Crypto Lengthy & Brief: Wyoming is Crypto's "Wild West", precisely what we want
In the world of financial regulation, it seems like progress is slow and arduous. But then there are weeks when a lot happens and parts with a loud clang and reverberation collapse.
This past week was one of them, and the pieces in question are largely overlooked as they settle in a relatively small corner of the crypto landscape. However, their effects are already significant at this early stage. And as part of the bigger picture, these pieces form the basis of a new crypto-based financial system whose influence is likely to expand further than many are currently realizing.
I'm talking about what's happening in Wyoming. This week there were two major announcements from the state that, along with other proactive legal initiatives, are building long-awaited bridges between traditional markets and crypto markets.
Clarity of the regulations
This week the Wyoming Division of Banking issued a "no-action" letter to Two Ocean Trust, a Wyoming-founded trust company that provides wealth management services to high net worth individuals, family offices and advisors. This entitles it to hold crypto and traditional assets under Wyoming law.
This is interesting in and of itself, as customers can add crypto assets to a diversified portfolio without looking for an additional manager or custodian. This goes a long way in overcoming the “problematic” barrier to crypto investing, where investor enthusiasm for the idea is dampened by the additional steps required.
The non-trading letter goes even further, however: It classifies Two Ocean Trust as a "Qualified Custodian" under the Investment Advisers Act of 1940, making it the first company to receive official approval to use the term specifically for custody of crypto assets. This is a big deal because the SEC's custody rule requires investment advisors to hold client assets with a "qualified custodian." The crypto markets have so far had no official clarity on how the definition of “qualified custodian” in the Investment Advisers Act of 1940 could apply to blockchain-based assets.
Several well-known companies offer crypto custody services through government-recognized trust companies. This makes them "qualified" and it makes them "custodians", but it does not guarantee that they meet the definition set out in the Advisory Act. This means that the "qualified custodians" include banks, savings banks, registered broker-dealers and traders of futures commissions. Trusts may be considered banks if, under Section 202 of the Act, "an essential part of the business … is to obtain deposits or exercise fiduciary powers similar to those of national banks".
Not all of the current cohorts of Crypto Custodian Trust companies do so, so technically they are not "qualified custodians" for the purposes of the Advisers Act. The thing is, with bitcoin, ether, and other decentralized cryptocurrencies, it doesn't really matter as the requirement of a qualified custodian only applies to securities. Investment managers who wish to handle Bitcoin and Ether for their clients do not need to use a “qualified custodian”. But they would likely want regulatory assistance when the opportunity arises. Official confirmation of where cryptocurrencies and other digital assets are in relation to custody requirements has been eagerly awaited as there is a risk that investment advisors could intervene if their clients' assets were improperly handled.
What matters here is not that a trust company offers custody of digital assets. That's not new. The big thing is legal clarity. A government regulator has officially recognized the custody of digital assets as a regulated activity, filling a loophole littered with unclear definitions and confusing boundaries. The scope is still very small – this is a no-action letter for a new and relatively small business in a sparsely populated state.
However, in terms of potential reach, this is a big step. Regulation in the US tends to build on regulation. A precedent has been set that both customers and other service providers will no doubt take note of.
The other big news of the week was the approval of a Special Purpose Depositary Institution (SPDI) charter for Avanti Financial by the Wyoming State Banking Board. This made Avanti Financial the second company that effectively became a "crypto bank". Avanti will be able to accept and hold deposits of fiat and digital assets while being referred to as a "bank" for regulatory purposes. Kraken was the first a few weeks ago, and Avanti isn't just expanding the field; It also pushes the boundaries in terms of innovative service.
Avanti, like Kraken, is a crypto and traditional asset manager that has access to the federal window once some more requirements are met. For institutions, this access to emergency funding is an additional layer of security, and the official approval to hold digital assets provides further validation of cryptocurrencies as an investable asset group.
In addition, Avanti will not benefit from FDIC protection for its deposits, nor will it be able to grant loans, so its deposits are 100% covered by assets in custody.
In addition to issuing the charter, the Wyoming State Banking Board also approved the future issuance of Avit, a blockchain-based token that, according to Caitlin Long, founder and CEO of Avanti, represents "programmable electronic money." This innovative approach to asset-backed value in theory will remove some of the legal uncertainty surrounding the enforceability of stable coin settlements, as it represents a token that is 100% backed by bank assets.
Avanti and Avit still have some legal steps to take, and reciprocity in major financial states like New York is unclear. Wyoming Governor Mark Gordon told CoinDesk earlier this week that it is unclear how the federal government will respond to the state's initiatives. However, a precedent has been set that could form the basis for future legislation. In addition, the clarity and support for financial innovation (Avantis charter application approved by a unanimous commission) could attract traditional corporations as well as crypto companies as well as customers to Wyoming and further promote regulatory progress beyond state borders.
Finance law is a complicated slab of convoluted definitions and delegated powers that lack the details necessary for innovation to take easy root. Wyoming seems to be addressing this confusion head on, paving the way for clarity to expand to other jurisdictions and applications.
Not so long ago, crypto markets were called the "Wild West". Wyoming is sometimes referred to as the "Cowboy State" according to Wikipedia. The metaphor is both pertinent and misleading – it's not the land of the outlaws, it's the land that makes laws appropriate for the territory.
To further emphasize the symbolism, the state's official nickname is "Equality State". Yesterday marked the 12th anniversary of the Bitcoin whitepaper, which provided an insight into a decentralized system of financial transfers whose core was equality and censorship resistance. Bitcoin was promoted in the early years by a group of idealists who hoped to change funding from the distant limits of influence.
Wherever you are now, I like to think that you would be both encouraged and amazed if it actually happened. Sure, the effects are due to laws, institutions and centralized authorities. But it has its origins in the least populous state of the largest economy in the world, far removed from the traditional centers of power.
Can you think of anything more "crypto" than that?
(Note: we use bitcoin in capital letters when we talk about the network and bitcoin in lower case or BTC when we refer to the asset.)
Does anyone know what's still going on?
This feels a bit like one of those old school TV game shows where contestants have to pick a door that might or might not have a shiny prize behind it. Only the doors in question are “Big Worries of the Month” and the price isn't exactly shiny, but it's a welcome understanding of what is driving the market's mood swings.
They could be election uncertainty, possible unrest, pandemic, likely oil price crash, income cliffs, impending bankruptcy, currency turmoil and I'm sure there are others that I will forget. I'm going to create a fair amount of confusion as to why the market didn't collapse sooner or further. I know, I know – cash flows and all that – but it doesn't feel sustainable or it shouldn't be.
Against this grim backdrop, Bitcoin once again outperformed other wealth groups, although sympathy for shaky global markets waned earlier this week.
Should markets tumble next week as the US election draws the world's attention, Bitcoin is likely to join the chaos. Progress this year in developing cryptocurrency as an investable asset group is creating tailwinds for lower correlations with stocks and even gold.
Software company MicroStrategy The company's president said Tuesday during the conference call on the business intelligence company's earnings that the company plans to top up its $ 521 million bitcoin stash. BRING AWAY: The notion of using BTC purchases as a PR stunt is alarming. Sure, it could drive the BTC price up, which is good for industry interest. But, like most hype stunts, this introduces a risk that doesn't feel properly quantified – and if (when?) A company's balance sheet is suffering from BTC volatility, it won't help the market's reputation. Call me old-fashioned, but I also have a problem with a company that says it will buy more BTC if the CEO turns out to have significant personal stake (which will presumably benefit from intent signaling as the company ends have to buy at a worse price).
US crypto exchange Coinbase Earlier this week it suffered an outage, apparently due to "feed issues" when Bitcoin price rose. BRING AWAY: Although you hear me talk a lot about how the crypto markets are maturing, the fact that a large exchange can fall during a sharp rise in prices (and it doesn't happen as infrequently as we'd like) highlights two things: 1) that the Market infrastructure is not exactly mature yet and 2) a layer of intermediaries who fulfill the role of broker (forwarding orders to the exchange which has the best price at that time) would increase market stability. Customers who had financed accounts with Coinbase would have been excluded from trading during the failure, unless they had also financed accounts on other exchanges – neither an optimal trading situation nor an efficient use of capital.
Exchange of crypto derivatives Deribit has listed bitcoin options contracts that allow traders to bet on a potential price rally of $ 40,000 next year. BRING AWAY: The options expire in March and June next year. According to skew.com, the options-based probability that the BTC price will exceed it by that date is too small to even appear on the graph.
The US Securities and Exchange Commission announced this on Tuesday William Hinman, The director of the SEC's corporate finance division plans to complete his term later this year. BRING AWAY: Hinman was the agency's first official to publicly share the view that Ethereum's home currency, ETH, was not a security. His departure is significant to the crypto markets as the commission will lose a relatively well-informed and thoughtful member who helped start some of the agency's early crypto initiatives. This is also relevant given the likelihood that its eventual replacement will have a significant voice in approving future crypto ETF approvals. None of the presidential candidates have provided much insight into their financial regulation plans, so clarification on this issue may take some time.
Bitwise asset management, A provider of cryptocurrency index funds for professional investors has passed the $ 100 million mark in AUM. BRING AWAY: This is a strong indicator of the growing institutional interest in crypto assets, and there is an interesting twist in the numbers: most of the growth came from Bitcoin, but from the Bitwise 10 Crypto Index Fund, which has several of the company's assets.
Crypto Investment Manager Grayscale investment (owned by CoinDesk parent company DCG) has released its second annual survey of investors. I found some results interesting:
- 55% of respondents showed interest, up from 36% in 2019.
- 83% of the surveyed investors made a Bitcoin investment in the past year.
- 38% of Bitcoin investors have invested in the past four months, and two-thirds cited COVID-19 concerns as the reason.
- Interest is highest in the 35- to 44-year-old cohort, with 68% expressing interest.
- 65% said the low minimum investment was a motivating factor. 59% of investors were drawn to the prospect of growth.
INX Limited, A cryptocurrency exchange that went public last month by issuing tokens based on the Ethereum blockchain has agreed to buy the US security token broker dealer Openfinance Securities. BRING AWAY: This strengthens INX's business model by adding an alternative trading system and broker-dealer license to the mix for exchanging digital assets. The company also announced this week that it intends to start trading on the Canadian Securities Exchange alternate market once it completes its IPO, which could result in more liquidity.