Wyoming Blockchain Stampede 2020 | LawCon
September 25, 2020, Wyoming, USA
Wyoming Blockchain Stampede 2020 | LawCon
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Regulatory Innovation: The Wyoming SPDI
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About speaker

Angela Angelovska-Wilson
Co-Founder at DLx Law

Angela Angelovska-Wilson is an early distributed ledger technology adopter and a leading authority in the evolving global legal and regulatory landscape surrounding distributed ledger technology and smart contracts. Prior to co-founding DLx Law, Angela served as the Chief Legal & Compliance Officer of Digital Asset and was part of the founding team. Prior to joining Digital Asset, Angela was a partner at Reed Smith where she regularly advised clients on the implementation of new technologies to payments and finance and the complex regulatory schemes involved in the development, creation, marketing, sale and servicing of various financial services and products. Before Reed Smith, Angela spent most of her career in various roles at Latham & Watkins, where she was recognized by The Legal 500 US among the top finance attorneys in the U.S.Angela has a deep understanding of the Fin-Tech industry and in particular mobile payments and the distributed ledger industry, having been involved in startups in various roles, as a founder, an employee, entrepreneur and advisor. In addition to DLx Law, Angela is also co-founder of Sila Inc., an innovative technology company.

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Wyoming Blockchain Stampede 2020 | LawCon | Angela Angelovska Wilson | 9-25-2020 | 1pm-2pm MT

01:17 SPDI definition

05:45 Characteristic of the Wyoming SPDI

11:00 Digital asset custody

16:30 Charter application

21:41 SPDI and any other entities

27:00 Wyoming banking board hearing

32:00 Wyoming banking board hearing – aspects to pay attention to

34:45 Charter application timeline

37:42 SPDI regulatory landscape

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Hello, everyone. We were talking about going to the background of you know, how did we get to the SPD? I and why is it a regulatory innovation? I'm in 2019 as I'm certain most of you may remember Wyoming crafted 13, very digital asset crypto-friendly laws and that's addressed all kinds of different aspects of doing business in Wyoming. Dad is very specific to the needs of the blockchain industry. And these laws address everything from you know, compliance custody and banking

blockchain companies the Wyoming legislature in 2019 and active HP 74 Ridge is the bill that authorized the chartering of the special-purpose depository institution speedy eyes if we can move the slides, please to one more please, hah, and one more, please on what exactly is an SBI people keep talking about what the mass media and you know, it's difficult to explain it, but it's not, it's not so new in the sense that you know, we do have general-purpose special depository institutions that have existed

for many years are available to boat under the federal as well as the state chargers. So in general and ask me the eye is a bank charter and it has a special purpose just as the name suggests. It can be you no credit card banks, you know development Banks cash management banks in a special purpose is one that has a limitation on the activities with respect to Wyoming SPDI characteristics that are taken into account by the legislature in drafting the statutory requirements for an SPDI. I so happy, that I under the Wyoming statutes is a full reserve

fee on the bank and it can take deposits from customers. It can engage in the custody of digital I said it is designed and permitted to engage in the in facilitating payments are both domestic as well as International and it can engage in all other permissible banking activities. However, it may not engage in London next flight. So when we talked about and ask PDI, we are talking about the bank and one of the key elements of the Wyoming legislation is the ability to

designate the side as a bank under various purposes of various Federal as well as state laws on those of you here trying to get you a CLE credits. This is the part where we are going to go through the plethora of laws on the Ridge and the SPDI the Wyoming SPDI has considered the bank goes under Federal as well as state law. Since the FBI is an institution engaged in the business of receiving deposits and it's Incorporated under the laws of the state of Wyoming SPDI meets the definition of a State Bank under the Federal Deposit Insurance Act or the

FDIC act even though it meets the definition understate Bank vs. PDI statutorily is not required to be federally insured. Yeah it is however eligible to apply and obtain FDIC Insurance on his fee a deposit. If so, so wishes then it will meet SPDI I mean the definition of a depository institution under the Federal Reserve Act. As I noted earlier the SPDI is a bang on the numerous other federal and state laws because it is an incorporated institution that receives deposits and is supervised by a state banking

regulator. And this definition is key for the operations of the SPDI on a national level. Next slide, please. So we've been talking about what Justin SPDI it's really is a bank and then you know now will talk about some of the fundamental characteristics of Wyoming a speedy. I noted earlier. That's one of the key characteristics that differentiate SPDI is delimitation that it has in London. So it may not engage in lending activities, which is a traditional

banking activity. Also, Wyoming SPDI is required to maintain 100% So it is fully deserved of its depository liabilities as liquid assets. As noted earlier for purposes of the FDIC act it is considered the bank and therefore it is eligible to obtain FDIC insurance with respect to seeing a deposit. However, it is not required to do. So to operate SPDI as I noted can engage in all of the lawful activities of a bank subject to some cabbie hats to that and you know as part of that it can serve as a vehicle for business

cash management operational account or anything else that is permitted except for London. And of course the SPDI is required to comply with the federal as well as state laws. Next slide, please. So when we think about the Wyoming SPDI one of the very important things to think about is you know, what does it look like? It is a bank, you know, but doesn't look like you are traditional consumer bank or a community bag and you know, probably the easiest way to think about the

SPDI and how is a fit within the US banking system is to think of it as a custody Bank it resembles very much a custody bank. For example Bank of New York Mellon and you know, it's activities are very much in line with a dose of a custody bank one, very important point is that you know sometimes due to the limitations of the charger on lending as well, as you know, just because of the limitations of the activities some commentators and others have you know groups or part SPDI in

the bucket of narrow Banks. It does not the narrow bank and we will not be going into what is or what is not a narrow bank and the regulatory as well as policy implications. That charm does have today, but suffice it to say that it's very safe to say that when somebody's talking about the SPDI as a narrow bank that is not the case and instead probably the right analogy is custody Bank the Bank of New York Mellon one of the best examples out there. So what

does it cost to do a bank do well, it's kind of obvious by its name a custody Bank in general is focused on custody on storing acids. It has to do with Sherry's management duties. It can conduct a variety of transactions would acids and is providing an on and off-ramps to various markets the Securities markets Commodities market and consumers Bank account. There are you know when we think about the characteristics and the limitations or negativity of SPDI a lot of this is contained in the regulation as well as in the

chartering requirements. So, you know just like any Bank the SPDI is subject to statutory requirements with respect to the chartering the supervision liquidation and as closely related as you know, traditional financial institutions. Next slide, please. One of the key elements of you know, Wyoming SPDI is Dad. You know, the legislation was very purposeful and Wyoming's regulatory framework was extremely purposeful in addressing the needs and kind of the holes that were in the traditional financial system when it

came to the servicing blockchain and digital asset types of business are one of the very important aspects and I think one of the key aspects of the Wyoming legislation is the very explicit permission for the custody of digital for our bank and the SPDI in the custody of digital assets. So when we talk about, you know, the custody of digital assets are the key elements of that is that under Wyoming law digital assets are viewed in the same light as traditional acids class says for commercial purposes

on soda commercial property law status of digital assets is very clearly established under Wyoming law that is not the case in any other jurisdictions in the US except for maybe Rhode Island, but you know the number of state right now that they're looking at these exact provisions and are debating considering the implementation of these types of provisions very much fashioned on the Wyoming Provisions in their state laws. This is important because you know having clarity about the commercial property law

status of digital assets does implicate a whole host of different issues in just traditional everyday operations both of a bank as well. As you know commerce one of the other things that we have learned since Wyoming instituted. Its legislation is further confirmation of the position. That's Wyoming had that, you know, the custody safekeeping and servicing of assets. It's is something that is traditionally a banking activity recently. The OCC came out with their

interpretive letter 11:17 on July 22nd, 2020 and it is the OCC confirmed for National Banks that are National Banks can engage in the custody of digital assets. And again, I think this is you no real benefit. The Wyoming legislation was that it was one very clear that that is part of the permissible activities and specifically addressed the casting of digital assets. But you know, it's not just the custody aspect that is important. As a new tooth at the very beginning of our session, Wyoming enacted a

comprehensive framework to make things work and one of those key elements as noted is the ability to confer the commercial property law status of digital assets, next slide, please So for the charting process, I have put up the link to the Wyoming banking division in which all of the instructions for the application to Charter Inn and a speedy. I contain one thing to note. Is that while the regulatory framework and the chartering process a very specific

to crypto and digital I have said it is as I noted earlier. This is a bank and as the chartering process is very thorough and he does require the ability to address a number of those statutory as well as you know, Wyoming banking division or requirement. In the application process next line, please. So one of the things to note is that they noted that the application fee for filing. It was set at $15,000. So then there is a very long list as you can see from here of the requirements that need

to be addressed in the application. So the application forms are supported by the application submission that needs to be very specific and address each one of these requirements. So, you know, we need Articles of Incorporation and there is a specific provision as to how we go by that we don't just incorporate a something. Corporation and say this is going to be a bank. There's a specific process that needs to be followed. There is you know, a requirement died. There is a, you know paid in Capital stock

as required by the banking statues. There is if DSP why is going to be going forth and it's going to be applying for FDIC Insurance than the FDIC application along with all of the forms that are either going to be or are submitted to the FDIC also needs to be provided to be a Wyoming Department of banking. Next slide, please. So you will see that I have kind of called out three very specific requirements and have bolted them and kind of made them stand out from the long list of requirements. And these are

you know, you don't seem like a very heavy left when you read them, but they are in my view kind of the key to the application and the chartering process. So I'm the first one is a statement with supporting evidence demonstrating that the conditions in the community in which the proposed institution would reject business affords reasonable promise of successful operations. This is the business plan. So as a bank M&T Bank is required to be profitable and ignore to meet its profitability goals.

It has a three-year the Nova. During the time the bank and engage only in the business plan that was filed and approved as part of the chartering process and this business plan has to provide a sufficient basis with evidence. Is going to be profitable by your three and then the bank will be able to operate, you know, profitably within the parameters of the application and the business plan during that time. The next requirement is that you know, I statement with supporting evidence demonstrating that the proposed capital and surplus are

adequate in light of the current and prospective conditions. So one of the things that are also very important to note that in chartering and a speedy I the same capital I want to call them requirements for the same capital R in place. There are statutory Capital requirements. No question about that. And is that the five million dollars for the division of banking have said that you know, it will be requiring a 10 billion dollars of capital for the licensing. At least the last time I left the

ability to support the bank, the ability for the bank to have sufficient capital is extremely important different concepts that are you know, potentially applicable did needs need to be addressed. One of them is the relationship chat between the SPDI and the incorporators or any of the other entities within the corporate family. It is also very important to note that you know, the capital requirements, you know may not be sufficient and the application and the business plan. Do you need to address, you

know stress situations and what happens if the capital reserve is not sufficient due to unexpected events, you know, one of the things that you know, we have seen in traditional banks are, you know, and even more so in credit card Banks is during the cold with crisis right as we're going through this we have never had you know, a global pandemic that would allow us to build models. Did you know various capital needs in the bag in a hammock stand area too. Well, that's me not be as applicable to an STD

because of the prohibition on lending. It is necessary to be addressed when it comes to the capital requirements are you know, some things need to be addressed there are other events that may negatively impact the operations visitor capital requirement is a statement with supporting evidence demonstrating that the proposed executive officers and directors have sufficient experience ability and standing to afford reason. The promise of successful operation again,

the executive team the operational team, as well as the board of directors, are key to the ability of the SPDI to operate successfully and be profitable in accordance with his business plan within three years. As needed. Extremely important to know to God, you know, the SPDI is operating not only with respect to the custody of digital assets that is just one of its functions, but it also can take deposits and will be taking deposits from consumers. It will be you know, connecting to

the payment system of the United States and globally and as it needs to operate within the same operational, you know, any management, provisions as traditional banks, and so the experience of the executive team in being able to operate in but I called the art of the key terms safely and soundly is going to be extremely important and being able to demonstrate that during the application process will also be extremely important next slide, please, you know, there are several other requirements and I will

leave you to reading all of the different unit provisions. What one hour is just not enough to do justice to all of the requirements, but one other requirement that ought to be noted is that you know in the preparation of the application and the submission, you know as it is customary with any other bank charter application. The regulators. And in this case the Wyoming division of banking and the commissioner is permitted and may I request any other information that they would

like to have that is required by the regulations? Or that would be you no further insight inside into the filing as it has been filed, next slide, please. It is also important to know that you know, the Division and the commissioner. Can I ask for additional information? There is an ongoing continuing obligation to out the application process to be some plummeted, especially when you know, there is an Archangel since never get information or the or the application changes in a

materially or you know, if there is an application that you know going to be taking place. At the same time oftentimes. You know difference regulators may require a different fine-tuning of the business plan based on their requirements and their risk assessment. And so would then after I see if there is enough UIC application process is somewhat similar to the process that did Wyoming division of banking is doing where you have an application and then, you know some input from the regulator

on the sufficiency of the application and the process along the way is one which is very collaborative between the regulators and the applicants until you know, an application is complete and it is ready to be accepted for filing and you know, our next slide, please there are several various requirements that have to be addressed in the application for those of you that may have not seen or have gone through all of their Twitter posts by crack and financial which received its charter

and it's the first SPDI in the state of Wyoming. You will probably see the recommended reading that describes that they are general counsel. And for those of you who haven't seen it, there is a fun picture that shows you a very thick binder. I am terrible at measurements. So I think it's a 6 inch or 12 inch is a really big binder with shows all of the different documents that were submitted as part of the Opera. You know, I highly encourage you to take a look at it will give you an idea

as well as some of the things that you know, I need to be included in the application. So once the application is completed and you know, you have gone through the back and forth that's unnecessary. And the application is accepted dad. There is the next step will be Wyoming banking for cheering for the Wyoming banking board. Hearing is provided for in the Wyoming legislation regulations. And that is you know, a standard just like the formation of any other under the laws of Wyoming. There are specific procedures as to

how the hearing is to be conducted. And the statutory requirements on which the board is to assess the application of the applicant. The board is dying with 90 days after receipt of the transcript of the public hearing will bring to a decision as it is customary and as you would expect a divorce can either approve it can be conditionally approved or disapproved and application for State Bank in the charger including an S-Video, please. So there are as a nuisance. Your three

factors that the board must take into consideration as it can. Reviews the application as well as the hearing before approving it the board has to ascertain and does so through reading the application and the public hearing dad the following conditions, which are again specified are being matched. The public need and convenience will be promoted by the establishment of the proposed financial institution the conditions in the community in which the proposed financial institution with transacting business affords reasonable promise of successful operation again, profitability

is key with respect to any Bank. Any business right financial institution is being formed for no other purpose than the legitimate object contemplated by the laws of the state the proposed capital and surplus are not less than the required minimums and are adequate in light of the current and the prospective conditions going back to the capital requirements in the business plan that the proposed officers and directors have sufficient experience ability and standing to afford reasonable promise of successful

operation. One which is kind interesting and also something to need that needs to be considered before applying seems logical but still some sometimes you'd kind of false. Did you know in the cracks is that the name of the proposed financial institution does not resemble so closely as to confuse with the name of any other financial institution transacting business in the counting so and you know, lastly and very importantly. The applicant has complied with all of the applicable provisions of the law next slide, please. So this

is just a quick summary of the charter application timeline. The application is received by state banking commissioner within 30 days of the application the commissioner will notify the applicant of any deficiencies in writing and applicants will hide the ability to either I meant or if there are no deficiencies that are being identified and the applicants than the commissioner will accept the application for filing one is Dean's complete and is accepted for filing by the commissioner than the commissioner notifies the

chairman of the state banking board establishes the time and place for the public hearing that we were just talking about the public hearing. Has to take place no less than 60 days and no more than 120 days from the day did the application was accepted for filing within 30 days after receipt of the notice of the time and place of the hearing. The applicant is required to publish notice of the application and the public hearing in a newspaper of a general

circulation within the county where the proposed financial institution is to be located. This is an important requirement and sometimes in the digital age can be forgotten but it is essential the publication has to be made once a week for three consecutive weeks before the sharing and approve of the publication has to be Committed to the commissioner before the hearing. I'm done. The public hearing is held and then after 90 days after receipt of the transcript of the public hearing the board, it will issue its approval conditional approval

or disapproval of the application next slide case. Next slide, please. So this is one of my favorites visual slides about regulation and this slide shows how complicated the US regulatory authority over payment clearing and settlement systems is in the US and this just gives you a kind of the complexities of the federal and the state system when it comes to supervision next slide, please so making some next slide, please make a little bit of, you know, I'm

cleaning that the slide and making sense of who regulates the SPDI and on the basis of what so with respect to the SPDI regulatory landscape. We know that the primary regulator is the Wyoming department. And the bank supervision and you know as they Wyoming financial institution the SPDI does also, you know subject to the consumer protection laws of the state of Wyoming on the level the Board of Governors of the Federal Reserve the FED. Where is one of The Regulators what the scoop is

will be dependent on whether or not the SPDI applies and receives either a red membership becomes afraid member bank or it applies and receives a bad master account. As we have no kids Rob has one of the things that the SPDI can but there's not required to do so, he has obtained FDIC insurance for its Fiat deposits if it does so then the FDIC will be one of the federal Regulators supervising DSPDI do, you know, the fact that it's a consumer-facing the Consumer Financial Protection Bureau also has jurisdiction to supervise

and last but not least we have the federal financial crimes enforcement network fencing and the office of foreign assets control, which are also going to be supervisors and laws and regulations will need to be complied with for the operations of the next slide please with respect to SPDI Wyoming supervision. The Wyoming Department of banking is developing a comprehensive regulatory and supervisory framework for the operation of the SPD eyes that is focused on the safety and soundness of digital assets activities.

Next slide please. As we're coming to the end of our time together. I'll just leave you with a couple of would I consider to be a key consideration for the success of a SPDI for NES PDI to be successful. It will need to assure that it's able to address a broad range of things. It will need you to address the regulatory approvals the licenses as well as the super supervisory Frameworks that apply to it bowed during the chartering process as well as operationally.

It will need to have operational and Technical robots this again just by the sheer fact that they're nasty the eye is engaging in the provision of services with respect to digital acids, simply requires, you know technical little Boston this to all of their systems the safety and soundness principles are key are in the business plan as well as in the operation's compliance is as always crucial and super important and has to be addressed boat in the application process as well as in the operation of consumer protection

Austin, a very important part risks dad. The operations are introduced to the US and the global payment system need to you understood and addressed as well as data protection. And that is all and we have come to the end of our time and I am willing to ask if anyone has any questions. Please don't hesitate and if you are unable and we are unable to address your questions, you can always reach me at Angela at D, as in dog, at law.com.

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