A year that saw unprecedented lockdowns and economic slowdowns also saw Bitcoin prices reach new highs, surging nearly 600% since the beginning of 2020 and stirring a movement toward greater acceptance of virtual currencies in the financial world.
In early 2021, Tesla announced, through a Securities and Exchange Commission filing, that it had purchased $1.5 billion worth of Bitcoin and would start accepting payments in the cryptocurrency on a limited basis. Mastercard announced plans to support select cryptocurrencies directly on its network this year. Morgan Stanley will launch access to three funds that enable ownership of Bitcoin, but only for its clients with an aggressive risk tolerance and at least $2 million in assets held by the firm. And, J.P. Morgan announced the formation of a cryptocurrency exposure basket, which is a debt instrument portfolio that includes companies that hold Bitcoin as an asset or are in industries complementary to the cryptocurrency industry.
But the movement toward greater acceptance is not guaranteed. At a recent conference, Federal Reserve Chairman Jerome Powell confirmed that he continues to view Bitcoin and other cryptocurrencies as “highly volatile” speculative assets.
Even as Bitcoin prices fluctuate, state lawmakers continue to introduce legislation to authorize virtual currencies, with measures pending in 25 states during the 2021 legislative session. Arkansas, Florida and Kentucky have bills that would define virtual currency under their money services or transmission statutes, while Indiana, North Dakota and South Carolina would add coverage for virtual currencies under their unclaimed property acts. Illinois and Nevada have pending bills to revise virtual currency provisions under their unclaimed property laws that already include virtual currencies.
Following Wyoming’s 2019 legislation that created special purpose depository institutions (SPDI) to assist blockchain innovators and the growing use of virtual currencies and other digital assets, eight states introduced legislation to authorize banks to provide custodial services or create SPDI charters.
Special Purpose Depository Institutions
What are SPDIs and how are they different from traditional banks? While a traditional bank serves its community and customers by safeguarding customer deposits and making loans, an SPDI serves as a custody bank for digital assets, focusing on asset custody and providing access for the custody bank customers to conduct securities and commodities market transactions. Traditional and custody banks are regulated as banks under state and federal laws because they accept customer deposits, but there some differences in regulation.
Under the Wyoming SPDI law, any state-chartered SPDI must maintain liquid assets valued at 100% of its depository liabilities in either U.S. currency or investments and is not required to obtain federal deposit insurance through the FDIC. Plus, SPDIs cannot make loans funded by its deposits, like a traditional bank can.
Toward the end of 2020, Wyoming approved SPDI charters for two applicants: Kraken Bank and Avanti Bank & Trust. “Wyoming’s new charter will allow those using digital assets, like cryptocurrency, to access reliable financial services, protect consumers and allow businesses a way to hold digital assets safely,” Wyoming Governor Mark Gordon (R) says.
Traditional banking institutions have raised concerns regarding cryptocurrency businesses.
Obtaining the SPDI charter lets cryptocurrency businesses apply for master accounts with the Fed to get access to the Fedwire payment system, which lets participants send or receive payments on behalf of corporate or individual clients, among other services. Traditional banking institutions have raised concerns regarding cryptocurrency businesses obtaining SPDIs.
“These entities see the value in getting access to Federal Reserve payments systems like the Fedwire Funds Service and the automated clearinghouse (ACH) network, but do not want to play by the same rules as traditional banks,” Rob Nichols, CEO of the American Bankers Association, says. “Finding chartering authorities that are willing to redefine what it means to be a bank introduces risks to the financial system’s safety and soundness, consumer protection laws and international reputation.”
The Bank Policy Institute has offered cautious support for Wyoming’s effort to encourage Kraken and other cryptocurrency businesses to come to the state as part of the regulated banking sector. “We hope that the state works together with federal regulators like the Federal Reserve to impose robust standards on Kraken and similar businesses, in recognition of their potential risks,” the institute has said.
Recently, the Office of the Comptroller of the Currency (OCC) took several steps that impact cryptocurrency businesses, including the creation of a new national charter for nondepository fintech companies, a move that alters the state-federal dual banking system by preempting state regulation.
“If facilitating fintech innovation and protecting consumers is the goal, preempting state licensing and consumer laws with a federal charter is not the answer,” says John Ryan, president and CEO of the Conference of State Bank Supervisors (CSBS). “State regulators have been the primary regulator of fintech companies. Federal preemption in financial services regulation should be the exception, not the rule. If misapplied, preemption can undermine financial market competition, innovation and consumer protections.”
NCSL strongly supports the preservation of the dual banking system established by Congress and believes the system enables state governments to apply laws and regulations that best serve the needs of local economies and citizens. Furthermore, any federal preemption of state banking authority should be done only by Congress, not federal agencies like the OCC. A lawsuit filed against the OCC by the bank supervisors conference and the New York Department of Financial Services is still in litigation.
In addition to the fintech charter, the OCC has, through interpretative letters, increased the trust and custodial powers of national banks for cryptocurrency assets. Based on the letters, the OCC conditionally approved the charter conversion application for Anchorage Trust Co., permitting the company to become a national trust bank.
Since Bitcoin’s beginnings in a 2008 white paper published under the pseudonym Satoshi Nakamoto and the first Bitcoin being mined in 2009, virtual currencies have exploded in number and value. Bitcoin is now just one of many virtual currencies used as a medium of exchange by individuals and merchants around the world. Who knows what the future holds for virtual currencies and if their acceptance and market value will continue to rise?
Heather Morton is a program principal in NCSL’s Fiscal Affairs Program.