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Wyoming vs Miami, and regulatory strategy from the legislative perspective
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Last week, in Compliance is a Negotiation, I detailed the concept of Legal as a Product, where startups use legal strategy to create opportunity and expand their addressable market. With the recent news that Wyoming will officially recognize Decentralized Autonomous Organizations (“DAOs”) as LLCs in an effort to attract the crypto community, I wanted to explore the legal strategy from the perspective of a state or municipality. Below, we’ll review legal and legislative strategy as a marketing tool to encourage an inflow of talent and economic activity.
It’s no secret that COVID has kicked off a sea-change in how companies think about remote work, and has lent accelerated credence to the idea that if their job is mostly at a computer, people can work anywhere, as long as they work.
This idea has extended not just to individual employees, but to founders and companies themselves. If you are enjoy seasonal weather, are interested in owning a home, are not a fan of taxes, or are have deep thoughts on what a broken car window means for society, then starting your company in the Bay Area might not be the move for you. Thankfully, in 2021 the world is your oyster, and you can build anywhere — as long as you are adept enough at securing talent and maintaining a culture around it.
With the new paradigm in place, cities and states are taking notice, and trying to take the opportunity to bring in talent and businesses. The most visible of these has certainly been Miami, led by master marketer Mayor Francis Suarez. Certainly, Mayor Suarez has a lot to work with — I have never been to Miami, but I have watched many television shows and movies set in Miami, and worst case scenario it seems like an awesome place to have a crime-based adventure.
Regardless, it seems fairly clear that there has been an increased inflow from the tech community into Miami (as well as other places in the country), and I would be hard pressed to say that Suarez’s campaigns — hype, memes, publicly cozying up to CEOs and VCs, and generally being available — has had nothing to do with it. Timing is everything and while the Twitter Geography Debate Club is one of the most tiresome things on the internet, Suarez has effectively presented himself, and by extension Miami, as the sort of welcoming environment that many believe Silicon Valley is not.
But if you don’t have warm-water beaches, Cubano sandwiches, and Mr. Worldwide, how else can you turn yourself into the next tech hub? It’s probably not by tweeting. If you’re Ohio, the answer is apparently placing billboards across coastal cities touting your low cost of living.
If you’re Utah, and you’ve already successfully established a Fintech community, you lean into it by becoming the go-to location for Industrial Loan bank charters (“ILC”) (basically a bank charter for non-banks) for companies like BMW, USAA, and most recently Square, the first company to get an ILC approved by the FDIC in over a decade.
If you’re the state of Wyoming, it apparently means creating a regulatory environment designed to lure crypto developers and businesses to your state. Over the last five years, Wyoming has made an impressive push to become a crypto hub.
Wyoming: Burgeoning Cryptopia
Prior to 2016, Wyoming was considered an unfriendly place for cryptocurrency companies to do business. This was largely due to the need to adhere to state-by-state money transmission laws, and Wyoming’s stance that digital asset custodians maintain double the reserves that they were holding for consumers. (Bank reserve requirements were zero to ten percent). In January 2016, a group of state senators turned things around, passing a bill that added digital currencies to the Wyoming Money Transmitters Act, lowering the reserve requirement to 100%, and opening up the state to more custodial services. A small step, and just the start.
Enter the Wyoming Blockchain Coalition, led most prominently by Wyoming native, Wall-Street veteran, blockchain executive, and neckwear aficionado Caitlin Long. The WBC explicitly set out to make Wyoming a “Haven for Blockchain”, and why not? Many of the states attributes could be said to embody “product-market fit” for the cryptocurrency industry, including no corporate taxes, strict privacy laws, and a very conservative population well-aligned with the libertarian-leaning ethos of the general vibe of the cryptocurrency community.
After supporting and passing a variety of crypto-focused bills, the crowning regulatory achievement for the WBC was securing the passage of the law creating the Special Purpose Depository Institution (“SPDI”) a state-chartered, fully-reserved bank designed to custody digital assets. Thanks to state reciprocity regimes, a state-chartered bank effectively bank nationwide, including in New York, where custodians have faced numerous problems and been unable to operate thanks to the much-maligned (though somewhat softened over time) Bitlicense, a requirement adopted by the state in 2014.
SPDI: First in the Nation
The SPDI charter is the direct result from the combined legal strategy of industry leaders and a willing state legislature. The first SPDI license was granted in fall 2020 to prominent cryptocurrency exchange Kraken, which notably does not offer services to residents in New York and Washington.
Kraken spun up a new entity to serve as its bank, appointed digital asset veteran David Kinitsky as the CEO of the bank, and made it clear that he would in fact be moving from New York to Wyoming to run the bank. Wyoming regulators wanted to market the value of the charter, and perhaps needle the Empire State:
“We are fairly confident that the Wyoming SPDI will be able to operate in New York without a BitLicense,” Chris Land, general counsel of the Wyoming Division of Banking, said Tuesday at CoinDesk’s Invest: NYC event in New York.
The New York Department of Financial Services (NYDFS), which created the BitLicense in 2014, did not answer requests for comment by press time.
Beyond potentially being able to return to New York, Kraken can streamline its operations without the need for upkeep of dozens of state money transmitter licenses, and phase out inefficiencies inherent in working through sponsor banks. It will also allow them to add offerings to consumer and institutional clients at a much faster cadence and provide them more seamless experience. Custody, treasury management, lending capabilities, and access to the federal reserve will no longer depend on a third party with a potentially conflicting development cadence, risk tolerance, and perspective. Users will be able to take advantage a much more integrated bridge between the worlds of crypto and fiat currency.
This will be an attractive proposition for any crypto custodian, and perhaps not so surprisingly, the second SPDI was awarded to Avanti Financial Group, an institutional custodian led by the aforementioned Wyoming legend Caitlin Long. An effective legal strategy played out. Perhaps it’s also no coincidence that the leaders of this emerging regulatory regime, Caitlin Long and David Kinitsky, both have law degrees (Harvard and Cardozo respectively).
DAOn By Law
The state is obviously not done with their plans, having recently launched the law recognizing DAOs as legal entities. A Decentralized Autonomous Organization is a community or a collection of individuals where decisions are governed by code and automated within the blockchain. It’s akin to a decentralized corporation that uses pre-set rules programmed into smart contracts and places a layer of structure and coordination into the decision-making process of a given community. This removes the need for traditional, hierarchical, top-down management. Here is an explainer, but here we can keep it simple - a company, but crypto.
So why would the members of a DAO care about recognition by a bordered jurisdiction, when the governance of the DAO — as with cryptocurrency generally — is borderless and largely free from government oversight? Well first off, just because your governance structure exists on the blockchain does not mean you are fully unencumbered from the physical world. If and when the DAO needs to interact with with the traditional world to make investments, purchase assets, employ people, or simply protect itself or its members in court, the state will inevitably need to be involved. One commonly cited landmine for DAO’s would be that in a dispute, a court may treat the DAO as a partnership as opposed to an entity with limited liability (such as an LLC) which could have unfortunate consequences for the DAO membership.
Like many of the LaaP concepts, a DAO has always been able to establish itself as an LLC with a little legal know-how and some paperwork, but the Wyoming law makes it much more accessible and will likely increase the number of DAOs that take this path.
Regulatory Strategy into Tangible Results
It remains to be seen how successful Wyoming’s “crypto-haven” play will be, but they’re making some intuitively strong moves to get there. Low taxes and a conservative vibe is one thing, but creating new laws specifically designed for digital assets makes much more sense— both for businesses and consumers — than cramming them into regulatory regimes created before the invention of Bitcoin. But the next step: fashioning those laws in such a way that creates new product and addressable market opportunities is what really gives the regulatory strategy a chance to succeed.
There are early signs of success, like crypto-payments company, XRP issuer, and SEC foe Ripple moving its business registration from Delaware to Wyoming. There also seems to be general political alignment, as shown by the state’s newly elected US Senator Cynthia Lummis donning “laser-eyes” on twitter in support of bitcoin (#laserrayuntil100k).
So what is the next move? I suspect Wyoming will continue to refine is regulatory regime around the SPDI bank charter, and encourage growth there. The SPDI charter is truly unique because it has nationwide impact and allows companies to do things they cannot do elsewhere. While the DAO law is potentially less impactful, it is a more direct path to interacting with the crypto community itself. However, inherently embedded in that community is a certain borderless, stateless ethos — being in a DAO isn’t going to make anyone move to Wyoming, but it could present a revenue opportunity all the same.
Ultimately, organizations run on talent. If they’re going to get technically skilled humans to start packing up and moving to a deeply conservative state lacking any real diversity, they’re probably going to need to turn the signal into results with some Mayor Suarez-style marketing or a few deep-pocketed cheerleaders touting the vibes. Right now the biggest Wyoming celebrity appears to be Kanye West and . . . well let’s just say buyer beware on that one. Perhaps the next Bitcoin conference can be on his massive ranch in Cody, Wyoming, and we can tour the eco-friendly “urine garden.” Maybe the most bullish sign for Wyoming is that Kevin Costner vest and hat vehicle, “Yellowstone,” has solid reviews and is apparently 4 seasons in.
So, the choice is yours! Where will you go? Austin? Park City? If you need thoughts on Miami, take a peek at America’s favorite game show. Or maybe you do find the crypto haven attractive and are ready to ride the wave to Old Faithful. If a plan really is coming together, IF:Then will be there to help.
Until next week friends - David Ikenna Adams
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