Feb 21, 2023

In the wake of prominent crypto companies filing for bankruptcy last year, Custodia Bank founder and CEO Caitlin Long discusses the state of the U.S. crypto regulation and the outlook for regulatory clarity.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. Our first guest saying Washington has a misguided crackdown on crypto and will only push risks into the shadows. Joining us now is custodian bank founder and Ceo Caitlin Long Kaitlin. Great to have you on the show. I saw this tweet thread before we entered the long weekend and you claim that you quote, handed over evidence to a lot of enforcement of probable crimes committed by a big crypto fraud starting months before that company imploded and stuck its millions of customers with losses. Very uh interesting uh tweet thread you had there. But I am curious, can you tell us what the company is because it could be any number? It could be Celsius Voyager FTX. No, not, not uh not sharing more than I shared. I have respect for law enforcement and the ongoing investigation, right? So you say that you warned regulators about the A bank run tied, uh bank run risks tied to crypto. Uh What was the result of that? Or, or you know, if any feedback or discussion you had with regulators? Well, uh well, who knows, it seems to have gone into a black hole. I did say that uh potentially it was just stuck in the bowels of the bureaucracy. Uh, but I have tried and, and the custodian staff across the board has tried very hard for the last 2.5 years to educate bank regulators on the risks and the upside in these technologies. And um there was a fairly obvious risk in the large banks that were serving the digital asset industry. They were taking the same traditional fractional reserve banking, borrow short and lend long type of approach and take some credit risk in the investment portfolio. And when the bank run happens and the demand deposits are all withdrawn in within the span of minutes. And they, they have to sell some of those fixed income securities at a loss because interest rates have gone up up since they purchased them. Uh And we did indeed see Silver Gate write down 750 million odd of, of losses in the in the fixed income securities that they had to sell in order to meet the demands of the bank run. These were things that were foreseeable and uh indeed, uh uh multiple bank regulators have uh have been noticing that. So Caitlin, you uh you know, your custodian bank tried to get a uh a master account over with the Fed and, and you know, I was just thinking when, when Christine asked the question uh, which, which company was it that had this massive fraud and lost millions of, of, uh, money for millions of people and, and the fact that we couldn't guess because there were so many companies that were doing that, I mean, isn't it sort of, isn't it? I mean, but doesn't that almost make the, the, the case that the fed might have? Like, hey, this, this is kind of a little too much for us to handle. Why don't we just not have it deal with it? And uh if people in the United States want to go offshore and, and, and lose their money, at least we don't get blamed for it. Well, there definitely is a, a lot of bureaucratic um maneuvering among the agencies right now trying to pass off blame for things that should have been foreseen. And indeed, I now know there are others who were warning as well. Uh And so the fact that they didn't take advanced action is interesting in and of itself. But, um, but, but you, you just articulated the anti view in Washington and we know that that anti crypto view came from the White House and the Fed coordinating in the case of custodian bank, I have no idea how the White House even knew what we were. We were not, we were not at the table at the president's working group discussions tried to be, but we're always rebuffed. And so the, the, the point though is if the, if that anti crypto faction thinks that crypto is going to go away or is not going to find its way back into the traditional US banking system, they're gonna be playing whack a mole for years down the road. And we now have the ability, we collectively, the humankind has the ability to create us dollars by just downloading code and use those US dollars. 8 billion people have that ability today. How fast they will, they will do. That is an open question. But to the extent that they do, it's really a question of when not if and then the bank regulators will lose control. Who in the White House was uh uh trying to say, oh boy Washington DC is a sieve and uh you know, it looked at the time on February 20 or January 27th where uh the White House released a policy statement anti crypto. The fed released an anti crypto guidance. The fed announced custodian's denial of the membership application all at the same time. And then a couple of hours later, the Kansas City fed uh denied the custodian master account and then the majority whip of the US Senate Dick Durbin came in, came over the top. A couple of days later to criticize custodian and fidelity. Um mixing us up with Sam Bank freed. I wonder if he understood he was criticizing two female run CEO S and comparing us to a 29 year old hipster, uh who's wearing. Uh, I don't think he knows where. Yeah. There you go. We do with Washington's a, we, we have had so many. It's so interesting because people on both sides of the aisle. Again, this is not political and I reject the attempt by the White House to politicize this. But II, I will say there are anti crypto and pro crypto factions within the White House just like there were within the Trump White House. And that's why we know what happened. Uh And it's, it's just a stunning story light needs to be shown on this. How that happens. Whether it's through the press, whether it's through the judicial process, we shall see, oh, they will come out, trust me, they will, this will all come out. And, and really, it does raise interesting questions about the independence of both the Federal Reserve from the White House itself and then the Kansas City Reserve Bank from the Federal Reserve Board as well. Uh Kale, you bring up a really interesting point um about how this will push crypto into the shadows. And I think that's a really important point because there's been a lot of people talking about how this will push crypto offshore. But as you just said, crypto is not going to go in, it's not going to leave the United States completely either, right? I mean, the United States like has a due to the capital markets, investors, customers it's still gonna be here in some form. Could you break down a little bit what you mean by pushing it into the shadows? Like what, what does that actually look like? Well, the, the concept here really that the push and pull is, should it be inside the regulatory perimeter where we have regulated versions of it or does the entire thing need to be done outside of the regulate, regulated financial system? So we sever all connectivity whatsoever. We don't know the answer. It's clear there's been a coordinated effort among multiple agencies, not just what happened to custodian on the 27th of January, just the tip of the spear. The, the fed clearly was in a rush to get some things done because they cut corners on procedural protections that we were afforded and, uh, but they wanted to get it out before the SEC took its action, which it did with the wells notices to the exchanges the week after. And then of course, the IRS did its thing and then the OCC did its thing and then the SEC came back last week with the custody rule revisions. This is all very coordinated. Um And so multiple agencies have been, have been working together. Now we again, we don't know just how far this is going yet. But, uh, but, but it's clear they're trying to sever the connectivity to the traditional banking system. And so what that means is that ultimately think about the tether model, right? Tether has done, they say they've, they, they've not done business in the United States but yet they're getting us dollar clearing from somewhere. Right. It's happening in the NON US bank, it's happening in offshore banks. It's the so-called euro dollar market dollars that circulate offshore outside of the United States, outside of frankly, the reach of us bank regulators. And this, there, there are, there will be people from the crypto industry who get us dollar access and that's and through offshore banks and that's where the whack a mole is going to continue to be played. This is not going away and these risks that the regulators didn't fully understand of just how connected and how deeply into the traditional financial system, the scammers themselves got. Holy cow. Look at what happened with Moonstone Bank, right? Um That, that, that, that the, the scammers were able to pull the wool over the heads of, of the innocent community bankers who didn't know what they were dealing with. Um And then the regulators are left to clean up the mess and that's going to keep happening through the offshore banks. If this whole thing goes offshore, Alameda knows where it is and they know where they know where those us non us banks are. They just wouldn't say it. Well, I also wanna talk, sorry, go ahead, go Caitlin. I also want to touch on something you mentioned earlier. Um And, and in your post because it's really interesting. So what we have sort of two problems here and a lot of projects are saying this and companies are saying this, that one is that there's not a clear road to like register with the SEC or to, you know, go in and actually do things like through the front door. But then there's like the second element which you talk about, which you said, you know, Custodio actually got disparaged. And so not only is it hard to actually go in and um register the correct way, you can also get punished for these good intentions. So, could you just break down exactly a little bit more? What happened there? Like what, what do you mean you were disparaged or, or, or, you know, how did you feel you were actually punished for trying to do things correctly? Oh, my gosh. Look at the, the, the power of the agencies that came down on custodian bank in one single day, the White House, the Federal Reserve Board of Governors, the Kansas City Federal Reserve and then the majority whip of the US Senate uh that speaks for itself. Uh, it, it, it doesn't even need to, uh, doesn't even need to have analysis done. Um And, and uh the disparagement that the, the, it started with the press release at the Federal Reserve of Governors released uh about the safety and soundness issues of a bank that is holding 100% cash not just 100% cash uh to back customer dollar deposits, but we also proposed at custodian to have 100% of our shareholders equity on top of the deposits held in cash. So just 100% liquidity to be able to handle a sudden withdrawal of all of the deposits at this the same time. And, and, and calling that an unsafe and unsound business model, I think it, it stands for itself. There will be more that comes out. Uh And um it's going to be fun to watch the crypto industries uh reaction when, when more comes out. But that those words were absolutely chosen carefully. The the the custodian bank has been disparaged by powerful regulators and politicians and we did nothing wrong. So just to be clear, you think they were disparaged but you think you were disparaged because you went in and tried to talk to them and that that's what kind of like drew the attention to you. Good question that will come out again. Uh Light needs to be shown on all this. Why the politicians got involved with a company that wasn't even operating yet? Why were, why was custodian bank chosen as the sacrificial lamb, the so-called uh shooting the stallion to scatt scatter the herd and boy, there will be a lot that will come out when, when the story comes out how it all finally comes out, I'm going to leave to the process. Uh But, uh, again, Washington DC is A s we've been contacted by a number of folks on both sides of the aisle who know what happened here and who understand that what happened to custodian bank was pro possibly, well, certainly unethical, certainly political, certainly not. It not comporting with the due process rights that are afforded to a lawful applicant who was complying with all of the requirements under the statute. There are a lot, a lot of things happening in Washington DC right now, uh that are going well beyond the statutory authority of multiple agencies. And, uh, and I've heard lots of scuttle butt from folks in Washington about the agencies just deciding to throw caution to the wind and let the crypto industry fight this out in, in the courts and let's just see how, how this all plays out. Uh But, but what I've heard about what happened to custodian when the story finally does come out is pretty explosive. So, uh II I that said, I mean, how do you see it playing out for custodian? You, you, you have uh regulators, you have the fed, you have the White House, everybody kind of, you know, it sounds like AAA and Dick Durbin uh going up against you and uh that's not gonna matter much with him. But um, what do you think actually happens at the end? Like, like how do you, does, does, do you, where do you go? I mean, like do you just sit there and, and, you know, wait for a few years for, for administrations to change and, uh, people to lose their jobs in the Senate or do you, uh, you know, do you see it playing out in court? What happens? Well, I, I do think cooler heads will prevail for the reasons. Emily was asking earlier. They, there is, this is not going away and the pro crypto, uh, pro crypto wing of the Biden administration is I think going to have a resurgency and are going to understand that they do need the rational players at the table. Uh You had, you know, Z and Powell meeting with the crypto those who were trying to pull the wool over their heads clearly and including Sam Bakeman freed and uh and, and the slight slate needs to be wiped clean and folks who, who have a real understanding of how to separate the wheat from the chaff in this industry and who have not been at the table with the decision makers such as Custodio Bank. We have not had any audience with any decision makers here. And so it's an interesting question. Why, why were, why were the good guys kept to the side? And uh and those, those few who came through 2022 having fully predicted what was happening, having uh tried to warn regulators having turned over evidence to law enforcement, the were the ones who, who are proverbially the messenger being shot. That that is, that's not rational. This was a short term political decision made by the, the White House and the Fed and uh and, and that pendulum is going to swing and we're being very patient and still offering to roll up sleeves and help. So on the uh evidence uh that you submitted to regulators on the alleged conspiracy that Custodio outlined in its filing. What, what kind of evidence were you able to offer? Oh, boy, that again, Christine that will come out that is in a, a legal filing. I obviously can't speak to the legal filing. Uh but there are standards required for making allegations and legal filings. And I think you can assume that custodian has receipts and just to follow up. Um why do you think that some of the crypto bros and you mentioned Sat Baby Fried were able to get the red carpet treatment at the White House uh in Congress, et cetera and you were, you know, given substantial barriers to that. Oh boy, isn't that an interesting question to probe? And I certainly hope that uh the journalists out there do go and uh dig because it is, it is a really interesting question. And uh III I have speculation. Uh but I, I'm not going to share it because to be honest, we don't know, we, we don't know the answer and, and, and again, II, I think light is going to be shown in some pretty dark corners about what happened in all of this. There are a lot of folks who are embarrassed about the extent to which a pretty clear, you know, alleged fraudster got time with the real decision makers in Washington DC and the overreaction that they're having, they, they're drawing the exact wrong conclusions from having spent time with Sam Bagman Fried and, uh, you know, I'll share something I've never shared before. Sure, campaign donations and I don't get involved with that to keep this a political, who knows who I mean, who knows? It's probably multifaceted. Uh But also something I've never shared before. I was invited to the Stanford Law Blockchain Policy Conference and I turned it down when I found out that Sam Bakeman freed was the sponsor of it. Uh Because I knew that, that uh I mean, you saw that the, the debate that I had on him on stage with him at Bitcoin 2022. Uh I wanted to stay arm's length and I also knew some things about what was happening in Washington DC FTX was trying to create a self regulatory organization with itself at the helm. And it's so interesting how far they got on Capitol Hill. Um And they were, I, I've, I've, I've, I've um analogized him to Bugsy Siegel in the past. 00, you know, the Vegas mobster who was trying to buy legitimate businesses and buy off politicians so that he could become legitimate. Um And it, it didn't quite work, but boy, look how far he got into, uh, into potential, making it. So I wasn't dating Virginia Hillel, but that's a different, effective altruism, not so effective sometimes. All right. But we should note that yesterday, Coindesk did reach out to the Doj secocc regarding Caitlin's blog post and the Federal Reserve for comment about custodian's application but have not heard back no less Caitlin. Thank you so much for joining us. It's in a continuing unraveling story that we want to get to the bottom two and we'll see you at consensus in Austin where you'll be speaking this year. I was custodian bank founder and Ceo Caitlyn Long.

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