Financial institutions in the state of Nebraska (United States) have been permitted to legally and lawfully offer digital asset depository services to individuals and legal entities operating lawful business. In this regard, the Governor of Nebraska approved the text of Legislative Bill 649, the Nebraska Financial Innovation Act (“LB 649”) on May 25, 2021, which will regulate such digital asset depository institutions and digital asset depository department of a financial institution. Digital asset depository services may be provided by either (a) an entity formed by 5 (five) or more adult persons, where at least 1 person should be a resident of Nebraska (digital asset depository institution), or (b) a bank holding company authorized by the Director of the Nebraska Department of Banking and Finance (digital asset depository department). Digital asset depository institutions and digital asset depository department are collectively referred to as digital asset depositories.
Section 5 of the LB 649 prescribes that the main office/ primary office of the chief executive officer of the digital asset depositories be maintained in Nebraska. Services may be provided to customers outside the state.
As per section 24 of the LB 649, the activities of a digital asset depository are limited to:
a. providing custody services for digital assets;
b. issuing stablecoins and holding deposits at financial institutions which are insured by the Federal Deposit Insurance Corporation; and
c. using an independent network of nodes for verification and stablecoins for payments.
Digital asset depositories are not permitted to (a) accept demand deposits in fiat currencies which can later be withdrawn by a cheque or any means of payment to third parties, or (b) engage in lending activities in fiat currency. However, digital assets depositories may facilitate the provision of services arising from the interaction between customers and centralized or decentralized finance platforms.
Section 9 of the LB 649 provides that digital asset depositories are required to maintain unencumbered liquid assets in United States Dollar for the entire value or 100% (one hundred per cent) of the value of the digital assets in its custody. Therefore, such depositories shall not be able to engage in lending activities of digital assets in the custody of financial institutions.
Further, it has been emphasized that it should be brought to the customers’ notice that the digital assets accounts are not insured by the Federal Deposit Insurance Corporations or guaranteed by digital asset depositories.
The Director of the Nebraska Department of Banking and Finance has been given powers under the LB 649 including: (a) to revoke the charter or authority of an entity to operate as a digital asset depository on several grounds including misrepresentation, and (b) to initiate liquidation proceedings or appoint a receiver in cases where the digital asset depositories are operating in unsafe and unsound condition or are endangering customers’ interests and it has not been remedied within the prescribed time.
BlockSuits Comments
The objective of the LB 649 has been clearly specified and it includes that the state wants to create an entrepreneurial ecosystem to attract young talent. It further specifies, within its objective, that the advent of digital assets and blockchain has complicated the financial system and that the innovators are willing to comply with know your customer (KYC) or anti-money laundering regulations or beneficial ownership regulation. With this confidence, the state of Nebraska has become the second state after Wyoming to regulate banks holding cryptocurrencies in custody. The LB 649 not only allows for a new corporation to provide services but also provides for existing banks to apply for a charter for providing digital asset-centric services. The enthusiasm of states is commendable as they become forerunners and envisage an economic opportunity at a developing stage. Wyoming already has 2 (two) financial institutions which have established charter as a digital asset depository, i.e. Avanti Financial and Kraken Financial.
Authored by Shivani Agarwal, Founder, and Samaksh Khanna, Co-founder.
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