The significance of Kraken getting a crypto digital banking license

Recently, Wyoming created a new State Banking Institution license (Special Purpose Depository Institution (SPDI)). Such an institution can absorb the user’s assets in storage, but must guarantee 100% storage and cannot provide loan services. The relationship between the user’s digital assets and this banking institution is a fiduciary relationship. This means, if the bank goes bankrupt, the assets stored by the user are not the assets of the institution and should be returned directly to the user.

Such a fiduciary relationship is different from the type of deposits in mainstream banks, which is a liability relationship that if a user deposits money in a bank, then this deposit is an asset of the bank. If the bank goes bankrupt, the user’s deposit needs to be disposed of together with other assets of the bank.

The U.S. banking system can be divided into a federal level and a state level. A federally issued banking charter allows the recipient to operate within the U.S. federal and no longer requires permission from individual states. A state-issued banking license, on the other hand, requires permission from other states to operate.

Wyoming sets this type of banking license as a state banking license, so there are limitations on the nature of its business and scope of operation. In particular, the profitability of this type of institution is very much affected by the fact that it cannot provide lending services. However, this type of institution is a banking license, so it can provide related financial services to users. For example, deposit services. Besides, it can also connect to the Federal Reserve’s payment system and is a part of the federal banking system.

Following the announcement of this license, Kraken, a U.S. crypto digital trading platform, became the first organization to receive this license. Previously, Kraken held Money Transmitter Licenses issued by various states, and under which it provided cryptocurrency trading services in each state. However, the banking services it required still needed to be provided through third-party banks. Now that Kraken has its own bank, then the banking services it needs can be provided through its own bank.

For Kraken, this is not only an improvement in terms of efficiency and cost but also a solid foundation for further growth. In addition, as a company that started as a provider of cryptocurrency trading services, Kraken’s acquisition of a banking license is actually an indication of further recognition of the business by US financial regulation. This, therefore, facilitates its business in terms of regulation.

Kraken’s banking license is both a requirement for its business development and in line with the trend of the crypto-digital finance industry. In the future crypto-digital financial ecosystem, both banking and securities will operate on top of the same financial market infrastructure, so either company can choose to conduct traditional deposit-taking and credit businesses, as well as trading in digital assets. For any of these companies, conducting these businesses is no longer an option, but a sure thing. Some companies are already moving in this direction on a global scale and Kraken’s acquisition of a banking license is one such development in this trend.

In Switzerland, it was actually the Swiss financial industry that supported the creation of the Swiss Digital Asset Exchange (SDX). The SDX was built entirely on the basis of distributed ledger technology. It will first conduct trading operations for digital assets. The Swiss central bank is now testing its CBDC issuance on top of the same infrastructure too. Credit business will be the next service that SDX will definitely offer. So the development of crypto-digital finance in Switzerland is actually moving towards the future of a hybrid banking and securities industry.

In Singapore, DBS Bank, the number one commercial bank in Singapore, recently launched a cryptocurrency trading service and will also provide STO services, which means it will provide digital financial product generation, circulation, storage, trading and settlement services. Such a process is actually a traditional commercial bank entering the traditional securities trading space. It is interesting to note that the Singapore Stock Exchange also holds a 10% stake in this entity. Such an equity arrangement is also very conducive for the Singapore Stock Exchange to move into the future world of crypto-digital finance. In addition, the CBDC in Singapore has also been in the process of being tested. These advances in Singapore’s financial sector could then potentially allow it to conduct banking and securities operations on top of the same financial market infrastructure in the future.

For Kraken, its acquisition of a banking license will directly help its existing cryptocurrency trading services on the one hand, and also help it enter the mainstream financial market. It will then be much smoother in both its credit business and its crypto digital asset trading business. Most importantly, its business strategies are in line with the trend development, so it will continue to dominate the crypto-digital finance world in the future.

Article from Gu Yanxi, Founder of Liyan Consulting

Translated by Yang(Mengyan Finance)

To translate some latest policy and issues on blockchain and fintech happened in China