Wyoming is a mountainous, sparsely-populated rectangle located in the middle of the United States. Despite its landlocked position, many Wyomingites are laying legal foundations to make it a harbor for the virtual world. A bundle of 5 bills, passed in March of 2018, positioned Wyoming as a serious contender in the race to build a crypto-friendly jurisdiction. This article is a quick summary of the five bills already passed, as well as a look at the prospective bills being proposed for the upcoming legislative session.
The Race To Regulate
There is a difficult divide between the “real world” of nation states, and the “virtual world” of distributed ledgers such as Bitcoin. For personal use, services like Coinbase bridge this chasm, but take a hefty fee along with their snitchy KYC. For enterprises, the uncertainty surrounding the legality of cryptocurrencies leaves many unable to keep a consistent banking partner.
While the feelings of banks are consistently negative, crypto technologies have been met with mixed reactions from governments. Powerful states are naturally skeptical of disruptive technology, yet smaller states recognize opportunity in hosting a revolutionary force. We see this in practice by the cautious tip-toeing around the topic of cryptocurrencies by federal regulators; cautiously making fuzzy statements that do not actually set any precedent. For instance, the SEC declared that “the DAO” was probably a security, and that Ethereum was probably a security initially. These statements chill the industry without actually necessitating a legal battle that the agency might lose.
So while powerful incumbents such as the US and Russia may be spreading uncertainty, many smaller jurisdictions are eagerly building landing pads upon which lucrative crypto projects may safely fall from the heavens. Paradoxically, one of these places is located inside the United States. In the first half of 2018, Wyoming legislators bundled five bills intended to make it an ideal place for emerging technology. While critics claim that Wyoming has pursued a dangerous deregulation of cryptocurrency, the opposite is true: it has classified it as a type of property rather than leaving it as an open question. While this doesn’t guarantee the SEC and its federal siblings from trying to exert their influence, it does put up a shield to make it a fair fight that will likely play out in the courtrooms.
Included in the package of five bills was the introduction of ‘Series LLCs’, which are able to spawn child LLCs that do not share liability between each other. Another bill allows for LLCs to be controlled by a blockchain address, opening up the possibility for hybrid entities, existing on both the planes of Ethereum and the plains of Wyoming. The combination of these two bills means that a DAO may be able to control a Series LLC, and then in turn create a child LLC for each of its projects. Each Child LLC does not share liability with its parent or siblings, enabling decentralization.
The remaining 3 bills:
- Exempt cryptocurrency projects from the same regulations as virtual money transmitters
- Classify utility tokens as distinct from securities
- Exempt cryptocurrency from property taxes
Wyoming Offers a Supportive Solution
Although the ground has been cleared with these five bills, not much has been built yet. A new bundle of bills seeks to build an even stronger foundation. The Wyoming Blockchain Task Force group met in Cheyenne last week to polish their proposals, after meeting in Jackson a month earlier. (Representatives from the SEC, Federal Reserve, and FDIC said they would attend the earlier meeting in Jackson, but were reportedly spooked when it was revealed that the location would be open to the public.)
After the Jackson session, I spoke with Albert Forkner, Wyoming’s Banking Commissioner, about what he perceived to be the most exciting development: a “sandbox option”. The sandbox allows projects to experiment with new business models without having to go through the mountain of paperwork that usually befalls fintech companies. Instead, these startups will be able to apply for special licenses that have a limited scope and duration, allowing them to see if their business model is viable before securing a more permanent permit. This test period will also allow the State to see if the ‘disruption’ that comes from these startups is positively or negatively impacting the ecosystem before granting them a permit.
There was also much talk about another major way Wyoming hopes to attract crypto businesses: a bank made by the State. This “Special Purpose Depository Bank” is intended to help businesses registered in Wyoming to find a consistent banking partner. Wyoming’s“Special Bank” will likely be FDIC insured, but would not make loans. The bank can only be accessed by corporations that can “provide reasonable evidence that the person is engaged in a lawful, bona fide business, or is likely to […] within the next six (6) months.” Whether the bank would provide an exchange service between fiat and cryptocurrency is still undetermined.
A recurring question that has come up at Wyoming’s Blockchain Coalition meetings is if, and when, the Secretary of State will open up its API. Although Wyoming invented the LLC back in the 1970’s, Delaware was able to bring it to market sooner, and has been a hub for business registration ever since. Both Delaware and Nevada have systems with APIs that allow trusted parties to register new corporations without the tedium of paperwork. Delaware recently paid three quarters of a million dollars to IBM to put their business registration system on a HyperLedger.
The nature of ownership of public records came into heated discussion at the last meeting. In order to spur the Secretary of State into action, one of the proposed bills will mandate that Wyoming deploy a new records system using a distributed ledger. Such a system could reduce the need for paperwork, but also open up new avenues for certifying ownership of commodities such as cattle, fine arts, and collectibles. After receiving a timestamp from the county clerks, citizens could transfer ownership using distributed ledgers, rather than rely upon additional paperwork.
Similarly, there is hope that the Wyoming Secretary of State will update its systems to allow easier management of LLCs. Rather than filling out paperwork to make a new LLC or change its operating agreement, it is hoped that owners will be able to interface directly with the state’s systems, reducing the reliance upon registered agents and county clerks. This issue is particularly pressing because recent legislation allows for people to register “Series LLCs”, which are capable of having thousands of child LLCs. Presently one must complete a forms to add a new batch of child LLCs; potentially thousands of forms to reach the max limit of child LLCs.
Wyoming and similarly eager states will be testing grounds that will allow the larger states to become more comfortable with these new types of businesses. While blockchains may allow for the removal of unnecessary middlemen, they also make enforcement of laws difficult due to their pseudonymous nature. We will surely soon see decentralized autonomous organizations (DAOs) controlling limited liability corporations (LLCs). While these hybrid entities may represent the both of best worlds, a steady pace will ensure that these exotic hybrid entities do not provide a shelter for bad actors to conduct fraud in the States and abroad.