Two weeks ago, Kraken Financial received with great fanfare the first Special Purpose Depository Institution (SPDI) charter from the Wyoming banking division. Through the hard work of well-known players such as Tyler Lindholm (R-Sundance) and Caitlin Long, CEO of Avanti Bank, the foundation was established to make Wyoming the most crypto-friendly jurisdiction in the United States. . Now that the laws are passed and the charter published, it is up to regulators in the Wyoming banking division to begin the very first reviews of crypto banks.
For reference, I have previous experience with the Federal Deposit Insurance Corporation (FDIC) where I reviewed banks in Texas, Louisiana, and Arkansas. Almost always, banks have a combination of federal and state reviewers if the charter is state-issued, with the FDIC or the Federal Reserve as the federal regulator. If the charter is national, the Office of the Comptroller of the Currency (OCC) will review the bank, which means that only federal regulators conduct bank reviews.
However, Wyoming’s new SPDI charter for Kraken Financial creates a very unique circumstance that I think created “unicorn regulators” for Fintech, who are at a historic point in preparing for asset banking exams. digital, much the same as when the FDIC began its first exams in 1933 and the OCC began exams in 1863. I had a unique opportunity to spend time talking to both Commissioner Albert L. Forkner from the Wyoming Banking Division and Chris Land, General Counsel, for an overview of this historic moment in banking reviews. . Below is my Q&A with them.
Jason brett: All regulators started somewhere from scratch. Whether it was the FDIC in 1933 about to conduct its first review, there’s probably a sense of history you have in what you do. What is Mr. Forkner?
Al Forkner: Although Wyoming was quite a pioneer in this area, fortunately we have a good base to build on. Regulators have overseen banks since the 1800s. In Wyoming, the first State Bank Examiner took office in 1892. Think about the evolution of banking and financial services since then. Today is really no different, other than the rate of change is much faster. I am therefore working to ensure that my staff, who are extremely competent, have all the necessary tools to properly supervise and review this new banking charter. If we happen to do a bit of history along the way, this might be something exciting to be a part of.
Brett: Who will perform the Kraken banking reviews? Most are familiar with the FDIC or the Federal Reserve alongside state regulators, or the OCC if you are a national bank. Who is responsible for issuing a review report in this case?
Forking: The Wyoming Banking Division is the licensing authority and primary supervisor of Kraken. The division is responsible for carrying out regular off-site monitoring of the Kraken, performing regular comprehensive reviews and working with management to ensure a safe and healthy institution. The division will be responsible for publishing the examination reports.
Brett: Can you tell us a bit about how you determine what the review policies and procedures will look like?
Fork : Great question. There is currently no policy manual or review procedure for banking digital asset activities. The Office of the Comptroller of the Currency (OCC) recently released two guidance documents claiming that domestic banks can provide certain digital asset services. However, legal authority is not enough, there must be oversight policies. Banks need to know how their regulators perceive the details of these activities, what their expectations are and best practices.
Wyoming is currently on the cusp of completing the first comprehensive set of policy and review procedures manuals for banking digital asset operations. It is the first of its kind in the United States and among the first in the world.
These documents will cover areas such as BSA / AML / KYC / sanctions, custody and fiduciary activities, information technology, risks related to payment systems and banking operations. These documents will give banks the details they need, balancing both the innovative nature of digital assets with the need for security and soundness in the US banking system. These manuals and procedures build directly on existing banking manuals and guidelines, with additional flavor and risk management considerations for digital assets.
Brett: Commissioner, From the perspective of seeing yourself as a “unicorn regulator,” should the people of Wyoming be concerned that there is now a bank without FDIC insurance?
Forking: No, for several reasons: First, every SPDI will be regulated by the Division in much the same way as a traditional bank. The Division is one of the few banking regulators in the world to have developed knowledge relating to digital assets. Second, the FDIC’s insurance limit only applies up to $ 250,000 and would not apply to digital assets, like bitcoin, even if the bank was FDIC insured. Under Wyoming law, 100% of each client’s deposit must be protected (which will be regularly verified by the Division), so there is no limit of $ 250,000. Third, each SPDI is required to commit to paying $ 15,000,000 + to the state of Wyoming to cover the costs of receivership. This money is held in a separate account at another bank under the control of the Division. This money would be available for the receivership fee, so the state of Wyoming would not be left behind. Finally, in the very unlikely event that the Division is required to close a PSDI, the Division already has procedures in place to manage a receivership. They are similar to the FDIC procedures for closing a bank.
Brett: Chris, recently there have been reports involving providers like Chainalysis and Promontory Financial, how do they help you in preparing for your exam?
Earth: Chainalysis, and potentially other vendors, will help the division comply with BSA / AML / KYC / sanctions, both on an ongoing offsite basis and during regular reviews. They will also be available to conduct more targeted investigations, if necessary.
Promontory Financial Group, a well-respected firm of market professionals and former regulators, worked with the division to develop our policy manuals and review procedures. They are quite insightful and have helped us gain an overview of how international regulators view digital asset business, as well as fine-tune a fine level of detail to guide our bank review staff and each SPDI. .
Brett: Are there any principles or key principles for the “digital asset oversight guidance” that you have already gleaned during your preparation?
Earth: First, we take a principled approach when we can. Digital assets are an evolving space and we try to facilitate responsible innovation. Second, existing principles relating to banking operations (BSA / AML, custody, etc.) should apply to the extent possible. Third, we take a collaborative approach, developing these documents with input from our federal and state regulatory colleagues. Fourth, we are committed to creating a comprehensive product and, for the first time, completely covering all aspects of the banking digital asset business. We hope the product will stand the test of time and start a national conversation on these issues.
Brett: What would you say to people in Wyoming or elsewhere who don’t understand crypto or “digital banking,” who would convince them that this is a safe and healthy institution based on your exams?
Earth: We will apply roughly the same standards to every SPDI that we apply to existing banks. Each bank will be reviewed regularly and has similar capital requirements as a traditional bank. In addition, we have detailed policies and procedures on how these banks are to operate. In many ways, digital assets are just a new asset class for banks.
Brett: What does it mean that, in the case of Kraken, they will “request a main account from the Fed”? How will this help the bank operate outside of the state of Wyoming and in other states?
Earth: Kraken is eligible to request an account relationship with the Federal Reserve System. This will potentially allow them to make payments with the Federal Reserve and conduct other related activities. Access to the payment system is one of the distinguishing features of a “bank”.
Brett: What happens if a bank becomes a member of the Fed or obtains FDIC insurance? Would that mean that federal regulators would then begin to play a role in reviews?
Earth: Kraken can apply to become a member of the Federal Reserve System and obtain FDIC insurance, although it is not required to do so. If Kraken were to pursue either option, the Federal Reserve or FDIC would conduct joint reviews of Kraken alongside the Division and help us ensure their safe and healthy operation on an ongoing basis.
Brett: Do you see what the OCC is doing as catching up with its interpretive letters? What advice would you give them?
Earth: Wyoming has been working on these issues in detail since 2018, and it’s great that the OCC also recognizes the importance of responsible innovation in the US banking system.
Brett: Are you going to take a safety and soundness exam and a BSA exam?
Earth: Yes, each SPDI will receive roughly the same review as any US bank, with more emphasis on BSA / AML / KYC / sanctions, custody and fiduciary activities, and information technology.
Brett: Are you going to make the review book public the way other regulators sometimes do once it’s refined?
Earth: These documents will be accessible to the public. The Division will determine the best way to do this in the near future.
Brett: Thanks to you two.