On September 16, 2020, Kraken, one of the largest and oldest digital asset exchanges, was granted a Special Purpose Depository Institution (“SPDI”) charter by Wyoming. Kraken is the first digital asset firm in the U.S. to be granted an SPDI charter.
Wyoming authorized SPDIs in 2019. An SPDI may engage in limited deposit-taking and may conduct fiduciary asset management, custody and related activities. An SPDI may not make loans with customer deposits of fiat currency and is not required to obtain deposit insurance from the Federal Deposit Insurance Corporation. Under the Wyoming statute, an SPDI may accept deposits only from entities, not natural persons. Depositors must provide sufficient information to the SPDI to allow it to comply with its anti-money laundering, customer identification and beneficial ownership requirements.
An SPDI is required to maintain 100% of its fiat demand deposits as liquid assets including cash, treasuries, and U.S. agency obligations. The required initial capital requirement for each institution seeking an SPDI charter will vary by applicant, but the Wyoming Division of Banking has noted that it will expect an applicant to have initial capital of at least 1.25-1.75% of its assets under custody or $10,000,000, whichever is greater. The SPDI charter is therefore limited to larger, more established firms such as Kraken.
An SPDI charter may potentially offer licensees some business advantages. Because it is a state-chartered bank, an SPDI is a “qualified custodian” for purposes of Securities and Exchange Commission regulations for registered investment advisers (“RIAs”). This means that Kraken Financial may act as custodian for a RIA that holds investor funds in cryptocurrencies or other crypto-assets,. Kraken has indicated that it is currently developing the policies and procedures that will allow it to act as a qualified custodian.
Further, having an SPDI charter could enable licensees to recognize cost savings by not having to partner with one or more other financial institutions to provide customer services. An SPDI may also have direct access to at least some parts of the payment system, which may enable it to transfer funds for customers directly without retaining a separate payments provider.
There are, however, several potential drawbacks to the SPDI charter. First, state-chartered banks are generally subject to broader and more stringent regulations than money transmitters under state law. Second, an SPDI will be subject to federal regulation if it obtains deposit insurance or if it becomes a member of the Federal Reserve system. Under Wyoming law an SPDI may, but is not required to, become a member of the Federal Reserve system.
Third, the SPDI charter does not entitle the SPDI to operate in another state without applying for and receiving approval from that state’s banking regulator. An SPDI will be subject to the jurisdiction of the banking regulator of each state in which it operates. Moreover, SPDIs are subject to bank capital requirements including the initial capital requirement discussed above.
Finally, an SPDI’s status as an uninsured bank (assuming it does not obtain FDIC deposit insurance) means that it would not receive the same regulatory treatment (and thus, the same business advantages) as a bank that has FDIC insurance. For example, in some states an entity is only a “bank” if takes deposits that are insured by the FDIC, and some may afford an SPDI different treatment than a bank with FDIC insurance under their banking or securities laws.
Kraken’s SPDI charter re-affirms Wyoming’s status as a “most favored jurisdiction” for digital asset firms. While Wyoming’s initial capital requirements likely will constitute a barrier for smaller firms to obtain an SPDI Charter, the SPDI charter may be attractive to other established and well capitalized firms in the future. In the meantime, Kraken may enjoy certain competitive advantages as a result of being the only digital asset firm with a state bank charter.