Why Minnesota is empowering local banks to fight Wall Street for crypto revenue

Minnesota financial institutions can no longer afford to remain on the sidelines as Wall Street aggressively captures digital asset infrastructure, driving a state-level legislative push to halt deposit flight and insulate the local economy, a local legislator and a banker told CoinDesk.

“Over the last several years, I’ve 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 enacted by Governor Tim Walz, paving the runway for state banks and credit unions to provide crypto custody service, explained that deposit flight has created significant challenges for Minnesota.

“When those dollars leave local institutions to crypto exchanges outside our state, there are fewer opportunities for those funds to be reinvested locally through small business lending, mortgages, and community development,” Perryman said.

From the state’s bankers’ perspective, the issue is also about remaining competitive, Meggan Schwirtz, chief experience officer at St. Cloud Financial Credit Union, told CoinDesk.

“This is no longer simply a question of ‘belief’ or consumer curiosity,” she said, “it’s a matter of commercial and competitive relevance for financial institutions.”

‘Aggressively positioning’

Schwirtz said 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 could not “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 Jefferies report found that although stablecoins are unlikely to spark a sudden run on U.S. bank deposits, they could steadily erode bank earnings as they gain traction. The firm estimated that privately-issued digital dollar adoption could drive a 3% to 5% runoff in core deposits over five years, cutting 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’re moving into a world where essentially the entire economy is going to 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 even think of themselves as crypto users.

Major milestone

Minnesota recently became the first Midwestern state 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 come into full force on Aug. 1, after passing with overwhelming bipartisan support in the legislature earlier this month.

Ryan Smith, chief Advocacy Officer at Minnesota Credit Union Network, said that while the passage of the law is vital, it is not the last word on crypto custody regulation.

“Federal requirements for financial institutions that offer 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 (SARs), and conduct enhanced know-your-customer (KYC) diligence.”

While digital assets remain entirely 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 to their custody operations.

While more work remains to be done, state Representative Steve Elkins (DFL) hailed the new law as a major milestone, marking a significant shift in how digital assets are managed.

“The community banks and credit unions wanted to be able to offer this service for their customers and members as part of a comprehensive array of financial services,” Elkins, one of the three authors of bill HF 3709, told CoinDesk.

The new law coincided with a regulatory clampdown on all crypto ATMs and kiosks across the state. Walz separately signed a bipartisan bill (SF 3868) implementing a statewide ban on the ATMs effective August 1. One of the U.S.’s largest bitcoin ATM providers, Bitcoin Depot, filed for bankruptcy on Monday.