Kraken’s Crypto Bank Is “An Accident Waiting to Happen,” says Bank Policy Institute
The structure of Kraken Financial is “prone to the same types of run risks as medieval banks and so-called “shadow banks,” said a non-partisan advocacy group representing the nation’s leading banks, Bank Policy Institute.
BPI’s remarks have been related to Kraken getting approval to be a special-purpose depository institution (SPDI) charter by the Wyoming State Banking Board.
With this approval, cryptocurrency exchange Kraken will custody digital assets on behalf of its customers and hold their US dollar deposits as well through Kraken Financial. According to BPI, it is an “accident waiting to happen” because,
“Kraken will take uninsured, demandable, retail deposits and invest them in “liquid assets,” including longer-term instruments like U.S. Treasury securities and corporate debt.”
And this model is “inherently unstable under stress,” it said.
It then points out the issues, including Kraken defaulting in case the interest rate goes up and that with longer-term corporate bonds, the risk of capital loss can even be greater as it also involves corporate default.
Because Kraken is not an insured bank and is subject only to capital regulation by the state of Wyoming’s Division of Banking, it doesn’t follow the capital requirements set by the federal banking agencies that have been raised and strengthened since the Great Financial Crisis, wrote BPI. This means,
“There would be a run on Kraken Financial, similar to the March 2020 (and 2009) run on prime money market funds, which also backed deposit-like obligations with a pool of high-quality assets.”
Bank Policy Institute further argues that Kraken has a moral hazard of “unrelenting incentive to shift its reserves toward slightly riskier assets.”
The group now wants the Federal Reserve to give the risks of Kraken’s business model “serious and thoughtful consideration,” as the exchange is applying for a master account with the Fed.
Kraken co-founder and CEO Jesse Powell only has this much to say on this, “Somebody's scared. Degen gambler fractional banks: “Full reserve banks are dangerous!”