inconsistent with the required factors under the law.”

“The [report] the Kansas City Fed provided Custodia makes clear that its view of perceived inadequacies in Wyoming’s laws and regulations for SPDIs is partially responsible for its denial,” said the court filing.

“The State of Wyoming believes that this changes the tenor of the suit and in turn questions the legitimacy and viability of the State’s statutory framework.”

Though Custodia filed its lawsuit in June 2022, the Fed released a report in March in which the central bank raised concerns about Custodia “seeking to focus almost exclusively on offering products and services related to the crypto-asset sector.”

Custodia spokesperson Nathan Miller told Cointelegraph at the time that the Fed’s decision was an example of “shortsightedness and inability to adapt to changing markets.“

Hill pointed to the Fed’s arguments that suggested Custodia was akin to an uninsured institution “seeking to engage in multiple high risk endeavors in a high-risk industry” as part of the state of Wyoming’s concerns.

The Attorney General said the Wyoming Division of Banking had issued guidance on capital requirements for the state’s SPDIs.

“[The Fed has] also expressed skepticism over the aptitude of ‘new’ state-chartered banks while allowing ‘old’ state-chartered banks like BNY Mellon to engage in substantially the same digital asset custody activity Wyoming SPDIs intend to engage in,” said Hill.

“A disregard of Wyoming’s right to charter depository institutions in the two-tier banking system appears, at least in part, to be the motivation for this disparate treatment and disregard of Wyoming-chartered banks.”

In a statement to Cointelegraph, a Custodia Bank spokesperson said the firm “supports Wyoming’s intervention”, citing the right of U.S. states to charter banks.

The court battle could become a defining moment for how financial institutions in the United States seeking to provide crypto custody services choose to get a charter under the federal or state system.

BNY Mellon launched its digital custody platform in October 2022 — the first major U.S. financial institution to do so — while the Office of the Comptroller of the Currency approved charters for Paxos, Protego, and Anchorage Digital as national trust banks in 2021.

Wyoming Defends ‘Legitimacy’ of Its Crypto Charter Framework in Custodia Lawsuit

The state’s attorney general claims the Kansas City Fed’s decision to deny Custodia’s master account rests partly on “perceived inadequacies in Wyoming’s laws and regulations.”

The state of Wyoming is taking umbrage at the Federal Reserve Board’s insinuations that its regulatory framework for special purpose depository institutions (SPDI) – state-chartered banks that can handle digital assets – are not up to snuff.

Wyoming Attorney General Bridget Hill filed a motion with the U.S. District Court in Wyoming asking for permission to intervene in Custodia Bank’s lawsuit against the Federal Reserve Board and the Kansas City Fed (whose jurisdiction includes Wyoming) for delaying and ultimately denying the crypto-friendly bank’s application for a master account and membership with the Fed.

Though the Wyoming-based bank’s applications were denied in January, 18 months after the application was first filed, the Federal Reserve Board only made public its reasoning for the denial in an eviscerating 86-page report last month.

The report condemned Custodia’s proposed business plan in every single category the Fed assesses, and claimed the decision not to federally insure deposits and Custodia’s dependence on a vibrant crypto market made it a danger to itself and its customers.

Custodia CEO Caitlin Long, who helped draft Wyoming’s crypto laws, has been vocal in her pushback against the Fed’s decision, citing Custodia’s proposal to be fully capitalized, holding $1.08 in cash for every dollar deposited by customers, and suggesting the real reason for denial is a Fed conspiracy to cut crypto off from the banking system.

But the battle between Custodia and the Fed is not just about crypto – it’s also about the dual banking system in the U.S., which allows banks to charter under either federal or state law.

Custodia was granted a SPDI charter from the state of Wyoming in October 2020. But, the motion argues, the Fed didn’t see that as good enough to grant Custodia membership.

“The Custodia Master Account Summary Analysis the Kansas City Fed provided Custodia makes it clear that its view of perceived inadequacies in Wyoming’s laws and regulations for SPDIs is partially responsible for its denial,” the report said.

Hill argued that, though Wyoming wasn’t taking a position on whether or not Custodia was entitled to a master account, it is necessary for the state to intervene to defend “the legitimacy and viability of the State’s statutory framework.”

“Although an adverse determination against Custodia on the merits of Custodia’s application and unique situation may not prejudice the State, the Defendants’ apparent determination that Wyoming’s SPDI statutes and regulations, and SPDI banks themselves, are deficient will,” Hill’s report argued.

The report points out the prejudice of the Fed’s skepticism about new state-chartered banks, like Custodia, and their involvement in the digital assets space while allowing “old” state-chartered banks, such as New York-based BNY Mellon, “to engage in substantially the same digital asset custody activity Wyoming SPDIs intend to engage in.”

Updated: 5-10-2023

Rehypothecation May Be Common In Traditional Finance, But It Will Never Work With Bitcoin

Several crypto lenders, exchanges and funds that used customer assets to grow rapidly had a crash course in the limits of digital scarcity in 2022.

If there is one cause for consensus in crypto after a disastrous 2022 it’s that centralized crypto lending carries a particular cause for concern. The rehypothecation of customer assets allowed crypto firms to grow rapidly until they collapsed under the weight of these risks.

Rehypothecation is the technical terms used when financial platforms reinvest their depositors’ assets to further those platform’s access to credit.

This practice is the norm in traditional finance – so deeply ingrained in the operating behavior of the legacy financial system that not doing so is dismissed out of hand as less efficient.

Applying this behavior onto bitcoin or crypto ignores the fundamental essence of these assets arising from a core bitcoin innovation. Scenarios like these will repeat into the future as long as the market is not effectively acknowledging and pricing the risk of rehypothecated collateral.

The risk to a customer is fundamentally different when there is and when there is not rehypothecation of the customer’s collateral.

Hypothecation occurs when a person or entity takes a loan and receives an interest rate based on providing collateral, like when bitcoin is posted as collateral to a lender. The promise made by the lender is that when you pay off your loan, you will receive your collateral back.

However, lenders themselves often take leverage based on assets on their balance sheet and get credit on other platforms – providing themselves with additional credit for their own use using the customer’s originally posted collateral.

This process is called rehypothecation. Deep in the fine print, that promise to return a borrower’s collateral is conditioned upon there being collateral available to return.

The very common use of rehypothecation in traditional finance created a sense of normal for how to treat assets – financial or otherwise. And as the bitcoin and crypto industry has grown, many from TradFi have brought those norms with them.

Scratch the surface of many crypto firms and you’ll find them using customer deposits to further their business goals (often while stressing the importance of “sovereign” money like cryptocurrencies).

An inescapable reality of this practice in TradFi is that it functions fundamentally via the system of fractional reserve banking. Dollars are largely created through the system of central banking which is awash in cheap liquidity, and in the event of a crisis scenario, the government opens the liquidity pump further.

Fractional reserve banking necessarily incentivizes risk taking. When credit dries up, the stated goal for opening the spigot: to incentivize lenders to take risks and put capital to work via credit. In this way, the normal market forces to identify weakness are mitigated and the cycle perpetuates.

However, these fundamental differences between dollars and bitcoin are not often well enough understood and it is an error to proceed with bitcoin using the same rehypothecation approach.

If there is one cause for consensus in crypto after a disastrous 2022 it’s that centralized crypto lending carries a particular cause for concern. The rehypothecation of customer assets allowed crypto firms to grow rapidly until they collapsed under the weight of these risks.

Rehypothecation is the technical terms used when financial platforms reinvest their depositors’ assets to further those platform’s access to credit. This practice is the norm in traditional finance – so deeply ingrained in the operating behavior of the legacy financial system that not doing so is dismissed out of hand as less efficient.

Christopher Calicott is the managing director of Trammell Venture Partners, an Austin-based venture capital firm focused on seed- and early-stage startups.

Applying this behavior onto bitcoin or crypto ignores the fundamental essence of these assets arising from a core bitcoin innovation. Scenarios like these will repeat into the future as long as the market is not effectively acknowledging and pricing the risk of rehypothecated collateral.

The risk to a customer is fundamentally different when there is and when there is not rehypothecation of the customer’s collateral.

Hypothecation occurs when a person or entity takes a loan and receives an interest rate based on providing collateral, like when bitcoin is posted as collateral to a lender. The promise made by the lender is that when you pay off your loan, you will receive your collateral back.

However, lenders themselves often take leverage based on assets on their balance sheet and get credit on other platforms – providing themselves with additional credit for their own use using the customer’s originally posted collateral.

This process is called rehypothecation. Deep in the fine print, that promise to return a borrower’s collateral is conditioned upon there being collateral available to return.

The very common use of rehypothecation in traditional finance created a sense of normal for how to treat assets – financial or otherwise. And as the bitcoin and crypto industry has grown, many from TradFi have brought those norms with them.

Scratch the surface of many crypto firms and you’ll find them using customer deposits to further their business goals (often while stressing the importance of “sovereign” money like cryptocurrencies).

An inescapable reality of this practice in TradFi is that it functions fundamentally via the system of fractional reserve banking. Dollars are largely created through the system of central banking which is awash in cheap liquidity, and in the event of a crisis scenario, the government opens the liquidity pump further.

Fractional reserve banking necessarily incentivizes risk taking. When credit dries up, the stated goal for opening the spigot: to incentivize lenders to take risks and put capital to work via credit. In this way, the normal market forces to identify weakness are mitigated and the cycle perpetuates.

However, these fundamental differences between dollars and bitcoin are not often well enough understood and it is an error to proceed with bitcoin using the same rehypothecation approach.

To illustrate, the software industry has enjoyed the margins it does because of the inherent ease in replication of digital information: there’s essentially zero marginal cost to produce one additional unit of a digital product.

Consequently, with music, movies and software, an entire digital rights management industry emerged with the internet to thwart free duplication of products.

Given that backdrop, a foundational innovation for Bitcoin was Satoshi’s solution for creating something that is provably digitally scarce – there can only ever be 21 million bitcoins – presenting us with something unusual for finance. There is a fundamentally different risk profile for collateral that is unique from that which is being continuously created or can be reproduced at will.

We must treat both bitcoin’s custody and the pricing of risk in bitcoin lending markets differently than an asset backed by a seemingly endless supply of dollars.

The reason is simple: if someone loses your bitcoin, there is no way to make more of them to make you whole. They are truly, irrevocably gone.

Traditionally oriented lenders balk at the very idea of non-rehypothecated collateral for their loans. They would argue that a pure balance sheet loan – making a loan as an investment of your own capital risk – is less efficient than rehypothecation.

To be sure, a company’s potential returns would not be a juicy as those when leverage has been taken by rehypothecating a borrower’s collateral, getting more dollars and originating even more loans in a cycle that repeats itself for that specific lender.

However, borrowers often lack the information needed to understand the risks they take when posting collateral to a lender who only offers this model, even though this currently represents nearly all centralized crypto lenders.

In the fallout of the failures in crypto and now in banking – where customer deposits above a certain threshold are treated as if the depositor was there with an investor’s hat on – it’s obvious that those depositors and borrowers did not intend to invest in the platform’s (or bank’s) business. Yet, in a failure depositors find themselves suddenly a creditor of the failed business.

For an everyday retail customer pursuing a personal loan and being asked to post bitcoin as collateral, it would seem sensible that they understand what is going to happen with their money and therefore have an understanding of what kind of overall risk they are taking when getting their loan.

$5 words like “rehypothecation” are rarely understood by borrowers today. Education for market participants is the most effective way to bridge the gap between the status quo in finance and the true benefits of a sustainable path forward in light of the emergence of Bitcoin and digital scarcity.

One powerful way for market participants – borrowers in this case – to get a sense of the risk involved is simply to ask what will happen to their collateral before repayment of their loan.

Fortunately, the key learning for these customers is a simple truth: Non-rehypothecated lending is a superior and objectively lower risk way to take out a loan and would naturally be worth some premium for many customers. This could take the form of lower interest rates for higher risk loans or higher fees for safer, non-rehypothecated loans.

A more transparent market would offer both loan types and respective interest rates side by side. An informed borrower considering the risks and costs could choose the lower rate/higher risk loan, but they would do it from a place of informed consent and not unexpectedly find themselves to be a creditor in a platform’s bankruptcy proceeding, possibly having lost their bitcoin forever.

During the last bull cycle, we have seen risk taking with customer’s assets at a shocking level. Until we see more information in the market about how customers’ assets are used on platforms and a recognition that bitcoin and digital scarcity needs to be thought of fundamentally differently than in traditional finance, it appears likely that these highly leveraged scenarios and subsequent asset losses will repeat themselves in the future.

Updated: 5-19-2023

Caitlin Long Resurrects The Idea of Banking Without Bank Runs

SVB’s collapse have been avoided if it were a “narrow” bank.

A “narrow” bank would keep its money at the Federal Reserve and leave the risk-taking to other financial companies—but the Fed isn’t a fan.

The collapse of three regional US banks this spring is a reminder that, at their heart, banks are risk-taking businesses. For most depositors, banks are risk-free thanks to federal insurance of as much as $250,000. That’s why “like money in the bank” is shorthand for a sure thing.

In reality, of course, the money that people keep in the bank isn’t sitting in cash. Deposits are a liability of the bank—a short-term debt it owes to its customers.

On the other side of its balance sheet are a bank’s longer-term loans and investments. If its bets go the wrong way at the same time that many depositors want their money back, it’s in trouble. That’s what happened to Silicon Valley Bank and its fellow failures.

But what if a bank did hold all its customers’ deposits safely in cash, or something exactly like it—and left lending to other institutions where investors know they’re taking a risk by giving them their money. The idea is sometimes called “narrow” banking, because it reduces a bank to its most mundane function.

The US Federal Reserve has tools to make this possible but has argued it could upend how the financial system works. “The Fed is negative on narrow banks,” says Campbell Harvey, a finance professor at Duke University.

For a big financial institution, the safest form of “cash” isn’t a pile of paper bills somewhere, but money parked in an account with the Fed. Individuals don’t have access to the central bank’s various facilities.

But in theory a bank could set itself up as a passive funnel to a Fed account. Customers could put money in this bank, which in turn would stash it at the Fed, passing along the interest minus a service fee.

Since every dollar of deposits would be backed by cash, there’d be no risk of a bank run. Variations of the idea have been embraced by libertarians who see it as a way to lessen the need for regulation, but also by people on the left looking to reduce the systemic danger and political clout of too-big-to-fail banks.

The most high-profile push for a narrow bank came in 2018, when TNB US Inc.—run by a former head of research at the Federal Reserve Bank of New York—sued the central bank, demanding that it allow TNB to open an interest-earning account. The Fed objected vigorously, and TNB’s suit was thrown out in March 2020.

The central bank has raised several concerns about narrow banks. The main one is that in times of stress they’d be too attractive as a haven. Money could pour out of Treasury bills, high-quality bonds or even accounts at conventional banks, amplifying risks to the broader financial system.

Narrow banks could also make it harder for the central bank to manage short-term interest rates. And because conventional banks could end up holding few deposits, they might do less lending, making loans more expensive and credit harder to get.

Some advocates of narrow banking say more lending could be done by financial institutions or funds that aren’t banks. “Take risks, make risky loans—just raise the money to do so by long-term debt or loads of common equity,” says economist John Cochrane, a senior fellow at Stanford University’s Hoover Institution.

Others think the Fed could use its balance sheet to ensure credit is still available where it’s most needed. Saule Omarova, a Cornell Law School professor whom President Joe Biden initially nominated in 2021 to head the Office of the Comptroller of the Currency, has proposed allowing the public to open Fed accounts, which could be administered through existing community banks.

She says the Fed could then lend money through its discount window to commercial banks at preferential rates, to encourage them to make loans to small businesses or in underserved communities. Omarova withdrew her nomination to head the OCC after facing fierce opposition from the banking industry.

There may be more than one road to something like a narrow bank. The recent flood of cash from bank deposits and into money-market funds has underscored that the funds already look a bit like narrow banks.

Money-market funds don’t have deposit insurance—one big fund famously collapsed during the 2008 financial crisis—but regulations have spurred a shift in balances to funds that invest in instruments implicitly backed by the US government.

These days they’ve collectively been parking more than $2 trillion overnight in another Fed instrument, known as the reverse repo facility, and earning more than 5%.

The central bank recently tightened its rules around its reverse repo facility, in an apparent effort to keep anyone from using them as a backdoor way to create a narrow bank. If the Fed determines a fund seems to have been designed only for the purpose of moving cash into this facility, it can deny access.

This was particularly bad news for a part of the cryptocurrency industry known as stablecoins. These coins, which are supposed to always be worth $1, generally need to be backed by cash or low-risk investments to work.

If a stablecoin’s assets were fully invested in a money-market fund that used the central bank’s reverse repo facility, it might look like a de facto Fed-backed cryptocurrency. But the Fed is already wary of letting digital assets any closer to the traditional banking system, so it looks like there won’t be any crypto narrow banks for the foreseeable future.

Updated: 5-26-2023

Banking Is Slowly Getting Narrower — And Better

The US economy is now closer than it ever has been to realizing one of the more radical visions in the finance industry.

Slowly but surely, through evolution rather than policy dictate, America is relying less on traditional banks — part of a reform known as “narrow banking.”

The basic idea is to separate lending and deposits: The banking system would hold very safe assets, such as government bonds, thereby limiting the risks from bank insolvency and bank runs, as well as the moral hazard from deposit insurance.

Loans would be made by commercial credit lenders and other non-bank sources. Better maturity matching on the loan side would make the economy more resilient.

That’s mostly for the better, but the narrow banking model has long been plagued by two major problems. First, there have never been enough safe assets to satisfy the demands of depositors. Second, excessive investment in government securities tends to crowd out private investment.

The rise of narrow banking can in part be explained by the mitigation of both these issues.

Unfortunately, the increased supply of US debt is mostly due to its deteriorating fiscal position. Currently the total stock of US government securities outstanding is a staggering $24.3 trillion, though not all of that is short term. The bright side is that asset holders have a greater number and variety of safe options.

The US is still not close to a point at which Treasury bills could serve as assets and liabilities for the entire banking system.

Bank deposits amounted to about $17.5 trillion in March 2023, and government securities are needed for many purposes, such as fulfilling portfolio demand abroad and as collateral at clearinghouses.

Nonetheless, there is an ongoing shift of funds out of private banks and into money market funds. Much of the change comes from fears about the solvency of regional banks and uncertainty about how far deposit insurance guarantees will extend.

Money-market funds are a safe bet, and they can be used to write checks. So at the margin there is more narrow banking, even though narrow banking is unlikely ever to swallow the entire financial system.

Another factor in favor of the growth of narrow banking is that the current system of US deposit insurance appears less and less workable. In some regional banks, over 90% of the held deposits are above the Federal Deposit Insurance Corp. limit.

Yet when the value of those deposits comes under question, the FDIC (often in conjunction with the Federal Reserve and the Treasury Department) finds itself stepping in and guaranteeing those deposits anyway, for fear of a bank run.

When all deposits are de facto guaranteed, a bank’s incentive to take risk increases. Perhaps today this dynamic is at a breaking point, and so a marginal increase in narrow banking could be a way of injecting more safety into the payments system.

The shifting of private funds into Treasury bills could be problematic if that meant credit to the private sector was shrinking. But the rise of private equity and other forms of non-bank finance has made that less of a concern.

While private equity growth has slowed since the second half of 2022, it has been on a steady rise since the financial crisis.

Private equity allows many new ventures to be financed, and a run on private equity firms is difficult to pull off, since they are not funding themselves by issuing liquid demand deposits. A private equity venture has a much greater ability to withstand swings in the market.

By one metric, private equity measures at almost $12 trillion in value as of mid-2022 — another sign of the US economy advancing in its tools of financial intermediation.

These are not pure market developments, as they are partly a response to the growing regulatory burden on banks, most of all capital requirements. Again, the current regulatory dynamic is not entirely stable.

Unstable banks do create trouble, and in return higher legal and regulatory burdens are placed on them, thereby diminishing their profitability.

The cycle continues, and implementing tougher regulations hastens the changes rather than halting them.

The marginal switch into more narrow banking is itself an imperfect alternative, as non-bank lenders are not riskless (nor, these days, are government securities).

Nevertheless the rise of narrow banking is a reality, and while we should recognize its weaknesses, we should not lose sight of its considerable virtues.

Updated: 6-9-2023

US Court Rejects Fed’s Motion To Dismiss Custodia Bank Case

Digital asset bank Custodia sued the Fed in June 2022, claiming an “unlawful delay” in processing an application for its master account.

Custodia Bank took a step forward in its legal battle against the Federal Reserve, as a Wyoming federal judge denied dismissal motions from both the Fed and the Federal Reserve Bank of Kansas City.

The digital asset bank sued the Federal Reserve in June 2022, claiming an “unlawful delay” in processing an application for its master account.

In 2020, Caitlin Long, a former executive at Morgan Stanley and an early proponent of Bitcoin, founded the bank to provide account services for crypto companies and serve as a bridge to the United States dollar.

“The Federal Reserve’s latest motion to dismiss Custodia Bank’s lawsuit was once again rejected. We are pleased that the Fed’s attempt to provide itself a veto over state bank chartering decisions will now be tested in federal court,” Nathan Miller, a spokesperson for Custodia Bank, told Cointelegraph in a statement.

Custodia was one of Wyoming’s first Special Purpose Depository Institutions (SPDIs), also known as “blockchain banks.” SPDIs were created to serve businesses unable to secure Federal Deposit Insurance Corporation banking services due to their dealings with cryptocurrency.

In April, the state of Wyoming requested to intervene in the case between the bank and the Fed, defending its framework allowing certain crypto firms to qualify as state-chartered banks.

According to Miller, the Fed is reinterpreting federal laws to grant itself special authority that it never received from Congress after decades of automatically granting master accounts to chartered banks.

“The Fed has never held such authority in U.S. history, nor does it need discretion to block banks that already have been validly chartered by state banking authorities that rigorously separate the wheat from the chaff,” Miller continued, adding that Custodia received its bank charter after more than 150 prospective applicants were rejected by the Wyoming Division of Banking. “We look forward to the court’s review of this power grab by the Fed,” he stated.

Updated: 7-25-2023

Wyoming Seeks ‘Stable Token’ Commission Head In First Steps To Establish State Stablecoin

The state seeks someone with connections and expertise in the blockchain industry, promising a $150,000 annual salary.

The United States state of Wyoming is beginning its work on its stablecoin, officially called the “stable token” project, by opening a job position for the head of the Stable Token Commission. The executive will lead a team responsible for making a proper legislative framework for the project.

The position was opened on the federal government’s website for civil jobs on July 20. The commission seeks to hire an executive director who would lead a team comprised of the Wyoming governor, state auditor, state treasurer and four “expert appointees.” The state is looking for someone with connections and expertise in the blockchain industry, promising a $150,000 annual salary.

The Wyoming Stable Token Act was introduced in February 2022, becoming law in March 2023. The act authorizes the issuance of a U.S. dollar-pegged stablecoin redeemable for fiat held in an account by the state.

According to the text of the law, the Stable Token Commission is responsible, among others, for deciding the overall number of tokens to be issued, concluding the requirements for redemption, and selecting the financial institutions to manage the tokens.

In April 2023, a similar initiative was proposed in the state of Texas, where lawmakers introduced bills for creating a state-based digital currency backed by gold.

At the same time, several U.S. lawmakers have argued against the federal government’s interest in introducing a central bank digital currency.

Wyoming is a crypto-friendly jurisdiction. Recently, the state’s Governor, Mark Gordon, signed a bill preventing the forced disclosure of private keys to protect the privacy of digital asset owners.

And in April, the state’s Attorney General Bridget Hill requested to intervene in the case between Custodia Bank and the Federal Reserve, seeking to defend its framework allowing certain crypto firms to qualify as state-chartered banks.

Updated: 11-7-2023

Caitlin Long’s Custodia Bank (Built By Bitcoiners For Bitcoiners #BBBFB) Launches Bitcoin Custody Platform

Custodia Bank’s launch of Bitcoin custody follows a series of regulatory challenges the firm faced earlier this year.

Custodia Bank, a cryptocurrency-friendly bank founded by Bitcoin advocate Caitlin Long, has launched its BT custody platform.

The firm took to X (formerly Twitter) on Nov. 7 to announce the launch of Custodia Bank’s Bitcoin custody service targeting businesses like fiduciaries, investment advisers, fund managers and corporate treasurers.

The launch comes soon after Custodia Bank earned approval from the Wyoming Division of Banking to go live with the service, the announcement notes.

Announcing the news, Custodia Bank emphasized that the platform is a non-lending bank built by Bitcoiners that offers segregated custody accounts on its “custom-built Bitcoin custody platform.”

The statement said that Custodia Bank offers integrated Bitcoin custody and U.S. dollar services on one platform, designed to simplify user operations and reduce risks. Custodia Bank added:

“Since we built our Bitcoin custody platform in-house, we’re especially grateful to those willing to help us by providing user feedback.”

Custodia Bank’s approval from the Wyoming Division of Banking follows a series of regulatory challenges for the firm. In January 2023, the Federal Reserve Board rejected the bank’s application to become a member of the Federal Reserve System, saying it was “inconsistent with the required factors under the law.” The Fed subsequently denied Custodia’s request to reconsider its membership application in its system.

In a detailed report in March 2023, the Fed’s board said the decision to reject Custodia’s application was due to concerns about banks with a high concentration of activities related to the crypto industry.

Custodia Bank opened for business in August 2023, though the Fed has blocked much of its proposed business model.

Founded in 2020, Custodia is a bank aiming to bridge the gap between digital assets and the U.S. dollar payments system and a digital asset custodian. The firm was formerly known as Avanti Financial Group and is based in Cheyenne, Wyoming.

Custodia Bank did not immediately respond to Cointelegraph’s request for comment.

Updated: 1-17-2024

Caitlin Long Builds The World’s First And Only Bitcoin Bank

Remember Operation Chokepoint 2.0? The narrative feels like a distant memory, buried by competing storylines like the Sam Bankman-Fried trial and the race for the Bitcoin ETF, but it dominated the crypto airwaves just a few months ago.

After the collapse of FTX in late 2022, leaders of the crypto industry began to argue that firms associated with digital assets were getting cut off from banking access in an effort coordinated behind the scenes by the highest reaches of government, from the Federal Reserve to the Treasury Department.

This culminated in the mini-banking crisis of March 2023, which felled several crypto-associated banks and the 24/7 payment networks like Signet that powered the industry.

Parts of the Operation Chokepoint 2.0 argument always rang true, as different federal agencies began to issue warnings and crack down on crypto after the spectacular collapses of some of the sector’s biggest projects. Other parts did not: All of the regulatory actions, after all, were happening in the public eye—that was the point.

One of the companies at the center of the Operation Chokepoint 2.0 narrative says it has new evidence that proves its existence. Caitlin Long, the founder and CEO of Custodia Bank, has been at war with the Federal Reserve for years.

With a Harvard Law degree and a Wall Street background, Long has been on a crusade to create a blockchain-focused bank since 2016, going so far as to lobby the Wyoming state government to create a specific digital asset banking structure.

The brainchild of the campaign became Custodia, which would offer crypto products like Bitcoin custodial services, as well as its own stablecoin.

Long’s plan hit a snag when the Federal Reserve Bank of Kansas City, which oversees Wyoming, wouldn’t approve a master account for Custodia, which would grant it access to key Fed payment services like inter-bank transfers.

Since 2022, Long and Custodia have contended not only that the Fed was compelled to grant her, and any eligible institution, a master account, but that the Federal Reserve’s Board of Governors has conspired against Custodia because of its crypto-first approach, pulling the ostensibly independent Kansas City Reserve Bank’s strings to guarantee a rejection.

In an ongoing lawsuit, a judge found it plausible that the Board of Governors “had at least some hand in controlling” Custodia’s master account application.

The legal arguments in the lawsuit are complex—for example, whether the Kansas City Reserve Bank is a federal agency, and whether the Fed has the discretion to deny a master account to eligible institutions—but the interesting details here are the Board of Governor’s efforts to derail Custodia’s efforts.

Ensuing discovery compelled by the court produced new evidence about the coordination, Custodia alleged in a late December motion, describing the affair as a “David and Goliath story.”

For example, Custodia’s motion details the level of involvement Board staff had in guiding Kansas City to rejection, including helping draft the eventual memo.

Custodia presents a deposition with Esther George, then-president of the Kansas City Fed, as a smoking gun, with George admitting that she was unaware that the Board had made edits, additions, and corrections to the memo, assuming it was instead done by her staff.

Even so, George seems nonplussed by the revelation in the deposition itself, citing the novel nature of Custodia’s application and the need for Fed guidance.

The thrust of Custodia’s argument is that its application would have been approved if not for the Board of Governors’ meddling, which itself was prompted by the FTX collapse and eventual fallout and “choreographed” with anti-crypto statements by the White House.

“The behind-the-scenes plotting does not reflect well on the Board,” Custodia writes in its latest motion.

While a spokesperson for the Federal Reserve declined to comment for this piece, its argument seems clear. Even if Custodia does not engage in the type of banking practices, such as lending, that sunk Signature and Silvergate, crypto still presents a clear and documented risk.

Long has spent years devising a structure that would allow a digital asset bank entrance into the Fed system, which it rejected through established channels.

Crypto advocates poring over Custodia’s 64-page motion will instead find further proof of Operation Chokepoint 2.0. Presented in a different light, Long worked with a state government to create a new legal framework for crypto banking that should work with the Fed model.

Instead, the Fed rejected its innovative approach, in a potentially illegal manner.

Coinbase’s lawsuit against the SEC gets the lion’s share of the headlines, with some legal analysts predicting that it could go all the way to the Supreme Court and defang several federal agencies. Custodia’s petition could be just as consequential.

Related Articles:

Bitcoin Information & Resources (#GotBitcoin?)

Bitcoin Is The Fraud? JPMorgan Metals Desk Fixed Gold Prices For Years (#GotBitcoin?)

Israeli Startup That Allows Offline Crypto Transactions Secures $4M (#GotBitcoin?)

[PSA] Non-genuine Trezor One Devices Spotted (#GotBitcoin?)

Bitcoin Stronger Than Ever But No One Seems To Care: Google Trends (#GotBitcoin?)

First-Ever SEC-Qualified Token Offering In US Raises $23 Million (#GotBitcoin?)

You Can Now Prove A Whole Blockchain With One Math Problem – Really

Crypto Mining Supply Fails To Meet Market Demand In Q2: TokenInsight

$2 Billion Lost In Mt. Gox Bitcoin Hack Can Be Recovered, Lawyer Claims (#GotBitcoin?)

Fed Chair Says Agency Monitoring Crypto But Not Developing Its Own (#GotBitcoin?)

Wesley Snipes Is Launching A Tokenized $25 Million Movie Fund (#GotBitcoin?)

Mystery 94K BTC Transaction Becomes Richest Non-Exchange Address (#GotBitcoin?)

A Crypto Fix For A Broken International Monetary System (#GotBitcoin?)

Four Out Of Five Top Bitcoin QR Code Generators Are Scams: Report (#GotBitcoin?)

Waves Platform And The Abyss To Jointly Launch Blockchain-Based Games Marketplace (#GotBitcoin?)

Bitmain Ramps Up Power And Efficiency With New Bitcoin Mining Machine (#GotBitcoin?)

Ledger Live Now Supports Over 1,250 Ethereum-Based ERC-20 Tokens (#GotBitcoin?)

Miss Finland: Bitcoin’s Risk Keeps Most Women Away From Cryptocurrency (#GotBitcoin?)

Artist Akon Loves BTC And Says, “It’s Controlled By The People” (#GotBitcoin?)

Ledger Live Now Supports Over 1,250 Ethereum-Based ERC-20 Tokens (#GotBitcoin?)

Co-Founder Of LinkedIn Presents Crypto Rap Video: Hamilton Vs. Satoshi (#GotBitcoin?)

Crypto Insurance Market To Grow, Lloyd’s Of London And Aon To Lead (#GotBitcoin?)

No ‘AltSeason’ Until Bitcoin Breaks $20K, Says Hedge Fund Manager (#GotBitcoin?)

NSA Working To Develop Quantum-Resistant Cryptocurrency: Report (#GotBitcoin?)

Custody Provider Legacy Trust Launches Crypto Pension Plan (#GotBitcoin?)

Vaneck, SolidX To Offer Limited Bitcoin ETF For Institutions Via Exemption (#GotBitcoin?)

Russell Okung: From NFL Superstar To Bitcoin Educator In 2 Years (#GotBitcoin?)

Bitcoin Miners Made $14 Billion To Date Securing The Network (#GotBitcoin?)

Why Does Amazon Want To Hire Blockchain Experts For Its Ads Division?

Argentina’s Economy Is In A Technical Default (#GotBitcoin?)

Blockchain-Based Fractional Ownership Used To Sell High-End Art (#GotBitcoin?)

Portugal Tax Authority: Bitcoin Trading And Payments Are Tax-Free (#GotBitcoin?)

Bitcoin ‘Failed Safe Haven Test’ After 7% Drop, Peter Schiff Gloats (#GotBitcoin?)

Bitcoin Dev Reveals Multisig UI Teaser For Hardware Wallets, Full Nodes (#GotBitcoin?)

Bitcoin Price: $10K Holds For Now As 50% Of CME Futures Set To Expire (#GotBitcoin?)

Bitcoin Realized Market Cap Hits $100 Billion For The First Time (#GotBitcoin?)

Stablecoins Begin To Look Beyond The Dollar (#GotBitcoin?)

Bank Of England Governor: Libra-Like Currency Could Replace US Dollar (#GotBitcoin?)

Binance Reveals ‘Venus’ — Its Own Project To Rival Facebook’s Libra (#GotBitcoin?)

The Real Benefits Of Blockchain Are Here. They’re Being Ignored (#GotBitcoin?)

CommBank Develops Blockchain Market To Boost Biodiversity (#GotBitcoin?)

SEC Approves Blockchain Tech Startup Securitize To Record Stock Transfers (#GotBitcoin?)

SegWit Creator Introduces New Language For Bitcoin Smart Contracts (#GotBitcoin?)

You Can Now Earn Bitcoin Rewards For Postmates Purchases (#GotBitcoin?)

Bitcoin Price ‘Will Struggle’ In Big Financial Crisis, Says Investor (#GotBitcoin?)

Fidelity Charitable Received Over $100M In Crypto Donations Since 2015 (#GotBitcoin?)

Would Blockchain Better Protect User Data Than FaceApp? Experts Answer (#GotBitcoin?)

Just The Existence Of Bitcoin Impacts Monetary Policy (#GotBitcoin?)

What Are The Biggest Alleged Crypto Heists And How Much Was Stolen? (#GotBitcoin?)

IRS To Cryptocurrency Owners: Come Clean, Or Else!

Coinbase Accidentally Saves Unencrypted Passwords Of 3,420 Customers (#GotBitcoin?)

Bitcoin Is A ‘Chaos Hedge, Or Schmuck Insurance‘ (#GotBitcoin?)

Bakkt Announces September 23 Launch Of Futures And Custody

Coinbase CEO: Institutions Depositing $200-400M Into Crypto Per Week (#GotBitcoin?)

Researchers Find Monero Mining Malware That Hides From Task Manager (#GotBitcoin?)

Crypto Dusting Attack Affects Nearly 300,000 Addresses (#GotBitcoin?)

A Case For Bitcoin As Recession Hedge In A Diversified Investment Portfolio (#GotBitcoin?)

SEC Guidance Gives Ammo To Lawsuit Claiming XRP Is Unregistered Security (#GotBitcoin?)

15 Countries To Develop Crypto Transaction Tracking System: Report (#GotBitcoin?)

US Department Of Commerce Offering 6-Figure Salary To Crypto Expert (#GotBitcoin?)

Mastercard Is Building A Team To Develop Crypto, Wallet Projects (#GotBitcoin?)

Canadian Bitcoin Educator Scams The Scammer And Donates Proceeds (#GotBitcoin?)

Amazon Wants To Build A Blockchain For Ads, New Job Listing Shows (#GotBitcoin?)

Shield Bitcoin Wallets From Theft Via Time Delay (#GotBitcoin?)

Blockstream Launches Bitcoin Mining Farm With Fidelity As Early Customer (#GotBitcoin?)

Commerzbank Tests Blockchain Machine To Machine Payments With Daimler (#GotBitcoin?)

Bitcoin’s Historical Returns Look Very Attractive As Online Banks Lower Payouts On Savings Accounts (#GotBitcoin?)

Man Takes Bitcoin Miner Seller To Tribunal Over Electricity Bill And Wins (#GotBitcoin?)

Bitcoin’s Computing Power Sets Record As Over 100K New Miners Go Online (#GotBitcoin?)

Walmart Coin And Libra Perform Major Public Relations For Bitcoin (#GotBitcoin?)

Judge Says Buying Bitcoin Via Credit Card Not Necessarily A Cash Advance (#GotBitcoin?)

Poll: If You’re A Stockowner Or Crypto-Currency Holder. What Will You Do When The Recession Comes?

1 In 5 Crypto Holders Are Women, New Report Reveals (#GotBitcoin?)

Beating Bakkt, Ledgerx Is First To Launch ‘Physical’ Bitcoin Futures In Us (#GotBitcoin?)

Facebook Warns Investors That Libra Stablecoin May Never Launch (#GotBitcoin?)

Government Money Printing Is ‘Rocket Fuel’ For Bitcoin (#GotBitcoin?)

Bitcoin-Friendly Square Cash App Stock Price Up 56% In 2019 (#GotBitcoin?)

Safeway Shoppers Can Now Get Bitcoin Back As Change At 894 US Stores (#GotBitcoin?)

TD Ameritrade CEO: There’s ‘Heightened Interest Again’ With Bitcoin (#GotBitcoin?)

Venezuela Sets New Bitcoin Volume Record Thanks To 10,000,000% Inflation (#GotBitcoin?)

Newegg Adds Bitcoin Payment Option To 73 More Countries (#GotBitcoin?)

China’s Schizophrenic Relationship With Bitcoin (#GotBitcoin?)

More Companies Build Products Around Crypto Hardware Wallets (#GotBitcoin?)

Bakkt Is Scheduled To Start Testing Its Bitcoin Futures Contracts Today (#GotBitcoin?)

Bitcoin Network Now 8 Times More Powerful Than It Was At $20K Price (#GotBitcoin?)

Crypto Exchange BitMEX Under Investigation By CFTC: Bloomberg (#GotBitcoin?)

“Bitcoin An ‘Unstoppable Force,” Says US Congressman At Crypto Hearing (#GotBitcoin?)

Bitcoin Network Is Moving $3 Billion Daily, Up 210% Since April (#GotBitcoin?)

Cryptocurrency Startups Get Partial Green Light From Washington

Fundstrat’s Tom Lee: Bitcoin Pullback Is Healthy, Fewer Searches Аre Good (#GotBitcoin?)

Bitcoin Lightning Nodes Are Snatching Funds From Bad Actors (#GotBitcoin?)

The Provident Bank Now Offers Deposit Services For Crypto-Related Entities (#GotBitcoin?)

Bitcoin Could Help Stop News Censorship From Space (#GotBitcoin?)

US Sanctions On Iran Crypto Mining — Inevitable Or Impossible? (#GotBitcoin?)

US Lawmaker Reintroduces ‘Safe Harbor’ Crypto Tax Bill In Congress (#GotBitcoin?)

EU Central Bank Won’t Add Bitcoin To Reserves — Says It’s Not A Currency (#GotBitcoin?)

The Miami Dolphins Now Accept Bitcoin And Litecoin Crypt-Currency Payments (#GotBitcoin?)

Trump Bashes Bitcoin And Alt-Right Is Mad As Hell (#GotBitcoin?)

Goldman Sachs Ramps Up Development Of New Secret Crypto Project (#GotBitcoin?)

Blockchain And AI Bond, Explained (#GotBitcoin?)

Grayscale Bitcoin Trust Outperformed Indexes In First Half Of 2019 (#GotBitcoin?)

XRP Is The Worst Performing Major Crypto Of 2019 (GotBitcoin?)

Bitcoin Back Near $12K As BTC Shorters Lose $44 Million In One Morning (#GotBitcoin?)

As Deutsche Bank Axes 18K Jobs, Bitcoin Offers A ‘Plan ฿”: VanEck Exec (#GotBitcoin?)

Argentina Drives Global LocalBitcoins Volume To Highest Since November (#GotBitcoin?)

‘I Would Buy’ Bitcoin If Growth Continues — Investment Legend Mobius (#GotBitcoin?)

Lawmakers Push For New Bitcoin Rules (#GotBitcoin?)

Facebook’s Libra Is Bad For African Americans (#GotBitcoin?)

Crypto Firm Charity Announces Alliance To Support Feminine Health (#GotBitcoin?)

Canadian Startup Wants To Upgrade Millions Of ATMs To Sell Bitcoin (#GotBitcoin?)

Trump Says US ‘Should Match’ China’s Money Printing Game (#GotBitcoin?)

Casa Launches Lightning Node Mobile App For Bitcoin Newbies (#GotBitcoin?)

Bitcoin Rally Fuels Market In Crypto Derivatives (#GotBitcoin?)

World’s First Zero-Fiat ‘Bitcoin Bond’ Now Available On Bloomberg Terminal (#GotBitcoin?)

Buying Bitcoin Has Been Profitable 98.2% Of The Days Since Creation (#GotBitcoin?)

Another Crypto Exchange Receives License For Crypto Futures

From ‘Ponzi’ To ‘We’re Working On It’ — BIS Chief Reverses Stance On Crypto (#GotBitcoin?)

These Are The Cities Googling ‘Bitcoin’ As Interest Hits 17-Month High (#GotBitcoin?)

Venezuelan Explains How Bitcoin Saves His Family (#GotBitcoin?)

Quantum Computing Vs. Blockchain: Impact On Cryptography

This Fund Is Riding Bitcoin To Top (#GotBitcoin?)

Bitcoin’s Surge Leaves Smaller Digital Currencies In The Dust (#GotBitcoin?)

Bitcoin Exchange Hits $1 Trillion In Trading Volume (#GotBitcoin?)

Bitcoin Breaks $200 Billion Market Cap For The First Time In 17 Months (#GotBitcoin?)

You Can Now Make State Tax Payments In Bitcoin (#GotBitcoin?)

Religious Organizations Make Ideal Places To Mine Bitcoin (#GotBitcoin?)

Goldman Sacs And JP Morgan Chase Finally Concede To Crypto-Currencies (#GotBitcoin?)

Bitcoin Heading For Fifth Month Of Gains Despite Price Correction (#GotBitcoin?)

Breez Reveals Lightning-Powered Bitcoin Payments App For IPhone (#GotBitcoin?)

Big Four Auditing Firm PwC Releases Cryptocurrency Auditing Software (#GotBitcoin?)

Amazon-Owned Twitch Quietly Brings Back Bitcoin Payments (#GotBitcoin?)

JPMorgan Will Pilot ‘JPM Coin’ Stablecoin By End Of 2019: Report (#GotBitcoin?)

Is There A Big Short In Bitcoin? (#GotBitcoin?)

Coinbase Hit With Outage As Bitcoin Price Drops $1.8K In 15 Minutes

Samourai Wallet Releases Privacy-Enhancing CoinJoin Feature (#GotBitcoin?)

There Are Now More Than 5,000 Bitcoin ATMs Around The World (#GotBitcoin?)

You Can Now Get Bitcoin Rewards When Booking At Hotels.Com (#GotBitcoin?)

North America’s Largest Solar Bitcoin Mining Farm Coming To California (#GotBitcoin?)

Bitcoin On Track For Best Second Quarter Price Gain On Record (#GotBitcoin?)

Bitcoin Hash Rate Climbs To New Record High Boosting Network Security (#GotBitcoin?)

Bitcoin Exceeds 1Million Active Addresses While Coinbase Custodies $1.3B In Assets

Why Bitcoin’s Price Suddenly Surged Back $5K (#GotBitcoin?)

Zebpay Becomes First Exchange To Add Lightning Payments For All Users (#GotBitcoin?)

Coinbase’s New Customer Incentive: Interest Payments, With A Crypto Twist (#GotBitcoin?)

The Best Bitcoin Debit (Cashback) Cards Of 2019 (#GotBitcoin?)

Real Estate Brokerages Now Accepting Bitcoin (#GotBitcoin?)

Ernst & Young Introduces Tax Tool For Reporting Cryptocurrencies (#GotBitcoin?)

Recession Is Looming, or Not. Here’s How To Know (#GotBitcoin?)

How Will Bitcoin Behave During A Recession? (#GotBitcoin?)

Many U.S. Financial Officers Think a Recession Will Hit Next Year (#GotBitcoin?)

Definite Signs of An Imminent Recession (#GotBitcoin?)

What A Recession Could Mean for Women’s Unemployment (#GotBitcoin?)

Investors Run Out of Options As Bitcoin, Stocks, Bonds, Oil Cave To Recession Fears (#GotBitcoin?)

Goldman Is Looking To Reduce “Marcus” Lending Goal On Credit (Recession) Caution (#GotBitcoin?)

Our Facebook Page

Your Questions And Comments Are Greatly Appreciated.

Monty H. & Carolyn A.