Kraken Wins Bank Charter Approval

[Darkoth89]

Kraken Financial, as a bank, is required by Wyoming law to maintain 100% reserves of its deposits of fiat currency at all times. If every client were to demand withdrawals of their fiat at the same moment, Kraken Financial would be able to fulfill each withdrawal immediately without regard to how many loans we had outstanding.

Now this begs the question: how the heck is Kraken supposed to make any money with a 100% reserve requirement? That means they can't loan any dollars out in a traditional fractional reserve savings-and-loan model.

In order to legally loan money, they would need to have surplus (>100%) reserves.

I was asking myself the same and found an interesting article about full-reserve banking here:

It seems like full-reserve banks indeed wouldn't be able to provide loans or overdrafts but would focus mainly on peer-to-peer payments, debit-card payments or wireing funds. They would invest all funds in zero maturity instruments, like loans, issued by the central banks. This way they are able to liquidate them at any point. And to generate revenue by providing only payments a full-reserve bank either has to introduce fees - which would drive customers away to other banks - or they need to get interest on their zero maturity instruments. And some central banks have started to pay interest on deposits. Not sure what of all this applies to Kraken though.

[exstasie]

Kraken Financial, as a bank, is required by Wyoming law to maintain 100% reserves of its deposits of fiat currency at all times. If every client were to demand withdrawals of their fiat at the same moment, Kraken Financial would be able to fulfill each withdrawal immediately without regard to how many loans we had outstanding.

Now this begs the question: how the heck is Kraken supposed to make any money with a 100% reserve requirement? That means they can't loan any dollars out in a traditional fractional reserve savings-and-loan model.

In order to legally loan money, they would need to have surplus (>100%) reserves.

I was asking myself the same and found an interesting article about full-reserve banking here:

It seems like full-reserve banks indeed wouldn't be able to provide loans or overdrafts but would focus mainly on peer-to-peer payments, debit-card payments or wireing funds. They would invest all funds in zero maturity instruments, like loans, issued by the central banks. This way they are able to liquidate them at any point. And to generate revenue by providing only payments a full-reserve bank either has to introduce fees - which would drive customers away to other banks - or they need to get interest on their zero maturity instruments. And some central banks have started to pay interest on deposits. Not sure what of all this applies to Kraken though.

Interest on central bank deposits.....that's an interesting thought I hadn't considered. It doesn't mean much in the current environment with the interest rate on excess reserves (IOER) at only 0.10%, but under "normal" circumstances it would be closer to 1.5-2% annual. That's worth considering. According to Powell, Fed interest rates will probably stay near the floor for the next year or two. With that in mind, I assume Fed deposit interest is not a vital part of their model.

Kraken's US banking provision has always been pitiful as far as I can tell. This could give them a large boost.

Good point. I always thought, given the pitiful nature of banking at most spot exchanges, that a sufficiently large one should just buy a US chartered bank to cut out the middlemen. That's basically what Kraken has done here.

[barbara44]

Do we really know what Kraken intends to use this for? I mean obviously they got a bank charter approval which means they are going to be a bank.

I wasn't expecting them to get a bank approval and start a bakery neither, but I just want to know what type of bank will they become? Like if they can open a regular bank, non-crypto old-timer version, if they have that right would they work with fiat as well? Will they become a place that people could put fiat money and take out fiat money?

Or are they going to be purely crypto and not deal with anything else at all? I am just not sure about what will happen to them and how that will happen. If we can make sure that they are purely crypto and do not involve any fiat at all, that would be really an amazing thing.

[ampu]

Kraken becoming a private bank is also an opportunity for people to know more about cryptocurrencies. In the future, other banks may be also engaged in crypto trading as they did with the Forex market.
In the future, there may be more banks like Kraken, which is the best legal and best bridge between cryptocurrency trading and FIAT.

[jaysabi]

Kraken Financial, as a bank, is required by Wyoming law to maintain 100% reserves of its deposits of fiat currency at all times. If every client were to demand withdrawals of their fiat at the same moment, Kraken Financial would be able to fulfill each withdrawal immediately without regard to how many loans we had outstanding.

Now this begs the question: how the heck is Kraken supposed to make any money with a 100% reserve requirement? That means they can't loan any dollars out in a traditional fractional reserve savings-and-loan model.

In order to legally loan money, they would need to have surplus (>100%) reserves.

Full reserve banking requires banks to keep 100% reserves for in-demand accounts, such as a checking or savings account.  These are generally accounts that could be withdrawn at any time ("on demand") and the bank would have to comply.  The 100% reserve generally does not apply to time deposits, such as CDs and other types of accounts where there are withdrawal restrictions, so this is one avenue where a bank could make loans under a full reserve banking system. 

Also, Wyoming law seems to specify 100% reserve for fiat currency.  Perhaps crypto is a loophole.

However, lines of credit do not appear to be what Kraken is interested in at all.  The real reason Kraken wants to do this is to serve as a bridge between the traditional banking system and cryptocurrency.

The unique charter made for Kraken’s SPDI model is more similar to a custody bank than a community one, meaning that its primary focus will lie in asset custody and things like regulated securities and commodities, rather than safeguarding customer deposits and giving out lines of credit. Still, it hopes to operate in an accessible manner for a wide array of customers, and mentioned that it maintains a 100 percent reserve of all deposits in fiat currency.

[fillippone]

Sorry, I am slow at this thing of 100% reserves.

This is perfectly clear for FIAT, but this means that Kraken will not be able to lend fiat or Crypto, is that correct?

If I deposit 100 USD, 100% reserve means that the liquidity will sit on bank’s account (actually at the Fed, maybe).
The bank won’t be able to lend my 100 USD in any way. That money will be used only to process payments (crypto exchange included).

But if I deposit 100 BTC on Kraken, there won’t be any fiat reserve backing those. The law requirement only means that the bank will have to keep my funds sitting on their wallet. Without lending (what are they supposed to do?Put those on uniswap?).

So there won’t be, as per my understanding, any “tether like” inquiry asking Kraken Banks to show fiat reserves backing their BTC holdings.

This is an obvious thing, but it get me a while to realise. Maybe I am getting old.

[jaysabi]

Sorry, I am slow at this thing of 100% reserves.

This is perfectly clear for FIAT, but this means that Kraken will not be able to lend fiat or Crypto, is that correct?

If I deposit 100 USD, 100% reserve means that the liquidity will sit on bank’s account (actually at the Fed, maybe).
The bank won’t be able to lend my 100 USD in any way. That money will be used only to process payments (crypto exchange included).

But if I deposit 100 BTC on Kraken, there won’t be any fiat reserve backing those. The law requirement only means that the bank will have to keep my funds sitting on their wallet. Without lending (what are they supposed to do?Put those on uniswap?).

So there won’t be, as per my understanding, any “tether like” inquiry asking Kraken Banks to show fiat reserves backing their BTC holdings.

This is an obvious thing, but it get me a while to realise. Maybe I am getting old.

Ostensibly, this is correct. If you deposit 100 USD in a checking account, the 100% reserve requirement means the bank could not loan that money out. If it was in a time-deposit account, like a CD, it is possible that the bank would be able to loan that money out. However, Kraken isn't operating a bank with the purpose of making loans, so the 100% reserve requirements aren't a problem for them.

As for bitcoin deposits, it's unclear under the law if they would be allowed to loan that out since the law refers specifically to fiat. But my guess is it's a moot point because Kraken won't loan it even if they're allowed to because they don't want to be in the loan business. They want to operate a bank as a means to increase bridges between the crypto world and traditional banking.