American Banker
Caitlin Long didn’t expect a long, heated legal battle with federal regulators when she launched Custodia Bank, a crypto-focused institution that she thinks can build a bridge between traditional finance and digital assets. But what started as a passion project has turned Long into a torchbearer for the federal regulation of digital assets.
The two-decade Wall Street veteran moved back to her native Wyoming in 2016, where she’s worked to expand digital asset legislation and design Custodia to offer banking, payments services and custody for crypto. Long said crypto services should be separated from traditional financial institutions, especially global systemically important banks, to prevent turbulence in the digital asset industry from bringing down banks with it, or vice versa.
“The whole concept of online banking, much less digital assets that move at the speed of light, has massively changed risk management for the banking industry,” Long said. “This has to be bridged very carefully for that reason, so that digital assets don’t trigger bank runs in the traditional banking system.”
Long’s original vision for Cheyenne-based Custodia was to be a “new breed of banker’s bank” that provided technology to traditional community banks. Banking is a highly regulated and notoriously slow-to-innovate industry. Long sees two ways to push change – by either creating new technology, or designing regulatory solutions that operate within the existing framework.
More than four years after its original conception, Long has built a 35-person team to forge Custodia’s technology and helped develop digital asset legislation in Wyoming, including a new framework for banks. For her work pushing crypto custody technology and governance, Long is one of American Banker’s 2023 Innovators of the Year.
Marcel Kasumovich, deputy CIO of Coinbase Asset Management, who’s also an investor in Custodia, said he thinks Caitlin is “one in a million,” in terms of knowledge, courage and resilience.
“Her ability to mesh the traditional system with what could be the new system, and her patience and willingness to do that through the regulatory mainstream, I think is just remarkable,” Kasumovich said. “Has it played out the way she had hoped? The way I would have hoped? Absolutely not.”
Custodia is limited in its banking powers on a major scale, as the bank is embroiled in a legal tug-of-war with the Federal Reserve. Long said it was always clear Custodia wouldn’t be eligible for Federal Depository Insurance Corporation membership, so the bank needed a different path to federal compliance.
The wild, wild west world of crypto
Long has helped Wyoming embrace digital assets since 2017, serving on the Cowboy State’s committee for blockchain and financial technology. Wyoming Democrat State Senator Chris Rothfuss said that Long’s experience and knowledge was invaluable to the committee. He added that she’s been instrumental in offering industry perspective and connections to stakeholders.
“People like Caitlin, who work hard, bring solutions and are realistic about getting work done in a meaningful way – that is going to be trailblazing,” Rothfuss said. “Caitlin’s also very willing to take risks, very willing to do hard things, very willing to aspire to significant challenges that are not easily overcome…Legislative working bodies more often spend their time plucking low-hanging fruit, and not taking on the difficult challenges that this select committee takes on.”
American Banker
Wyoming, also known as the Equality State, has a track record of zigging: it was the first state where women had the right to vote, and the first to authorize the creation of limited liability companies.
In 2019, Wyoming developed a framework for crypto banking, which Rothfuss said Long was heavily involved in. The state created special-purpose depository institution charters, or SPDIs, with which banks can receive deposits and provide custody, asset servicing and other services for digital assets. SPDIs can’t make loans, and aren’t required to have Federal Deposit Insurance Corporation insurance.
Custodia Bank, then called Avanti, received its charter that year, and became an uninsured, but state-regulated, institution.
Master of none
The SPDI legislation was the first of its kind, but Rothfuss said it’s essential that banks with that charter have access to Fed master accounts, which grants holders access to the Fed’s payments system and discount window, and allows banks to serve institutional clients.
Long, through Custodia’s legal melee with the Fed, has been Wyoming’s champion for the framework, Rothfuss said.
Custodia has been battling the Federal Reserve in court since last summer over access to the central bank’s payments system. In January, more than two years after it first applied, the bank was denied a master account at the Kansas City Fed on the grounds that its management was inexperienced, its business model was too risky and it was too reliant on crypto. Long said she was blindsided by the decision.
Federal regulators have issued warnings about the crypto industry for years, and with increased vigor following last summer’s “crypto winter,” the failure of crypto exchange FTX last November and the recent banking crisis. Even global systemically important banks that are trying to service digital assets are feeling friction from accounting requirements and regulation.
The litigation has gone through various iterations. It now hinges on what types of banks are entitled to accounts at the Fed, and how the Board of Governors interacts with the regional arms of the central bank. A bench trial is slated for April 2024, taking the Fed the furthest it’s gone in a legal proceeding in recent history. The Federal Reserve declined to comment. Long thinks that the Fed’s decision is unfair, inaccurate and disparaging to Custodia and SPDI bank legislation.
“We are still a state chartered bank,” Long said. “It’s not that the Fed killed us. They shot a bazooka at us and tried. They clearly tried to disparage us and keep other banks and other business partners from doing business with us…Has it made it harder for us? Absolutely. That is clearly what they intended. But they didn’t kill us. And so you will be seeing that we will be operating with our state bank charter soon.”
Custodia’s journey to regulation has been a marathon, but Long said she’s been determined to find a way to push it past the finish line. She said the bank has permission to operate in Wyoming, and will, while moving forward in its pursuit of Fed approval.
Long said the recent banking crisis and instability of digital assets should make federal regulation more of an imperative, not less.
“This technology is not going away,” Long said. “I really do fear that the federal bank regulators are going to rue the day that they decided to shove this whole thing into the shadows, because it is going to suck deposits out of the traditional banking system in a much bigger way.”
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