In 2017, Caitlin Long, a former managing director at Morgan Stanley, was just trying to donate some Bitcoin to her alma mater, the University of Wyoming, she says. But the University of Wyoming wasn’t set up to accept Bitcoin donations, and because her Bitcoin had appreciated in value, her donation would go much further if she didn’t need to convert it to cash first.
The problem, Long realized, wasn’t specific to the university—instead, it had to do with the state’s restrictive money transmitter law. By Long’s account, what started as simple attempt to give back to her home state ended with her leading a charge to completely change how Bitcoin and other cryptocurrencies were regulated in Wyoming. That campaign would make the state an oasis for America’s crypto speculators, and, not incidentally, lead Long to start her own Wyoming-based crypto bank, making use of a new type of bank charter, the rules of which she helped to craft.
Although other states may follow suit (Texas is already starting to make moves), Wyoming has pulled out far ahead of the rest of the country in opening the door to new types of cryptocurrencies businesses. Whether that’s a good thing or a bad thing depends a lot on whether you view more speculation and investment in cryptocurrencies, and more connections between cryptocurrencies and the traditional banking sector, as a potential boon to economic growth—or the next financial crisis waiting to happen.
And it all started with that University of Wyoming donation. Long told the American Banker podcast that she “volunteered to help get [the money transmitter law] fixed, and one thing led to another.” Soon, Long was leading a push to change all sorts of cryptocurrency rules in her home state; within a year, the state Legislature created a state blockchain taskforce, and then-Wyoming Gov. Matt Mead appointed Long to it. With her encouragement, Wyoming would enact 24 laws designed to lure cryptocurrency companies into a state with exceptionally cheap energy prices but only 579,000 residents and just two escalators.
For instance, in most states, any company that processes cash (or Bitcoin) payments has to show it has enough spare money to make consumers whole if things go a little haywire. One new Wyoming law makes Bitcoin and other cryptocurrency transactions exempt from such transmitter regulations. Other laws made sure that cryptocurrency transactions would basically be free of state taxes, including sales tax and property tax. (Wyoming already didn’t have a personal or corporate income tax.) When I spoke to Long by phone, she told me the most important of the legislation was “the most boring”: laws that clarified how disputes about crypto would be handled in Wyoming courts.
The state’s rally to become the friendliest (some would say most permissive) place in the country for crypto speculators appears to have worked, at least in some respects: Two major crypto companies, Ripple, valued at $10 billion in December 2019, and Kraken, valued at $4 billion in February 2019, have partially set up shop in the state.
How many smaller companies are there? It’s hard to say. As Long tweeted in February, “More #crypto cos are realizing Wyoming is a better domicile than Delaware due to our crypto-friendly laws. People often ask how many cos have relocated/redomiciled to Wyoming–we dunno. We don’t keep lists & we like it that way #XRP @Mark_Gordon_WY 🤠.” (Gordon, who was tagged in the tweet, is the state’s current governor and, like the emoji, is often found sporting a cowboy hat.) As of June, Wyoming has 48 LLCs or corporations registered in the state with bitcoin in their names. California, by comparison, has 31, and neighboring Montana has just four.
It’s not clear whether most Wyoming residents are going to benefit. Since the transactions aren’t taxed, Bitcoin trades and most corporate crypto activity won’t directly fill the state government coffers. And while dozens of crypto companies have decided to make Wyoming their legal home, they’re not exactly going on a hiring spree in the Equality State. Kraken, a crypto exchange, got a banking charter in Wyoming (more on that in a moment) but kept its parent company headquartered in San Francisco, and as of June, it has three job openings in Wyoming, compared with 162 remote roles. A spokesperson for Kraken declined to tell me how many Kraken employees live in Wyoming. It’s definitely not unusual these days for companies to have remote-first hiring policies, but it certainly makes it harder for governors or state legislatures to create white-collar jobs specifically for their own state’s residents.
Some states that try to lure companies through friendly corporate policies, low taxes, and dedicated corporate courtrooms, like Delaware, get money through all the fees they collect when companies register and incorporate. In Delaware, those company registration fees account for a quarter of the state’s budget. Wyoming decided to undercut Delaware on that count, too; in a blog post for Forbes, Caitlin Long told Delaware-based businesses to ask their tax advisers about the franchise taxes and fees they could save by moving to Wyoming. Even collecting the annual $94 filing fees, though, is easier said than done. Although Kraken brags that it’s “one of the largest and oldest cryptocurrency exchanges in the world,” according to the Wyoming Secretary of State website, as of June 21, Kraken was about six weeks past due on paying its Wyoming filing fee. When I contacted Kraken for comment, Kraken promptly made its $94 tax payment; a Kraken spokesperson denies that they made the payment because of my inquiry but didn’t provide any other context or explanation for their past-due status.
In some ways, it’s a tale as old as time: One state undercuts the rest of the country in terms of taxes or regulations, and lures a whole industry to relocate. South Dakota did it in the 1980s with the credit card industry. For most of the 1800s and 1900s, loan interest rates, including credit card interest rates, were capped under state laws at rates that could be as low as 4 percent or as high as 18 percent, depending on the time and place. But in 1978, the Supreme Court ruled in Marquette National Bank v. First of Omaha that banks only had to follow the interest rate caps of the state in which they were chartered. So Bill Janklow, the former governor of South Dakota, and Walter Wriston, then chair of Citibank, engineered the Mount Rushmore State to become the perfect home to the credit card industry. Although the size of the banking workforce in South Dakota has started to dwindle, Sioux Falls’ daily newspaper Argus Leader reported in 2018 that the financial sector still employed nearly 14,000 people in the state.
On the American Banker podcast, Long trumpeted the comparison between Wyoming and South Dakota. But consumer advocates spent decades ruing South Dakota’s choice to kowtow to credit card companies. (At this point, though, they’ve largely stopped complaining about South Dakota, since so many other states have followed suit.) At least South Dakota got a decadeslong employment boom out of its Faustian bargain.
The idea at play in Marquette v. First of Omaha turns out to be pretty important to understanding what’s happening in Wyoming. Basically, if a banking practice is legal in one state, it’s as if it’s legal in all 50 states, whether the other 49 states like it or not. There’s basically nothing the government of New York, for example, can do to stop a Wyoming-chartered bank from operating within New York state, according to whatever rules that Wyoming sees fit to impose. That’s why it’s particularly important that Wyoming also created a brand-new type of bank charter. If the new Wyoming companies weren’t becoming banks, the consequences might have otherwise been mostly contained within Wyoming borders.
In 2019, after stepping down from her volunteer role on the blockchain taskforce, Long founded and became the CEO of Avanti Bank. It was the second company (after Kraken) to be chartered in Wyoming as a crypto bank, otherwise known as a Special Purpose Depository Institution. (If you want to sound cool, it’s pronounced like “speedy.”) Avanti closed a $37 million funding round in March. A year earlier, Avanti’s $7 million angel round was led by the University of Wyoming Foundation; according to Long’s LinkedIn, she was on the University of Wyoming Foundation’s board from 2003 to 2011.
While Kraken plans to continue to serve the consumer market, letting people buy and sell various cryptocurrencies, Long says that Avanti will serve businesses, family offices (e.g., the teams of investment professionals that work on behalf of the world’s wealthiest people), and institutional investors. Long knows this world well; she was the head of Morgan Stanley’s pension advisory group, overseeing the pension funds of major employers.
Today, big crypto exchanges need to rely on a partner bank to actually handle many of the dollar transactions, especially when dollars need to be accepted or paid out. (Coinbase and Gemini both use JPMorgan.) Because Kraken and Avanti will both be banks, and both have applied for master accounts at the Federal Reserve, they’ll be able to bridge the divide, using the Federal Reserve payments system to pay people in dollars (for example, when a customer wants to sell Bitcoin and put U.S. dollars back into their bank account) and the blockchain to make crypto payments, assuming the Fed approves their applications.
These changes could spell the end of superhigh fees to convert your Bitcoin or Ether into dollars and vice versa, increasing the amount of trading activity. And the changes could also increase the comfort level for pension funds to hold growing amounts of cryptocurrencies, with unknown consequences for the retirement security of America’s firefighters and teachers. (For wonky legal reasons, which Caitlin Long explains at minute 59:54 of the Unchained podcast, pension funds aren’t really supposed to store Bitcoin in, for example, a Coinbase account but could hold Bitcoin in a SPDI like Avanti.)
Long told me she had no intention of starting her own bank when she moved back to Wyoming, and that she did so because she believed the cryptocurrency industry was still largely underbanked. She says Wyoming received several other applications for SPDI charters, but that most applicants lacked either the capital or the expertise to eventually be approved by the Federal Reserve. After all, starting a new bank usually takes about $20 million. Long outraised that number, but not by much, and she had more than two decades of experience on Wall Street under her belt. Long says she worked with Kraken to help facilitate its successful SPDI application, but it didn’t solve the problem she cared about—cryptocurrency companies lacking affordable banking services, and a safe crypto custodian for major investors—since Kraken didn’t plan to serve big institutions.
A lot will depend on whether the Federal Reserve approves Kraken’s and Avanti’s applications to have Fed master accounts. Without those accounts, which allow them to use the Federal Reserve payment system, the advantage that Kraken and Avanti have over nonbank crypto companies will be limited. Luckily for them, Kraken and Avanti now appear to have a guardian angel in Washington: U.S. Sen. Cynthia Lummis, elected by Wyoming in November. Lummis, like Long, donned “laser eyes” on Twitter, a symbol of commitment to help Bitcoin reach a price target of $100,000. (As of Sunday, Bitcoin is traded at $32,748.10.)
Lummis hired former Wyoming state Rep. Tyler Lindholm, who served with Long on the Wyoming blockchain taskforce, to be her state policy director (Lindholm is also the founder of BeefChain, a company that offers “blockchain verified beef and sheep.”) Long told the Casper Star-Tribune that she welcomed Lummis’ interest in cryptocurrency issues and that, “It will be helpful for Wyoming’s delegation in DC to be actively involved to protect Wyoming’s lead,” given the risk that Congress or the Fed could either shut the Wyoming experiment down, or, alternately, grant nationally chartered banks the same powers as Wyoming SPDIs.
If any working-class Wyomingites stand to get jobs or keep their jobs because of the Bitcoin push, it’s coal miners and other fossil fuel employees. In 2010, Wyoming produced more coal than the next six states combined, but production has been slowing; some Wyoming mines have even shut down operations, as energy buyers and producers in other states shifted to renewables and natural gas. Bitcoin mining uses an incredible amount of electricity—more than Argentina or the Philippines, for example—famously prompting crypto-enthusiast Elon Musk to decide Bitcoin’s current environmental impact was unforgivable in May. China’s Inner Mongolia region has historically been the world’s Bitcoin mining epicenter, but China has started to shut down Bitcoin mines. That means Wyoming looks like it could become the new Inner Mongolia, especially if fledging businesses like the Wyoming Mining Co. have their way.
It would be hard to imagine Caitlin Long or anyone like her having so much success rewriting the laws elsewhere, in part because in a larger state, there would have been more people paying attention. Clearly, many Wyoming lawmakers supported Long’s ambitions. But it’s also the case that Wyoming is one of only four states with a part-time citizen legislature. It’s only in session for 60 days every two years, and Wyoming legislators earn less than legislators in any other state. Sixty days is not a lot of time for a group of ranchers, oil workers, and physician assistants to learn the ins and outs of something as complicated as cryptocurrency regulation, making it all the more likely that lobbyists or people with vested interests could set the agenda and write the rules.
According to Lee Reiners, executive director of at the Duke Global Financial Markets Center, one hint that Wyoming’s banking sector might be a little bit too cozy is the fact that when Wyoming’s banking commissioner proposed to tighten capital requirements for the Wyoming SPDIs, they received exactly one comment letter in response, from Avanti Bank.
“They put the Division of Banking in a really tight spot,” Reiners told me. “State banking commissions are understaffed and under-resourced all the time. And then you have the legislature that was totally hoodwinked by all these crypto people, Caitlin Long in particular. They created this new banking charter, and then told the Division of Banking, ‘Oh, by the way, now you have to figure out how to regulate this and draw up new rules.’ ” In a blog post, Reiners flagged that the Division of Banking had hired Promontory Financial Group to help them make sense of things, ostensibly triggering the stricter proposed regulations that Avanti then objected to.
In Long’s view, Wyoming is being “tougher on the banks” than most other states, pointing to the fact that Wyoming SPDIs can’t lend out consumer deposits or take on leverage themselves. That doesn’t really reassure Arthur Wilmarth, author of Taming the Megabanks: Why We Need a New Glass-Steagall Act. He pointed to the fact that although money market mutual funds are also supposed to be invested only in very conservative assets, they’ve still been bailed out by the Fed on multiple occasions.
A quick crash course on how banks make money: Normally, banks earn a profit by accepting deposits and then earning interest on those deposits, either by lending out the money, or by investing in things like U.S. treasuries or corporate debt, which can either be low-risk or risky depending on the choice of investment. Avanti, Long told me, plans instead of have a fee-based business model. But Reiners argues that what’s relevant isn’t Avanti’s initial plans, but the maximum amount that’s permitted under Wyoming law. After all, over time, banks tend to drift toward the most profitable (and riskiest) activities they’re allowed to do.
If things blow up in Wyoming, the national fallout could be significant. “I don’t know why we want a proliferation of crisis-prone, fragile, illiquid, shadow banking deposits,” said Wilmarth.
Future Tense is a partnership of Slate, New America, and Arizona State University that examines emerging technologies, public policy, and society.
