Financial institutions in Minnesota can no longer afford to remain on the sidelines as Wall Street aggressively seizes digital asset infrastructure, driving a legislative push at the state level to stop deposit flight and insulate the local economy, a local lawmaker and a banker told CoinDesk.
“Over the past several years, I have consistently heard concerns about the increasing amount of deposit flight from local financial institutions to crypto exchanges and digital asset platforms,” said Rep. Bernadette “Bernie” Perryman (R-St. Augusta).
The lawmaker who authored the bill recently passed by Gov. Tim Walz that cleared the way for state banks and credit unions to provide crypto depository services explained that deposit flight has created significant challenges for Minnesota.
“When these dollars leave local institutions for crypto exchanges outside of our state, there are fewer opportunities 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 about staying competitive, said Megan Schwirtz, chief experience officer at St. Cloud Financial Credit Union, to CoinDesk.
“This is no longer simply a matter of ‘belief’ or consumer curiosity,” she said, “it is a matter 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.”
She also said community banks and credit unions cannot “afford to ignore that shift if they intend to remain relevant to future generations of consumers.”
And Schwirtz is not wrong. Wall Street giants are increasingly deepening their crypto exposure 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 trigger a sudden run on US bank deposits, they could steadily erode banks’ earnings as they gain traction. The firm estimated that privately issued digital dollar adoption could lead to an outflow of 3% to 5% in core deposits over five years, reducing average bank earnings by about 3%.
In fact, tokenization and stablecoins were the main topics at Consensus Miami this year, overshadowing all other crypto-related topics. “We are moving into a world where virtually the entire economy will be tokenized,” said Joseph Lubin, CEO and founder. Meanwhile, Circle SVP of Marketing Tim Queenan said institutions are increasingly exploring how to move core financial infrastructure onchain, adding that stablecoins are becoming so embedded in payments that many users no longer think of themselves as crypto users.
Big milestone
Minnesota recently became the first Midwestern state to adopt 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 Gov. Tim Walz last week and is scheduled to take full effect Aug. 1 after it passed with overwhelming bipartisan support in the Legislature earlier this month.
Ryan Smith, Chief Advocacy Officer at the Minnesota Credit Union Network, said that while the passage of the law is crucial, it is not the final word on crypto-custody regulation.
“Federal requirements for financial institutions offering these services must comply with a wide range of federal regulations, as cryptocurrency custodians must specifically implement anti-money laundering (AML) programs, file suspicious activity reports (SARs), and perform enhanced know-your-customer (KYC) due 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 specifically tailored for their custody operations.
While there is still more work to be done, state Rep. Steve Elkins (DFL) hailed the new law as an important milestone that marks a significant shift in how digital assets are managed.
“The 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 the bill HF 3709, told CoinDesk.
The new law coincided with a deregulation of all crypto ATMs and kiosks across the state. Walz separately signed a bill (SF 3868) implementing a statewide ATM ban effective August 1. One of America’s largest bitcoin ATM providers, Bitcoin Depot, filed for bankruptcy on Monday.
