Wyoming Digital Asset Management: Think Twice

All cyber currency and corporation technologies are essentially databases, managed and maintained in various secure ways, to enable accurate transfer of information. The primary security feature is the legacy accountability, where distributed-open ledgers enable verification of legitimacy. Other features are a lack of a requirement for third party verification, peer to peer transfers and defined feature elements, such as tying the database to a change when certain key elements are present- or digital contracts. The end result is a faster, smoother transfer of information that facilitates trade or ownership records.

It is very noteworthy that cryptocurrencies are not tied to any physical assets, like gold or real estate. Essentially, it is a group of individuals mutually agreeing that a set of zeros and ones have value.

For example, a system of micropayments enabled at each step of the supply chain might end the practice of factoring, each step verified digitally in a legacy enabled database. If a grower of apples is paid when the apples come off the tree, and the pickers paid when the apples are in storage, the trucker is paid when the apples are delivered to a warehouse, and the warehouse paid when the apples are delivered to the store, a store can contract for the apples without paying for the cost of the intermediary finance, the speed of payments is greatly improved, and costs come down.

This has implications for any contract, payments system, and wealth storage mechanism.Securities might be created out of combinations of micro-slices of stocks- we see that in the Robin Hood trading system where retail buyers can purchase a portion of a share of an expensive stock, like Tesla or Berkshire Hathaway. Payments might be linked to options or calls, performance clauses or underlying risk factors. All government activities and documents might move to linked databases.

What is clear is that the various state regulations, such as those in leader states such as Washington, New York and Massachusetts, will be superseded by Federal regulations. In the interim between state and federal regulation, various corporations will look for arbitrage opportunities between the different regulatory environments. This may not work to the advantage of the state involved.

Kraken has applied for and received approval from the Wyoming State Banking Board as a Special Purpose Depository Institution (SPDI).The problem that Kraken will have is that while it promises to maintain a 100% ratio of assets to deposits, their business model might make that impossible, or even worse, encourage the moral hazard of taking on capital risk in search of return to maintain the 100% ratio. https://bpi.com/beware-the-kraken/

While Wyoming seeks to become a leader in this rapidly expanding field of opportunity, the risks are many: the technology is still in its infancy, and early adopters in technology are often "first to fail."The Federal government, as well as banks and financial institutions, have very little incentive to move towards accepting digital assets in an even exchange for traditional assets, such as cash, bonds and securities, due to the lack of oversight as this technology emerges.

We know Kraken's strategy is to fulfill the Wyoming statute's 100% liquidity requirements partially through the bond market. The 100% liquidity requirement is how they avoid FDIC insurance requirements. However, the basics of bond market dictate that when interest rates rise, bond prices fall. So, modest interest rate increases could destabilize Kraken's liquidity requirement. Worse, Kraken will be upside down very quickly if inflationary pressure increases the agreed upon value of the cryptocurrencies in combination with devalued bond prices. Kraken would not survive even a modest run on the bank. These inherent instabilities could be a central reason the Federal Reserve is slow to accept cryptocurrencies into the banking system.

Without support and buy in from the Federal regulators (and there are a lot of them! https://www.investopedia.com/articles/economics/09/financial-regulatory-body.asp#commodity-futures-trading-commission ) the storage and valuation of digital assets as a form of payments will be subject to market forces beyond the control of the digital custody entity.While there are many Digital Assets Management companies, and their software, the is no overarching format or standard that is comparable to the current financial technology structure.This means that at any point along the path of storing digital assets, especially currency-like products, the federal regulators can (and will) step in and close down the business in the event of failure to provide adequate capital reserves, or if there is an attempt to evade regulation.

And there is no incentive for the regulators and industry to support nascent and disruptive technology.The banking and finance industry, as well as the federal government, is built to create secure storage and management of wealth.This requires, as frequent failures along the way have shown, a rigid, well enforced and clear directive on the part of the firms and the regulators to establish and maintain the correct structure that can withstand the stresses of market forces.

Wyoming banking regulators would be well advised to maintain the capital requirements for digital asset storage at a level that accounts for the instability of a market securities based deposit company.The opportunity exists for Wyoming to join in with leader banking states and the federal government to encourage the formation of Wyoming based fintech and digital asset management companies.The risk lies in getting ahead of the necessary completion of regulatory supervision and buy in from existing stakeholders and creating a "bust" in these industries, ruining Wyoming's reputation.