Digital Currency Gets Real

An actual physical bank will soon be providing the full slate of deposit-taking, custody and fiduciary services for cryptocurrency such as bitcoin.

The Cheyenne, Wyoming-based Kraken Financial on September 16 became the first digital asset firm in the U.S. to obtain a federal- and state-recognized bank charter and thus will be regulated very similarly to other American banks. Although the institution will have a physical office in Cheyenne, the plan is to emphasize online and mobile banking, with customer support on call 24/7/365.

Kraken has a stated vision of bridging the current financial ecosystem with the “crypto economy of the future” and says that its recently obtained Special Purpose Depository Institution (SPDI) charter  granted by the State of Wyoming will enable the bank to do so. Operating fully independently and without relying on third-party financial firms will help lead to innovative products, Kraken believes.

Bitcoins and other cryptocurrency operate over a type of disruptive technology known as blockchain, which creates a digital ledger stored in a wide-ranging network, as described in this earlier post of mine. (I have also written in the past about the legal uncertainties about this type of online currency, as well as the wisdom—or lack thereof—of small businesses investing in bitcoin, at least as long as it remains unregulated.)

With its charter in place from the Wyoming Division of Banking, which the state designed with crypto businesses in mind, Kraken will offer accounts to U.S. residents only at first, but the bank hopes to provide services globally before long. In its first year, the institution plans to enable clients to use digital assets like bitcoins to deposit money, pay bills, receive their salaries, and add to investment and trading portfolios, all at a regulated, state-chartered bank.

The bank also will provide during the first year such crypto-focused services as digital asset custody, demand/deposit accounts, and wire transfer and funding services. In the next few years, Kraken plans to add a full suite of products for online and mobile banking, debit cards linked to crypto funds, and trust account and administration.

While Special Purpose Depository Institutions are allowed to focus on traditional assets, they primarily emphasize digital and virtual currencies—and while they are allowed to provide many traditional banking activities, they may not make loans with customer deposits. And for that reason, they are not mandated to secure FDIC insurance, although they can.

To gain access to the federal payments system, which does not happen as a matter of course in receiving its special purpose charter, Kraken will need to send an application to the Federal Reserve Bank of Kansas City for a master account. The Kansas City Fed’s decision will send a signal as to the acceptance going forward of banks dealing in cryptocurrency, as a second crypto company, Avanti Financial Group, planned to begin offering services in October.

Ultimately it seems likely that bitcoin and other cryptocurrencies are not just a passing fad, which means that banking agencies at the state and federal level will need to figure out how to – and how not to – regulate them.