Two weeks ago, Kraken Financial received the first Special Purpose Depository Institution (SPDI) charter from the Wyoming Banking Division to much fanfare. With the hard work of well-known players such as Tyler Lindholm (R-Sundance) and Caitlin Long, CEO of Avanti Bank, the foundation has been established for Wyoming to be the most crypto-friendly jurisdiction in the U.S. Now that the laws are passed and the charter is issued, it is up to the Wyoming Banking Division regulators to begin the first-ever crypto bank examinations.
By way of background, I have prior experience at the Federal Deposit Insurance Corporation (FDIC) where I have examined banks in Texas, Louisiana, and Arkansas. Almost always, banks have a combination of federal and state examiners if the charter is issued by the state, with either the FDIC or the Federal Reserve as the federal regulator. If the charter is national, the Office of the Comptroller of the Currency (OCC) will examine the bank, meaning only federal regulators go on bank examinations.
However, Wyoming’s new SPDI charter for Kraken Financial creates a very unique circumstance that I believe has created ‘Unicorn Regulators’ for Fintech, who are at a historic moment in preparing for digital asset bank examinations, similarly to when the FDIC began its first exams in 1933 and the OCC started exams in 1863. I had a unique opportunity to spend some time speaking to both Commissioner Albert L. Forkner of the Wyoming Banking Division and Chris Land, General Counsel, to get an inside view of this historic moment in bank examinations. Below is my Q&A with them.
Jason Brett: All regulators started somewhere from scratch. Whether it was the FDIC in 1933 about to conduct its first examination, there is likely a sense of history that you have in what you are undertaking. What is that like Mr. Forkner?
Al Forkner: While Wyoming has been fairly pioneering in this space, fortunately we have a good foundation to build upon. Regulators have been supervising banks since the 1800s. In Wyoming, the first State Bank Examiner took office in 1892. Think about the evolution of banking and financial services since then. Today is really no different, other than the rate of change is much faster. So, I am working to make sure my staff—which is extremely capable—has all of the tools necessary to properly supervise and examine this new bank charter. If we happen to make a little history along the way, then that might be something exciting to be a part of.
Brett: Who will conduct the bank examinations of Kraken? Most are familiar with either the FDIC or the Federal Reserve alongside the state regulators, or the OCC if you are a national bank. Who is in charge of issuing an Examination Report in this case?
Forkner: The Wyoming Division of Banking is Kraken’s chartering authority and primary prudential supervisor. The Division is responsible for conducting off-site monitoring of Kraken on a regular basis, conducting regular full-scope examinations and working with management to ensure a safe and sound institution. The Division will be responsible for issuing Reports of Examination.
Brett: Can you tell us a little bit about how you are figuring out what the examination policies and procedures will look like?
Forkner: Great question. No policy manuals and examination procedures for bank digital asset activities exists today. The Office of the Comptroller of the Currency (OCC) has recently issued two guidance documents affirming that national banks may provide certain digital asset services. However, legal authority is not enough—there must be supervisory policies. Banks need to know how their regulators view the details of these activities, what their expectations are, and best practices.
Wyoming is currently nearing completion of the first comprehensive set of policy manuals and examination procedures for bank digital asset activities. This is the first of its kind in the United States and among the first in the world.
These documents will cover areas like BSA/AML/KYC/sanctions, custody and fiduciary activities, information technology, payment system risk and bank operations. These documents will give banks the detail they need, balancing both the innovative nature of digital assets and the need for safety and soundness in the U.S. banking system. These manuals and procedures are built directly upon existing bank manuals and guidance, with additional flavor and risk-management considerations for digital assets.
Brett: Commissioner, from the perspective of thinking of you as a ‘unicorn regulator’, should the people of Wyoming be fearful that there is now a bank without FDIC insurance?
Forkner: No, for several reasons: First, each SPDI will be regulated by the Division in much the same way as a traditional bank. The Division is one of the few banking regulators in the world that has developed knowledge relating to digital assets. Second, the FDIC insurance limit only applies up to $250,000 and wouldn’t apply to digital assets, like bitcoin, even if the bank was FDIC-insured. Under Wyoming law, 100% of each customer’s deposit is required to be protected (which will be regularly verified by the Division), so there is no $250,000 limit. Third, each SPDI is required to pledge $15,000,000+ to the State of Wyoming to cover receivership costs. This money is held in a separate account, at another bank, under the Division’s control. This money would be available for receivership costs, so the State of Wyoming isn’t left on the hook. Finally, in the very unlikely event that the Division was required to close an SPDI, the Division has procedures already in place to manage a receivership. They are similar to the FDIC’s procedures for closing a bank.
Brett: Chris, recently there were reports of bringing in vendors such as Chainalysis and Promontory Financial, how are they assisting you with your exam preparation?
Land: Chainalysis, and potentially other vendors, will assist the Division will BSA/AML/KYC/sanctions compliance, both on an ongoing off-site basis and during regular examinations. They will also be available to conduct more focused investigations, if necessary.
Promontory Financial Group, a well-respected firm of market professionals and former regulators, has been collaborating with the Division to develop our policy manuals and examination procedures. They are quite insightful and have helped us take a wide-lens view of how international regulators are viewing digital asset activities, as well as honing in on a fine level of detail to guide our bank examination staff and each SPDI.
Brett: Are there any key tenets or principles for ‘Digital Asset Supervisory Guidance’ you have already gleaned from your preparation?
Land: One, We’re taking a principles-based approach where we can. Digital assets are an evolving space and we’re trying to facilitate responsible innovation. Two, existing principles relating to bank operations (BSA/AML, custody, etc.) should apply whenever possible. Third, we’re taking a collaborative approach, developing these materials with feedback from our federal and state regulatory colleagues. Fourth, we’re committed to creating a product that is comprehensive and, for the first time, completely addresses all aspects of bank digital asset activities. We hope the product will stand the test of time and start a national conversation on these issues.
Brett: What would you say to people in Wyoming or elsewhere that do not understand crypto or ‘digital banking’, that would convince them this is a safe and sound institution based on your examinations?
Land: We will be applying nearly the same standards to each SPDI that are applicable to existing banks. Each bank will be examined on a regular basis and has capital requirements similar to a traditional bank. Additionally, we have detailed policies and procedures for how these banks should operate. In many ways, digital assets are just a new asset class for banks.
Brett: What does it mean that, in the instance of Kraken, they will ‘apply for a Master Account at the Fed’? How will this help the bank work outside of the state of Wyoming and in other states?
Land: Kraken is eligible to apply for an account relationship with the Federal Reserve System. This will potentially allow them to clear payments with the Federal Reserve and to conduct other related activities. Access to the payment system is one of the hallmark features of a ‘bank.’
Brett: What happens if a bank becomes a Member of the Fed or gets FDIC Insurance? Would that mean that Federal regulators would then start playing a role in the examinations?
Land: Kraken is eligible to apply for membership in the Federal Reserve System and to obtain FDIC insurance, though they are not required to do so. If Kraken were to pursue either option, the Federal Reserve or the FDIC would conduct joint examinations of Kraken alongside the Division, and would assist us in ensuring their safe and sound operation on an ongoing basis.
Brett: Do you consider what the OCC is doing as catch-up with their interpretive letters? What advice would you give them?
Land: Wyoming has been working on these issues in detail since 2018, and it’s great that the OCC similarly recognizes the importance of responsible innovation in the U.S. banking system.
Brett: Will you be doing a Safety and Soundness and a BSA exam?
Land: Yes, each SPDI will receive nearly the same examination that any U.S. bank would, with enhanced focus on BSA/AML/KYC/sanctions, custody and fiduciary activities, and information technology.
Brett: Will you make the examination booklet public like other regulators sometimes do once it is refined?
Land: These materials will be publicly available. The Division will determine the best way to do this in the near future.
Brett: Thank you both.