The world of cryptocurrencies faces many challenges. They include price volatility as well as low mainstream uptake. Cryptos are also susceptible to a 51 percent attack as was seen recently with Ethereum Classic.
However, the biggest challenge remains to be the ambiguous and vague regulatory framework governing the industry. Wyoming has set out to solve this challenge with its latest digital assets bill.
The bill classifies digital assets into three categories, the first of which is digital consumer assets. The second is digital securities which entitle an investor to part ownership of an enterprise. The third is virtual currency, a category into which most cryptos aim to be included in. Virtual currencies are digital tokens that are used for the purposes of transactions and according to the bill, they shall be considered as money.
We’ve known that digital assets fall into these three categories for years. However, what makes this bill very significant is that it will give cryptos legal recognition. This is something the crypto universe has been begging for. If passed into law, the bill will give crypto businesses including exchanges and lending firms the freedom to operate freely in the state.
Caitlin Long, a former Wall Street veteran who served at Morgan Stanley, has been one of the key people behind the bill. Long is a long-standing member of the Wyoming Blockchain Association. The organization has been working with the state government to introduce crypto and blockchain regulations. It lists some highly influential people as advisors including Patrick Byrne, the CEO of Overstock and David Miller, a top executive at Ernst and Young.
Long posted a long info-packed Twitter thread, explaining what the bill could mean for the state as well as the crypto industry.
19/ So, if you must use a custodian, use a #Wyoming custodian–nowhere else will your property rights in digital assets be better protected. STAY AWAY from NY especially, bc NY permits #rehypothecation & allows failures to deliver. WY protects investor rights better than NY does!
— Caitlin Long ? (@CaitlinLong_) January 18, 2019
The bill also seeks to bring clarity to an area that has been an Achilles Heel for institutional investors: crypto custody. Under the current regulatory framework, crypto custody is offered by startups such as BitGo and Coinbase. Fidelity Investments and Bakkt have been some of the institutional-grade entrants, but not much has come of these efforts.
Not anymore. The bill authorizes banks to offer custodial services.
A bank may provide custodial services for digital assets consistent with this section upon providing sixty (60) days written notice to the commissioner.
For a bank to qualify as a crypto custodian, it must fulfill a number of obligations. The first of these is adhering to federal custodial rules such as accounting and internal control standards. The bank must also comply with the set federal anti-money laundering requirements as well as know-your-customer rules.
While commercial banks don’t have the best history with cryptos, they are still a big and important inclusion. For one, this will attract more institutional investors who will feel more at peace with banks than with young startups. Further, this will be a big consideration by the SEC as it considers how best to regulate the industry.