Cryptocurrencies Utopia

Mar 12, 2019   |   by Marvin Ordonez   |   Current Events

Beautiful mountain ranges, open prairies, fresh air, bright stars, an abundance of wildlife, and pristine rivers and lakes. Just thinking about these things makes you feel good inside, but it’s hard to imagine that in our modern day society there is still a place on earth with all of this natural beauty. Maybe this is why some people think that Wyoming doesn’t exist. “How could there be a utopia on earth?” they ask. “It’s not real, it doesn’t exist,” they say. In order to prove these Wyoming disbelievers wrong, the crypto community in Wyoming is doing everything they can to tell the world that Wyoming does in fact exist. And although it may not be a real utopia, the legislature that they have passed over the past two years makes it a crypto one.

2018 Wyoming Cryptocurrency Legislature

Last year Wyoming passed five crypto friendly bills that were designed to clear up a lot of the uncertainties surrounding crypto and attract business to the state. The bills were numbered HB 19, HB 70, HB 101, HB 126, and SF 111.

  • HB 19 - Wyoming Money Transmitter Act - Virtual Currency Exemption
    • This bill was passed in order to exempt virtual currency transmitters from Wyoming monetary transmitter laws. Before this bill, any person or business accepting cryptocurrency as payments were considered to be money transmitters and had to abide by the Wyoming Money Transmitter Act. Caitlin Long, the spearheader of these bills, ran into this problem when she was unable to donate bitcoin to an engineering endowment at the University of Wyoming. She began researching why that was the case and after her research, she realized that it was time for new legislation to pass in order to make Wyoming a leader in this emerging industry.
  • HB 70 - Open Blockchain Token Exemption
    • Also known as the “Utility Token Bill”, this bill exempts certain digital assets from Wyoming securities laws. To qualify for this exemption the issuers must not market the tokens as investments and the token must be for a consumptive purpose. That is, it must be redeemable for a product or service.
  • HB 101 - Electronic Corporate Records
    • Also known as the blockchain records bill. This legally legitimizes blockchain based record storage and shareholder management.
  • HB 126 - Limited Liability Companies Series
    • Series LLCs offer an alternative to creating multiple LLCs. Instead of creating different LLCs to protect an organiztions assets, you can create a Series LLC that has multiple subsidiary units. Each unit is protected from liabilities being incurred from another unit in the series. It makes management and administration much easier.
  • SF 111 - Property Taxation Digital Currencies
    • This bill was made to exempt virtual currencies from Wyoming property taxes.

2019 Wyoming Cryptocurrency Legislature

However, these past bills pale in significance to the new bills that are currently being passed in the Wyoming legal system. Here are the highlights from the new bills as discussed in this interview with Caitlin Long, one of the originators of the bills, and prominent crypto influencer Naomi Brockwell.

SF 125 - Digital Assets Existing Law

The interview began with what Caitlin believed to be the most significant bill, SF 125. This bill recognizes digital assets as property, and as property, these digital assets are entitled to property rights. With this legal framework in place, digital assets can now be accepted by the rest of commercial law.

One of the most important things that this new bill enables is the self-custody of digital assets, even for institutions. Before this bill, institutions only received property rights if they owned an asset through a securities intermediary, but this indirect ownership has led to a slew of bad practices in the financial world. Rehypothecation being one of the worst.

Rehypothecation is when you allow an institution to hold your asset and that institution then goes and uses that asset for their own purposes. As Caitlin Long describes it

"If I post bitcoin to you as collateral for a loan, and you’re an institution, then you can turn around and take my bitcoin that I’ve posted as collateral and post it for a second loan and you wouldn’t have to tell the second lender that that collateral was posted to you as a loan. So you actually have the same bitcoin posted as collateral for two different loans. That’s what rehypothecation is and it turns out, in securities, these so-called collateral chains can be many many parties long. It’s not just that it happens with two loans. It can happen with a dozen different loans against the same asset and the different lenders don’t know that that collateral has already been pledged for a different loan.”

Caitlin Long

This is extremely important for cryptocurrencies because if there was ever a “bank run” or, more appropriately, an exchange run where thousands of people try and pull their digital assets from an exchange all at once. And if this exchange has been rehypothecating the digital assets in its custody, then only those that were able to withdraw their assets first would be able to retrieve their digital assets. The thousands of other people who were not able to withdraw their assets would be left with nothing. These people would have no opportunity at all to retrieve their digital assets since, in crypto, there is no lender of last resort. This was the entire idea behind Trace Mayer’s Proof-of-Keys that happened in January. He wanted to put pressure on the exchanges to see if they really were holding on to and securing everyone’s digital assets, or if they were lending them out to other people and institutions behind closed doors.

The good news is that rehypothecation has been illegal in Wyoming since 1986 when someone was convicted of a felony for trying to rehypothecate an industrial diamond.

HB 74 - Special Purpose Depository Institutions

This introduces a new type of banking charter that has to have a 100% reserve requirement because there is no FDIC insurance for this bank. This institution cannot lend money, is for business only, and basically acts as an on and off ramp to the payment system. The reason why they decided to create this type of institution is because of previous foul play by the FDIC through Operation Choke Point. This operation gave the FDIC the power to decide which industries were able to be banked and which weren’t. They did this by threatening to revoke a banks banking charter if the bank didn’t comply with their demands. Operation Choke Point affected the gaming, marijuana, firearms, and blockchain industries. In total it affected thirty-one different legal industries in the United States. It especially hurt the blockchain industry and caused hundreds of blockchain and cryptocurrency bank accounts to be closed. Many of those blockchain and cryptocurrency businesses were not able to survive.

"It’s gotten to the point in the blockchain industry that everybody has 2-3 bank accounts because you can’t afford to take the risk of only banking in one place. 2016 Morgan Stanley went through and did a big compliance audit and closed thousands of bank accounts that people were using for legitimate digital asset businesses and then there was this huge rush to get a bank account open at Silvergate and Silvergate at the end of the year didn’t have the capital to serve everybody and literally couldn’t go through all the customer onboarding in enough time. So there were several businesses, dozens of businesses, who shut their doors at the end of 2016 after Morgan Stanley closed their bank accounts. And I don’t mean to single out Morgan Stanley because they were not alone. And I also think that there’s a lot of anger towards the banks. I won’t defend the banks because I don’t think they communicated this well but what I’m laying out for you is it wasn't their choice. They had to defend their bank charter against the risk of losing it and the higher cost of heightened regulatory supervision that was coming at them from the Feds in Washington at the FDIC”

Caitlin Long

HB 185 - Corporate Stock Certificate Tokens

This was the next bill discussed in the interview. It enables tokens that are created on a blockchain to be used as corporate stocks in lieu of the paper certificates that we still use to this day. In the interview, Caitlin highlights that the Depository Trust Company (DTC) still uses a vault to hold a paper copy of each global security. When these global securities are digitized they are called security entitlements. These security entitlements are what we own against the global security in the vault. This bill capitalizes on the convenience that blockchain allows for when trust, security, and non-fungibility are important. Paper certificates are obviously more difficult to deal with than their digital counterparts. Especially if those paper certificates are stored in one central location (like a vault) and that central location happens to flood (like the vault at the DTC did during Hurricane Sandy) and thousands of global securities happen to be destroyed.

SF 28 - Banking Technology and Stock Revisions

This bill adds on to HB 101 and gives banks the ability to record their transactions, or any other data, on a blockchain.

HB 57 - Fintech Sandbox

Caitlin was particularly excited about this bill because it gives Fintech startups the opportunity to flourish and do what they do best without worrying about jumping through hoops to satisfy regulators. The bill exempts Fintech companies (that are accepted to the program) to be exempt from the Bank Secrecy Act, and other regulations that have slowed down or even stopped some companies from offering new financial solutions to consumers. The sandbox would last for two years with the opportunity of applying for a third.

This ended the list of bills that Caitlin had come on to speak about, but the conversation continued and centered around the radically different approach that Wyoming and New York are taking when it comes to regulating new digital assets.

“I’m so glad that you highlighted the New York vs Wyoming fault line,” says Caitlin, “because it’s even bigger than that. New York allows rehypothecation, failure to deliver, and naked shorting. All these bad practices that happen on Wall Street, that pick mom and pops pocket, are legal in New York. There’s a reason why John Corzine didn’t go to jail because what he did wasn’t illegal. There’s a reason why no one was prosecuted in the Lehman Brothers failure or the Behr Sterns failure because what they did wasn’t illegal. Well, how’s that possible? Most of us scratch our heads and say this is crazy. How come there wasn’t a criminal liability for the collapse of these big financial institutions and what most of us would consider outright theft from peoples livelihood and the answer is because in New York it’s legal. It is not legal in Wyoming”.

Caitlin Long

It’s hard to argue with Long on that. Thousands of people were hurt in 2008 from immoral but legal activities that the state of New York had allowed. The only positive to have come from that economic disaster were cryptocurrencies, Wyoming understands this and is doing everything it can to help turn cryptocurrencies into a reality.

“Wyoming is standing for solvent financial institutions. For direct property rights in your assets. We do not want bad actors who are going to play three card monte with assets into the state of Wyoming.”

Caitlin Long

So, the fact of the matter is that Wyoming does exist. And not only does it exist, but it’s also working on setting the foundation for a crypto utopia. But you know what doesn’t exist in Wyoming? State income taxes, crypto property taxes, and crypto sales taxes.

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Marvin Ordonez