Avanti, a new crypto-asset bank to be based in US frontier state Wyoming, will take advantage of the state’s potentially revolutionary new legal framework for the custody of clients’ crypto assets.
In contrast to hundreds of years of established practice in the global markets for banking and securities custody, Wyoming’s laws emphasise that clients’ assets cannot be reused without their consent.
Avanti is to be headed by Caitlin Long, a 22-year veteran of Wall Street and a trained lawyer and Wyoming native. She also lobbied the state’s legislature to pass a number of crypto-asset-friendly laws during 2019.
Long announced the new initiative on Twitter on February 24. She said the new bank is preparing its application for a charter under Wyoming’s special-purpose depository institution (SPDI) law and aims to open for business in early 2021.
“Existing US banks and trust companies can’t provide optimal services to crypto”
In a series of tweets, Long called SPDI ‘the optimal regulatory-compliant structure in the US’ for providing financial services around crypto-assets.
Avanti is partnering with Blockstream, a Canadian technology company focused on cryptocurrency-related infrastructure.
Blockstream’s CEO is British cryptographer Adam Back, one of the early theorists of decentralised digital money.
Long said she and Blockstream had spotted a gap in the US market for providing financial services around bitcoin and its derivative digital assets.
“For various regulatory reasons, existing US banks and trust companies can’t provide optimal services to crypto,” Long said on Twitter.
“Avanti plans to break that logjam and thereby help keep the US from falling behind other countries whose regulated banks are already serving institutions in this market.”
Recently, BitGo, a crypto-asset custodian backed by several Wall Street and Silicon Valley firms, said it was opening subsidiaries in Germany and Switzerland to take advantage of new regulatory regimes for crypto assets in those two countries.
According to the Avanti CEO, there’s a major difference between Wyoming’s financial custody regime for crypto-assets and custody law in most traditional securities markets. This boils down to a fundamental principle regarding the status of assets handed to a third party.
“Wyoming law is uniquely consumer-friendly because it enables custody via bailment, the same legal treatment as valet parking or a coat check,” Long said on Twitter.
“You give possession of your property to a service provider, but not the legal title, and the service provider can’t use it for its own benefit.”
“In a bailment, your asset remains legally yours even if you give temporary possession of it to a service provider for safekeeping. If your service provider goes bust while holding your asset in its custody you get it back without waiting through a messy bankruptcy,” Long said.
“From experience, you can’t know for sure if your custodian actually has your securities. It’s wrong!”
She contrasted Wyoming’s legal set-up for crypto custody with the custody regime in the multi-trillion-dollar market for shares and bonds.
“Ironically, traditional securities markets don’t offer [bailment],” Long said.
“To use the valet parking analogy, a securities custodian can rent out your car to an Uber driver after you parked it, share only a fraction of the earnings with you and then tell you that you’re lucky to get back the same make and model.”
“Plus, if the garage goes bust while in possession of your car, you’re stuck as a creditor in a messy bankruptcy. From experience, you can’t know for sure if your custodian actually has your securities. It’s wrong!” Long said.
Some major securities custodians have already faced regulatory censure for their failure to treat client assets with due care.
In 2015, for example, the UK’s Financial Conduct Authority (FCA) fined the UK arm of BNY Mellon, the world’s largest custodian bank, £126 million, for breaching its safe custody rules.
This was the eighteenth penalty levied in four years on UK-based financial institutions for breaches of the country’s asset custody regime.
BNY Mellon, said the FCA, had failed to maintain adequate books and records for client assets supervised from its UK office. And it had made unauthorised use of those assets, held in so-called omnibus accounts, to settle the trades of other clients.
More seriously, BNY Mellon had failed to segregate client assets held in omnibus accounts from assets belonging to the bank, the UK regulator said.
Wyoming’s use of a bailment theory of law for the custody of crypto-assets sets the US state in direct opposition to other common law regimes.
In the UK, for example a jurisdiction taskforce released a legal statement in November saying that since crypto-assets cannot be physically possessed, they cannot be the object of a bailment.
One UK lawyer suggested the UK taskforce’s view was unnecessarily restrictive.
“Although it’s correct to say that [crypto-asset] tokens themselves are not subject to bailment, you may be taking bailment of the underlying asset, and you may be recording part of that information in the token itself,” James Burnie, senior associate and head of the blockchain and crypto-assets practice at law firm Eversheds Sutherland, told New Money Review.
“We think it would have been helpful if the [UK jurisdiction taskforce’s] report had recognised this,” Burnie said.
English law has historically been lax regarding the reuse by intermediaries, such as broker-dealers and custodians, of clients’ shares and bonds held in custody.
Specifically, it placed no formal limits on the rehypothecation (relending) of client assets in so-called securities lending and repo transactions, a factor many saw as pivotal in the collapse of Lehman Brothers in 2008.
When Lehman filed for bankruptcy in September 2008, its London branch had rehypothecated about $22 billion of its clients’ assets, most of which were not recovered when British administrators took charge.
“Some feel […] that the UK offers a unique forum for ‘unlimited rehypothecation’,” Manmohan Singh, an IMF economist, said in a 2017 book on the reuse of collateral.
“The crypto custodian should be a mere service provider, not a counterparty forcing you into a debtor/creditor relationship”
Common law systems are grappling with crypto-assets in other ways too. In an ongoing landmark case, an English judge recently stated for the first time that crypto-assets such as bitcoin constitute property, making them subject to court freezing orders like injunctions.
According to Avanti’s founder and CEO, there’s a revolutionary difference between Wyoming’s new legal regime for crypto-assets and the traditional relationship between a bank and its clients.
“Wyoming took a different approach based on property rights,” said Long.
“That is, the crypto custodian should be a mere service provider, not a counterparty forcing you into a debtor/creditor relationship. That’s especially important for crypto since there’s no lender-of-last-resort. Wyoming is the best legal regime for consumers,” Long said.
“US federal know-your-customer, anti-money laundering, counter terrorist financing and related laws are unconstitutional in their overreach”
However, the Avanti CEO made it clear her bank will have to respect federal laws on countering illicit money flows, even if she doesn’t necessarily agree with them.
“We will comply with all US federal know-your-customer, anti-money laundering, counter terrorist financing and related laws. These are the law of the land so Avanti will strictly comply, period. I’ve long written about why these laws are unconstitutional in their overreach, but they’re the law, so compliance isn’t optional,” Long said.
This week, central governments stepped up their rhetoric against what they see as the abuses of new money technology.
“We urge countries to implement the recently adopted Financial Action Task Force (FATF) standards on virtual assets and related providers,” G20 finance ministers and central bank governors said in a communique following their 22-23 February meeting in Riyadh, Saudi Arabia.
Last summer, the FATF called for a new regulatory regime for crypto-assets, involving the identification by service providers of identifying information for all those originating transfers in virtual assets and all those receiving such transfers.
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