JACKSON, Wyo. – When Rep. Tyler Lindholm (R-Sundance), a tall, rail-thin and ascendant young lawmaker, brought a bill in 2016 to make cryptocurrencies legal in Wyoming, he didn’t get far.
The House Minerals, Business and Economic Development Committee killed the bill 5-4.
Cryptocurrency — a melding of digital wizardry called blockchain with a quest for decentralized, manipulation-free currency — returned to the Wyoming Legislature in 2018. That year, Lindholm and other lawmakers pushed several more bills, including a measure exempting cryptocurrencies — dubbed “virtual currencies” in Wyoming statute — from property taxes, and another allowing blockchain tokens to be exchanged as cash, not securities as they are under most legal structures.
The lawmakers championing those early bills were aided by a sudden influx of young, tech-savvy crypto industry representatives — diverse faces that stood out in the halls of the Wyoming state capitol. Helming efforts was Caitlin Long, a Wyoming native with a Harvard degree in economics who worked on Wall Street before becoming a crypto industry advocate.
The bills passed and the “crypto cowboys” were born. Financial publications began spotlighting the legislation, holding Wyoming up both as a leader in cryptocurrency regulation and, with its libertarian leanings, a natural match for the industry’s values.
In 2019, the Legislature passed seven more bills. Detractors noted a lack of resistance, particularly, some argued, given how few lawmakers actually understand the legislation. The body will consider at least eight more bills during the upcoming session in February.
In explaining the legislative success, Long said it helped when lawmakers met the players, and realized “they weren’t all criminals and drug dealers and they have real business opportunities.”
Wyoming, in two years, became the budding blockchain industry’s darling.
To lawmakers desperate for an economic development win, blockchain offered hope. The state made the pages of Forbes, Wired, CNBC and other financial and technology publications. The national press was writing about Wyoming and the stories, for once, weren’t about coal’s decline.
Crypto entities have followed in the wake of the bills. Hard numbers are difficult to pin down — the Wyoming Secretary of State’s office does not sort registering businesses by sector — but it’s clear companies are filing their businesses in Wyoming, and some are beginning to set up shop here.
There are also multiple bitcoin mining companies operating in the state, Long said. “We don’t know how big these companies are and how many jobs there are on the ground,” she said. “It’s all anecdotal.
Wealthy investors who accrued huge fortunes by investing in bitcoin early are circling the state. Two big players in the cryptocurrency sector, Kraken and IOHK, were major sponsors at the WyoHackathon in Laramie in September.
The CEOs of both companies told WyoFile at the time they hope to move jobs and operations to the state.
“When a politician takes a chance and gives you open arms and embraces your industry, you give them something back,” said Charles Hoskinson, the CEO of IOHK.
But some see risks. “One must ask how this would benefit the everyday citizens of Wyoming trying to put food on the table and educate their kids,” Rob Jennings wrote WyoFile in an email. Jennings, a political fundraiser with a long history in Wyoming politics, was one of the early players in the blockchain effort. He is now embroiled in a lawsuit regarding the blockchain brand BeefChain. “All of this goes back to one simple phrase — if it sounds too good to be true, it probably is,” Jennings wrote.
Will Wyoming spark a tech economy by courting blockchain and cryptocurrency companies? Or are industry players taking advantage of a desperate and uninformed Legislature to treat the state as their sandbox — an easy place to pass laws and experiment, but not a place to stay and build?
To address the question, one must first differentiate between the technology of blockchain, the cash-flush but nebulous cryptocurrency industry that is born of it and the fundamental changes to financial systems its wide-scale adoptions could spawn.
The blockchain revolution
A “blockchain” refers to a “chain” of cryptographic digital records, where each “block” carries transaction data. The use of complex codes on each data block creates, when chained together, a record of ownership and transactions that is supposed to be extremely difficult if not impossible to manipulate.
Blockchain advocates say the system allows entire histories of assets to be encoded securely in a digital record. The technology can be used to track the provenance of anything from bitcoins to real estate, or merely assure the discerning diner that the steak on their plate comes from where the label says it does — the ostensible idea behind BeefChain.
The fact that a cryptocurrency unit carries a theoretically airtight history has the potential to revolutionize commerce, advocates say. That’s because a secure digital ledger could eliminate the need for a whole host of regulatory compliance.
Many financial service industries — such as accounting, lending and money transferring — profit from the complications of ensuring secure transactions of money and property. Blockchain holds the promise to sweep those commerce costs aside.
“Every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared,” Harvard Business School professors Marco Iansiti and Karim Lakhani wrote in the Harvard Business Review in 2017. “Intermediaries like lawyers, brokers, and bankers might no longer be necessary. Individuals, organizations, machines, and algorithms would freely transact and interact with one another with little friction. This is the immense potential of blockchain.”
For now, however, that promise is still just promise. Unlike the rapid reimagining of a single business model — think Amazon and book stores or Uber and traditional taxis — blockchain technology poses much more significant disruptions, the Harvard Business Review authors argued. It’s a technology that could change the bedrock tools of societal, economic and regulatory systems.
“If there’s to be a blockchain revolution, many barriers—technological, governance, organizational, and even societal—will have to fall,” the authors wrote. “It would be a mistake to rush headlong into blockchain innovation without understanding how it is likely to take hold.”
A blockchain world is still some time away, the authors wrote. “While the impact will be enormous, it will take decades for blockchain to seep into our economic and social infrastructure.”
The Legislature, in a gambit to position Wyoming on the cutting edge of that change is writing blockchain-friendly regulations, and relying on industry players to help craft them.
If blockchain may one day rewrite the financial system of both Wyoming and the nation, for now only one application of the technology appears to have significant financial clout: cryptocurrency.
Cryptocurrencies use blockchain technology to create unique digital “coins.” Bitcoin is the most prominent cryptocurrency, but several varieties exist and more are being invented.
Because the blockchain code is supposedly unbreakable (yet, hackers appear to have found ways to steal bitcoins) cryptocurrencies allow for peer-to-peer transactions outside traditional financial institutions, bringing the anonymity of cash transactions to the digital world.
Wyoming has a history of offering itself up to shadowy financial schemes. The state’s lax business registration laws, for example, encourage the creation of shell corporations and make Wyoming an attractive place for people trying to hide money from tax collectors or law enforcement. Indeed, registering businesses anonymously in Wyoming has its own cottage industry.
For international regulators, the anonymity afforded by cryptocurrencies raises myriad concernsabout drug and sex trafficking, money laundering and financing terrorism. A 2018 study by the University of Sydney estimated that nearly half of bitcoin transactions each year are related to illegal activity.
Lindholm isn’t worried. “If most folks actually sat and read our bills they’d go ‘well actually they’re forcing these companies into a regulated space,’” he said.
Cryptocurrencies quantity is limited in nature based on the computing power it takes to produce it. As such, the coins are also traded like commodities, driving values up and down.
In 2017, the value of bitcoins shot up as people suddenly bought in to the technology. Today, a bitcoin is worth around $9,000. At a peak in December 2017, a bitcoin was worth $17,394, according to the cryptocurrency media website CoinDesk.
Like savvy stock market players, bitcoin’s early adopters found themselves suddenly very wealthy. Some went on to build businesses as an industry sprouted around cryptocurrency wealth.
Rep. Mike Yin (D-Jackson), a Blockchain Task Force member and developer, sees the blockchain industry as a way to court the broader technology industry. “Here’s one type of emerging market in technology that we can put our foot in,” he said, “see what it’s like.”
For now, he said, cryptocurrency remains the industry subsection in which Wyoming is most likely to see any concrete economic benefits. “I do think that there are relevant uses for blockchain outside the crypto space,” Yin said, but “I wouldn’t be able to say what I think specifically is available or not available.”
Brave new banking
Wyoming has lured cryptocurrency businesses by passing a variety of laws. The one that appears to appeal most to businesses creates, as its title implies, “Special Purpose Depository Institutions.”
House Bill 74 created a new form of banks — acronymed SPDIs and pronounced “speedies” — to hold crypto assets The new financial institution is necessary because traditional banks are “refusing to provide banking services to blockchain innovators,” according to “Legislative findings” attached to the bill. This includes a refusal to hold U.S. dollars acquired through selling cryptocurrency, according to the findings.
“Authorizing special purpose depository institutions to be chartered in Wyoming will provide a necessary and valuable service to blockchain innovators, emphasize Wyoming’s partnership with the technology and financial industry and safely grow this state’s developing financial sector,” the findings say.
Wyoming’s traditional banking industry offered perhaps the only opposition to the SPDI bill during the legislative session. Bankers were concerned that people would conflate SPDIs with traditional banks, said Michael Geesey, executive director of the Wyoming Banking Association.
It’s a “reputational risk” for Wyoming banks if that happens and the experimental institutions fail, Geesey said.
But more broadly, Wyoming banks are part of the local economy, Geesey said, and it seems unlikely SPDIs would occupy that role. “A bank grows the community by giving loans to people and allows them to build a business or grow a business,” Geesey said. The goal of SPDIs is to offer banking services to those who use cryptocurrency — including businesses that don’t engage in traditional banking.
Advocates say that category could include anything the traditional banking industry doesn’t do business with — cryptocurrency, for one thing, but even politically unpopular industries like firearms. Skeptics wonder.
“[SPDIs] are not going to do that,” Geesey said. “They’re just going to provide a service for a group of people that can’t get banked elsewhere so they can come to Wyoming to get banked.”
The law went into effect on Oct. 1. On Nov. 10, Long told WyoFile she was aware of seven companies interested in opening SPDIs.The Wyoming Division of Banking is currently working with around five applicants who are going through a months-long application process, according to the agency.
“That’s economic development,” Lindholm said. “We just almost tripled the size of the banking industry in Wyoming but I’m not going to count that shit until it’s done.”
Between the companies she knew of, Long said, they look to house around $20 billion in assets in the state. Despite the exemption on property taxes, the state will earn revenue off the banks. That’s because they’ll pay a fee on every dollar of assets. Long calculates that $20 billion a year will bring in $4 million in fees.
The money raised would fund the Wyoming Division of Banking’s work. The agency is self-funded, though its budget is governed by the Legislature.
Long declined to say whether Hackathon sponsors Kraken and IOHK — two companies considered big players in cryptocurrency — were among the five interested in establishing SPDIs. She did not want to preempt company announcements, she said. In an email, a representative for Kraken said the company was considering applying.
“When they show up, others try to be nearby,” Senate Minority Floor Leader Chris Rothfuss (D-Laramie) said of Kraken and IOHK. Rothfuss is chairman of the Blockchain Task Force, a special legislative committee. The companies could help drive the “development of an ecosystem” of blockchain companies in the state, Rothfuss said, an ultimate goal of the legislative effort.
Blockchain’s ‘happy accident’
IOHK CEO Hoskinson, cofounder Jeremy Wood and Jesse Powell, the founder of Kraken, were among the early cryptocurrency adopters. Kraken is a cryptocurrency exchange — a marketplace where traders can buy and sell different digital coins, like commodity trading.
IOHK plays more broadly in the blockchain world. On its website, IOHK describes itself as a “decentralized” engineering company that builds cryptocurrencies and blockchains for “academic institutions, government entities and corporations.” Through blockchain, the company seeks to provide financial services to 3 billion people around the world without them, according to its website.
The company also has a research arm, employing scientists and collaborating with at least three universities. It is as much “academic institution” as engineering firm, Hoskinson said, and is interested in partnering with UW.
For Hoskinson, the attraction to Wyoming comes from both proximity — he and Wood are both Colorado residents — and lawmakers’ sudden embrace of his fledgling industry.
“Wyoming was the happy accident,” Hoskinson said. The company’s full name is Input Output Hong Kong, a reference to its headquarters in that city. IOHK’s website still lists an office address in Hong Kong. But the company started eyeing a new home when the Chinese government began exercising too much authority over both the city and the industry, Hoskinson said.
When the company went looking for a new home, he said, they looked at all “the usual suspects” like Singapore, Switzerland, Lichtenstein and Luxembourg. “Those places,” he said. All are known tax havens.
When a Republican-controlled Washington D.C. passed a corporate tax cut in 2017, Hoskinson said, the company started looking at U.S. states. “Our lawyers said ‘oh Delaware right?’” he said, “and I said ‘no, fuck that, we’re going to Wyoming.’”
Hoskinson is dedicated to Wyoming, he said. “We really do feel that we have a moral commitment to do something in Wyoming.” The company could have employees here “this year,” he said.
He remained vague on what exactly the company would do in the state. There are opportunities to “mine” cryptocurrencies, he said, or develop blockchain technologies for the energy or agricultural industries.
Hoskinson described jobs here as critical to maintaining political support for an industry seeking new legal and regulatory structures. “If regulatory arbitrage is part of your business strategy, you should damn well be creating jobs here to be able to have proper representation and reward the politicians for taking the risks,” he said.
Blockchain’s advocates in the Legislature want to keep up their end of the romance too. Statute disbands the Blockchain Task Force in January 2020. A draft bill already exists to create a more permanent ‘Select committee on blockchain, technology and innovation.’
If created, the new committee would take a broader look at technology developments, Lindholm said. “Financial technology is always going to be something we should keep our eyes on,” he said. “But on top of that, artificial intelligence, electric vehicles the list will go on.”
Real change and real jobs?
Hoskinson described a high ceiling for what the industry can do for Wyoming.
“If every company carries its weight, we do three, four [jobs] here, someone else does three here, you wake up and suddenly you have a few thousand,” he said. “And if we’re successful and we grow suddenly a few thousand turns to 30,000 turns to 50,000 and so forth.”
But detractor Jennings argued it’s high time for the industry to put up or shut up.
“The question Wyoming citizens should be asking is, ‘where are the jobs?’” he wrote. “Where is the revenue? All I’ve seen to date is a whole bunch of $50 dollar business registrations and not much more.”
Even the advocates worry that if blockchain does have staying power it won’t stay in Wyoming long. Other states are nipping at Wyoming’s heels, Long said. Colorado is making inquiries about the SPDI legislation, she said.
To stay ahead, Wyoming has to keep building its regulatory structure, she said. “We move fast.” Because once companies do become established here, she said, they’ll stay regardless of what laws other states, or the federal government, pass.
Powell, CEO of the cryptocurrency exchange Kraken, said his company could employ up to 10 people in the state with a SPDI. But he also expressed interest in Wyoming writing regulation that could be used as a model for other states.
Like Hoskinson, Powell said the industry should reward Wyoming politicians by bringing jobs to the state. Doing so could encourage other states to pass similar laws, he said. “If we show that there’s significant rewards for creating a structure that is beneficial to the industry … other states will see that,” he said.
There is also the question of whether an industry populated by by rich young entrepreneurs would want to settle in Wyoming.
Speaking to reporters at the Hackathon in Wyoming, Powell suggested a culture clash.
“It’s even a tough sell getting people to a conference here,” he said, “when you tell them the nicest hotel is $85 a night and it’s a two-star Hilton or whatever. They’re like, ‘I’ve been staying at the Four Seasons everywhere because I’m a bitcoin millionaire and I don’t know if I can go back to staying at the Hilton now.’”
Shiny object, bold move or something else?
Blockchain came up in a live-streamed debate by Wyoming political leaders in Rock Springs last month. At the panel, called “Breaking the Boom and Bust Cycle in Wyoming,” former Gov. David Freudenthal (D) suggested blockchain was the latest “shiny object” chased by politicians desperate to break Wyoming’s dependency on fossil fuels.
“I appreciate blockchain in that it might bring some jobs,” Freudenthal said, “and I think it will, but not the kind of jobs to replace the jobs we’re losing.”
The suggestion drew heat from Sen. Tara Nethercott (R-Cheyenne), who serves on the Blockchain Task Force.
Given coal’s outsized influence on Wyoming’s economy and state revenues, “criticizing blockchain or any of the cryptocurrency concepts as a replacement to coal is not a fair analysis,” she said, “but is it part of the conversation … of attracting businesses that weren’t here before?”
Blockchain legislation exemplifies creative thinking by lawmakers up against the wall, she argued.
The near-unanimous legislative support for blockchain bills, “that should signal to … the citizens of Wyoming that there is a strong commitment to take bold moves to advance the state and diversify our economy,” Nethercott said.
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