Client Alert: Cryptocurrency Charters – Is Illinois Next?
The Illinois General Assembly is likely to enact legislation soon permitting the establishment of non-bank, special purpose trust companies that can provide custodial services for cryptocurrencies. Once the legislation passes, and after completing its rulemaking process, the Illinois Department of Financial and Professional Regulation (DFPR) would be tasked with establishing and supervising these new entities. If the legislation passes in the fall of 2021, we expect that charter applications will be considered in the first half of 2022.
Illinois would join other states, such as Wyoming and Nebraska, that have created (or are creating) special purpose trust charters aimed at cryptocurrency businesses. Wyoming began accepting special purpose depository institution (SPDI) charter applications in late 2019. Although there is general excitement for crypto-focused charters, few have actually been granted. Wyoming has only granted an SPDI charter to two institutions, and the Wyoming Division of Banking has indicated that it will temporarily delay considering additional applicants due to staffing and logistical issues. Nebraska’s crypto-friendly charter was just approved in late May, so the first Nebraska charter is likely at least months away.
Not content with the state path, three cryptocurrency businesses were granted conditional charters by the Office of the Comptroller of the Currency (OCC), though some federal lawmakers have asked the OCC to reassess those charters. Senator Sherrod Brown (D-OH), for example, has questioned whether the OCC performed enough due diligence on the chartered institutions, and whether the OCC is able to regulate cryptocurrency companies comparably to traditional banks. The current Acting Comptroller of the Currency, Michael Hsu, has said that everything regarding crypto is “on the table,” presumably including reevaluating those conditional charters.
Although few businesses have successfully pursued state or federal cryptocurrency-related charters, obtaining such charters could transform those businesses, and the cryptocurrency industry as a whole. Without significant movement under existing banking law, a special or limited purpose trust charter is viewed as having three significant advantages for those who pursue it:
- Enabling them to provide custody for digital assets, which is becoming increasingly important as cryptocurrency and other digital assets are gaining acceptance;
- Giving them the ability to provide non-lending banking services to cryptocurrency and blockchain businesses, many of which have difficulty securing or keeping accounts at traditional financial institutions; and
- Providing them a clearer path for regulatory oversight and minimizing the need to secure a patchwork of state licenses, such as those related to money transmitters.
Given these advantages, and the vibrant cryptocurrency industry throughout Illinois and the Midwest, it is expected that there will be a significant demand for an Illinois special purpose trust charter. We recommend that potential charter seekers engage with the DFPR proactively to assess how the agency may supervise their activities, and to advocate for their perspectives during the DFPR’s rulemaking process.
We Can Help You
Combining our extensive experience establishing 100+ de novo banks and representing myriad, cutting-edge cryptocurrency companies, our team is uniquely positioned to assist businesses interested in exploring charter options. Our bank M&A and regulatory practices are consistently recognized in the U.S. News & Best Lawyers. Complementing our award-winning banking practice, our team boasts nationally-recognized cryptocurrency and FinTech practitioners. Whether it is traditional banking or the future of finance, we are at the forefront of legal thought leadership.
Justin C. Steffen is a nationally recognized FinTech and cryptocurrency attorney who helps financial institutions navigate the legal and regulatory obstacles to innovation. Justin regularly advises clients on the intersection of technology and the law, including on issues related to cryptocurrency, licensing, and regulation.