Custodia Bank's CEO Says Bad Actors and Regulators Caused Crypto Crash

Caitlin Long said the use of leverage spelled trouble for the industry.

AccessTimeIconJul 1, 2022 at 6:44 p.m. UTC
Updated Jul 1, 2022 at 6:51 p.m. UTC
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Fran is a TV writer and reporter at CoinDesk. He owns no crypto holdings.

The crypto crash was foreseeable, Custodia Bank CEO Caitlin Long said on CoinDesk TV’s “All About Bitcoin.”

The signs of leveraging bitcoin and cryptocurrencies have been around since 2018, Long said Thursday, and while she wishes the lesson of leveraging digital assets had been heeded, regulators are still to blame for not cracking down on bad actors sooner and for not approving good companies and products in the industry.

“They [regulators] haven’t been greenlighting the good players as they needed to be,” Long said. “And also, they haven’t been prosecuting the bad guys as they needed to be.”

Long said that Grayscale Bitcoin Trust (GBTC), one of the few Securities and Exchange Commission (SEC)-approved funds for investors to gain exposure to bitcoin via their brokerage accounts without the need to buy, store or safeguard their BTC, ultimately “brought in a whole bunch of hedge fund money and wreaked havoc on the industry and really destroyed value.” Greyscale is owned by Digital Currency Group, which also owns CoinDesk.

In that situation, because of an imbalance between supply and demand, GBTC’s price traded far above bitcoin’s (BTC) market price, acting like a hedge fund that brought in significant amounts of leverage, Long said. Retail investors bought in, but only until the SEC approved competing products. Once competition creeped in, closed-in funds like GBTC reversed course and began to trade at a discount to their net asset value.

On Friday, Grayscale filed a lawsuit against the SEC after the agency rejected Grayscale’s application to convert GBTC into an exchange-traded fund.

“My gut tells me that there are some folks at the SEC who wish that had never happened because it took them over six years to greenlight another product to compete,” Long said. “Therefore that premium sat out there and a lot of mom-and-pop investors got hurt by the whipsaw, as did the whole industry.”

While Long cannot pinpoint exactly what the SEC’s next move will be, she noted distortions in the market are caused by regulatory decisions. She cited cryptocurrency market maker and lending firm Genesis Global Trading, as it faces nine-figure losses because of its exposure to crypto hedge fund Three Arrows Capital, which now faces collapse. (Genesis is owned by Digital Currency Group.)

And while questions remain surrounding companies that are still leveraging bitcoin, Long said that it could be good for the industry to “say good riddance to all of it.”

“I’d rather see it all go away,” she said, and instead, “rebuild it [the industry] based upon a non-leveraged business model.”

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Fran is a TV writer and reporter at CoinDesk. He owns no crypto holdings.

CoinDesk - Unknown

Fran is a TV writer and reporter at CoinDesk. He owns no crypto holdings.