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Kraken: the First Crypto Bank in US

The borderline between crypto exchange and banks just got even dimmer. Recently, Wyoming has given the crypto exchange Kraken a license to create a crypto bank in the country, which will be tentatively called Kraken Financial.

Because of this, Kraken will be made as the first US crypto exchange to create a bank. Notably, a “Special Purpose Depository Institution,” this means that Kraken can hold custody over digital assets, operate payment systems, and allow the customers to easily switch between fiat and crypto.

Kraken’s financial customers, currently limited to US residents – and not New Yorkers – can pay bills and receive salaries in crypto salaries thru cryptocurrency; the bank can also hold cryptocurrency within the bank, once it launches. Kraken’s Financial CEO, David Kinitsky, said that the bank

“expects to launch this either later year, but will most likely at the beginning of 2021.”

Kraken wants to introduce new services, together with crypto debit cards and staking services, for the next few years.

The license comes with small limitations: Kraken Financial will be called a “custody bank,” it means that it is not allowed to issue loans with computer deposits: the Wyoming law has required Kraken to maintain all of the customers’ reserves always.

“Right now, we are prohibited from lending on the US dollar side,” said Kinitsky. “There are some provisions in the statute that enable us to facilitate customer-directed lending of digital assets. And so we would anticipate conducting that type of lending activity,” he said. Still, Kraken has no plans for fractional backup loaning.

Kraken makes money through a traditional way, according to Kinitsky. The treasury securities and other assets have yielded, but “the US dollar-denominated yield is not so tremendous” right now, he added.

Besides that, Kraken will take a cut from crypto deposited in its account and charge fixed fees for the services, like wires and bank-to-bank transactions.

“Those are the standard mechanisms for banks to make money outside of lending,” he said. Then: “New products; qualified custody; wealth management [and] other types of asset classes will have new revenue streams as well. But to start, it’s going to be a very standard banking commercial model.”

Through its new bank, Kraken will also remove its reliance on third-party banking infrastructure.

Will it be a cost-cutting measure? “Yeah, possibly,” he said. “We’ll see.”

That is relevant because the license will permit Kraken to apply for an account at the Federal Reserve. It “can even seek membership,” Kraken’s legal head, Marco Santori, tweeted earlier today.

“This brings with solemn responsibilities, plus Fed supervision. It is a powerful tool, and I hope this becomes de rigueur for all applicants.”

But it was the added bonus of potentially giving Kraken direct access to the Fed. And when that happens, then “in theory, they don’t need to rely on other banks for the fiat side of their business,” elaborated Nic Carter, a partner at Castle Island Ventures. Meanwhile, Kraken would still have a long way to go before it gets there; it can eventually “provide those fiat banking services directly, which is a clear value [proposition],” he said.

Earlier today, Santori has further explained that the move can bridge the gap between traditional and crypto finance.

“A crypto-focused bank would permit an efficient, transparent and responsible nexus between the traditional financial system and the crypto ecosystem,” he said.

A member of Wyoming’s Blockchain Select Committee, Caitlin Long has added in a tweet that the vote in favor of the license was “unanimous,” and that the process took 27 months.

A few months previously, the idea that cryptocurrency companies can become banks was clarified in a public letter in July from the United States Office of the Currency Comptroller, an independent bureau in the US treasury, said that national banks can hold safekeeping over cryptocurrency. According to Carter, Wyoming’s staunch crypto-friendly stance has paved the way for crypto banks to take form, and it has been no small feat.

“It matters because Wyoming’s set of laws clarifies the relationships between depositors and institutions in a definite legal manner, which wasn’t really clear before,” he said. “For instance, it wasn’t exactly clear whether client deposits would be claimable by creditors in a liquidation situation. The SPDI law clearly establishes that distinction.”

He also said that the main contribution, however, was establishing “Wyoming as a crypto-friendly jurisdiction and making some important legal clarifications around the nature of crypto collateral, which I expect other states will adopt too.”

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