Avanti Bank, a startup that
It has raised money and won support from a wide range of investors, regulators, legislators and partners. Yet it has also become a lightning rod for critics of the state's new bank charter and the companies trying to use it.
Cheyenne-based Avanti closed a $37 million Series A round last week. Individual investors in the cryptocurrency, tech and traditional asset management space contributed, as did institutional investors including 1843 Capital, Binance.US and Coinbase Ventures.
The financial support and regulatory approval give Avanti Bank a strong foundation on which to build. But at the same time, lobbying groups such as the Bank Policy Institute have claimed the crypto assets Avanti and fellow Wyoming crypto-bank Kraken will hold will be too volatile to act as reserves against deposits.
Other hurdles lie ahead for Avanti, too, such as the Federal Reserve's OK for it to use the payments system and for state approval of the young company's own digital currency.
What’s happening in Wyoming is a reflection of how cryptocurrency is becoming interwoven with the financial services industry and how regulations are forming around it. It also shows a path for banks to issue, hold and provide custody services for
digital currency, as Avanti is doing and as the Office of the Comptroller of the Currency
Wyoming to New York and back
Avanti Bank is the brainchild of Caitlin Long, who grew up in Wyoming then worked on Wall Street for almost 30 years at Salomon Brothers, Credit Suisse and Morgan Stanley. After that, she was president of a blockchain technology company called Symbiont.
In 2017, she tried to make a donation in bitcoins to the University of Wyoming to fund an endowment for female engineers.
“I'd seen while I was working at a previous startup how hard it is to hire female engineers,” Long said. “And I didn't anticipate that that would turn into anything other than a private charitable gift.”
But a Wyoming law required money transmitters in the state to hold dollar-for-dollar reserves against the value of the digital assets. It drove out cryptocurrency service providers like Coinbase, which prevented the university from accepting Long’s donation.
“I had been on the board of the foundation previously, and I shared with them the view that bitcoin was going to become a big deal and it would be good for Wyoming to fix this issue now,” Long said.
She moved to Cheyenne and began meeting with state legislators and explaining bitcoin to them. A new money transmission bill passed nearly unanimously through the legislature that year.
Albert Forkner, commissioner of the Wyoming Division of Banking, backs up this account.
“Caitlin has had an outsized role when it comes to advocating for crypto in Wyoming,” Forkner said. “Anyone who knows Caitlin knows that she seems to have endless energy and enthusiasm for crypto and making our home state the most attractive state in the U.S. for crypto and blockchain businesses. She has spent a lot of time talking to individuals, groups and the state legislature about crypto.”
Long also gets props from Kraken Bank CEO David Kinitsky for helping get the legislation passed.
“Caitlin's been involved in a number of the developments on the legislative and regulatory side, first in Delaware and now in Wyoming,” Kinitsky said. “She definitely helped drive that forward, amongst others.”
Long led a volunteer coalition that helped get four more crypto-friendly bills passed during the 2018 legislative session, eight more during the 2019 session, seven more in 2020. A handful are working their way through this year.
“It started small and snowballed into something that the state of Wyoming has embraced as a major economic development initiative,” Long said.
The effort is modeled after what South Dakota did with the credit card industry in the early 1980s, she said.
“Wyoming sought to be the home of digital assets, which is a niche part of the financial services industry, and it's happening,” Long said.
Avanti will be a custody bank and serve institutional customers that need help dealing with their crypto holdings.
The recent $37 million in funding will help Avanti fulfill capital requirements, fund operations and expand its team of 16 employees. It had previously raised $7 million.
“De novo banks are not easy to fund,” Long said. “There are only, as you know, a couple dozen that have been formed since the financial crisis.”
The next step is obtaining approval from the Federal Reserve to use the central bank's payment rails. Avanti’s application was submitted in October.
Several traditional banks and fintechs have reached out to Avanti and are looking for partnership opportunities, Long said. Avanti and Kraken might find ways to partner, too.
“Crypto companies tend to look at each other as so-called frenemies, both competitors and potential partners,” Long said. “That is a function of the fact that these digital asset networks are open networks. And so every one of us is a participant in open platform that doesn't exist in the traditional banking world, where the platforms are all closed. And that has a big impact on the culture of the players of the intermediaries who provide services around these open networks.”
Kraken, which runs a New York-based cryptocurrency exchange, is on a similar track in Wyoming, though it seeks to serve retail customers where Avanti is focused on institutional investors. Its de novo bank unit, which was originally named Kraken Financial but is now called Kraken Bank, received a Wyoming special purpose depository institution license shortly before Avanti did.
“We’re heads down, building on our plan to launch over the next quarter or so,” Kinitsky said. “Certainly building a bank is no small task, but we don't see any blockers in the way.”
The objectors
The Bank Policy Institute and other groups have objected to Wyoming’s special-purpose charter and the new banks it has legitimized.
The BPI has said in blog posts, for instance, that they're not subject to the same rigorous capital and other requirements that insured banks are under federal law.
Wyoming’s requirements for special-purpose depository institutions, according to its website, are that they have at least $5 million in capital, money set aside to cover three years of projected operating expenses, and 2% of demand (noncustodial) deposits in fiat currency.
“Wyoming has, in fact, adopted federal bank capital requirements for SPDIs,” Long said.
The institute further asserts that the assets Avanti and Kraken banks hold against deposits can include Treasury securities of any maturity and investment-grade, private securities including corporate bonds and asset-backed securities.
“I think it's important to contrast that with what reserve balances are: super short-term, completely safe, a hundred percent liquid deposits at the Federal Reserve,” said Bill Nelson, economist at the Bank Policy Institute. “Every bank basically has 110% reserves against all of the deposits or even more because the banks have to have capital.”
Long said 100% of Avanti’s customer deposits will be invested at the Federal Reserve or in high-quality liquid assets, as Wyoming SPDIs are required to do.
The Wyoming SPDI charter focuses on custody, and its rules generally mirror those of custody banks such as State Street or Bank of New York Mellon, Long said.
The BPI seems to be concerned more about what Avanti and Kraken could do than what they are actually doing.
“That's what regulations are for, to consider the eventualities and control the potential risks that an institution can take,” Nelson said. “It's not a very good regulation if it's just suited for your current circumstance. Under the current law and current regulations, the range of assets that those institutions are permitted to invest in is quite broad.”
In a blog called
“It's disappointing, but it's not surprising,” Kinitsky said of the group’s critiques. “They're a lobby for the biggest banks in the world, so they have a job to oppose anything that threatens their constituents’ competitive position. Unfortunately they're mistakenly using us as a poster child for some of the industry issues that they're against. Those industry issues don't apply to us. We are fully reserved and our business is not to ladder out our underlying investments into risky or long-duration instruments. We are going to keep money in cash at the Fed or at a fully insured, domestic correspondent.”
If there were a run on the bank, Kraken and other SPDIs would be able to accommodate it, because deposits are kept in liquid instruments, Kinitsky said.
Forkner said his attitude about letting banks get involved in cryptocurrency has evolved.
“I have had to spend a lot of timing thinking about banking and digital assets and crypto,” he said. “As the chartering authority charged with administering the banking laws in the state, I strive to balance innovation in a safe and sound manner that allows for economic opportunities and strong consumer protections for the citizens of Wyoming.”
States have long been not only laboratories of democracy but also incubators of innovation, Forkner said.
“As digital assets, including crypto, continue to grow in the U.S. and around the world, regulators should not create artificial barriers to entry,” he said. “Rather, it is important to work with various stakeholders to understand the proposed activities, technologies, risks and opportunities, then work on building the infrastructure that allows all of these issues to be appropriately addressed and managed.”
Forkner hopes that Avanti, Kraken and other SPDIs will be strong examples of how the custody of digital assets, and the on-off ramp into digital assets, can be done in a safe and sound manner within the banking system.
A digital coin for settlement
Avanti is also creating a digital coin that will help deal with the unique risks that digital-asset companies face due to the differences in settlement timing and settlement finality of U.S. dollars versus digital assets.
“It's a strict requirement from our regulators that all of the trades are fully collateralized, in other words, fully funded upfront,” said Zach Dexter, CEO of LedgerX, a bitcoin derivatives exchange overseen by the Commodity Futures Trading Commission that lets people trade bitcoin options, swaps and futures.
“The implementation details of how you do that in the current banking system are creating a lot of challenges for us and any business like ours,” said Dexter, whose company accepts U.S. dollar collateral and bitcoin collateral.
LedgerX uses wire transfers and the Automated Clearinghouse to receive the payments to fund trades.
“Every day we have to look at our bank and look at our internal ledger and we have to true them up and reconcile them,” Dexter said. “If people have been depositing funds for trading using a wire, there's any number of things that can go wrong. You can't send wires around the clock. They can get recalled, you can have return issues. Wires take too long and you can’t take advantage of trading opportunities.” There are also many different challenges reconciling accounts while wires are in transmit.
ACH is even worse in this situation, he said. “The number of return codes is just unbelievable and the system is basically just a total mess,” Dexter said. “We cannot have funds in transit. We cannot have float. Everything has to be fully funded, settled, fully collateralized upfront because of these frankly wise and intelligent federal regulations.”
Such issues drove LedgerX to start looking at stable coins. But existing stable coins are lightly regulated, and Dexter knew his regulators would have objections.
Avanti's Avit, on the other hand, will be regulated and therefore more acceptable to the CFTC, he said. That will help the exchange accept funds for trading.
“What's so great about crypto is you send bitcoin and it's either there, or it's not,” Dexter said. “If you can move funds around 24/7 with a convenience in crypto and that's visible on a public ledger, then it's just so much easier to let people move money around to trade.”
Forkner said that “the Avit has the ability to free up significant capital, especially for global firms, by allowing for real-time settlement receive a central banks and other regulators around the world, exploring various models and so forth.”
Forkner is evaluating Avanti's request to issue the Avit.
“Since laws and regulations tend to lag behind technology, sometimes woefully so, regulators will need to continue to define and refine the regulations around these products and services,” Forkner said. “In Wyoming, we tried to address stablecoins and other real-time settlement products and the risk surrounding them to ensure that issuers properly identify the risks in these products and implement appropriate risk management processes.”
The adoption of digital currency in the traditional financial services industry could lead to convenience, inclusion, equity, efficiency and wealth and capital creation, Forkner said.
“However, there are new and increased risks as well,” he said. “There’s increased cybersecurity threats, financial privacy concerns, BSA/AML compliance risk, and regulatory uncertainty. The key will be striking the right balance between emerging technologies and regulatory oversight. If the scales are tipped too far in either direction, consumers could be harmed or innovation could be stifled.”
