Wyoming recently awarded its second special-purpose depository institution (SPDI) charter to Avanti Bank. Kraken was the first institution to receive the newly created SPDI charter in September. As Wyoming had likely hoped when it passed a flurry of blockchain legislation, it appears that it is starting to take hold as a digital-asset-friendly banking state. The state has now chartered two new banks in less than two months; before September, the last newly chartered bank in Wyoming was approved over a decade ago.
Unlike Kraken, which is one of the largest cryptocurrency exchanges, Avanti appears to be focused on a more niche banking market. In a recent interview with American Banker, Founder and CEO Caitlin Long explained how her Wall Street experience in the pension world led her to the conclusion that there needs to be a bank that provides digital asset custody services for mainstream institutional investors. Avanti will initially focus on servicing institutional customers, with typical clients expected to consist largely of hedge funds or family offices. By focusing on that group of customers, Long posits that Bank Secrecy Act and anti-money laundering risks will be significantly lower than with traditional retail customers.
One of the most notable products that Avanti intends to offer is a product called the “Avit.” On its website, Avanti describes the Avit as a “tokenized, programmable US dollar.” Long positions the Avit as similar to stablecoins in terms of the underlying technology, but points out that the fact that the Avit will be issued by a bank is a critical difference. Only a bank has the ability to issue a bank note, which is a direct obligation of the bank, and the Avit will simply be an electronic version of a traditional bank note. This means the Avit can be used in software applications like other stablecoins but may be considered more reliable than traditional stablecoins because users can trust that the deposits backing the Avit are held in the same state chartered financial institution that issued the instrument. Critically, if the Avit is a bank note it is also exempt from regulation as a security by the SEC (though the federal banking regulators retain authority to police offerings under the relevant SEC exemption).
The Avit raises novel legal considerations. Specifically, Article 3 of the Uniform Commercial Code (UCC), which governs bank notes, has never before been directly extended to electronic negotiable instruments such as digital bank notes. Nevertheless, there is an argument that Article 3 provides the necessary legal framework for banks to issue a variety of electronic negotiable instruments, including digital certificates of deposits. As alluded to by Long in her interview, one could argue that a bank issuing a product with features similar to a stablecoin is really just a new form of a traditional bank activity. It remains to be seen exactly how the Avit will function in practice, but Avanti’s website does point out that it has a patent pending for the product. First and foremost, Long touts that the Avits will allow Avanti to offer its customers a programmable payment system with immediate settlement and settlement finality, thereby eliminating counterparty risk.
The Federal Reserve Bank of Kansas City will likely be considering two applications for master accounts from Wyoming crypto banks now. Direct access to the federal payments system is a significant advantage of being a chartered bank and it is clear that such access is desirable given the suite of products and services Avanti intends to offer.
Wyoming, and the Wyoming Division of Banking in particular, has done a remarkable job in creating a highly attractive regulatory environment for companies engaged in digital asset activities. Until other states begin making concerted efforts to update their regulatory regimes in order to allow banks responsibly to offer digital asset products and services, Wyoming will retain a significant competitive advantage. Wyoming may even become the state of choice for Fintechs seeking a bank charter as well as existing financial institutions seeking to expand into the digital assets space. While we use the term “crypto bank” generally, we do wish to point out that the SPDI is not specific to companies engaged in cryptocurrency activities even though the first two charter recipients are certainly deserving of the title.