By authorizing the issuance of a stable token, “Blockchain Valley” leads the way in state digital asset adoption and integration.
By Jenny Cieplak, Arthur S. Long, Yvette Valdez, Stephen P. Wink, Adam Zuckerman, and Deric Behar
For the last few years, Wyoming has been a leader among US states at the intersection of digital asset innovation, adoption, and regulation. In July 2021, Wyoming became the first state in the nation to allow decentralized autonomous organizations (DAOs) to obtain legal company status by registering in Wyoming as limited liability companies (LLCs) (for more information, see this Latham blog post).
More recently, on March 17, 2023, Wyoming became the first state to enact a bill allowing it to create its own stablecoin. After vetoing the original version of the bill in March 2022, Governor Mark Gordon allowed the updated version SF0127 – Wyoming Stable Token Act (the Act) to go into law, albeit without his signature.
Summary of the Act
The stable token and the corresponding trust account that backs the stable token established by the Act will function as follows:
- An individual stable token is a virtual currency representation of US $1.
- A token shall be redeemable upon demand for US $1 (except in the event that the US short-term Treasury rate falls below zero, or the value of the assets held in the trust account falls below US $1 per stable token outstanding).
- The notional value of all outstanding tokens will be held 100% in the newly-established Wyoming stable token trust account (although the trust does not create any fiduciary duty between the state and token holders).
- Funds held in the trust will be invested only in low-risk short-term US Treasuries.
- Any investment earnings generated above 102% of outstanding token value will be deposited into a separate Wyoming stable token administration account, to cover operational costs and fund other state endeavors.
- The Act establishes a Wyoming Stable Token Commission with the ability to issue and oversee the program.
The Act provides that the Commission “shall endeavor to issue at least one Wyoming stable token not later than December 31, 2023.” Startup costs of US $500,000 will be provided by the Wyoming state treasury for issuing and administering the tokens, although such funds are expected to be repaid, presumably from anticipated interest income.
Governor Gordon sent an open letter to the secretary of state lauding the Act as a significant contribution to Wyoming’s financial ecosystem, and furthering Wyoming’s leadership position in the digital asset world. He did, however, raise some concerns about the thoroughness and feasibility of the plan. He noted that running simply on a “poorly thought through build-it-and-they-will-come scheme” — is a perilous path forward, especially considering recent stablecoin and digital asset market failures. He was also concerned that startup costs may exceed the initial US $500,000 allowance, and that details are lacking on the size, qualifications, and cost of the required support staff.
Finally, he reiterated an objection raised in his veto of the Bill in March 2022, that the stable token may face state constitutional challenges (namely, when Wyoming taxpayers fund and administer a token project, and tokens may be traded beyond state boundaries by non-citizens, it may run afoul of the state constitution’s prohibition on the state funding any individual, association, or corporation, except for necessary support of the poor).
Nevertheless, he was comfortable that the Act made sufficient progress from the previously vetoed bill to become law this time around, and was hopeful that a successful project would contribute to “vital progress” as well as “significant revenue” for the state.
The short bill leaves many questions unanswered regarding issuance of the tokens, administration of the program, and its legal feasibility. Some of these include:
- What degree of permissioning, oversight, and surveillance will the state of Wyoming or the federal government have with respect to the stable token and its holders? (an oft-cited concern for the crypto community with respect to central bank digital currencies, or CBDCs)
- How will Wyoming foster adoption of the stable token? (bearing in mind that most stablecoin issuers actively seek partnerships and markets to improve adoption)
- Will the tokens be issued on a blockchain, and if so, which blockchain?
- Who will have the ability to mint and redeem the Wyoming stable tokens?
- Will Wyoming allow or promote adoption of the token outside of the state of Wyoming?
- Will Wyoming be required to obtain money transmission licenses?
- Will the issuance of a state “currency” cause concern at the federal level? And if so, will the federal government be able to halt the program if it attempts to?
In addition, the Act does not address the recent actions brought by the Securities and Exchange Commission (SEC) against other stablecoin projects. Although the SEC has not clearly articulated why it believes certain stablecoins are securities, given the similarities between the project proposed by the Wyoming Act and other stablecoins, the SEC could view any stablecoin issued by Wyoming as a security.
Further, other federal agencies may not approve of a state-issued stablecoin — given the Federal Reserve’s work on a US central bank digital currency, any state that proposes to issue its own stablecoin may face pressure and potential challenges to that authority under federal law, including the constitutional prohibition on states issuing their own money. A state-issued stablecoin is somewhat reminiscent of the issuance of currencies by various states prior to the enactment of the US Constitution, in a period marked by economic fragmentation among the original states.
Finally, a Wyoming stablecoin would face competition from other stablecoin issuers and could expose the state government to litigation if it is viewed that the state is favoring its own stablecoin over others.
Despite the Act’s lack of details and noted shortcomings, Wyoming has assumed the risk and potential reward of being the first mover among 50 states to issue its own stablecoin. Whether or not market participants flock to the state-issued token, or keep away, remains to be seen, but the initiative may prove a milestone in the still fledgling digital asset sector. The other 49 US states and the federal government will certainly be paying attention.
Latham & Watkins will continue to monitor state digital asset developments.
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