Caitlin Long: Crypto Banking in the Post–Choke Point Era | Caitlin Long | Brady Dale |

[Music] hello hello um so our next conversation very very exciting um if you know anything about crypto and web 3 you definitely know our our next guest so I would love to introduce uh Brady Dale from axios having a conversation with Caitlyn [Applause] long hello eth Denver great to see you guys thanks for sticking around Friday afternoon uh yeah I'm Brady Dale I write uh about crypto for axios I have a newsletter axios crypto you should all just subscribe to it right now and uh welcome to Caitlyn long founder and CEO of custodia Bank in Wyoming woohoo so uh in January 2023 the fed the FDIC and the OCC the office of the com controller of the currency put out this statement that basically said crypto's legal but we feel kind of weird about it uh it was a sort of ambiguous statement and a lot of people view that as sort of the start of uh real trouble with banking in the industry so Caitlyn maybe you can take it from there and tell us your perspective on on that story from where you sat yeah the actually if we if we go back in history there has been like a repeating wave of Deb bankingsales Silicon Valley bank account and part of the reason that it broke out and some of the other payment startups at that time didn't is that coinbase was able to get a backup bank account at Cross River through its connections with Andre and Horwitz so um banking has unfortunately been a a a determining factor for who wins and who doesn't in this industry for time in Memorial you're you're you're right though that the Biden Administration in over reacting to FTX the timing again is FTX failed in November 2022 they started working we we're in a lwuit with the fed and we started to see in fact actually the Fed was going to approve custodia we actually have the draft of the approval letter that they were going to ask us to make commitments and conditions for approval they were FDX filed for bankrupcy November 11th 2022 we have a copy of that letter November 15th 2022 then Michael bar had a meeting November 22nd 2022 to to discuss our application and the first draft of the denial letter was right after that and then they were working through December 2022 on that joint statement with the other agencies so it all comes back to FTX I I cringe at the concept that they that there's even a discussion of pardoning Sam bankman freed because he harmed a lot of really good people not just his own customers but all of us and so the um I'll give you my version this and Caitlyn you can correct me but the the service that custodia was looking to offer right was what sort of what we call a narrow Bank a bank where people could make deposits with custodia that it would be dollars and Bitcoin they want to do both of them and they e and eth and they' pay a little bit of a fee and exchange for that fee custodia was not going to make any loans which meant it was a super safe bank and they'd offer some other services too but this is like really interesting concept that we don't have the United States we don't have narrow Banks we don't have 100% total Reserve Banks why what's your take on why that is not a a model that we we allow here well this the the uh conspiracy theorists would would point out that if there were TR a truly safe bank that it would threaten the the unstable fractional Reserve Banks which is every other bank here's the irony though the the stable coin bill that's being debated in Washington DC they're going to do a markup in the Senate three weeks from now two weeks from now it's that soon um that is going to create non-lending Banks so we're going to see this in the United States and um it's going to be fascinating I think this is a big change in financial services it's bringing open public permissionless blockchains into the regulated umbrella for the first time ever and um it's it's it's a big change in financial Services there's I don't know how it's going to play out whether the stable coin issuers are going to have to get Bank Charters whether the non-banks are going to be okay there's the whole tether question we will have I think some visibility into how this will all play out in the next uh in the next few months let's get to the stable coin bill but let's hold off on that for just a second I want to hear about I know you've said that custodia has lost a bunch of its own bank accounts so like first of all why does the bank need bank accounts and then what what are sort of your um tell us a little bit of the story of what happened there with you guys so we created custodia to be able to provide durable banking services to this industry because of the very problem that we talked about that every we've this we've lived through three different waves of debank and this was the worst one of the of the bunch custodia was debanked repeatedly um why why did we as a bank not have to why did we have to worry about this why were we not able to solve that problem for our customers it's because fed denied us access to the ma what's called a master account the developers would understand that as root access to the core of the US Financial system and I wanted to be able to get that for this industry the original concept of the Wyoming special purpose depository institution Charter was that it would be a mutual it would be owned by the members of the of the bank and the Wyoming legislature didn't like that idea so they wanted it to be a for-profit corporation but that was the ethos is we wanted to be able to create something that the industry would own and that we would be able to control whether we got debanked or not and so we wouldn't have to go through these waves of debank um which of course you know unfortunately hit a lot of startups very hard so there's a a narrative out there that with a new Administration in the White House things have really changed you know we saw the SEC for example has stood down on a bunch of the cases that had brought against different um aspects of the industry what has changed uh from your perspective for uh people regulated in the banking industry however since uh since Trump took over actually nothing okay the perception is that there has been a loosening but none of the Federal Banking agencies have actually overturned any of the anti- crypto guidance it is still presumed unsafe and unsound for a bank to touch a digital asset even in a Dom Minimus amount so like paying gas fees um for customers in custody we can't do that um uh and and uh banks are prohibited from issuing stable coins on public permissionless blockchains obviously JP Morgan has had its Onyx um private Fork of ethereum out there for years and they they have a closed network uh so it's it's funny because Signet and Sen were closed networks but those served the crypto industry so they got shot and JP Morgan has its closed Network that serves the non-crypto industry and that's fine in the regulator's eyes I digress uh just and just so folks understand what we're talking about here I don't know if you guys remember but like during the prior crypto boom like around 20121 2022 we saw a decent number of banks come out with statements like you know oh we're thinking about doing roughly what PayPal and vinmo do we'll let our folks you know buy some Bitcoin and hold it in their bank accounts if if you want um a lot of banks announc that kind of thing then we didn't really ever see those uh Services go live and and if and and that's because I think we've come to understand they had to tell the FDIC usually that that was their idea and then you know what would happen after you could describe sort of what would happen after that kayin well the FDIC was is very has been very anti- Innovation the guy who led it for almost 15 years almost um uninterrupted there was a um an interim chairman during Trump's uh Trump's term who was not an anti- innovation but this guy his name is Marty grunberg really just was anti- technology anti this is why the banking system is so backwards in this country um because for for the last 15 years we've had somebody who just isn't interested in any change and would I think candidly he he wants us all to be he wanted a cbdc wants us all to be banking at the post office in paper form okay so it the whole concept of of what we stand for in our industry just blew his mind and um they they were they were just rejecting technology proposals right and left not just from our industry but also from the fintech industry broadly and any bank that tried to get involved with it I mean there's virtually a 100% of the banks that touched the crypto industry that got consent orders with the glaring exceptions of the very largest banks who got to skate um and the same thing happened in the fintech industry so just very anti- Innovation that is going to change no doubt but Trump hasn't proposed yet um there there are new acting heads of these Federal Banking agencies uh at the OCC and the FDIC not yet at the FED um but we don't have an actual nominee for the new FDIC chair yet so it's going to take some time and uh like like I said in the beginning all those anti-crypto statements are still out there the SEC obviously has done a massive 180 but it hasn't happened yet in the banking industry the one thing we've seen in B in the banking side on the FD I is and this is interesting if folks want to go take a look at this uh the FDIC released just several hundred Pages worth of letters that they had sent that had been sent under the previous administration about these sorts of issues and it just it shed a lot of light on sort of like how this regulatory process works like like kayin said no rules have changed but we did get a lot more that visibility that was one thing we got to see yeah yes and uh it's not just the FDIC um we were talking as we were preparing about what Senator lumus disclosed from the FED oh yeah yeah um that that that they were taking into account controversial activities and controversial comments um in in in in assessing whether a bank could e access or continue to access the root access to the financial system called a master account um and that would that had not been publicly disclosed before so it's a de facto admission that um this this was kind of finger in the air if we like you you get in if we don't like you we you don't um and of course that's what we what custodia has sued over but the whole concept of controversial what does that mean there is no standard this was never publicly disclosed it's like the 15% limit that Nick Carter has been talking about that was imposed on banks that Banks couldn't have more than 15% of their US dollar deposits coming from the crypto industry after silvergate that was never publicly disclosed this is the kind of regulatory abuse that has has been rampant in Washington DC where they just change the rules willy-nilly and start applying them without announcing them so I know that that to shift towards looking forward now I I know that the topic that you're most interested in is the stable coin legislation that's been proposed we've got a a bill that's been introduced in the Senate um by Senator Hagerty there's a bill that's been in draft form in the house the stable Bill uh led by uh style and um french hill and um what's your what's your take on these proposals what do you feel good about what do you feel less good about definitely going to happen so this is great so trafi and our industry are going to be merging no question about it what we don't know is are the banks going to dominate they're really powerful and they give a lot of money to politicians and they are trying very hard to keep all of us sidelined um and then the incumbent stable coin issuers are having a scrum with a tether question right so it's kind of like the circle and and Pax us is kind of who you're talking about mainly yeah yeah it it's it's uh there's a lot let's put it this way there's a there this is out there on Twitter so I'm not going to break any news here but there's a lot of regulatory capture attempts happening a lot of Industry money got spent by the banking industry and by the crypto industry and certain people want to see certain things and have the regulatory regime Advantage themselves um and it and it's going to be fascinating to see because I don't know who's going to win we got a lot of money that lobbying money that got paid um into proc crypto politicians and the banks are really they believe that this is their territory that we are encroaching upon their territory we should go away and they should dominate it all and they might win so Caitlin obviously you have a dog in this fight and you're biased but I'm just curious if if you were what do you think is the right level of consumer protection like what's the what's the stable coin bill that you would write if you were a senator yeah well it's it's really what the Wyoming legislation wrote which is that the we learned this in in the silvergate situation that a bank run can happen super fast especially with this industry where everybody's driven by technology and that you can literally withdraw all your deposits on your online banking within you know a few minutes right so you cannot have any any U rolling of the dice in the Investment Portfolio of the bank so the best consumer protection Brady is make the bank hold on to cash so that if you want to withdraw your cash you want to redeem your stable coin you can redeem it for dollars almost instantly really simple don't let the bank do what normal Banks do which is take your money your your demand deposit that you think you can get back today and go make you know long-term mortgage loans or car loans or student loans with it and uh the average Bank in the United States right now holds eight cents in cash against every dollar of demand deposits the big Banks hold more they hold 12 cents in cash against every dollar of demand deposits that's fundamentally un stable um and fundamentally susceptible to a bank run and in the crypto industry I think we've learned that that business model does not work um you can't marry a traditional fractional Reserve Bank with liabilities from our industry that can move it literally at the speed of light and so uh the right thing to do from a consumer protection standpoint is just the stable coin issuer be honest and hold cash to back the stable coin liability really simple and like what else if if so we were talking back we were talking beforehand you were saying you think basically even though like for example in the Hagerty bill it says you can be a private stable coin issuer you don't have to be a bank it'll be under the OCC but you you you think that it'll amount to the same thing it'll sort of amount to the equivalent of a bank Charter so like if you if you what else does a if you have a bank Charter what more layers does that add to the to your work ah good good question well um the law says that every valid every eligible depository institution does get a Fed master account that's the the litigation that's in in in process right now uh and we don't know how that's going to come out but it may set a precedent um the FED literally told a judge in a in a related case that its motivation doesn't matter in other words it's arguing that it can do anything it wants and not have its decisions be judicially reviewable so let's see if that stands that's their position um um but but but they're supposed to be giving that the the the statute says that every eligible deposit institution automatically gets a master account so so ultimately that's the big difference between a bank and a non-bank is getting root access again developers would really understand this because it's not just root access to fedwire it's it's also root access to the the core of the system so that you can much more quickly without going through an intermediary um with delays and cost and counterparty credit risk you can settle your transactions a lot faster uh and then there there there's another esoteric piece which has to do with bankruptcies banks have better protections for consumers than non-banks in bankruptcy and unfortunately a lot of people have learned that lesson the hard way in the Celsius bankruptcy and more recently the prime trust bankruptcy trust companies are not treated as customers of trust companies are not treated as well as customers of banks if the financial institution goes down and so I I think um it's going to be interesting to see how the market evolves there's a there's a lot of benefits to being a bank in in financial services and the same thing's true in the custody business the Securities custodians are almost entirely Banks not trust companies there's a reason for that and I think that the stable coin Market might evolve in that direction as well that's not to say that all of us are going to be frozen out it's it is to say that all of us will probably as that market shakes out end up getting the bank charters for those reasons because they are better for consumers uh and we only have have one minute left but really quickly do you think this next round of stable coin legislation should deal with decentralized stable coins or should it just leave it alone for now well it's not trying to it's just it's just dealing with the centralized ones so the um algorithmic stable coins uh it's it's literally leaving Alone um but the right call well look I mean the defi defi is is is is a different animal truly um and the SEC obviously made a huge statement yesterday about meme coins uh and Jonathan Mohan and I were just talking about um the sufficiently decentralized um giving you actually if you can if your project becomes sufficiently decentralized in many ways that's better that from a liability perspective than having a corporate form where corporate a l the reason why many people form corporations is liability protection if you are a sufficiently decentralized project then you are also you have that same kind of um liability protection so defi I think is is is handling it in a in a very different way which is why they're leaving the stable leaving um algorithmic stable coins out of the stable coin Bill all right well great well thank you Caitlyn if you guys want to follow all these issues subscribe to AIO crypto thanks for being here thank you