Minnesota financial institutions can no longer afford to sit on the sidelines as Wall Street aggressively seizes digital asset infrastructure, prompting a state-level legislative push to stem the flight of deposits and isolate the local economy, a local lawmaker and banker told CoinDesk.
“Over the past few years, I have consistently heard concerns about the increasing amount of deposits leaking from local financial institutions to cryptocurrency exchanges and digital asset platforms,” said Rep. Bernadette “Bernie” Perryman (R-St. Augusta).
The lawmaker, author of the bill recently signed into law by Governor Tim Walz, which paves the way for state banks and credit unions to provide cryptocurrency custody services, explained that the leak of deposits has created significant challenges for Minnesota.
“When those dollars leave local institutions to cryptocurrency exchanges outside of our state, there is less opportunity for those funds to be reinvested locally through small business loans, mortgages and community development,” Perryman said.
From the perspective of the state’s bankers, the issue is also remaining competitive, Meggan Schwirtz, chief experience officer at St. Cloud Financial Credit Union, told CoinDesk.
“This is no longer simply a question of consumer ‘belief’ or curiosity,” he said, “it is a question of commercial and competitive relevance for financial institutions.”
‘Aggressive positioning’
Schwirtz said that “the reality is that large financial institutions and Wall Street firms are aggressively positioning themselves around digital asset infrastructure because they recognize the long-term implications for payments, settlement, custody and the future movement of value.”
He also said local banks and credit unions cannot “afford to ignore that change if they intend to remain relevant to future generations of consumers.”
And Schwirtz is not wrong. Wall Street giants are increasingly deepening their exposure to cryptocurrencies through stablecoins and tokenization to stay ahead of the competition in the race to adopt blockchain technology.
A recent report from Jefferies found that while stablecoins are unlikely to cause a sudden run on US bank deposits, they could steadily erode bank profits as they gain traction. The firm estimated that adoption of the privately issued digital dollar could lead to a 3% to 5% drain on core deposits over five years, reducing average bank profits by about 3%.
In fact, tokenization and stablecoins were the top topics at Consensus Miami this year, overshadowing all other cryptocurrency-related topics. “We are moving toward a world where essentially the entire economy will be tokenized,” said Joseph Lubin, CEO and founder. Meanwhile, Circle senior vice president of marketing Tim Queenan said institutions are increasingly exploring how to move core financial infrastructure on-chain, adding that stablecoins are becoming so integrated into payments that many users no longer even consider themselves cryptocurrency users.
Important milestone
Minnesota recently became the first state in the Midwest to pass an explicit, unified legislative framework authorizing both state-chartered commercial banks and credit unions to offer cryptocurrency custody services.
The new law was signed by Governor Tim Walz last week and is scheduled to take effect on August 1, after passing with overwhelming bipartisan support in the legislature earlier this month.
Ryan Smith, director of advocacy at Minnesota Credit Union Network, said that while passage of the law is vital, it is not the final word on cryptocurrency custody regulation.
“Federal requirements for financial institutions offering these services will have to comply with a wide variety of federal regulations, as cryptocurrency custodians must specifically implement anti-money laundering (AML) programs, file suspicious activity reports (SAR), and conduct enhanced know-your-customer (KYC) diligence.”
While digital assets remain completely excluded from federal FDIC or NCUA insurance, local institutions are developing private compliance alternatives. Schwirtz confirmed that St. Cloud Financial Credit Union has proactively secured a strategic underwriting partnership with a Lloyd’s of London-backed insurance solution designed specifically for its custody operations.
While there is still work to be done, State Representative Steve Elkins (DFL) praised the new law as an important milestone, marking a significant change in the way digital assets are managed.
“Community banks and credit unions wanted to be able to offer this service to their customers and members as part of a comprehensive range of financial services,” Elkins, one of the three authors of HF 3709, told CoinDesk.
The new law coincided with a regulatory crackdown on all ATMs and crypto kiosks across the state. Walz separately signed a bipartisan bill (SF 3868) implementing a statewide ban on ATMs starting August 1. One of the largest US bitcoin ATM providers, Bitcoin Depot, filed for bankruptcy on Monday.
