Wyoming’s special-purpose depository institutions — state-chartered banks that can custody digital assets and provide banking services to crypto-related businesses — have almost everything they need to go live. They have received state banking charters, built infrastructure, hired people and in March, received their ABA routing numbers.
But the one final piece they need — master accounts at the Federal Reserve that will give them access to its payment rails — has eluded them for two and a half years.
Their applications sit at the Fed as the central bank and industry participants debate who, besides federal insured depository institutions, can access the Federal Reserve’s payments systems.
The Fed floated proposed payment system access guidelines with requests for comment in May 2021 and again in March 2022. Both versions have the Fed taking a sterner look at, and potentially imposing stricter risk management controls on, financial institutions that lack Federal Deposit Insurance Corp. insurance and that are not supervised by federal regulators, such as Wyoming’s SPDIs. On
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The Fed doesn't have a timeline to finalize the payment system principles. It’s unlikely that the Wyoming SPDIs will be approved until that happens. The Kansas City Fed, the branch with jurisdiction in Wyoming, did not respond to a request for comment.
Meanwhile, time is running short for Wyoming SPDIs like Custodia Bank, which was founded by Caitin Long and recently rebranded from its original name,
These Wyoming companies are burning capital. They have to pay their employees while they're still in nonoperating status.
Sen. Cynthia Lummis (R-Wyoming) brought the matter up during Fed Chair Jerome Powell’s confirmation hearing in January.
"I’m terribly concerned about the manner in which Wyoming's SPDIs are being treated by the Federal Reserve," Lummis told Powell. She said the Fed does not have a legal right to deny master accounts to SPDIs, and accused it of a strategy of "deny by delay" and "starving the applicants until they die."
Powell said he saw good arguments for approving the SPDI applications, but that letting these companies join the Fed could set a precedent.
"If we start granting these, there will be a couple hundred of them soon," he said. "They’re hugely precedential, which is why I'm taking my time on this."
Champions of the SPDI charter are hopeful the Fed will vote soon to approve the new payment system access guidelines, and that then the central bank will greenlight the Wyoming SPDIs.
The issue over access to the payment rails
Getting a master account at the Fed gives a company entree to the Fed’s payment system. Without such an account, companies have to partner with a traditional bank to use Fed services like ACH and Fedwire.
Some say the Fed’s authority, granted under 12 USC 248 and 12 USC 342, does not give the Fed discretion over what entities can access its networks.
Wyoming proponents say there’s no need for federal regulators to be concerned. The SPDI charter is compatible with federal banking law. Wyoming legislators wrote a 700-page bank exam manual for the Wyoming SPDIs. The Fed reviewed it and provided feedback, which was incorporated into the document.
Former Wyoming State Banking Commissioner Albert Forkner, who helped create the SPDI charter but left his post in January to help start a fintech, says he anticipated federal regulators would challenge the innovative bank charter.
“I knew that was going to be a heavy lift,” Forkner said. “If a state creates something, whether it's the SPDI or ILCs, given the connectedness to the federal agencies, specifically the Fed payment system, you have to figure out how to get those to align. I think one can expect a reticence at the federal level for a novel charter type. It appears to be a slow walk at times.
“But I also am a firm believer that the SPDI is absolutely the solution that the Fed and Congress have been looking for, especially regarding stablecoins.”
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“If you look at this idea that stablecoins need to be in a bank and need to be supervised and regulated like a bank, we've done that,” Forkner said.
If Congress passes one of the many bills in front of it that would set rules for cryptocurrencies or if the Federal Reserve finalizes its guidelines for payment system access, the SPDI could be modified accordingly, Forkner said.
What the SPDIs will do
The SPDIs reflect “how finance is moving and really the future of our financial system will be built on Web 3,” said Julie Fellows, co-founder and CEO of Bank Wyse, the trade name for Wyoming Deposit & Transfer Corp. She started her career as a national bank examiner with the Office of the Comptroller of the Currency and has held leadership roles in financial services organizations.
The special-purpose charter offers legal clarity for providing commercial banking services combined with serving as a regulated custodian for digital assets, she said.
“That clarity is very much needed,” Fellows said. “The legal structure, the regulatory oversight, even down to the examination manual that the Wyoming Division of Banking will be using to oversee these entities has been drafted and completed.”
Her SPDI plans to provide institutional investors with qualified custody and banking services to businesses such as law firms, accounting firms, and software companies in the digital asset space, many of which have difficulty obtaining commercial banking services, especially any integrated with digital assets.
Long, a former Wall Street banker, envisions her company as a “compliant bridge to the U.S. dollar payments system and a custodian of digital assets.”
The bank will comply with the Bank Secrecy Act and federal “know your customer,” anti-money-laundering and related laws and regulations, as well as Wyoming’s SPDI and digital asset laws, which include requirements that fiat deposits be 100% reserved.
The Wyoming SPDI is simply the latest version of depository trust bank charters that have been around for a long time, Long observed.
Recent progress
The Wyoming crypto banks have made some recent progress.
Custodia Bank’s and Kraken Bank’s receipt of ABA routing numbers in March was a major step.
Fellows was heartened by the Biden administration’s
“There's been so much momentum over the last six months I'm feeling really encouraged that there's recognition that this can be done in a safe and sound manner and in compliance with regulations,” she said.
Fellows’ team is working to prepare for Bank Wyse’s pre-opening examination, where regulators come in and perform tests of controls and make sure systems work and policies and procedures are all in place, and then issue a certificate of authority to be able to take customers.
Long, Custodia's CEO, plans to open the bank's doors in the second quarter, offering U.S. dollar deposit accounts for business customers and Fedwire and ACH payments. If the Fed does not approve Custodia’s application for a master account in time, Custodia will partner with a traditional bank. Its post-launch road map includes digital asset custody and the rollout of a stablecoin called Avit, which will be similar to a digital cashier’s check.
In verifying Custodia Bank’s ABA routing number, the Fed confirmed that Custodia is a depository institution, which Long says is significant.
“The Fed did make a big decision and the positive confirmation of that is that we got an ABA routing number, but that's just really just step one,” Long said. “And we're two years into the process.”
