Crypto: What Kraken’s Bank Charter Means to Banking and Crypto
When Wyoming issued a bank charter to the cryptocurrency exchange company Kraken yesterday (9/16/20), it did so under a new set of laws – the only laws in the country that seamlessly integrate digital currencies and paper-denominated (fiat) dollars in the same institution and in the same customer accounts. But now that Kraken is approved in Wyoming, it has banking access to every other state in the United States.
More such banks will come onboard in the next few months, creating a wholly new banking structure in our country. That new regime has just been birthed.
What’s significant is that these banks are chartered as “special purpose depository institutions” (SPDIs), which means they operate under special rules for the purpose of serving as custodians of deposits. What that means in plain language is that the money and/or crypto they receive as deposits must be kept in the bank. The bank custodians are not allowed to lend that value out under any conditions.
That’s not the same rules as govern your current bank. Technically and legally, when you deposit money in your current bank it’s no longer yours. All you technically and legally have is a claim on the assets of the bank, but the bank now owns your money as its own asset, and it can do whatever it wants with the assets it owns. What your bank does is loan it out at interest, keeping on reserve only what the government requires it to keep on hand to meet the ongoing money needs of customers – about 1% of total deposits. The other 99%, or thereabouts, is out on loan. So if your bank goes broke, you’re not likely to see any of your deposit. Instead, a receiver is going to take control of all of the bank’s assets, including the money you deposited with them, and decide who gets paid first and who gets stiffed. Hint: you’re small-fry, you’re getting stiffed.
Under the rules of a SPDI you never lose ownership of the assets you place in an account for safekeeping. Whether you deposit cash or crypto into your account – and you can do both in the same account – it belongs to you. This is very much like special depository vaults for precious metals. So, even if the bank goes broke, your deposited wealth is still yours.
In turn, this means that these new banks are 100% solvent all the time. And they are audited. You’ll pay for the service with some percent-of-value charge, just as you would with a precious metals vault, of course. But you’ll also be able to get credit and debit cards, checks, make ATM withdrawals, and buy online, all secured against your wealth, regardless of whether that wealth is denominated in fiat, crypto, or a combination.
This new charter also means that crypto has just become integrated into the US financial system writ large. As Kraken’s bank rolls out into other states, and as other SPDI banks come online and spread, the integration of crypto-denominated wealth into the US economic system will be deepened and strengthened, and become intertwined. In short: the window for the US government to move to outlaw crypto has just closed.
Even more exciting for those of us who believe in sound money, SPDI banks will be positioned to take business from fiat-oriented banks. As people understand that only in SPDI banks is their deposit still truly their deposit, the public appetite for banks that don’t take ownership of a customer’s wealth will metastasize. As a result, all banks will have to tighten up their practices to compete for customers. (We hope.)
Now, as a thought exercise, if you combine the emergence of SPDI banks with existing online lending platforms, it’s possible to see how finance can begin to turn in a whole new direction. Consider: Online lending platforms like Blockfi, Nexo, and Crypto.com can already custody any amount of crypto or fiat I wish to secure with them; I can opt to put some of my wealth into a pool that’s available for loaning out. The platform makes loans against the value in the lending pool. Every loan made is over-collateralized by the borrower, loans are made with realistic market rates of interest, and the owners of the assets in the pool earn interest in the 4-8% range, on average.
If (I say, “when”) SPDI banks are able to engage in the same kind of arrangement, they will be able to establish in-house pools of wealth on loan from account holders that can be lent out at real rates of interest – rates that beat the rate of inflation. Wealth that an account holder places in such pools will not be available for spending until reclaimed (at which point interest earnings will stop), however savers who participate in those lending pools will once again be rewarded for their thrift. I can imagine that when the public understands the opportunity, millions will vote with their feet and dollars against the current corrupt banking system that pays virtually zero interest at best, and threatens to soon impose negative interest rates on savings and checking accounts.
One more consequence of the Kraken charter: now that there is a legally approved and audited custody solution, the gates are open for institutions to get into cryptocurrencies. The ability to custody client assets has been the stumbling block for investment companies, retirement account and pension plan fiduciaries, and similar legal entities who are required to secure client assets 100%. The Wyoming framework of laws was designed specifically to address this custody issue and to simplify the onboarding of institutions and institutional investors into the crypto space. Kraken has just cracked the barrier and opened the floodgates. Very soon other SPDI banks will be approved, and new money will begin to flow into cryptocurrencies – especially Bitcoin, the “digital gold” of the cryptosphere.
Since June of this year, MicroStrategy has converted a half billion dollars of reserves into Bitcoin, rightly identifying BTC as more secure than dollars and possessing more value growth potential than gold. $500 million is a lot of money, but it’s nothing compared to what is coming now that the means to enter the cryptocurrency space has been simplified and the custody of large crypto holdings has been secured and assured.
It’s still early days. I say that a lot, but it’s true. For now. Only a few people know about the Kraken Bank Charter, and fewer understand what it portends. Until more understand, it’s still possible to front-run the development by securing some still-inexpensive BTC. But these early days are now limited.
No one knows when the calculus will shift – that depends on the rate of infrastructure development by SPDIs and the rate of adoption by institutional players with billions to invest. Many potential institutional-scale investors have been exploring the cryptosphere for awhile, but they have been on hold until the legal framework was developed and SPDI charters were issued.
Their day has arrived. It means the end of the “early days” is at hand, even if no one can point forward to exactly when the last of the early days will be, after which BTC prices will move up significantly, and then finally – some years down the road – begin to level off as the asset becomes fully mature.
I have a Kraken acct. and saw this release as well. Although what does bother me a little, is that on their platform, they seem to be offering some sort of derivative bs too; I hope they keep that far removed from people’s bank deposits. Anyways, I’m short-term optimistic and look forward to the shift it inspires but eventually this will all succumb to the universal forces of greed and temptation.
I’m also not a hater of crypto; it’s just really hard for me to see where the speculative volatility ends and stability begins. I suppose if there is standard…but it still has counterparty risks and what I see as vulnerability to an imminent leap in supercomputing (no, not quantum) that will make the most advanced ASIC units look like Punchcard machines. Sure there are strong advances taking place in the gold mining industry as well; discovery will become easier as will the processing of low yield ores. But, it’s still tangible, multipurpose and people have been in love at first sight for many thousand years. It’s doesn’t have to be TED-talked to death or debated for people to assign value.
That said, life isn’t a zero-sum game (well it doesn’t have to be), so there’s plenty of room for all sorts of alternate methods of exchange. I think institutional investors may dabble in btc. But they will more likely just start creating their own; also creating in parallel, all sorts of regulatory wizardry to secure their currency as the dominant one. I mean, unless the folks (bankers/politicians) that administer our current financial shipwreck unilaterally join Elon on his hyperloop to nowhere/Mars, it’s going to be pretty tough to scrape off the layers of barnacles and parasites that have accumulated; for the sake of a new paradigm.
but it still has counterparty risks and what I see as vulnerability to an imminent leap in supercomputing (no, not quantum) that will make the most advanced ASIC units look like Punchcard machines.
The counterparty risk is probably slightly higher than that for traditional bank deposits, yes. There is no known imminent leap in supercomputing that is not quantum, as far as I know. The quantum task-solving advancements as we move into the officially-acknowledged 1000+ qubits arena is indeed a major risk of difficult to ascertain timeframe. The thing is, though initial mayhem is possible, it’s relatively trivial to switch to quantum-resistant algorithms (with significant trade-offs in performance), and a bunch of crypto devs are already onto the task. Just to name one example, there’s one called Quantum Resistant Ledger centering primarily around gaining highest-known quantum computing resistance.