Some say that meaningful change happens gradually. Others insist it erupts unexpectedly. This week, we saw that both are true.
Earlier this week, the Wyoming Banking Board voted to approve the application from San Francisco-based crypto exchange Kraken for a Special Purpose Depositary Institution (SPDI) banking charter. Yes, one of the crypto industry’s oldest exchanges has become a bank.
This is a big deal, one that heralds a coming transformation of the crypto asset industry. Market participants and commentators understandably reacted with glee and surprise. Both are warranted, yet both overlook the bigger shift that has been building up for some time, and which will have an even more significant change on how finance functions.
First, to understand the excitement, let’s look at what this means for Kraken.
A SPDI is a bank charter, but it is not a traditional bank in that it can’t make loans. It also is not required to have FDIC insurance, since there is no solvency risk stemming from fractional reserve banking – 100% of its deposits have to be backed by assets on hand.
Pending approval, this should give the firm’s subsidiary Kraken Finance access to an account at the Kansas City Federal Reserve, which gives it access to the U.S. payments system. This will make it easier for clients to move funds on and off the exchange, as well as allow for the launch of new products such as debit cards, IRA accounts and wealth management services.
Also, Kraken Finance will be able to custody both fiat and crypto assets, with more oversight and legal protection for clients than a trust company can offer. Client confidence will get a further boost through the additional capital that banks are required to hold, and through the required contingency account.
And, although it is chartered in Wyoming, Kraken Finance will be able to operate in most U.S. states under a unified regulatory framework through reciprocity agreements, possibly even returning to…