Legal Expert: Avanti May Face Uphill Battle Getting Fed Payment Access

Over the weekend Avanti announced it had filed an application to become a Member Bank of the Federal Reserve to obtain payment system access from the Federal Reserve via a master account. While most financial institutions that get access to this payment rail need to have FDIC insurance, Avanti believes that it meets similar standards via Wyoming’s SPDI. 

Avanti’s claim that it has the same compliance, controls, and supervisory requirements of a traditional bank vis-a-vis Wyoming’s special-purpose depository institution (SPDI) charter, and thus should be granted access to the Fed’s payment systems, might not hold up in DC, said legal scholar Rohan Grey. 

Grey is best known as one of the authors of the STABLE Act, which would require stablecoin issuers to obtain a bank charter. Pushed by Democrats, including Rep. Alexandria Ocasio-Cortez (D-NY), the proposed legislation was nearly universally pilloried by digital assets industry advocates.

Wyoming’s SPDI bank charter

Wyoming’s SPDI bank charter, which was signed into law in 2019, is a regulatory framework that many digital asset companies and advocates have deemed to be favorable to the growth of the industry. SPDI institutions cannot offer loans, and must have 100% liquid assets to cover the value of deposits plus a 2% contingency reserve.

SPDI does not require FDIC insurance — impossible to get for a digital assets-focused institution as FDIC insurance doesn’t cover stocks or crypto — though advocates say it’s not necessary because of the large contingency fund. 

The Fed, in Grey’s opinion, is “reluctant” to grant member bank status to banks that don’t provide lending services and this has been demonstrated in their recent litigation with Connecticut-chartered Narrow Bank. 

“I’m not sure why they would be inclined to approve this without a broader overhaul of their regulatory framework to prevent such banks from falling through the cracks created by them not having FDIC insurance,” he told Blockworks, arguing that Avanti is trying to avoid the greater scrutiny that comes with FDIC insurance and oversight of a traditional banking charter.

“This arrangement was intended to sidestep the more rigorous regulatory standards of the FDIC that depository institutions are traditionally required to get, while still presenting Avanti as a ‘bank’ for PR and marketing purposes,” Grey told Blockworks in an interview. “The concern here would be by granting them member bank status without requiring them to get a regular bank license and FDIC insurance, the Fed would be undermining the broader federal regulatory framework aimed at the banking system in favor of whatever Wyoming happens to think is an adequate alternative to FDIC insurance.”

Grey argues that the very existence of SPDI charters is because “Caitlin Long and other crypto advocates convinced a few friendly Wyoming legislators to let her write a new law specifically so she could avoid having to go through the traditional bank chartering process.”

The nation’s banks seem to be ideologically aligned with Grey’s sentiment, via a recent blog post from the Bank Policy Institute — which has spent $1 million this year (in all of 2020 it spent just over $1.1 million) lobbying on payment systems issues and against the OCC’s crypto bank charter proposal. 

Citing the structure of SPDI, institutions’ deposits, which are largely geared towards long-term instruments like Treasury securities and corporate debt, BPI says that SPDI is an “accident waiting to happen” and the model “is inherently unstable under stress” because the value of the deposits aren’t going to be able to withstand a rise in interest rates. 

Avanti isn’t the first to apply for access to the Fed’s payment system. Last year, US-headquartered exchange Kraken also applied but has yet to receive an answer. 

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