Intersection of Fintech, Cryptocurrency, and Emerging Banking - Kraken Financial, Will it be Your Bank of the Future?

The long-standing U.S. exchange Kraken obtained a Special Purpose Depository Institution (SPDI) banking charter in Wyoming this year. An SPDI is a Special Purpose Depository Institution that allows Kraken's subsidiary, Kraken Financial, to become the first officially chartered crypto bank in the state. What sets it apart from traditional banks that people interact with on a daily basis?

Special Purpose Depository Institution

Custody Bank

According to Kraken's announcement, Kraken Financial, like some major U.S. banks, operates as a custody bank, allowing clients to securely store assets and transact safely in a compliant securities and commodities market. What sets Special Purpose Depository Institutions (SPDIs) apart is that they can hold digital assets such as cryptocurrencies.

100% Reserve Bank

David Kinitsky, CEO of Kraken Financial, mentioned in an interview with CoinDesk that unlike banks operating on a fractional reserve system, under Wyoming law, Kraken Financial cannot use client deposits for loans to generate profits. Instead, every fiat currency deposited by clients must be 100% reserved to ensure immediate repayment upon withdrawal.

State Chartered Banks

In the United States, state chartered banks differ from Federal Reserve Banks in that they do not set monetary policy but offer retail and commercial services regulated by the Federal Deposit Insurance Corporation (FDIC). Federal Reserve Banks, on the other hand, are overseen by the Office of the Comptroller of the Currency (OCC).

Despite FDIC insuring deposits up to $250,000, Kraken Financial's 100% reserve system eliminates the risk of a bank run. Coupled with regulatory oversight, it is considered a safer option.

Who Can Use Kraken Financial

Currently, the bank only serves U.S. residents and in its first year offers services such as digital asset custody, interest-bearing accounts, wire transfers, and financing. Future services will include a wider range of digital asset custody, staking, trust accounts, full online banking services, and debit cards.

How Does a 100% Reserve Bank Profit?

David Kinitsky explained that traditional banks operating on a fractional reserve system have a bailment relationship with client assets, allowing them to use the assets for short-term lending or collateral during the contract period. However, Kraken Financial cannot do so; assets cannot be utilized at will.

Regarding profitability, Kinitsky mentioned that clients of Kraken Financial may become users of Kraken's exchange platform, introducing the existing revenue model. Additionally, revenue sources include deposit fees and institutional custody fees.

Of particular interest is the aspect of cryptocurrency deposits and lending. When asked if they completely avoid lending, Kinitsky mentioned that clients can request to lend out their cryptocurrency deposits. This approach suggests that Kraken Financial aims to enter the DeFi lending platform business, potentially offering higher interest rates than traditional banks. Moreover, under Kraken Financial's centralized custody model, the operational costs of executing products similar to DeFi or CeFi are expected to be lower and more secure.

Are Taiwan's Online-Only Banks Competitive Enough?

In Taiwan, digital banks like Richart from Taishin Bank, Wangdao Bank, and online-only banks such as Next Bank, LINE Bank, and Rakuten International Bank are gaining traction. These digital banks, with features such as user-friendly apps, higher interest rates, and multiple free interbank withdrawals, have attracted many traditional bank users. The performance of online-only banks, which have yet to officially launch, remains to be seen under Taiwan's strict Financial Supervisory Commission oversight.

The licensing of SPDI banks in Wyoming, USA, is expected to pave the way for financial technology, cryptocurrency, and emerging banking. If Kraken Financial succeeds, the innovative future of "online-only" banks seems promising.