Caitlin Long, the Founder and CEO of Custodia Bank, who advocates for cryptocurrency as a burgeoning asset class at both state and federal regulatory levels, notes that Custodia Bank, a non-loan-making institution, has been encountering regulatory challenges for a while.
At Zenger News’s Future of Digital Assets event on Tuesday, Matthew Sigel from VanEck inquired about the role of a crypto-native bank like Custodia Bank. He asked whether its function was solely to hold assets and lend dollars to the U.S. government through T-bills, or if it would become a loan-making institution. Long affirmed that Custodia Bank operates as a non-loan-making institution.
U.S. Digital Asset Regulation: Long further elaborated that in the U.S., regulatory matters are increasingly being contested in courts, pointing out that this issue extends beyond just cryptocurrency. She emphasized that it also involves states’ rights. According to her, the Federal Reserve has established specific guidelines that seem to undermine state authority, leading to several banks, not just those related to crypto, experiencing denial or delays in obtaining master accounts.
She pointed out that the Federal Reserve has shown discrimination against six U.S. states, evenly split between three red and three blue states, whose banks were unable to obtain FDIC insurance yet still became operational banks. In contrast, she noted that institutions lacking FDIC insurance, or any federal insurance, and without a federal regulator, are among the 442 entities that possess a master account with the Federal Reserve.
U.K.’s Stablecoins Regulation An Example For Fed: Long said that in the last week, the U.K. announced that all stable coin issuers must be banks that hold their reserves at the central bank and cannot lend them.
“So while the Fed deemed that business model in January to be unsafe and unsound, which I find rather ironic. The central bankers in the U.K. said that’s what you actually have to do, and actually from a risk perspective, is the only thing that makes sense.”
She believes that what the Bank of England has done is the safest way of protecting customer deposits, as it requires banks to hold cash balances with the central government and not in T-bills or short-term government securities.
“T-bills settle trade date plus one day, so there’s a one-day liquidity gap whereas the Fed has capabilities to do real-time master account monitoring and to prevent an overdraft in a master account,” Long said.
New Product Launch: The Custodia Bank CEO said that its new custom-built Bitcoin (CRYPTO: BTC) custody product launched in October offers something different, which is not an omnibus account, it’s a segregated account. This helps in demarcating between customer assets in a custodian that is a bank, compared to those in a Trust Company, which can be a debtor in bankruptcy.
Premonition About Silvergate and Signature: Long said that she privately warned bank regulators a year ago that Silvergate and Signature were going to have a bank run, and it was obvious because it was the “potential failure of a protocol that could trigger a run on the stablecoin reserve.”
“When you think about transactions that settle as fast as they do with digital assets, it’s really tough to do a traditional lending maturity transformation banking business when payments can settle that fast.”
Produced in association with Benzinga
