On March 15, 2024, the state of Wyoming enacted a first-of-its-kind cryptocurrency bankruptcy law (SF0096) that will protect cryptocurrency and fiat customers subject to “covered accounts” who provide their assets to Wyoming trust companies and special purpose depository institutions. Staking, staking as a service, sub-custodians and third-party platform trading are also bankruptcy-protected under certain circumstances. The legislation will take effect on July 1, 2024. Wyoming anticipates other states will follow suit.
In a series of large-scale cryptocurrency bankruptcy cases in recent years, customers have found out too late that their assets were not protected. In response, a working group was formed in connection with the state legislature’s Select Committee on Blockchain, Financial Technology and Digital Innovation, the Wyoming trust industry and the Wyoming Division of Banking to draft new legislation to protect cryptocurrency and fiat customers in the event of bankruptcy. The working group was led by Wyoming Banking Commissioner Jeremiah Bishop; Joel Revill, a member of the Blockchain Select Committee and CEO of Two Ocean Trust; Wyoming legal expert Chris Land; and Joseph (Joe) B. Evans, the head of McDermott’s crypto group, along with McDermott lawyers, including partner Darren Azman.
“This legislation provides much-needed clarity and legal certainty, which will help protect digital asset customers and the financial industry working in that space,” said Commissioner Bishop.
The new bill makes it clear that cryptocurrency or fiat currencies provided to a Wyoming financial institution in a “covered account” are not “deemed assets or liabilities of the financial institution” in the event of a receivership, conservatorship or federal bankruptcy filing. To be a “covered account,” there must be a “written agreement” to make it clear that none of the cryptocurrency or fiat provided by customers is commingled with assets of the financial institution. Importantly, the bill specifies the language financial institutions must have in their customer agreements to qualify as “covered accounts.”
From the industry perspective, Revill said, “This key piece of legislation provides much-needed legal protection for digital assets customers and builds on Wyoming’s position as the preeminent jurisdiction in which to manage your digital assets.”
“After representing creditors and debtors in many crypto bankruptcy cases, McDermott is honored to have been selected to draft the legislation necessary to protect crypto customers and give clarity to financial institutions serving this industry,” said Evans. “Without precedent from any other states, we had to get creative and leverage our real-world experiences in how these crypto cases actually shake out for creditors, while also trying to make it user-friendly for financial institutions that desire to protect their crypto customers in the unlikely event of bankruptcy. This bill recognizes and protects business practices that are occurring in the crypto industry, which is why, under certain circumstances, we bankruptcy-protected stablecoin reserves, sub-custodians, trading on third-party platforms, staking and staking as a service.”
Wyoming tapped the McDermott team, led by Evans and Robert Kaylor, in consultation with Darren Azman, Gregg Steinman, Elise McGee and James Cundiff, to assist in drafting this first-of-its-kind legislation.
The McDermott crypto and bankruptcy teams have represented creditors’ committees and debtors in connection with most of the cryptocurrency bankruptcy cases to date, including Cred, Voyager, Prime Trust, Genesis and Terraform Labs. The Firm’s crypto and private client teams specialize in cryptocurrency custody issues and have represented most of the cryptocurrency-centric trust companies in Wyoming and across the United States.
The cryptocurrency bankruptcy bill is titled “Trusts and bank assets in bankruptcy-clarification” and is sponsored by Senator Chris Rothfuss. The initial draft was introduced on February 13, 2024. After a series of edits and testimonies, the bill received unanimous consent and was signed into law by Wyoming Governor Mark Gordon on March 15.
