Wyoming Passes New Blockchain Laws With Hopes Of Stimulating Economy Via Jobs Creation

“One of the most important things for Wyoming happened when former Governor Mead created the Wyoming Governors Blockchain Task Force.
Wyoming Passes New Blockchain LawsWyoming Passes New Blockchain Laws

Wyoming Passes New Blockchain Laws

A year after passing several laws defining the legal framework of blockchain and cryptocurrencies, Wyoming has passed an additional few laws to advance blockchain technology for companies and individuals.

Steve Lupien of Digital Trade Asset Association stated that according to him, the state passed the legislation to promote job creation. In his words,

“One of the most important things for Wyoming happened when former Governor Mead created the Wyoming Governors Blockchain Task Force. This was unbelievably forward thinking, as this task force consists of industry experts such as Caitlin Long, along with legal experts who understand blockchain technology. These experts spent a year looking at what Wyoming could do to advance blockchain adoption, with the ultimate goal of creating jobs.”

Currently, the two most significant drivers of the state’s economy are tourism and mineral extraction. However, these industries are having a hard time because surrounding states are attracting Wyoming’s workers. The hope is that blockchain technology will bring more business back into the state. Lupien stated

“There is a bit of a challenge with Wyoming’s boom and bust economy. As the coal business declines, the Wyoming Governors Blockchain Task Force force, which DATA is also a part of, looked for opportunities to bring capital into the region. We looked at blockchain and said, ‘if we create enabling legislation, then we can bring this industry into Wyoming and create more jobs.’”

The task force has been instrumental in drafting legislation for the proposed bills, which were signed into law and have gone into effect this month.

At this point, there is no indication as to whether the laws will be successful in drawing more jobs and industry to the state. However, Lupien noted that he’s seeing a change – a number of organizations are shown interest in establishing banks under the new laws. As he stated,

“We know the new bills will bring in more jobs and capital. For instance, SF0125, the custody bill, is game changing for digital assets because it defines property ownership. This law authorizes banks as qualified custodians for digital assets. The SEC has never allowed this, but Wyoming is now defining direct ownership of digital assets like property. Now, businesses that set up in Wyoming will view digital assets as custody. In turn, this will bring in capital from institutional investors who by SEC law were required to use a third-party custodial service when investing over $150 million.”

According to DATA member Caitlin Long, banks will be able to start operations in September of this year. She added,

“Wyoming’s digital asset custodians will stand out above all others because they will respect the direct ownership nature of digital assets! These new custodians won’t be like traditional securities custodians, because for a Wyoming-based custodian investors will still directly own their digital assets under custody as a bailment, which means they retain direct ownership while merely giving up control (much like valet parking). In sum, Wyoming will become known as the home of solvent, investor-friendly digital asset custodians to which investment fiduciaries are likely to migrate over time.”

Wyoming’s approach is not revolutionary though. South Dakota applied such a strategy in the 80s by altering its usury laws, which rode caps for rates and fees. Doing so enabled more business to establish itself in the state.

At this point, Wyoming may be in a good position when it comes to blockchain and cryptocurrency technology. Several companies have noted their plans to move to Wyoming, such as BeefChain. Further, Wyoming has been able to do what may take other states much longer. According to Long,

“More than a dozen other states have already passed or are in the process of passing bills that incorporate the Wyoming language. For example, Colorado recently enacted a utility token bill quite similar to the bill Wyoming enacted last year. However, I doubt other states will catch up to Wyoming’s lead, simply because legislatures rarely enact 13 bills on a single topic in a short time frame, especially when another state has already grabbed the first mover advantage.”

At this point, it will be interesting to see the change that Wyoming’s economy goes through in the coming years.

The Cowboys Got It Right: Wyoming’s New Blockchain Laws Will Create More Jobs And Capital

Last year, Wyoming passed five bills into law as the beginning of a legal framework to define the use of cryptocurrencies and blockchain technology.

Getty

Getty

Last year, Wyoming passed five bills into law as the beginning of a legal framework to define the use of cryptocurrencies and blockchain technology. Almost a year later, Wyoming has legislated a total of13 blockchain laws. As one of the least populous states in the U.S., Wyoming happens to be the only region to offer a lawful structure designed to advance blockchain technology for both individuals and companies.

But, why?

According to executive director of theDigital Asset Trade Association (DATA), Steve Lupien, the ultimate goal of Wyoming passing blockchain legislation is to create more jobs.

One of the most important things for Wyoming happened when former Governor Mead created the Wyoming Governors Blockchain Task Force. This was unbelievably forward thinking, as this task force consists of industry experts such as Caitlin Long, along with legal experts who understand blockchain technology. These experts spent a year looking at what Wyoming could do to advance blockchain adoption, with the ultimate goal of creating jobs,” Lupien told me.

Mineral extraction and tourism are the main drivers behind Wyoming’s economy. Yet boom conditions in neighboring states such as North Dakota continue to draw energy workers away. According to theU.S. Census Bureau, about twelve hundred fewer residents remained in Wyoming from July 2017 to July 2018.

There is a bit of a challenge with Wyoming’s boom and bust economy. As the coal business declines, the Wyoming Governors Blockchain Task Force force, which DATA is also a part of, looked for opportunities to bring capital into the region. We looked at blockchain and said, ‘if we create enabling legislation, then we can bring this industry into Wyoming and create more jobs,’” explained Lupien.

During the middle of 2018, the Task Force helped draft legislation for the eight newly proposed bills. All eight bills were signed into law at the end of Februar 2019 and went into effect March 1 of this month.

Wrangling In Jobs And Capital

Compared tolast year’s laws, Wyoming’s new blockchain laws aim to have more of an impact in terms of bringing in jobs and capital. While there are no statistics showing how many blockchain-based companies relocated to Wyoming last year, Lupien noted that there are already three or four organizations interested in setting up banks under this new charter.

We know the new bills will bring in more jobs and capital. For instance,SF0125, the custody bill, is game changing for digital assets because it defines property ownership. This law authorizes banks as qualified custodians for digital assets. The SEC has never allowed this, but Wyoming is now defining direct ownership of digital assets as property. Now, businesses that set up in Wyoming will view digital assets as custody. In turn, this will bring in capital from institutional investors who by SEC law were required to use a third-party custodial service when investing over $150 million,” explained Lupien.

Caitlin Long, who is also a member of DATA, has noted that Wyoming banks can start establishing such operations as soon as September 1, 2019. Moreover, Long pointed out in her recent Forbes article,

Wyoming’s digital asset custodians will stand out above all others because they will respect the direct ownership nature of digital assets! These new custodians won’t be like traditional securities custodians, because for a Wyoming-based custodian investors will still directly own their digital assets under custody as a bailment, which means they retain direct ownership while merely giving up control (much like valet parking). In sum, Wyoming will become known as the home of solvent, investor-friendly digital asset custodians to which investment fiduciaries are likely to migrate over time.”

According to Lupien, what Wyoming is doing with its blockchain legislation is similar to what South Dakota did in the early 1980’s during the economic recession. When interest rates were sky rocking at the time, South Dakota was the only state to change itsusury laws to eliminate the cap on interest rates and fees.

As a result, New York banks set up credit card operations in South Dakota. Citibank in particular promised to bring 500 jobs to the area. Citibank now employs more than 2,900 workers in Sioux Falls and provides more than 16,000 jobs in a South Dakota metro area.

Ten Years Before A Significant Impact

While Wyoming has already seen blockchain-based startups likeBeefChain set up shop in the region, other businesses are now flocking to the western state. For example,IOHK, the company behind Cardano (ADA cryptocurrency), has confirmed they are moving from Hong Kong to Wyoming. The founder of Cardano, Charles Hoskinson, mentioned the move when he was questioned on whether he would consider relocating the firm to Malta.

In addition to companies coming to Wyoming, the new legislation is also influencing other U.S. states to create blockchain friendly governance. Yet according to Long, it’s going to be difficult for other regions to progress as quickly as Wyoming has.

More than a dozen other states have already passed or are in the process of passing bills that incorporate the Wyoming language. For example, Colorado recently enacted a utility token bill quite similar to the bill Wyoming enacted last year. However, I doubt other states will catch up to Wyoming’s lead, simply because legislatures rarely enact 13 bills on a single topic in a short time frame, especially when another state has already grabbed the first mover advantage,” Long told me.

Despite all the progress, Lupien believes this is only the beginning of something much larger.

“Make no mistake that it will take ten years before we will see a significant impact in Wyoming. However, there is enough innovation going on now to see a true influence in the region, which other U.S. states are finally taking note of.”

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$25 Million in 2 Weeks: BlockFi Booms as Bitcoin, Ether Investors Seek Interest

According to CEO and founder Zac Prince, users have already deposited more than $35 million worth of crypto, around 80 percent of it in bitcoin, into …

The Takeaway

  • BlockFi’s interest-yielding deposit accounts, launched in beta in January and fully live this month, have attracted more than $35 million in crypto. Most of it is being lent to institutional borrowers.
  • BlockFi’s terms of service give the company significant leeway over how it uses depositors’ funds and what interest rate it can pay them. This flexibility is needed for the company to grow fast, CEO Zac Prince says.
  • Institutional investors borrow crypto at individualized terms, at interest rates from 4 to 12 percent, and BlockFi can call in the loans at any time.
  • When crypto prices move dramatically, BlockFi manages risks by making borrowers put up more collateral or selling some of it.
  • BlockFi is planning to roll out new products every six months and raise more capital.

BlockFi wasn’t the first lending startup in the cryptocurrency market, but it’s likely the one getting the most attention these days — including some heat from community members.

While it was founded in 2017, and began making fiat loans with crypto collateral in January 2018, the company was thrust into the spotlight earlier this month when it officially launched an interest-bearing deposit account. Seemingly too good to be true, the product entices investors with returns of up to 6.2 percent annually for holding their bitcoin or either.

So far, the product seems to be gaining traction. According to CEO and founder Zac Prince, users have already deposited more than $35 million worth of crypto, around 80 percent of it in bitcoin, into their interest-bearing accounts since beta testing began in January. Of that, $25 million, was gathered after the March 5 launch.

Yet skeptics almost immediately began looking under the hood.

For example, lawyer Stephen Palley noted that, while BlockFi is advertising 6.2 percent, according to the product’s terms and conditions page, the company can modify the rate at its discretion. Others pointed out that, as the deposits won’t be insured as they would be at a bank, “your upside is limited to 6.2 percent whereas your downside is 100 percent” if BlockFi fails.

Wall Street veteran Caitlin Long noted that by depositing their crypto with BlockFi, people expose themselves to a form of counterparty risk: “I didn’t see disclosure on that,” she wrote, adding that by rehypothecating clients’ funds – that is, lending out collateral – BlockFi may be exposing itself to legal challenges in some U.S. states.

Given the controversial yet clear market interest in this product, CoinDesk sat down with Prince to talk about the company’s policies, how BlockFi’s business works, and, most importantly, how it manages risk.

Lending fiat, borrowing crypto

BlockFi is currently offering two products to retail customers: cryptocurrency-backed loans and crypto-funded interest accounts. With the loans, the customer borrows U.S. dollars for one year at 4.5 percent interest, depositing bitcoin, litecoin or ether as collateral. They can only borrow up to 50 percent of what the pledged crypto is worth at the time.

Meanwhile, with the interest account, the customer deposits bitcoin or ether with BlockFi so that the asset can accumulate interest (denominated in crypto) every month. As mentioned, BlockFi is advertising a 6.2 percent annual compound interest rate for such accounts, which is two to three times better than a U.S.Treasury bond or a U.S. bank saving account yield.

Image of BlockFi’s CEO Zac Prince by Anna Baydakova for CoinDesk

But again, the terms and conditions explicitly say that the interest will be calculated by BlockFi at its discretion.

When asked if there is any benchmark BlockFi uses to determine the interest rate (the way, for example, a bank might take into account an index like LIBOR when setting the rate on a loan), Prince answered simply: “No.”

The absence of any formula allows BlockFi to flexibly change the rate and make it more attractive to potential users, he said, explaining that for now, the product doesn’t make money:

The rate is a combination of the market and customer acquisition costs. This product will be for some amount of time, probably for for 3 to 18 months, a loss leader. We are OK with losing money for a while. If it was purely formulaic we probably wouldn’t have enough control to make sure it’s attractive enough to a large amount of people to hit our customer acquisition targets.”

To grow its user base quickly, BlockFi is planning to roll out new products every six months and to raise more capital. (It has already done several venture funding rounds, the largest one – led by Mike Novogratz’s Galaxy Digital – raising $52.2 million.)

Prince explained:

“We believe that we will be able to continue raising venture capital supporting the growth and at a certain point down the road [when] we’re a much bigger company, maybe we’re a public company, then we can say: ‘Ok, we turn to profit now.’ We anticipate being able to raise larger and larger amounts of venture capital for a while, at least for the next couple of years.”

…and lending crypto, too

The third thing BlockFi does, without advertising it to the retail market, is lend crypto to financial institutions. “We don’t really think of it being a product,” Prince said. “We think of this as of something we need to do to be able to deliver our product to our core customer, which is retail.”

This third element is what allows BlockFi to earn crypto that can be used to pay interest to its retail depositors. (The fiat loans are in a separate bucket, funded from the venture capital BlockFi raised.)

Most of the $35 million in deposits gathered is being lent to institutional borrowers: of every deposit, a bigger part goes to the lending business and a smaller part stays as a reserve, but the exact ratio is not disclosed.

Gemini Trust, founded by Cameron and Tyler Winklevoss, was chosen to handle custody for BlockFi’s clients, as well as the moving of crypto from the depositors to the institutional borrowers — BlockFi itself doesn’t hold the cryptographic private keys controlling the funds, Prince said.

Currently, BlockFi’s borrowers mostly belong to two groups, he said: people trading bitcoin futures and traditional financial institutions – in particular, proprietary trading firms and market makers.

The terms on which institutions borrow crypto vary on a case-by-case basis, Prince said. The interest rate can be between 4 and 12 percent, and the fiat collateral (which can be denominated in stablecoins, either the Gemini dollar or the Paxos Standard) can be between 110 and 150 percent of the loan amount. The relationships with borrowers are governed by individual ISDA agreements (the standard document governing over-the-counter derivatives transactions, made famous by the bestseller and movie “The Big Short“).

The term of the loan can vary, but BlockFi reserves the right to call in the loan with one’s week’s notice — the same amount of notice a depositor can give to withdraw crypto. This clause ensures the company will always have enough crypto to meet withdrawal requests, according to Prince.

Managing risk

So what happens when crypto prices move significantly (as they often do)?

When the price goes down, clients’ collateral will shrink, too, and the loan-to-value (LTV) ratio of the loans will rise from 50 percent to a higher number. On the other hand, if prices soar, institutional crypto borrowers will find their loans much more expensive to pay back. But according to Prince, BlockFi has taken several measures to mitigate these risks.

For the fiat loans, if at some point the amount of cash a retail client borrowed becomes equal to 70 percent of the collateral instead of 50 percent, to return to a safer LTV ratio, BlockFi will contact the client and give them 72 hours to either pay back the loan, add more collateral or take no action. Choosing the third option means BlockFi will sell a part of the collateral on an exchange or through an OTC desk, use it to pay down the loan, and get the LTV “back into the safe zone,” as the terms and conditions page puts it.

The same mechanism works for institutional investors that borrow crypto: if the price of bitcoin goes up, and what they borrowed ends up costing more relative to the amount of cash collateral, BlockFi will contact them and ask them to add more cash. If the bitcoin price hits a certain preset level, which also varies from borrower to borrower, BlockFi can use the collateral to buy bitcoin and close out the loan.

The terms for institutions, again, are highly dependent on the level of trust a particular client has. As Prince put it:

“If, say, JP Morgan wanted to borrow a million dollars from us, we probably wouldn’t need to take any collateral.”

Plus, the loans are structured so that if need be, BlockFi can chase after the deeper pockets behind a borrower. “We’re making sure that we have passed through to a parent entity if we’re facing a subsidiary, in terms of a default,” Prince said.

Legal and regulatory

In case the borrower defaults, taking them to court won’t be a problem, Prince believes.

“The legal structure we use to lend someone crypto is no different than we would use, say, to lend somebody USD secured by Japanese yen,” he said.

As for regulatory compliance, BlockFi is a licensed lender in the states that require this — the cash loans are now available in 47 U.S. states.

“The biggest state we don’t support is Nevada because it requires you to have an office in the state, which isn’t something we plan on doing in the near term,” BlockFi’s director of marketing Brad Michelson told CoinDesk. He wouldn’t name the other two excluded states.

As for the interest accounts, they are available worldwide, except the states of New York, Connecticut and Washington and in any countries sanctioned by the U.S., the U.K. or the E.U.

BlockFi doesn’t hold a New York State BitLicense, which explains why it lends but won’t take deposits there.

“For the crypto loans, we don’t believe we need a BitLicense,” Prince said. “For the interest accounts, we don’t believe we need one either, but our opinion on that is not strong enough for us to offer it here.”

Some of BlockFi’s state lending licenses on display at its office

The fine print

The terms and conditions on BlockFi’s website say that the company “will lend, sell, pledge, rehypothecate, assign, invest, use, commingle or otherwise dispose of funds and cryptocurrency assets to counterparties, and we will use our commercial best efforts to prevent losses,” affording the lender significant leeway over its use of clients’ funds.

Further, users waive their rights to obtain a paper copy of the contract, file a class action against BlockFi or request a jury trial. The company also can change the terms at any time and it’s the user’s responsibility to review them “from time to time.”

Prince explained that what is described in the terms is just the real risk to a crypto investor, plainly stated.

“There is this conundrum that you’re put in: you have to be really, really careful in terms of what your agreement says to protect your company, because crypto is in this regulatory grey area,” he said. “The Catch-22 is you have lawyers, you disclose any risk, you’re trying to protect your company from the regulators, but that means you need to write stuff like this.”

He added:

“Scams don’t write stuff like this.”

As for rehypothecation, which Long and others consider antithetical to bitcoin’s promise, Prince argues it’s essential for the nascent crypto market to grow. One of the benefits of rehypothecation, he explained, is that it allows intermediaries to reduce trading fees and enable short selling.

“If you don’t have a market that goes both ways, you can’t find the true price of an asset. Rehypothecation is the major component enabling that,” he said.

At the end of the day, any investment is risky, and BlockFi is just being forthright about it, Prince argued, concluding:

“Read a risk disclosure of, say, an IPO, and maybe in the end you say: ‘This is the scariest thing ever, I’ll never invest in a stock again in my life!’”

Image of BlockFi’s CEO Zac Prince by Anna Baydakova for CoinDesk

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It Finally Happened: The State of Wyoming Passes 2 Crypto Bills — Who Will Benefit From That?

The rapid innovation of blockchain technology, including the growing use of virtual currency and digital assets, has resulted in many blockchain …

The U.S. State of Wyoming is quickly becoming the hotbed for crypto regulation in the country, with lawmakers now proposing 2 more bills for legislation, this time focused on legitimizing cryptocurrencies as an asset class. The bill, SF0125, recognizes “property rights in the direct ownership of digital assets.”

…classifying digital assets within existing laws; specifying that digital assets are property within the Uniform Commercial Code; authorizing security interests in digital assets; establishing an opt-in framework for banks to provide custodial services for digital asset property as custodians; specifying standards and procedures for custodial services under this act…, the bill reads.

Caitlin Long, member of the Wyoming Blockchain Coalition, publicized the news on Twitter:

1/ BOOM! #Wyoming just recognized clear, direct property rights for #digitalassets by passing SF125! This means #blockchain cos will prob want to apply WY law to your contracts, domicile here, &/or have a physical presence here. Thx again to the army of ppl who helped over months pic.twitter.com/I4E3GfPZbC

— Caitlin Long 🔑 (@CaitlinLong_) February 14, 2019

It makes perfect sense that Wyoming is the epicenter of blockchain law in the US. That’s also why institutional investors, which are prohibited by federal law from directly owning the assets they manage, can rest assured that Wyoming’s digital asset custodians are actually solvent, Long said.

Wyoming has been in the thick of things when it comes to blockchain-related regulation, with the state passing several laws in crypto since the new year began.

This new development joins the ratification of 2 laws passed only a few weeks ago. One law officially deemed cryptocurrencies as money. Shortly after, state authorities went a little further and recognized crypto as property.

While the U.S. is lagging behind other nations in terms of overall regulation, some states are taking up the mantle, keen to leverage the powers of blockchain. New Hampshire has proposed that Bitcoin be considered for state tax payments, while Colorado senators have introduced a “Digital Token Act” to exempt digital assets from securities laws.

Who Will Benefit From These Laws?

The 2 new bills will be passed on to Wyoming Governor Mark Gordon, and could become official by as early as next week.

The key point about this bill is the fact that it addresses property law, which states are allowed to determine.

The target audience of this new bill will primarily be individual and institutional investors. Now that digital assets are deemed as property, these entities can directly hold digital assets and not indirectly through an intermediary.

Long is optimistic that this change in legality could attract heavy institutional investment and blockchain companies to Wyoming.

All of these regulations that Wyoming is forming sets an example for other states to follow. Banks can operate with cryptocurrency more easily, while investors have less to be worried about when it comes to the legitimacy of cryptocurrency.

In the Twitter thread that followed the announcement, Long explains how the bill makes digital asset ownership easier and more direct:

In other words, you’re not forced to own digital securities through an intermediary. Blockchain tech enables direct ownership of assets, and now the law does too.” Since property law in the United States is in the hands of state jurisdiction, this new step is not only safe from the federal government but also can serve as a model for other states.

Indeed, the combination of making crypto legal tender and allowing banks to provide financial services with blockchain-based assets encourages innovation and work in the states. According to one of the bills:

The rapid innovation of blockchain technology, including the growing use of virtual currency and digital assets, has resulted in many blockchain innovators being unable to access secure and reliable banking services, hampering development of blockchain services and products in the marketplace.

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Wyoming passes two bills on crypto and blockchain

Wyoming is creating new ripples in the crypto sphere by passing two progressive blockchain associated bills. These bills are anticipated to be signed …

Wyoming is creating new ripples in the crypto sphere by passing two progressive blockchain associated bills. These bills are anticipated to be signed in the law by the Mark Gordon, the state’s Governor very soon.

The corporate stock token bill (HB0185) and the special-purpose depository institution (SPDI) bill (HB074) specifically are the bills, which firmly supports the cryptosystem of Wyoming as it builds up an understandable regulatory structure for cryptographic money shareholders and blockchain entrepreneurs.

Caitlin Long who is the Co-founder of Wyoming’s Blockchain Coalition talked on why the bills are progressive and why it’s a noteworthy move towards the complete crypto industry.

Caitlin Long also stated that one of the bills, the special-purpose depository institution (SPDI) is specifically essential. It takes care of the blockchain area’s concern of trouble acquiring basic US bank accounts that are of the dollar only, which not many banks offer to new businesses. Numerous apprehensive accounts of new companies closing down on the grounds those banks shut their accounts. However, those US organizations that lose their financial accounts go out of business.

Additionally, she said that, for instance, IRS requires holding back taxes that are to be paid automatically by means of financial accounts. It is perilous to the accomplishment of the blockchain area that more than a couple of banks serve the business for essential payroll/money/checking the management accounts.

SPDI, which is the first bill, assist the blockchain entrepreneurs presently in danger of getting their financial accounts closed. The second bill is the corporate stock token bill, which makes it feasible for companies to provide tokenized stocks rather than paper stock declarations.

She further added that this bill makes a non-loaning, state-contracted and a hundred percent (100%) retain the depository institutions for the corporation only. Importantly the SPDs’ bills are not FDIC assured.

Due to this step, Wyoming has set up itself as an innovator in the US about building up clear rules and structure for the blockchain business.

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