San Francisco-based crypto exchange Kraken has become the first cryptocurrency business to receive a charter to operate as a bank in the United States. When seen as part of a larger-scale shift in regulatory attitudes that may help to bring crypto into the mainstream, the repercussions could be even more significant.

Kraken Financial, the firm’s new bank, got the green light from Wyoming on Sept. 16 as a special-purpose depository institution (SPDI) — a bank that can both receive deposits and custody assets.

“For Wyoming, this is an economic development initiative,” founder and CEO of Avanti, Caitlin Long, told Cointelegraph in a joint interview with David Kinitsky, Managing Director of Kraken Financial.

Avanti is another crypto-first company seeking approval to operate a bank, although it has not yet received the legal go-ahead. “Wyoming is looking to diversify its economy to bring in jobs and capital — and revenue — from outside the state,” Long said. “The Kraken charter is the first of what Wyoming hopes are many,” she noted, mentioning that more than 1,000 companies have turned to the state to harness its fintech-friendly regulatory framework. 

“Wyoming has also done a great job of forming this public/private coalition to get smart on industry issues,” Kinitsky added.

Two crypto companies serving different needs

Kraken went public with its charter approval on Sept. 16. Although the company is the first to receive official approval, Avanti surfaced in February 2020 to much fanfare within the industry, also seeking to receive a charter, albeit filling a different role.

The two entities compete in some ways, but not directly. “Everyone competes, right — and certainly we’re going to be competing on some level, there’s no doubt about that, but I would suggest that, at this point in time, our product sets and customer segments are more different than they are similar,” Kinitsky explained. 

“Kraken is primarily consumer-focused, Avanti is exclusively institutional- and high-net-worth-investor-focused, so there’s really very little overlap in our targeted customer base,” Long said. “Avanti has no intention of becoming an exchange,” she added. “There are certain things that we are in discussions to work with Kraken on, where Kraken may be able to help Avanti and we may be able to work together on some of the consumer aspects of Avanti’s business, precisely because we don’t service consumers — we can’t.”

Pushing toward a common goal

Despite their differences the two companies have been laying the groundwork for the future of sound, non-stifling crypto regulation. One might describe the approach as “co-opetition”; cooperating at the same time as competing, both entities pursuing their unique endeavors toward a common regulatory goal. 

“The chartering of a Wyoming SPDI is a watershed moment for the crypto industry in the U.S., precisely because, until this point, crypto-native companies were blocked from having access to the Federal Reserve payment system,” Long said. “Only banks have access to the Federal Reserve payment system, and, until today, a crypto-native company could not be a bank,” Long explained. “Now, a crypto-native company is a bank, and congratulations to Kraken.”

Kinitsky added that both Kraken and Avanti are currently making strides that will help the entire industry. “Only banks can interface with key parts of our national payments and other banking-related infrastructure,” he explained. “If you’re going to be a broad, widely scaled financial services company, you need to be able to have direct access to that infrastructure.”

A changing financial landscape

Since its inception over a decade ago, the cryptocurrency and blockchain movement has facilitated rapid change in technology and finance. Although slow to catch up, regulators in the U.S. are finally putting parameters in place to encourage cautious growth. In July, for example, the Office of the Comptroller of the Currency (OCC) approved crypto custody by federally chartered banks. 

“We’re in an interesting period in financial services in general where we’re seeing the merging of the digital asset industry with fintech’s traditional financial services,” Kinitsky posited. “Banking is kind of the granddaddy of them all in terms of regulated financial services. This is why the SPDI is so interesting,” he added. “It allows us to tie together and play across that landscape — across digital assets, fintech and traditional financial services within a banking framework.”

Is banking the glue holding the system together and facilitating most financial dealings, Kinitsky wondered, or is banking the base layer on which all finance is built? According to him, banking has yet to break into the crypto and fintech space as it has the rest of finance. “You’re also seeing the inter-agency crosswinds, both at a federal and state level,” he added, referencing the recent statement provided by the OCC as clarity more than change. “That’s just one piece,” He said, adding: 

“There is no dedicated framework at that OCC or national level for a digital asset-focused bank or other institution. There’s no dedicated supervisory program. These are things that Wyoming has spent a lot of time investing in and is one of the attractive features of the SPDI, and I’m pretty sure that different states and national organizations are going to borrow liberally from the Wyoming framework.”

Long agreed with Kinitsky, noting Wyoming’s 27-month journey to the first regulated crypto-native bank. “This is not a short-term project,” she said. “It has taken a lot of work to get to this point.” Long herself was deeply involved in helping to push for the Wyoming regulation, as the President of the Wyoming Blockchain Task Force.

After the dashed expectations of 2017, during which the Initial Coin Offering sparked a retail investor frenzy in the crypto industry, regulators stepped in, seeing a need for tighter restrictions on the sector. Some regulation has stifled innovation, according to critics, although Wyoming has pushed forward in an effort to provide the best of both worlds — protection through regulation, as well as the freedom for innovation to flourish. 

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