The cryptocurrency exchange Kraken has become the first crypto company to receive a bank charter.
It’s not a full-fledged national banking license or an industrial loan company charter, but a special-purpose depository institution license from Wyoming. Kraken Financial is a wholly owned subsidiary of Kraken headquartered in Cheyenne and it will be the first regulated U.S. bank to provide deposit-taking, custody and fiduciary services for digital assets. Caitlin Long, a former Wall Street banker, is also forming a special-purpose bank in Wyoming called Avanti Financial Group that will provide custody and other crypto banking services.
Both companies are taking advantage of a set of blockchain laws Wyoming passed late last year, one of which created the special-purpose banking charter.
“I’m proud that Wyoming is leading the way in digital assets and built the framework for this historic announcement to occur,” Gov. Mark Gordon of Wyoming said when Kraken’s charter was approved Wednesday morning by the Wyoming State Banking Board. “This puts into practice what Wyoming saw as an opportunity to meet the challenges of a digital economy and allow businesses a way to hold digital assets safely.”
Kraken closed its operations in New York in August 2015 when the state rolled out a set of regulations for digital asset companies called a BitLicense (it continued business from its San Francisco headquarters). At a Consensus event in 2018, Powell said the BitLicense was regulatory overreach and that it would have required Kraken to “disclose all the information about our entire global client base to the state of New York,” which he said was a potential data privacy violation.
“Regrettably, the abominable BitLicense has awakened,” the company said in a blog post in 2015. “It is a creature so foul, so cruel that not even Kraken possesses the courage or strength to face its nasty, big, pointy teeth.”
Now Kraken, which says it has about 4 million clients globally, will make a fresh start in a welcoming state. David Kinitsky, its CEO, explained to American Banker why the company pursued this charter and what it hopes to do with it. Kinitsky is a former attorney who joined Kraken about six months ago after spending the past 15 years in financial services that included stints at Fidelity Investments and Circle.
Why did you pursue this Wyoming special-purpose charter and what do you hope to do with it?
DAVID KINITSKY: First, we hope to pursue a regulatory framework and supervisory program that appropriately fits the digital assets in our operations. This SPDI statute and the division of banking’s oversight program is carefully tailored to meet the needs of the digital asset firm. And it’s also a nice way to get regulatory coverage in the U.S. in a more consolidated way, rather than a patchwork state-by-state approach.
Second, this will enable us to get direct access the federal payment system and be able to integrate it into the customer products we have today more seamlessly to improve the customer experience.
Third, we could function as a bank. This enables an entirely new product and distribution platform for us, so we can offer products and services that we wouldn’t otherwise be able to serve. One example would be qualified custody for institutions.
Is this a sequel to your efforts to get a New York BitLicense?
Yes. The BitLicense was the most advanced digital asset native framework that existed. I think there are some key differences, which is why we chose this path versus that one. This one is even more digital assets focused. It uses concepts of bailment law for crypto safekeeping that I think are useful in this context. Furthermore, Wyoming has a dedicated digital asset supervisory program that it’s building. And this one is a bank and the New York Bitlicense is not. So this enables us to operate as a bank and access certain things like the Fed master account and other advantages of being a bank.
Do you see Kraken moving its headquarters to Wyoming, or is this a piece of Kraken that will have a Wyoming base?
Kraken is a global entity with affiliated entities across different jurisdictions and business lines. This is a wholly owned subsidiary, but because it is a bank, it does need to have independent governance and independent operations. And so we’ll operate that way. We envision that going forward, this will be the service provider to U.S. Kraken customers, and existing products that are offered by the exchange will be passed through this entity. So we envision this as being the principal U.S. customer-facing outlet.
What are some of the products you might offer through this entity?
When we launch, things won’t look very different from a new product standpoint. We’ll just be integrating banking and funding services for existing Kraken customers. But then towards the end of year one, year two and year three, we’ll be launching new things. While we won’t conduct fractional reserve banking or U.S. dollar-denominated lending activity, on the digital asset side, we expect to offer certain digital asset lending products and digital asset payment products, like debit cards. We expect to offer qualified custody for institutions. We would offer different types of accounts, for example, IRAs or other kinds of tax-advantaged or special-purpose accounts, and then wealth management investment services. And then ultimately service other asset classes, including securities, commodities and derivatives.
Who will the customers be, institutional investors or consumers?
Both. There will be institutional clients of qualified custody. We also will be serving U.S.-based individuals that are current Kraken customers, we will safekeep or custody their digital assets.
What was the process of getting this charter like? Did you have to jump through a lot of hoops? Did you have to make some changes to the way you do certain things?
Kraken has been working on this with other partners, the Wyoming legislature, the Wyoming governor’s office and the Wyoming division of banking to craft this legislation. We’ve been supporting the Wyoming ecosystem in terms of hackathons and other efforts.
Then we have worked very closely with the Wyoming division of banking to make sure that all of our policies and procedures and the appropriate business plan and financial projections were in place. And then, towards the end of last month, we had our public hearing, a presentation in front of the state banking board for the approval of our charter application. We will get a Fed master account, as well as other kinds of domestic correspondent banking partner relationships, and then operationalize and launch. so we’re not there yet. There’s still a long way to go. We expect to go live, most likely in the first quarter of next year.
How do you think you will reach out to people and companies? Will you market yourselves more like a bank, or a digital currency exchange or an investment provider?
We probably haven’t finalized the go-to-market strategy beyond initial launch. At initial launch, we will serve our existing Kraken U.S. customers, so not too much will change. As we move further into year one of the de novo period, we’ll have to figure out that go-to-market [strategy].
Kraken’s mission has always been to promote the adoption of digital assets to enable more individual financial freedom. This SPDI is a key tool for that, because it creates a seamless integration between the legacy system and digital assets. And so we now have the option to continue as a digital asset company, as we always have been. We now have that option to market ourselves more like a consumer bank or institutional bank, and have that be the façade. So TBD.