As the fallout from the collapse of the Bahamas-based FTX cryptocurrency exchange continues to shake the financial technology sector, Wyoming’s regulatory laws regarding digital assets are gaining more notice.
That regulatory structure could create more interest by fintech companies in moving their operations to the state, Wyoming digital asset advocates say.
Wyoming is ahead of other states in requiring transparency and proof of reserves in how digital assets of depositors are held by state-chartered financial institutions such as the special purpose depository institutions (SPDIs). There are no similar federal laws to handle cases like FTX or its relationship with an affiliated trading firm, Alameda Research, both owned by Sam Bankman-Fried, that led to bankruptcy and billions of dollars in lost digital assets for account holders.
U.S. Sen. Cynthia Lummis, R-Wyo., is using the FTX bankruptcy, the 10th largest bankruptcy in U.S. history, to highlight legislation she is cosponsoring with U.S. Sen. Kirsten Gillibrand, D-N.Y., inspired by Wyoming law. Called the Responsible Financial Innovation Act, Lummis said during a November Senate Banking Committee hearing that the act would have prevented FTX’s insolvency.
“My home state of Wyoming saw this problem coming in 2019, and banned banks and digital asset exchanges from re-lending customer digital assets,” Lummis said. “That’s probably surprising to many of our witnesses today, but Wyoming has a surprisingly tough set of rules for digital assets. It’s obvious that Congress needs to regulate digital assets, and that Lummis-Gillibrand is the legislation that most comprehensively addresses these issues in a way that balances consumer protection and responsible innovation.”
The past five years has seen Wyoming pass dozens of innovative laws to regulate digital assets and related blockchain-based concerns to encourage economic benefits for the state, not unlike what happened in South Dakota with laws that encouraged credit card companies to headquarter there.
“Events with FTX really show the importance of providing a sound regulatory structure with quality oversight,” said state Sen. Chris Rothfuss, D-Laramie. “As we develop Web3 space, blockchain and cryptocurrency financial technologies, it’s essential.”
Rothfuss co-chairs the Wyoming Legislature’s Select Committee on Blockchain, Financial Technology and Digital Innovation. He said the laws that Wyoming has in place should encourage fintech companies to incorporate in the state, if not move here.
To offer an environment where those holding digital assets can feel confident their assets are protected, Rothfuss said the select committee is refining a proposal for the 2023 session of the Legislature to establish a Wyoming stablecoin. The Wyoming Stable Token Act, passed by the 2022 Wyoming Legislature, was vetoed by Gov. Mark Gordon earlier this year over administrative concerns in the Secretary of State’s Office that Rothfuss believes are addressed in the latest draft by the select committee.
Stablecoins are virtual currency tied to stable assets, like cash and U.S. Treasury bills. Wyoming would be the first government in the nation to create its own stablecoin that would be used for digital asset transactions.
“A stable token needs to be stable, and it needs to be something that people can have confidence in,” Rothfuss said. “This is an opportunity for the state of Wyoming to step up, as we have been, and lead and provide that clarity, bright line guidance and opportunity for this financial sector.”
Federal recognition sought
Federal recognition of Wyoming SPDI’s would go a long way to bringing more fintech businesses to domicile in the state, Rothfuss said.
Caitlin Long, founder of Custodia Bank in Cheyenne, has been waiting for two years for the Federal Reserve Bank of Kansas City to issue a master account. Custodia, formerly Avanti, was among the first entities to be chartered as a Wyoming SPDI. In June, it filed lawsuits against the Federal Reserve Board and Kansas City Fed Board over the lack of action.
Long also said laws governing Wyoming SPDIs that handle digital assets would have prevented the FTX situation and diminished the influence that leverage has had in the crypto sector. Leverage is when individuals or companies borrow funds to buy and trade cryptocurrencies or other digital assets with the aim to gain a high return before the loan is due. When the price of a digital asset falls below the value of the loan, companies and investors can go bankrupt. Prices can go up or down due to supply and demand, public perception of the cryptocurrency, government policies and other reasons.
Long, a veteran of Wall Street, is on record against leveraging cryptocurrencies like the risky behavior seen with FTX using depositor assets for Alameda Research to make questionable investments.
“I’ve always been critical of leverage with Bitcoin,” Long said. “I have always predicted that this was going to end in tears.”
More importantly, Long said a Wyoming SPDI would have provided owners of digital assets a secure place to hold them, encouraging fintechs to work within Wyoming laws and bringing the state revenue through transactions.
That doesn’t mean Wyoming hasn’t benefited as a result of its digital asset laws, Long said. She mentioned companies like Tacen, Elite Mining and VMAccel that have located in Cheyenne.
However, the potential revenues from assets held in Wyoming SPDIs are being held up by the Fed’s lack of action on issuing banking master accounts, as are the jobs that a growing fintech sector would bring to the state, she said.
“The delays are allowing other states to catch up to Wyoming,” Long said.
There’s a lot of noise surrounding the viability of cryptocurrency and digital assets due to scams and schemes resulting from the lack of regulation, said Steve Lupien, director of the University of Wyoming Center for Blockchain and Digital Innovation.
“Things like this have happened before when you look at the stock market crash (of 1929), the dot-com bubble and the 2008 financial crisis,” Lupien said. “Bitcoin itself isn’t the problem. It’s doing what it is designed to do.”
While the “Crypto Winter” that started last year seems to be getting “colder” with the FTX collapse, and other crypto and digital asset companies are rumored to be on the cusp of crisis, Lupien believes Wyoming will still attract new businesses, thanks to its regulatory foresight and its support of the underlying technology behind cryptocurrencies, blockchain.
“Regarding blockchain, Wyoming needs to do a better job of advertising the advantage we have in this space,” Lupien said. “The university is working hard at this. But we really need all oars in the state pulling in the same direction to capitalize on this advantage.”
Due to delays in Fed approval of Wyoming SPDIs and growing national interest in crypto regulation, Lupien estimates Wyoming has only three years before other states catch up to what it offers.
Representatives of a new Wyoming blockchain-based business, TruckCoinSwap, are advocating that the state be more proactive in promoting its digital asset legal advantages.
TruckCoinSwap founders Jacob Centner, CTO; Phil Schlump, CCO; and Todd Zeigler, CEO, spoke at the November meeting of the Select Committee on Blockchain, Financial Technology and Digital Innovation in Cheyenne.
The three discussed their Wyoming startup’s plan to disrupt traditional payment processes in the trucking industry using blockchain that would speed up payments for shippers to truckers, as well as saving significant amounts of money by avoiding banking transaction fees.
Since launching the startup at the Wyoming Blockchain Stampede at UW in September, TruckCoinSwap cofounders have been traveling across the country, attending trucking industry trade shows to publicize their business.
Zeigler told the committee that at a recent show in Los Angeles, Schlump met with 20 blockchain VC funds.
“Every fund he spoke to naturally asked where TruckCoinSwap is based,” Zeigler said. “And when he told them Wyoming, every fund he spoke to was surprised. He had to explain to them that Wyoming has passed dozens of bills to provide a real regulatory framework for blockchain companies.”
And that’s a problem, he said.
“Wyoming has yet to market itself to the startup world, to technology startup companies and venture companies,” Zeigler said.
Schlump told the committee while the state has marketed industries like tourism, he believes it needs to market specifically to the people that can influence new startup companies, such as venture funds and angel groups.
“This is the ‘blockchain world,’ where half of everything is marketing,” Schlump said. “Tremendous work will go to waste if you don’t get out there and start contacting these people to make certain that they understand why Wyoming is unique and special.”
He said Wyoming has something to offer the blockchain market that no one else does, which is regulatory frameworks that are different than the rest of the United States, and different than the rest of the world.
“And there is a lot of value to that,” he said.