Tag Banking

After 22 years on Wall Street, Caitlin Long got intrigued by bitcoin and the blockchain in 2012. From 2018 through 2020 she served as a member of the Wyoming Blockchain Task Force, which made the Cowboy State the most welcoming for blockchain companies.

Long is the founder and CEO of Custodia Bank, a bitcoin-focused “full reserve” bank proposing to keep 108 percent of customer deposits on hand. The Federal Reserve has denied its application for membership, claiming that “the firm’s novel business model and proposed focus on crypto-assets present significant safety and soundness risks.” Custodia is currently challenging that decision. Reason‘s Zach Weissmueller interviewed Long about the ongoing lawsuit and the future of bitcoin in May, at the Bitcoin 2023 conference in Miami.

Q: Why did you start Custodia Bank?

A: The proposal was to be a 100 percent reserve bank that would keep all of our cash at the Fed. Basically, a pure service provider. There’s no reason why your bank needs to be a counterparty.

It’s just like the law of bailment, which is how a valet parking works or a coat check. When you park your car, you’re not turning legal title to your car over to the garage. And if the garage happens to go bankrupt while your car is parked there, you can still get your key and drive your car away. Let’s just turn this into a basic money warehouse to the maximum extent possible within the law.

Q: Why were you seeking a master account with the Federal Reserve?

A: We wanted to be able to keep cash directly at the Fed. Like any depository institution, federal law says the Federal Reserve shall provide services to depository institutions.

We actually did apply for FDIC insurance and they were not interested in anything related to digital assets. And as I’ve said before, I agree with them. We saw how fast the money can move in the digital asset world. The traditional banking system is not set up for that yet. I mean, holy cow, just online banking movement is enough to take down a bank in today’s day and age. Crypto moves so much faster than traditional payment rails.

Q: What was your reaction to the Fed denying your application?

A: We were blindsided. We had been making a lot of progress with the Fed. And then something clearly changed.

Q: Wyoming approved your charter but the Fed is basically vetoing that. What worries you most about a future where banking becomes more nationalized?

A: The degree of control that the federal government has tried to exert. Cleaning up fraud is not political. Banking should not be political either. We—we collectively, all the people—should not be using the banking system as a political hammer. And it shouldn’t be against abortion clinics as much as it shouldn’t be against oil and gas companies. Either side should stay out of this.

We should just let financial services happen and fight out the policy fights in the legislatures, including Congress at the federal level. But the bureaucrats in Washington discovered that they had power they didn’t know they had.

This interview has been condensed and edited for style and clarity.

“We have learned over the last few days that many small and mid-sized banks in this country are Zombies,” writes Arnold Kling, a senior scholar at the Mercatus Center at George Mason University and former economist for the Federal Reserve system and Freddie Mac.

Following the run on Silicon Valley Bank, former U.S. Treasury Secretary Larry Summers urged the federal government to guarantee the money of all the bank’s depositors and warned that “now is not the time for lectures about moral hazard.” But Kling insists that “past crises,” such as the savings and loan collapse of the 1980s, “were bungled by authorities who were blind to the moral hazard problem.”

And Lyn Alden, founder of Lyn Alden Investment Strategies, says “banks are basically highly-leveraged bond funds with payment services attached, and we treat it as normal to keep our savings in them.” She argues that the Federal Reserve makes it nearly impossible for banks to hold the bulk of their customers’ deposits in cash because “regulators want banks to be reasonably safe, but not ‘too safe.’ They want all banks to be leveraged bond funds to a certain degree, and won’t allow safer ones to exist.”

Join Reason‘s Zach Weissmueller this Thursday at 1 p.m. E.T. for a discussion about the federal government’s decision to guarantee all deposits at the failed Silicon Valley Bank with Alden and Kling. Watch and leave questions and comments on the YouTube video above or on Reason‘s Facebook page.

Photo credit: Shen Hong / Xinhua News Agency/Newscom