Now, let’s look at why this was a surprise.
A group of visionary regulators and advocates started work in 2018 on the painstakingly detailed process of drawing up legislation that takes crypto assets into account. Caitlin Long, one of the aforementioned advocates, hosted a panel at our Invest conference last year that went into many of the details, and has both written and spoken about it at length. So, no surprise there.
And a Kraken job ad in December of last year hinted that applying for the SPDI charter was in its plans. Yet, Kraken’s win in being the first caught many off guard, because Kraken has not traditionally been seen as, well, the type to choose the banking route.
The exchange was founded in 2011 (when the bitcoin price averaged $5.60) by Jesse Powell, one of the industry’s earliest advocates, and an outspoken critic of regulatory overreach. What is one of the original crypto companies doing becoming a bank? Has it given up its principles to join the “system” bitcoin was supposed to circumvent?
The answer is no, it hasn’t. On the one hand, Powell has shown from the beginning that he will take steps to ensure fair access to cryptocurrencies, and has worked at getting strong banking relationships to support his business. Becoming a bank is an efficient way to cement the firm’s standing in the financial community, which benefits its clients.
On the other hand, the “system” that Kraken is joining is changing. And that has been the point all along.
Here we get a glimpse of the bigger shift I mentioned above. It’s not that crypto businesses are jumping through hoops to become respectable. That is happening to some extent, and it’s good for the industry. Respectability brings mainstream acceptance and investment inflow. And with its SPDI application, Kraken is reinforcing its reputation as one of the more innovative institutions in our sector.
The bigger shift is that traditional finance is changing to adapt to the crypto industry.
The SPDI is a new type of bank charter that was created with the crypto industry in mind. A new set of definitions and protections was drawn up to take into account crypto asset characteristics. A state passed financial legislation for the crypto industry.
What happened this week is not so much confirmation that crypto businesses are joining traditional finance. It’s more, to some extent, the other way around.
Many of us working in this industry are here because we believe that we are witnessing the emergence of a new economic system that will reform capital markets and finance. We have all faced cynics who insist that traditional finance won’t change, that cryptocurrencies are a threat to stability and order and that authorities won’t let this scale of innovation take root.
This week proved the cynics wrong.
The main story is not that one of the original cryptocurrency businesses, which supports the underlying principles of distributed governance, has joined the legacy financial system.
The story is more one of traditional finance adapting.
So far, this is both a small step (Kraken is one company, Wyoming is one state, the U.S. is one country) and a big one. The crypto industry wants reasonable regulation, for security and respectability. But it knows that traditional rules can’t apply. So it has convinced the rule makers to make new ones.
This week it showed that it can get the traditional side to meet it halfway. If you were wondering how the crypto industry could transform traditional finance, this is how it happens.
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