Minnesota financial institutions can no longer afford to stand on the sidelines as Wall Street aggressively seizes digital asset infrastructure, leading to a legislative push at the state level to end deposit flight and insulate the local economy, a local lawmaker and banker told CoinDesk.
“Over the past several years, I have consistently heard concerns about the growing flight of deposits 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 paving the way for state banks and credit unions to provide crypto custody service, explained that deposit flight has created significant challenges for Minnesota.
“When these dollars leave local institutions to crypto exchanges outside of our state, there are fewer opportunities for these funds to be reinvested locally through small business loans, mortgages and community development,” Perryman said.
From the state’s bankers’ perspective, the issue is also staying competitive, Meggan Schwirtz, chief experience officer at St. Cloud Financial Credit Union, told CoinDesk.
“It’s no longer just a question of consumer ‘belief’ or curiosity,” she said, “it’s 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.”
She also said local banks and credit unions cannot “afford to ignore this change if they intend to remain relevant for 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 U.S. bank deposits, they could gradually erode banks’ profits as they gain traction. The company estimates that adoption of the privately issued digital dollar could lead to a 3% to 5% decline in 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 crypto-related topics. “We are entering a world where virtually the entire economy will be tokenized,” said Joseph Lubin, CEO and founder. Meanwhile, Tim Queenan, Circle’s vice president of marketing, 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 crypto users.
Major milestone
Minnesota recently became the first Midwestern state to adopt an explicit, unified legislative framework allowing state-licensed commercial banks and credit unions to offer cryptocurrency custody services.
The new law was signed by Gov. Tim Walz last week and is set to take effect Aug. 1, after passing with overwhelming bipartisan support in the legislature earlier this month.
Ryan Smith, director of advocacy for the Minnesota Credit Union Network, said that while passage of the law is vital, it is not the final word on crypto custody regulation.
“Federal requirements for financial institutions that offer these services will need to comply with a wide variety of federal regulations, as cryptocurrency custodians must specifically implement anti-money laundering (AML) programs, file suspicious activity reports (SARs), and conduct increased 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 entered into a strategic underwriting partnership with an insurance solution backed by Lloyd’s of London, specifically tailored to its custody operations.
While there is still work to be done, State Rep. Steve Elkins (DFL) hailed the new law as a major step, marking a significant shift in how 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 full suite of financial services,” Elkins, one of three authors of HF 3709, told CoinDesk.
The new law coincided with a regulatory crackdown on all crypto ATMs and kiosks in the state. Walz separately signed a bipartisan bill (SF 3868) implementing a statewide ban on ATMs starting August 1. One of the largest Bitcoin ATM providers in the United States, Bitcoin Depot, filed for bankruptcy on Monday.
