Caitlin Long on Banking Backdrop, Stifled Regulation to Serve Crypto
Speaking to Cointelegraph during Virtual Blockchain Week, Caitlin Long predicted an oncoming wave of institutional investment.
During Virtual Blockchain Week, Cointelegraph spoke with Caitlin Long — the founder and CEO of the upcoming “crypto bank” Avanti Bank & Trust as well as the driving force behind regulatory changes in the state of Wyoming for allowing financial institutions to handle both crypto assets and fiat currencies.
A Wall Street veteran, Caitlin Long ran Morgan Stanley’s pension solutions for a decade after holding a number of senior roles at Credit Suisse prior to transitioning to focus on the blockchain and crypto sector.
Caitlin shared her perspective on the impact that the lack of crypto-friendly financial institutions has had on the development of the digital asset ecosystem, the intersection between mainstream and decentralized finance, and her prediction that major institutional investors will soon enter the crypto space.
Cointelegraph: How does a lack of access to financial services impact the development of the crypto ecosystem?
Caitlin Long: It was the lack of traditional banking services that actually prompted the creation of stablecoins. Necessity is the mother of all inventions. When the big banks stopped allowing crypto exchanges to have fiat on- and off-ramps, that’s when stablecoins got invented.
“So, the lack of availability of banking services has had a huge impact on this industry that few actually really recognize unless they really studied the history or were around that time and were watching.”
But the overhang of that continues. It has definitely been a challenge for the industry to continue to get traditional fiat on- and off-ramps. That’s especially true in the United States, but it’s not just true in the U.S., and Wyoming is attempting to solve that problem.
CT: What are some of the forces that have prevented banks from providing financial services to crypto companies?
CL: The vast majority of [crypto] banking services in the U.S. are provided by three, relatively small banks. Silvergate, Signature and Metropolitan are their names. The big guys like the JP Morgans and the Citis of the world have not touched it — and it is a function of regulation.
This overhang is something that the U.S. experienced called “Operation Choke Point,” which started in 2013 under the Obama administration. The FDIC targeted 30 different industries that were not politically favored. That’s the porn industry, the firearms industry, the gambling industry — you know, a list of the sort of “sin industries,” in some folks’ eyes. They were targeted.
It started with the payday lenders, and the regulators were giving [...] a much higher risk assessment for banks doing business with these 30 industries that were deemed risky. And the crypto industry got caught up in that as well. So what it means is that the regulators in D.C., at the FDIC especially, were dinging the risk assessments, and therefore requiring higher capital from the banks.
“I think in the absence of that, the banks would love to serve this industry. and if we had the compliance regime of the 1970s, we wouldn't be having these problems at all.”
CT: What are some of the major challenges facing the crypto industry right now?
CL: One of the challenges that this industry has is that we have a lot of unregulated companies that are trying to become regulated. And that’s difficult to do, especially because we’ve got a lot of people who don’t have experience working in the regulated financial services industry.
“That’s part of the charm of this industry, and that’s why this industry created stablecoins to solve the banking problem — that’s not something somebody who came from the traditional banking industry probably would have invented.”
But by the same token, it actually makes it hard for the unregulated businesses to become regulated. So one of the differences that you’re starting to see now is that there are a few businesses that are natively regulated from inception.
I think it’s just a smoother process when you’re not trying to convert a business that may have some past footfalls, and probably every crypto business that’s been around for several years has Bank Secrecy Act footfalls — where they weren’t monitoring their customer base as strictly as they as they would have, had they been regulated.
It’s a lot easier to deal with regulators when you are submitting to regulation from inception. We saw it with Fidelity, we saw it with Bakkt, we saw it with Ledger X, and Avanti just happens to be one of the bank examples of that.
CT: Can you tell us a little about what you have been working on in Wyoming?
CL: Full disclosure — after watching how many people tried to start a bank and realizing how you actually get over the finish line, I decided to step up and actually try to create what is an industry consortium bank.
There will be others who will be [launching crypto banks] in Wyoming as well. We created a special purpose depository institution — which is a special fintech bank charter that enables companies to both custody crypto assets and have direct access to the Fed through a master account.
So that takes a significant risk away from this industry where crypto custody and exchange have to be separated from the dollar piece of this business. You’re going to see custodians and exchanges now actually have their own banks, and that’s going to de-risk banking pretty substantially.
CT: What are some of the major trends within blockchain and crypto that you see the industry moving toward in the coming years?
CL: More adoption! I think there are going to be a lot more institutions — and that’s a word that very many people agree on the definition of.
“Most people look at it and say, ‘Well, gee, if a small hedge fund or a small venture capital fund is a crypto, that’s an institution.’ And that’s technically true.”
When I’m talking about institutions, I’m talking about the gigantic pension fund managers, the CalPERS of the world — in Australia, the superannuation funds; in Canada, the Ontario Teachers’ Pension Plans of the world — these are the institutions that actually own a decent percentage of all the financial asset value in the country. These gigantic institutional asset managers are also subject to fiduciary standards that smaller hedge funds and venture capital funds are not.
Traditional asset owners that have very high standards — we really don’t have very many of them in crypto right now at all. And if they come in, boy, the world will change pretty fast. Same thing with corporate treasurers.
“The big businesses are just not touching any of these assets yet, and I see a huge opportunity for them to come in. In the next few years, I think that's where we're headed.”
I think the big institutions are coming in — and that wave started with the more risk-taking institutions like hedge funds and family offices that we’re willing to look beside the fact that they didn’t know whether their counterparty was credit-worthy or not because they were just speculating, and willing to take risks. The big pension funds can’t take risks like that. And that’s part of the reason why I’m challenging the industry to up our game in that regard and prove our solvency.
This interview has been edited and shortened for clarity.