Ripple price Today – While Washington dithers, Wyoming and other US states mine for crypto gold

The United States is divided politically these days into red states and blue states, and increasingly, it seems to be fracturing into cryptocurrency-friendly and crypto-wary locales, too. On Feb. 21, it was revealed that San Francisco-based Ripple Labs had registered as a Wyoming business. Wyoming is arguably the most blockchain and cryptocurrency-welcoming state in the United States. 

Meanwhile, several days later, New York State’s attorney general announced a settlement of the office’s long-standing investigation into crypto trading platform Bitfinex for illegal activities. As a result, Bitfinex and affiliated Tether must pay $18.5 million for damages to the state of New York and submit to periodic reporting of their reserves.

Wyoming and New York — poles apart on the crypto regulatory spectrum — were both making industry headlines in the same week in other words. The irony wasn’t lost on Timothy Massad, former chairman of the U.S. Commodity Futures Trading Commission and now a senior fellow at Harvard University at Kennedy School, who told Fintech Zoom:

“Federal regulation of crypto assets is like swiss cheese — full of holes — and that has meant a smorgasbord at the state level, with Wyoming actively luring crypto businesses and the New York attorney general bringing aggressive enforcement actions as we saw this week with Tether and Bitfinex.”

Whether this “smorgasbord” is a good thing is a matter of some debate. Crypto havens like Wyoming can be centers of innovation, pushing a potentially revolutionary technology further forward, as Wyoming’s recently elected U.S. Senator Cynthia Lummis emphasized this week in a Chamber of Digital Commerce panel discussion with Miami’s Mayor Francis Suarez, another crypto enthusiast.

A complex fabric

But it also leads to regulatory uncertainty that gives entrepreneurs a case of hypertension. As Stephen McKeon, an associate professor of finance at the University of Oregon, told Fintech Zoom: “Our regulatory system is a complex fabric of multiple agencies at both the state and federal level.” He further emphasized that “they need to coordinate on the topic of crypto assets because this asset class doesn’t map cleanly to the existing regulatory structure.”

Asked if, from a business standpoint, Ripple and others were making a smart business move registering in crypto-warm states like Wyoming with a higher degree of regulatory certainty and freedom — as well as lower taxes — McKeon added: “Businesses strive to reduce regulatory uncertainty. If moving to Wyoming helps to achieve that objective, then it’s a smart move.”

Others could follow Ripple. Zachary Kelman, managing partner at Kelman Law, told Fintech Zoom: “Many crypto projects fled New York after the introduction of the onerous BitLicense back in 2015. I expect more projects to relocate in Wyoming, as well as other crypto-friendly states like New Hampshire.”

Wyoming created a stir in 2019 when its legislature authorized the chartering of special purpose depository institutions, or SPDIs, that can receive both deposits and custody assets, including cryptocurrency. The state’s banking division itself acknowledged that “it is likely that many SPDIs will focus heavily on digital assets, such as virtual currencies, digital securities and utility tokens,” though they could also deal with traditional assets. SPDIs can’t make loans like traditional banks, however.

Kraken Bank was the first business to receive a Wyoming SPDI bank charter in September 2020, followed by Avanti Bank and Trust in October, and there are “three more [SPDIs] in the pipeline” said Lummis at the Chamber of Digital Commerce’s Feb. 25 event. Avanti founder and CEO Caitlin Long had earlier suggested that Wyoming’s SPDIs potentially were “a solution to the #BitLicense problem” faced by crypto companies because “New York law exempts national banks from the BitLicense.”

But even though the Wyoming SPDI’s are state-chartered institutions, not national banks, “federal law protects parity of national banks and state-chartered banks,” continued Long, and following that logic, she concluded that SPDIs represented “a passport into some 42 U.S. states without the need for additional state [crypto] licenses.”

An accident waiting to happen?

Not all are enthralled by Wyoming’s new special-purpose banks, though. The Bank Policy Institute suggested that Wyoming’s SPDIs could be an “accident waiting to happen.” The BPI noted in September that Kraken was “the first digital asset company in U.S. history to receive a bank charter recognized under federal and state law” but warned that its business model “is inherently unstable under stress” because the new bank is funded by uninsured, demandable retail deposits “and relies on a pool of assets such as corporate bonds, munis and longer-term Treasuries to fund redemptions under stress.”

David Kinitsky, CEO of Kraken Bank, in a conversation with Fintech Zoom, said that he believes the BPI blog post “comes from a lobbyist group funded by, and working on behalf of, the world’s biggest banks” and rests “on a slew of faulty assumptions,” adding further:

“[It’s] comical and hypocritical that they think their fractional reserve model along with its total reliance on asset exposure and interest rate environment is somehow less risky than a full reserve custodian bank that won’t do any lending and has a diverse set of adjacent revenue streams.”

Others have opined that innovation centers like Wyoming were merely filling the void left by the federal government, which has yet to take a coherent stance vis-a-vis the burgeoning crypto market. Benjamin Sauter, a lawyer at Kobre & Kim LLP, told Fintech Zoom: “Wyoming is showing that individual states can play a meaningful role in crafting a coherent legal framework for the crypto/blockchain industry — particularly when it comes to state taxation as well as commercial and some banking issues.”

By comparison, according to him, the U.S. federal government “hasn’t really made an effort to create such a framework, and this has led to a lot of regulatory inefficiencies and general confusion.”

Innovator or loophole?

So, what about the notion that Wyoming merely created a means for its new banks to lure firms and investors based in more regulated states like New York? Kelman told Fintech Zoom on the matter: “Many institutions operate entities all over the world, not just the United States. New York has jurisdiction over New Yorkers — but not any company related to a company that has had operations there.”

“Wyoming can and is becoming a center for crypto business and innovation,” Kinitsky told Fintech Zoom, adding: “Certainly, there are ready similar examples within financial services like the credit card industry in South Dakota and ILC banks in Utah….SPDI banks have similar frameworks for being able to operate across the country and indeed internationally.”

McKeon agreed that Wyoming was following the South Dakota playbook: “South Dakota created favorable legislation for banks around interest rates and fees in the 1980s and now has one of the highest concentrations of bank assets in the U.S.,” adding further:

“By creating an environment that allows crypto projects to operate with a higher degree of regulatory certainty and freedom, Wyoming is likely to attract similar relocation within crypto.”

Will others join in?

Of course, other states could follow Wyoming’s lead. Kelman said: “I also expect larger states, like Florida, to follow suit with more crypto-friendly guidance, especially after Miami Mayor Francis Suarez’s overtures to the crypto community.” However, he further stressed that “given Wyoming’s small size and relative obscurity, I don’t know if it will remain a haven for an entire industry in the way Delaware has been for incorporations and corporate governance.”

As reported, Mayor Suarez is looking to develop some of “the most progressive crypto laws” and proposing within his jurisdiction innovations like paying city workers’ wages in Bitcoin (BTC) and purchasing BTC for the municipality’s treasury. Senator Lummis applauded the mayor’s initiatives at the Chamber of Digital Commerce’s panel, inviting him to “look at Wyoming’s legislative framework as a template and then build on it” by developing new Bitcoin “components,” including a pension plan for Miami workers that includes Bitcoin — something Suarez is looking into.

Multiple innovative centers like Miami and Wyoming, among others, could advance technological progress generally, she suggested. Suarez, for his part, said: “One of the things that we want to do is imitate Wyoming’s very successful integration of crypto into their community.”

Meanwhile, Avanti’s Long remains an ardent booster for her state: “Why should crypto companies redomicile to Wyoming?” she asked rhetorically on Feb. 21 following the news that Ripple Labs had registered as a Wyoming limited liability company, adding:

“No state corp tax, no franchise tax, crypto exempt from property & sales tax, our commercial laws clarify crypto legal status, crypto-friendly banks opening soon, access to crypto-open gov/legislators/US senator — all laws open-source.”

Is Wyoming good for BTC adoption?

What exactly do these tech-friendly states and cities mean for cryptocurrency adoption? Sauter was cautiously optimistic: “It’s possible that Wyoming’s efforts will have some trickle-up effects, should the federal government ever get its act together.” He stated further that there is also a major risk as businesses may be “lulled into a false sense of security and potentially conflating Wyoming’s regime for compliance at the federal level.”

Kinitsky told Fintech Zoom that the convergence between crypto and banking, as is happening in Wyoming, “portends an important step toward mainstream adoption,” while McKeon added that crypto users “are primarily concerned with access to products and features. Better products translate to increased adoption.” Therefore, if Wyoming-type legislation enables crypto projects “to provide new and desirable features by mitigating regulatory risk for the providers, then it will be a positive force for general public adoption.”

Many, though, still seem to be treading water until the federal government acts to provide some legislative/regulatory structure to the nascent blockchain and cryptocurrency industry. According to Sauter, “as great and encouraging Wyoming’s recent actions are, there is only so much one state can do.” Massad also told Fintech Zoom:

“This regulatory confusion creates higher costs and uncertainty. There’s still plenty of money and talent in this country flowing into crypto innovation, but we need greater regulatory clarity to ensure investor protection, financial stability and responsible innovation.”