SPDI: Special Purpose Depository Institution Charter

Although cryptocurrencies allow individuals to self-custody their funds, ‘being your own bank’ can open institutional investors to a series of risks that they can’t accept. 

Because of this, many institutional cryptocurrency holders prefer to custody their digital assets with specialized and regulated custodians.

In an effort to address this point, Wyoming created the Special Purpose Depository Institution (SPDI) Charter in 2019.

Under Wyoming law, an SPDI is a state-chartered bank. Wyoming’s unique regulatory framework allows approved banks to custody digital currencies while also accepting fiat deposits. SPDIs may also offer a range of other banking services to their customers, bridging the chasm between cryptocurrencies and cash. 

While SPDIs are chartered banks, they don’t present many of the risks inherent in traditional banking institutions.

For example, SPDIs operate on a full-reserve basis, meaning they must hold unencumbered liquid assets valued at no less than 100% of their clients' fiat deposits. This contrasts with fractional-reserve banking common in traditional institutions, where only a fraction of client assets are held in reserve.

Kraken, which operates a cryptocurrency exchange, was the first digital asset company to receive the SPDI charter in Wyoming, operated through Kraken Financial.  

The regulated entity provides institutions with fiat deposit accounts and a qualified custody solution for digital assets. Kraken Financial is headquartered in Cheyenne, Wyoming, and is subject to regular safety and soundness examinations from the Wyoming Division of Banking.

Traditionally, a chartered bank in the U.S. is a government-approved financial institution charged with safeguarding funds deposited by people and organizations. 

The Office of the Comptroller of the Currency (OCC) oversees the chartering of national banks, while individual states like Wyoming establish and oversee state-chartered banks.

Banks today offer monetary services necessary for growth in the modern economy. These services include offering interest on savings deposits, and processing daily transactions for their customers. Banks typically lend out a portion of their depository assets to individuals and commercial borrowers.

Obtaining a bank charter is typically one of many regulatory approvals that an institution must get before engaging in banking business. As part of the chartering process, a regulator will assess the institution’s business plan, senior management team, and capital adequacy, among other things, to determine if the institution will be operated in a safe and sound manner. 

The Wyoming SPDI charter represents a shift in the regulatory framework for digital asset custody. Inspired by Wyoming's progressive stance toward digital asset regulation, the SPDI charter was established to bridge the gap between traditional financial services and the burgeoning world of digital assets. 

Wyoming was the first to offer a charter that outlines exactly how regulatory authorities will supervise digital assets. The SPDI charter is specifically designed for digital assets, addressing their unique characteristics and custody requirements.

It was designed to create a regulatory regime that acknowledges the unique nature of digital assets, while still ensuring high standards of safety and compliance are upheld.

With the SPDI charter, Kraken Financial will offer institutions many of the elements they expect from a traditional bank with connectivity to the digital asset ecosystem. 

Kraken Financial will initially offer eligible institutions in certain U.S. states fiat deposit accounts and qualified custody for digital assets. Services are all provided online and clients benefit from the 24/7 support that Kraken is renowned for.

What does this mean for Kraken clients?

Eligible new and existing institutional clients can establish a Kraken Financial account to gain access to a suite of carefully tailored products and services. 

SPDIs provide support for digital assets, making them easier and more reliable to use given the fact that they were purpose built for — not adapted to — the digital asset industry. 

They are fully-reserved banks that receive deposits and conduct other banking activities, including custody, asset servicing, asset management, and other banking services. 

The unified approach offers increased protection for clients by shrinking the number of counterparty and intermediary risks, while also removing the potential of losing cryptocurrencies due to a host of pitfalls that can occur when self-custodying. 

Kraken Financial, a Wyoming chartered and licensed SPDI, is distinct from Kraken, functioning as a separate entity with its own governance structure.

It has a dedicated board of directors, responsible for overseeing its operations and ensuring compliance with the stringent regulatory requirements set by the Wyoming Division of Banking (WY DoB). This targeted governance structure is better suited to address the unique risks and operational requirements of a financial institution under the SPDI charter, separate from the functions of the digital asset exchange.

It enables Kraken Financial to tailor its services to meet the specific needs of its institutional clients under the SPDI charter, leveraging its regulatory framework advantages to offer innovative financial products and solutions. This separation also reinforces client trust by assuring asset integrity and protection, knowing that they are held by a regulated financial institution. 

Oversight from the WY DoB further bolsters Kraken Financial’s position as a robust and compliant banking institution, setting a new precedent in the digital asset custody space.

Visit Kraken Financial today to learn more about our offering for institutional clients.