Intro and Background:
Technology innovation tends to happen at a rapid pace, as companies take on a “fail fast” approach to ensure that products are responsive to market demands. If technology advances at the speed of sound, the legal structures and regulations often struggle to keep up. In the blockchain and digital asset space, an antiquated regulatory framework does not attract innovative businesses or capital.
Wyoming Makes Its Move:
This year, Wyoming enacted a series of new laws to create a sound and “user-friendly” regulatory regime for digital assets and digital banking. This regime results in Wyoming being regarded as a leading venue for locating digital asset businesses
Wyoming’s new structures separate digital assets into three classes: digital securities, digital consumer assets, and virtual currencies. The first two categories, digital securities and digital consumer assets, track the current framework from the Howey test, which categorizes assets as either a security or a utility. The third category, virtual currencies, adds a definition of the unique nature of cryptocurrencies. Wyoming also codifies that all of these digital assets constitute intangible personal property.
Wyoming Digital Banks: The SPDI. Wyoming also created a new category of state-chartered depository institutions. These Special Purpose Depository Institutions (SPDI) will be required to have 100% reserves, cannot lend, will be for business depositors only, and will not be required to have FDIC insurance. The benefit here is that companies that have been excluded from traditional banking options will now be able to access basic banking services.
What these friendlier regulations will mean for the U.S. crypto market remains to be seen, but Wyoming is hoping that these friendlier regulations will lead to an influx of capital. Just as Delaware has made itself into a friendly jurisdiction for corporations, Wyoming seeks to be the same for the digital assets industry. The hope is that companies will choose either to legally domicile in Wyoming or physically locate their business in Wyoming. Like Delaware, Wyoming has set up its own Chancery Court to resolve disputes involving crypto businesses, and the state has a very business friendly tax regime.
Colorado, no stranger to emerging markets, is set to enact its own laws to make their state more welcoming for digital asset companies. In October, Colorado’s Office of Economic Development & International Trade (OEDIT) hosted a meeting to work on developing legislation to authorize the creation of special-purpose banking institutions in the state. This working group continues the efforts of the Colorado Blockchain Council, which has worked with state legislators to develop new laws such as the Colorado Digital Token Act, which seeks to lessen the regulatory burden of offering cryptocurrencies and other digital assets.
Colorado also seeks to enact its own SPDI laws. An extra incentive in Colorado is to see whether the new SPDI model can also provide service to the state’s growing cannabis industry. Because cannabis is illegal at the federal level, cannabis companies have been largely shut out by traditional federally chartered banking institutions. Should Colorado find a way to provide banking services to both crypto and cannabis companies, they could offer products that would make Colorado a leader in this arena.
Potential Western States Banking Alliance (WY, CO, NM, AZ)
New Mexico and Arizona are also entering the digital banking fray, as they also seek to emulate Wyoming’s SPDI laws. While each of these states is trying to be first to market, it shows that there has been a shift in attitudes towards crypto companies and digital assets. There rumors of Wyoming, Colorado, Arizona, and New Mexico joining efforts to push for regulatory changes at the federal level. While it is too early to speculate how successful that effort would be, it serves as a reason to be optimistic about the future of the digital asset industry in the U.S.