THE NEWEST HAVEN FOR CRYPTOCURRENCY COMPANIES? WYOMING
IF YOU BELIEVE you may have stumbled into a cryptocurrency conference (godspeed, my friend), there are a few telltale signs. First, look for the live bulls and the yellow Lambos. But if they’ve fallen victim to cost-cutting or newfound modesty, then look for a procession of cream-colored cowboy hats. They belong to a retinue of lobbyists and legislators from Wyoming, preaching the virtues of their state as a mecca for blockchain.
Wyoming’s transformation into a blockchain booster is somewhat legendary in cryptocurrency circles. Until recently, strict money-transmitter laws meant residents there couldn’t even use a Coinbase account. But over the past two years, Wyoming has enacted 13 blockchain laws, with a raft of other proposals on the way. The question is, what does the country’s least-populous state, far from tech hubs and long associated with an unhealthy dependency on resource extraction, want with blockchain?
“The ethos of blockchain and the ethos of Wyoming are very similar,” says Caitlin Long, cofounder of the Wyoming Blockchain Coalition, a lobbying group responsible for pushing for the crypto-friendly bills, many with a libertarian bent.
Wyoming’s push is a reflection of the nation’s patchwork of state laws, created in the absence of clear federal rules. Some, like New York, favor rigorous regulation. The state’s Bitlicense regime, which began in 2015, involves a strict vetting process for companies that want to deal with New York residents, prompting complaints that it deters innovation. Legislators in Wyoming, as well as neighboring Colorado and Montana, see that as an opening.
“It’s been good for Wyoming that the federal government has been proving its stripes of incompetency,” says Tyler Lindholm, a state representative who, at 6’7″, does much to increase the visibility of the cowboy hats.
Lindholm and Long first partnered on blockchain legislation two years ago. Long, a former executive at Morgan Stanley, became interested when she discovered that state regulations prevented her from donating bitcoin to her alma mater, the University of Wyoming. Lindholm, a longtime cryptocurrency enthusiast, had previously tried to tackle that issue. But his fellow legislators mostly associated cryptocurrency with drug sales and scams. “This was their first blush with crypto—even hearing about it,” Lindholm says. “I got my ass whipped pretty bad.”
Their fortunes improved by casting cryptocurrency as a way to replace flagging state revenue from the coal industry, Long says. Working with lawyers from Consensys, a company that builds and promotes Ethereum applications, they drafted bills that exempted certain digital tokens from state securities rules, and exempted cryptocurrency from state property taxes. Those laws passed, and over the next year they became the basis of what Long calls a complete legal framework for owners of digital assets and the companies dealing with them.
The effect of those laws, however, appears to be somewhat muted, says Benjamin Sauter, a lawyer for Kobre & Kim who works extensively with blockchain companies. The trouble is that blockchain, by nature, is not easily contained to one jurisdiction. It’s easy enough to fence out residents of New York, but harder for a company to take advantage of more permissive laws in one small state. And on issues like securities laws, companies still need to play by federal rules. Without hammering out any formal guidelines, the Securities and Exchange Commission last year suggested all tokens involved in initial coin offerings were securities, and thus subject to federal oversight. The move largely scuttled Wyoming’s plans to attract companies doing ICOs to the state, Long says.
Still, the new laws have brought one thing to Wyoming: limited liability corporations, or LLCs, dozens of them with “Blockchain” or “Crypto” in their names. “I’ve been around startups a long time and I don’t ever remember interacting with a tech startup that was based in Wyoming,” says Stephen McKeon, an economics professor at the University of Oregon. “But in the last two years just in crypto I’ve seen it multiple times.” But he notes that those companies, while legally based in Wyoming, have rarely established a physical presence there.
Lindholm, who last year cofounded his own blockchain startup, BeefChain, which verifies the provenance of premium Wyoming cattle, argues the state is on a path to attract companies that offer more than a $100 filing fee and a PO box in Cheyenne. Companies, in other words, that bring jobs and hubs of innovation that benefit Wyomingites. He points to a pair of bills passed in February as an initial step, establishing a new type of crypto-friendly banking license, as well as rules that allow banks to hold digital assets. Banks chartered under the license would not be FDIC-backed and unable to lend, with a requirement to hold more than 100 percent of their liabilities in reserve. And they would have to set up a physical office in the state.
Not exactly a moneymaker, in other words, as far as banking services go. But it’s an intriguing carrot for cryptocurrency companies, who say traditional banks, under pressure from the FDIC, often refuse to hold their assets or suddenly cut off services. That makes it impossible to run a business, since they need a checking account to pay employees and remit taxes to the IRS. That’s led to some creative, and in some cases destructive, workarounds. After Wells Fargo ended its services, Bitfinex, the company behind the “stable” cryptocurrency tether, turned to Panama-based Crypto Capital, whose assets were allegedly later seized by foreign governments. That left Bitfinex some $850 million short.
At least one company, New Mexico–based FreeRange, has said it plans to apply for the state banking charter when applications open later this year. Others say they are interested. Jesse Powell, CEO of the cryptocurrency exchange Kraken, says his company, which has been dropped by US banks in the past, could use such a banking license to hold crypto assets. He notes that because state charters are typically recognized in other states, Kraken could potentially offer services nationwide. Neither FreeRange nor Kraken, which has about 50 employees in San Francisco, say they expect to move large number of employees to Wyoming.
With a legal framework roughly in place, Wyoming’s blockchain enthusiasts are now entertaining some more unusual ideas for how blockchain could enter government services. Last month, the Wyoming Blockchain Taskforce heard the results of an experiment to put land titles on a blockchain system in Teton County and a pitch from officials in Bermuda to collaborate on a form of digital identity. It also floated making Wyoming a “safe harbor” for developers who fear they can be prosecuted for activities that take place on the “decentralized” applications they develop but say they do not control.
But Powell, who attended the meeting, says he’s more excited by a less sexy proposal: a blockchain-based form of automated LLC registration that he says could help Kraken’s customers sidestep pesky regulations in other states. That way, if a person in New York wanted to use Kraken, the company could set up an LLC in Wyoming on their behalf. “If we can get everyone in Wyoming, that would be great,” Powell says, pointing out that, even with low registration fees, its millions of users would be a “cash cow” for the state.
Long says the task force is still working out the details of the latest proposals, with plans to develop pieces of model legislation in July. Some initiatives, like automated LLC registration, are likelier to move ahead in some form, while others, like the digital identity application, face a tougher road. “The technology just isn’t there yet,” Long says.
One wrinkle for Wyoming: There soon might be fewer opportunities for the state to distinguish itself if federal policy comes into clearer focus—and preempts state rules. “I’m skeptical that many of these ideas will gain traction at the federal level,” says Sauter. “I don’t see the political will for it.” One federal bill, called the Token Taxonomy Act, would seek to tie the SEC’s hands and exempt some tokens from securities regulations, but both Long and Lindholm say it goes too far in lassoing states as well. But for now, they may be safe. There’s little indication Congress has any interest in tackling blockchain just yet.