Wyoming's Wild West Blockchain Laws and a Start-up Lobby
Wyoming is one of the 50 states of the United States (“U.S.”), located in the Mountain Division in the Western part of the U.S. It is spacious and mountainous with beautiful rivers and valleys. The economy in Wyoming is tied to mining, agriculture, and tourism. However, for the past couple of years, Wyoming has been aiming to become one of the promising crypto lands. Wyoming has enacted multiple crypto laws that seek to create a very friendly environment for blockchain and virtual currency businesses. But to what end?
Wyoming’s blockchain affinity started with Caitlin Long, who after a career on Wall Street, has decided to support the blockchain industry in her home Wyoming through legislative actions. Mrs. Long volunteered to join the Wyoming Blockchain Taskforce back in 2018, where she worked on numerous laws related to blockchain and digital assets. Back in 2019, she heavily advocated for legislative changes during the Consensus in New York. In 2020, Mrs. Long has co-founded the Avanti Financial Group. Avanti, a crypto start-up that aims to provide custodial services for institutional investors in virtual currencies, was granted a Wyoming bank charter back in October 2020. Avanti has recently (in March 2021) completed series A and raised $44 million since its inception. Over the past years, Mrs. Long and Avanti have helped draft more than twenty crypto-friendly acts. Many may see a substantial conflict of interests of Mrs. Long, but we have seen numerous times in the U.S. heavy involvement of tech companies in legislative drafting and negotiating processes, to whose benefit, I leave for constitutional scholars to assess. Nevertheless, it might be refreshing that at this point it is a start-up that has been supporting a legislative change. Ultimately, as shown in the past, the final narrative of Mrs. Long’s and her start-up’s involvement will depend on the success or the failure of the crypto world in Wyoming.
Nonetheless, it is important to actually review the Wyoming crypto acts and understand what kind of measures and approaches are being undertaken. Whether it is for inspiration or reflection on our contemporary financial system. Even though Wyoming was not the first state to enact legislation specific to blockchain and virtual currencies, it is the state with the most comprehensive body of legal acts in the U.S. In the following sections, I will introduce the essential acts and provide some reflections. This article represents an introduction to a series of articles on blockchain and virtual currency regulation.
Back in March 2018, the Wyoming state legislature passed four bills that provide certain exemptions for virtual currency and blockchain tokens under Wyoming state law.
1. Wyoming House Bill 19 (HB 19) defined virtual currency as any type of digital representation of value that is used as a medium of exchange, a unit of account, or store of value and is not recognized as legal tender by the U.S. government, HB 19 exempts virtual currency from the application of the Wyoming Money Transmitter Act to allow parties to buy, sell, issue, or take custody of virtual currency. Based on this exemption, the exchanges did not have to comply with the act and its obligation to maintain cash reserves to back 100% of their crypto holding. Thus, opening Wyoming for virtual currencies exchange business.
2. Wyoming Senate File 111 (SF 111) amended the property tax rules of the Wyoming Taxation and Revenue Act by adding exemptions for digital currencies. The SF 111 exempted money and cash on hand, including currency, gold, silver, other coins, bank drafts, certified checks, cashier’s checks, and virtual currency from property taxation, incentivizing for their purchase also from a tax perspective.
3. Wyoming House Bill 101 (HB 101) amended Wyoming’s Business Corporation Act to allow companies to maintain corporate records and manage shareholder votes and other transactions on electronic networks, including distributed networks. Furthermore, HB 101 allows pseudonymous data strings to identify its shareholders, log shareholder voting, and track the transfer of corporate shares on decentralized networks. Thus, providing another space, in addition to Delaware and other states, where corporate governance can move to the blockchain world.
4. Wyoming House Bill 70 (HB 70) created a new section on blockchain token exemption to securities regulation within the state. HB 70 created a framework for virtual currency token sales in Wyoming to be classified as open blockchain tokens (utility tokens) when they comply with all conditions:
The developer or seller of the token or the registered agent of the developer or seller files a notice of intent with the secretary of state;
Giving tokens a consumptive purpose, which shall only be exchanged for, or provided for the receipt of, goods, services, or content, including rights of access to goods or services or content; and
The developer or seller of the token did not sell the token to the initial buyer as a financial investment, which means that the developer or seller did not market the token as a financial investment and simultaneously one of the following is true, (i) the developer or seller of the token reasonably believed that it sold the token to the initial buyer for a consumptive purpose; (ii) the token has a consumptive purpose that is available at the time of sale and can be used at or near the time of sale for use for a consumptive purpose; (iii) if the token does not have a consumptive purpose available at the time of sale, the initial buyer of the token is prevented from reselling the token until the token is available for use for a consumptive purpose; or (iv) the developer or seller takes other reasonable precautions to prevent buyers from purchasing the tokens as a financial investment.
For this exemption to be fully applicable, the tokens could not be sold outside of Wyoming’s borders and to persons or entities with registered seats or addresses outside Wyoming. Otherwise, the U.S. federal securities laws are applicable.
In 2019, another set of laws was adopted to further support the environment for blockchain and crypto assets business, by introducing new legislation or amendment to existing one.
5. Wyoming Digital Assets Act (SF 125) classified digital assets within existing laws and specified that digital assets are property within the Uniform Commercial Code. SF 125 further established an opt-in framework for banks to provide custodial services for digital asset property as custodians while specifying standards and procedures for custodial services. Moreover, SF 125 addressed an important procedural aspect, clarifying the jurisdiction of Wyoming courts relating to digital assets.
6. Wyoming Corporate Stock Certificate tokens (HB 185) continued to digitalize corporate governance by authorizing corporations to issue certificates tokens instead of stock certificates.
7. Wyoming Financial Technology Sandbox Act (HB 57) created the financial technology sandbox for the testing of financial products and services in Wyoming. FinTech sandboxes are being established across the world since 2016 when the UK introduced its sandbox idea. In comparison to other states and countries, Wyoming understood the key message of a regulatory sandbox, which is a statutory waiver, allowing the sandbox to grant a necessary waiver from an applicable regulation while maintaining consumer protection. Establishing a FinTech sandbox is often a balanced act of providing sufficient space and possibilities for a start-up to innovate, and protecting the consumers and market from unnecessary risks. HB 57 has also established the “Select Committee on Blockchain, Financial Technology, and Digital Innovation,” which works with the government to understand the novel technology, its possibilities and implement new laws supporting innovation. Having an advisory innovation committee that provides a combination of experience and knowledge without any pervasive self-interest is a must for any state that wishes to keep up with digitalization and innovation.
8. Wyoming Special Purpose Depository Institutions Act (HB 74) might be one of the key pieces of legislation adopted introducing a new financial intermediary. HB 74 has established a “special purpose depository institution” (SPDI) as a new form of state bank in Wyoming. The HB 74 requires SPDI to:
Maintain all of their depository liabilities as liquid assets;
Not engage in lending activities;
Only provide services to bona fide business, with a minimum deposit; and
Comply with all other applicable federal and state laws.
A major difference between an SPDI and a traditional bank is the type of lending they engage in. Federally charted banks must comply with additional regulations as they lend money to customers and hold less in reserve than the customer initially deposited. Plus, they also need to be insured by the Federal Deposit Insurance Corporations, which SPDIs are exempted from. On the other hand, an SPDI will be required to hold all assets deposited with them. This distinction addresses one of the main problems in the crypto world, where many crypto companies remain un-banked given that traditional banks are not willing to hold their digital assets and provide banking services. This is a very common problem that blockchain or crypto companies and start-ups face. SPDI might serve as a new financial intermediary that will be able to offer banking and custody services for digital assets and integrate them with federal payment systems. The question is, whether this is actually a) necessary and b) advisable. For more on this topic, see below.
Since the adoption of HB 74, Kraken Financial received a Wyoming state bank charter and so did Avanti Financial Group. In addition to HB 74, the Wyoming Division of Banking (“WDB”) has on October 23, 2020 issues a no-action letter to a Wyoming-chartered public trust company allowing it to provide custodial services for digital assets under Wyoming law. The letter states that the WDB considered the trust company to be a “qualified custodian” under the Investment Advisers Act of 1940 and the SEC Custody Rule. In response to the WDB, less than three weeks after WDB’s no-action letter, on November 9, 2020. the Securities and Exchange Commission (“SEC”) issued a statement and request for feedback encouraging a further discussion on the application of the Custody Rule to digital assets and what is considered “qualified custodian”. SEC´indicated numerous questions, but did not specify a deadline for submission of the response to these questions. Thus, we are still waiting for the response.
A couple of months ago, another very interesting new addition to Wyoming’s corporate law has been adopted.
9. Wyoming DAO Supplement Bill (SF 38) has introduced decentralized autonomous organizations (DAOs) and has recognized them as a form of limited liability companies. SF 38 stipulated that the rights of members in a decentralized autonomous organization may differ materially from the rights of members in other limited liability companies. The Wyoming Decentralized Autonomous Organization Supplement, underlying smart contracts, articles of organization, and operating agreement, if applicable, of a decentralized autonomous organization may define, reduce or eliminate fiduciary duties and may restrict the transfer of ownership interests, withdrawal or resignation from the decentralized autonomous organization, return of capital contributions and dissolution of the decentralized autonomous organization. This new act deserves more space and analysis. Thus, I will leave for another short piece.
This overview of Wyoming’s acts and amendments outlines the current regulatory framework that Wyoming has been working on since 2018. With the adoption of the DAO SF 38, it seems that Wyoming still aims to establish itself as one of the most crypto- and DLT- friendly jurisdictions. Even though this might seem inspiring and exciting for many, we should all reflect on what does this ultimately means for the financial system. There are numerous questions that scholars, economists, lawyers, but also technologists have been asking, predominantly those who remember the financial crash from 2008 and see several similarities.
Wyoming has always been a little different from the rest of the US. It was the first state to grant female suffrage, and its contemporary politics are deeply libertarian, which makes it an ideal place for all blockchain enthusiasts, who see DLT and virtual currency as the tools for their economic independence. It is home to some of the world’s most spectacular landscapes like Yellowstone National Park. Its nickname is the Equality State, and its high proportion of ultra-wealthy landowners and tourists have made the city of Jackson Hole the single most unequal place in the U.S. The word “Wyoming is derived from a Delaware word meaning “land of vast plains” (Britannica) and possibly this is how the blockchain and crypto world is perceived there. Wyoming, home of fewer than 600,000 inhabitants can however represent a gate into the entire financial system of the U.S. and introduce risks to the financial system’s safety and soundness as well as consumer protection of a size that the state legislators are not aware of.