Caitlin Long, founder and CEO of Avanti Financial Group, talks about the issues plaguing the current state of technology in traditional finance and how her background as a 22-year Wall Street veteran, gubernatorial appointee to the Wyoming Blockchain Task Force, and crypto pioneer is helping her shape Avanti into a bridge between conventional banking and crypto. Tune in to hear Caitlin discuss:
- the current state of crypto adoption on Wall Street (1:09)
- how her entrepreneurial spirit galvanized a career spanning Wall Street, the Wyoming Legislature, and, now, crypto banking (2:07)
- why Caitlin fell in love with Bitcoin (4:57)
- fractional reserves and why the current financial system is a “violation of property rights” (7:00)
- how stablecoin technology will change banking leverage and what effects faster settlement times will have on inflation (11:30)
- why corporate treasurers have been using BTC since 2014 in foreign exchange transactions (17:14)
- what issues Wyoming is trying to solve through crypto legislation and why banks might be closing down customer accounts linked to crypto exchanges (19:18)
- a proposed Wyoming bill that would prohibit judges from disclosing private cryptographic keys (28:32)
- where the idea for Avanti came from and how it will be different than other banks (32:50)
- existing problems with stablecoin regulation and a deep-dive into GAAP accounting for crypto (46:51)
- why Wall Street’s accounting system is to blame for the GameStop and Robinhood situation (52:32)
- whether or not a blockchain could work for settling securities (52:32)
- her thoughts on pension funds and endowments directly owning crypto (59:54)
- what it is going to take for Avanti to successfully bridge the gap between traditional finance and crypto (1:02:38)
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Episode links:
Caitlin Long
Twitter: https://twitter.com/CaitlinLong_
Personal website: https://caitlin-long.com/
CoinDesk profile: https://www.coindesk.com/most-influential/2019/caitlin-long
Avanti
Website: https://avantibank.com/
Twitter announcement: https://twitter.com/CaitlinLong_/status/1231958552790482950
Banking charter: https://www.forbes.com/sites/michaeldelcastillo/2020/10/28/avanti-unanimously-wins-bitcoin-banking-charter/?sh=50db610816aa
Wyoming and blockchain: https://www.coindesk.com/haven-blockchain-case-wyoming
GAAP accounting and crypto: https://twitter.com/CaitlinLong_/status/1356759511856410624
Trust charter vs. SPDI: https://twitter.com/CaitlinLong_/status/1349850451374587907
Special purpose depository institutions: https://twitter.com/CaitlinLong_/status/1194022779730968577
Caitlin on GameStop:
https://www.coindesk.com/first-mover-crypto-gamestop-bitcoin-dogecoinPrevious Episodes
On How ‘Utility Tokens’ Are Now Legal in Wyoming, 2018 Why the ICE/BAKKT News Makes Some Crypto Investors Nervous, 2018 How Avanti Will Be a ‘Not Your Keys, Not Your Coins’ Bank, Feb 2020Transcript:
Laura Shin:
Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago, and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full-time. Subscribe to Unchained on YouTube where you can watch the videos of me and my guests. Go to Youtube.com/see/unchainedpodcast and subscribe today.
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Laura Shin:
Today’s guest is Caitlin Long, founder and CEO of Avanti Bank. Welcome, Caitlin.
Caitlin Long:
Hey. Good morning and good to be back with you again.
Laura Shin:
You have extensive experience both on Wall Street and in crypto and I wondered, given your background, how you would characterize the current state of the industry in terms of this trajectory and what would you expect to happen in terms of crypto’s relationship to Wall Street in the coming years?
Caitlin Long:
Well, I think we’re barely in the first inning. I think we are finally in the first inning of crypto. It’s starting to really go mainstream and we’re starting to see users use it for mainstream use cases. In terms of its relationships to Wall Street, that is evolving. I still think the two systems are evolving in parallel and not really connecting to each other. The bridges that bridge the two are important, and you’re definitely now starting to see some of the big banks come in, in terms of bitcoin custody, but they’re not building the platforms themselves. They’re subcontracting out in a sub-custodial relationship to crypto-native companies who really know how to do it.
Laura Shin:
And so we have so much to discuss when it gets to the meat of the discussion but I actually really want to make sure that all the listeners know your backstory because, in researching this, when I was piecing together all the strands of your history, which encompass Wyoming and Wall Street and enterprise blockchain and crypto, it just sort of feels like you were meant to sit at this place where you’re sitting right now. So, can you just walk us through your story and how you came to be in this position?
Caitlin Long:
Oh, boy. Long and winding road and I tend not to sit too long in any place. I spent 22 years on Wall Street and part of that, started three new businesses inside the big banks, so didn’t let the grass grow. I was an entrepreneur inside big organizations, got the bitcoin bug dating back to 2012, and thought at the time that we would do a walled garden acceptance of this technology and sort of an intranet before internet approach among the big banks.
It turned out the technology is just so fundamentally different it just didn’t fit into the tech stacks of the big banks, and so ultimately I concluded that the open permissionless systems were going to actually grow up independent of the big banks and not inside them. Frankly, the two systems will exist in parallel, which is exactly what is developing and now bridges are being built. So, with the sub-custody contract for the big banks, that’s one bridge, and then what Avanti’s doing and the other crypto banks that are Fed clearing applicants are creating bridges between the US dollar and crypto-assets. So, the only detail I didn’t cover is Wyoming. I moved back to my native state of Wyoming after more than 25 years, almost 30 years on the East Coast, and volunteered for a couple of years helping to get commercial laws to clarify the legal status of digital assets. They, generally speaking, fall in between the buckets.
So, we clarified that in Wyoming so you know in the event there’s a dispute that ends up in court what your rights and obligations are as a party to a transaction and judges have a roadmap to adjudicate it so you don’t get crazy decisions all over the place. Then we also set up this new special purpose depository institution charter. That, I think, actually this year going to be copied by Nebraska. A couple of other states have tried to copy it but it’s really complicated and detailed and intricate stuff. So, it does take a big push to get it done, and it does look like Nebraska will be the fast follower to Wyoming.
Laura Shin:
Great. Can you tell us a little bit more about how it was that you found out about bitcoin and why you fell in love with it at that time?
Caitlin Long:
Well, it dates back to the financial crisis. I did not find it. Brian Bishop, our CTO, was on Satoshi’s original email in October of 2009 but I was not. It took me a few years. I started to come across it because I got very curious about the mainstream explanation for the financial crisis. I realized that the mortgage problem was the symptom, not the cause and there was definitely something else going on underlying it. Went on a deep dive in alternative schools of economic thought ranging from MMT at one end to the Austrian school at the other and a lot in between. I just did a lot of reading, and it was through those alternative economic circles that I started to see Bitcoin come up in 2012.
Finally dove into it in depth in February 2013, set up my first wallet, and then like I said, it was actually after I met Ripple in 2014 at Morgan Stanley, because at the time we all thought…all of the Wall Streeters thought we would be fired for being involved in bitcoin, so we kept our heads down, and I was only doing it on my own time and my own dime after work and on weekends. But then this company called Ripple came in with one of the big hedge funds, and I was pulled into that meeting. I remember putting my pen down during that meeting and saying, oh, my gosh, this is going to tip.
I was thinking, at the time, enterprise blockchain would be the thing that would tip because somebody figured out how to apply that technology to mainstream payments. It hasn’t worked out that way, not as much as I thought back then. Jimmy Song is a prominent bitcoin core developer, also took a tour through enterprise blockchain thinking that that was the way it was going to play out. It didn’t, and then we independently…there are others who did the same. Independently all came out and came back to decentralized, open permissionless systems and are working on the infrastructure in that industry now.
Laura Shin:
Yeah. And we’re going to circle back to this in a moment because obviously with the Game Stop / Robinhood stuff that’s been in the news I see more chatter about that and so I wanted to ask you about that. We’ll actually do that a little bit later because one other thing that I wanted to ask about was… I feel like another kind of philosophy that you’re known for is understanding that rehypothecation or acceptance of a kind of fractural reserves in traditional banking has been a problem, though you can correct me if I’m wrong. From what I’ve read of your history it sort of seems like you just sort of didn’t accept that that’s the way things should be. Am I right about that and if so why do you think that you didn’t view things that way?
Caitlin Long:
It’s so interesting you ask it that way because it just struck me when I realized how the system worked this is just a violation of property rights. Most people think that they own their GameStop stock in their Robinhood brokerage account, but I think the world is now waking up. Certainly, the Wall Street bets world has woken up that that’s not the case. It’s just that Robinhood owed it to you and they may or may not actually have it in their inventory. Most folks, I think still don’t realize that’s the way it works.
When you deposit your dollars at a bank they’re not yours. You lent them to your bank and the bank owes them back to you so what you really own is an IOU. The same thing is true of your brokerage account. If you deposit your Apple shares at Schwab, Schwab is the legal owner and they owe it back to you and then the same thing with your bitcoin. If you deposit it at an exchange, they’re the legal owner and they just owe it to you. So, you don’t really own bitcoin. You own an IOU to bitcoin.
Wall Street’s bookkeeping systems figured out that they can make money off that because the systems are never in perfect sync with each other. That’s how the GameStop situation occurs where you can have a stock 138 percent sold short. In other words, there were 38 percent more claims to GameStop shares than there were GameStop shares. We saw that in the Dole Food situation. I’ve experienced it in my pension business. It just hit me in the gut that this is just wrong.
The inaccuracies in the ledge systems of Wall Street generally are not nefarious. They’re just a function of bad system design and bad technology and too many layers of intermediaries that are not in sync at the same time, but it definitely has been, shall we say…there are hedge funds out there who figured out how to arbitrage the system and try to double-dip in those kinds of situations. It’s like a double-spend problem in bitcoin. There were hedge funds that double-dipped in the Dole Food situation. They had sold the shares and then they went in and filed a claim for consideration in a lawsuit after the company had been acquired because their brokerage firm statements still showed that they owned the shares and they figured they could get away with it. It’s a double-spend problem, and it’s fundamentally a bookkeeping problem and at an even deeper level, it’s all about clarity of property rights. We don’t have clear property rights in our financial assets in this country, and the great thing about bitcoin is it allows you to own your asset outright. You have legal title and you have actual possession of your bitcoin if you custody of your private keys yourself.
Laura Shin:
Just the way you’re talking about this, it reminds me of something that I read. I believe it was in the Coin Desk profile you. This idea about property rights. If that’s something that really is engrained in Wyoming’s culture. Is that right?
Caitlin Long:
Absolutely. In fact, actually, one of many civil wars that have been fought in the United States was the Johnson County cattle war, and it was fought between ranchers who wanted to fence off their property and actually fence in their cattle versus the open range supporters who thought they can graze their cattle anywhere. So, the fencing of the west is about one of the…we don’t call it a civil war but it was, and it was fought in Johnson County Wyoming over this exact issue. Does a property owner have the right to put up a fence to keep other people out? The answer very clearly after that war was yes. Then the west got fenced and the west definitely changed after that. We’ve literally fought a war in Wyoming over that very issue.
Laura Shin:
Yeah. Because when I was reading about that and then reading about how you kind of didn’t really seem to accept that this rehypothecation is the way things should happen. I just thought, oh, I wonder if that is why you had that perspective because probably there weren’t a ton of people from Wyoming on Wall Street so maybe you could see that in a way that other people couldn’t.
Caitlin Long:
Maybe. But there’s one really interesting thing that I’ve been thinking about relating the stablecoins, which is as you may be following, stablecoins have really high velocity. I just looked at update velocity numbers recently for Tether and the annualized velocity is 1,247 times for the M1 velocity of Tether and the M1 velocity of the US dollar is four. Okay. So, we’re talking just not even in the same zip code. What’s going on? Tether’s just better technology. All of its problems aside, it’s better technology. It’s a better, faster, cheaper way to settle a US dollar trade.
So, what’s happening is you can get velocity through technology. It used to be that you got velocity through leverage and what I mean by that is in the traditional banking system the central banks used to…before the securities markets really came along, so I’m talking about up through the 1970s, central banks would inject a dollar of so-called high-powered money, monetary base into the system and then the banks would take it and lend it out through fractional reserve banking approximately 10 times. So, you’d have an M2 velocity of 10. So each dollar that was created by the central bank was lent out 10 times. Okay. That’s leverage. That’s how fractional reserve banking works.
We got M2 velocity through leverage. Well, now, Tether and stablecoin technology is enabling velocity through technology. We don’t need that leverage anymore to create velocity in the payment system. So, what’s fascinating is that’s going to have a big impact on these technologies, as we get faster payments generally. Even leaving crypto aside we’re going towards real-time ACH. We’re going toward FedNow, which will be a 24/7, 365 replacement for Fedwire that the Fed is putting together. We’re speeding up payment settlement cycles and what that means inherently is that we don’t need that much leverage in the banking system anymore to create velocity because technology is going to create the velocity in and of itself.
It’s going to create some interesting challenges for central banks around the world because things used to settle really slowly. They still do and now we have the technology to settle things quickly. Banks can’t afford to be super leveraged and have the traditional fractional reserve model where they take a demand deposit and turn around and lend it out in a mortgage for 30 years. So, there’s an inherent mismatch between the assets, which are really long duration, and the liabilities which are available on-demand and that’s how you could get a bank run historically. There’s a lot of tools banks have now to manage that interest rate risk, but I think what’s going to happen is all of this is just going to deleverage the banking system across the board because we don’t need to get velocity through leverage anymore. We’ll get velocity through technology. It’s really a big, important point.
Laura Shin:
Yeah. That is so interesting. Do you think…what kind of impact do you think that will have on the economy? How will things change in terms of the way that our financial system grows or the economy grows?
Caitlin Long:
Well, I think it’s deleveraging the banks. We’re seeing that already actually with the Fed monetizing the debt that it has over the last 15-ish years since the financial crisis. Not quite 15 but literally what the Fed is doing is taking debt off the private financial sector and putting it on its own balance sheet. That’s exactly what it has done. So, this is the reason why we haven’t seen inflation in CPI yet. We’ve seen it in other places but we haven’t seen it in CPI yet, in the Consumer Price Index, because actually, the new money the Fed is injecting isn’t really new debt. It’s basically the monetization of old debt. It’s swapping from the private sector financial institutions to the Fed, which is a public sector financial institution.
Long story short, what’s happening is it’s already leveraging the banking system. We’re just going to keep seeing more of that. Banks are going to deleverage because they have to because everything is settling faster. They can’t afford to take that much leverage risk. It starts to pose risk to the payment system. By the way, this has nothing to do with crypto. Pile crypto on top of that and it just accelerates it all.
Laura Shin:
That’s what I really was asking about because if we’re going to start to see orders of magnitude faster velocity then what effect do you think that would have on our economy?
Caitlin Long:
Well, it’s positive for the economy. By the way, this may be part of the reason why we’re seeing inflation heating up. The CPI is popping up a little bit. It’s obviously related to COVID as well, but there are monetary dynamics. To quote Milton Friedman, inflation is always and everywhere a monetary phenomenon. There are monetary dynamics underneath it and increasing velocity is one of them. It’s not showing up in those traditional measures though because to go back to the M1 velocity of the US dollar right now is four. It’s not coming from those traditional banks. It’s coming from the securities markets. It’s coming from other sources where velocity is heating up, and we’re seeing it in interest rates.
We’re recording today on a day when the 10-year treasury is spiking and it’s actually causing some concern in the stock market.
Laura Shin:
So, we’re going to dive into the Wyoming crypto laws but before we do that, just one last quick thing about your history that I want to ask you about. I did also see that you said that even as far back as spring 2014 major multinational companies were quietly using bitcoin to execute foreign exchange transactions. Was that just being done experimentally or was that a part of their regular practice and was this ever publicly announced and maybe you couldn’t reveal something now because enough time has passed.
Caitlin Long:
No, I can’t reveal who they are because they’re still doing it and I know they are because I talked to them recently. It’s small. It tended to be in emerging markets where there were not well-developed banking systems. Corporate treasurers generally don’t speak out publicly. You hear on financial media a lot of interviews of hedge fund managers and traders and speculators but the real power behind the foreign exchange markets is the actual movement of money in the corporate world, real money moving overseas not just for speculation. It’s corporate treasurers who actually control the bulk of those markets, and they don’t talk publicly and they don’t have an incentive to talk publicly. I mean certainly back then everyone would have been horrified if they understood that well-known brand name companies were using it.
So, now it’s funny, I’m kind of hoping some of them come out and say we’ve been using it all along but just knowing who they are they’re probably just going to keep it quiet. Ultimately, what’s going on, it’s not an ideological decision. It’s just that corporate treasurers have an absolute incentive to find the best, fastest, cheapest, and safest way to move money around the world. If it happens that in an emerging market they don’t trust the banks or there’s no liquidity and bitcoin was the cheapest way to do it then they absolutely have an incentive to do it and they’ve been doing it all along. You’d be floored how many have been doing it all along.
Laura Shin:
Really interesting. I mean it makes sense of course. All right. So, let’s now talk to Wyoming. Let’s just talk about how it was that you helped make Wyoming one of the states most welcoming of bitcoin.
Caitlin Long:
Well, it got started when I tried to donate appreciated bitcoin in the last bull market and realized Wyoming had a bad money transmitter law. I tried to set up an endowment for female engineers at my alma mater, undergraduate, The University of Wyoming. They couldn’t accept it because as a Wyoming corporation nobody would do business with them due to the bad money transmitter law in Wyoming. So, we got that. I volunteered because I’d been always kept close ties back home here in Wyoming. Even though I was on the East Coast for a few decades and so I volunteered to help fix it. I’d been an intern at the legislature in college, so I was at least familiar with it.
I figured if I went back home and rolled up sleeves and sat down and talked and walked legislators through bitcoin and why it’s not scary that we would be able to get that money transmitter law fixed. Low and behold, we did that, but a number of legislators said what else can we do? What else can we do? And then the snowball just picked up. I knew we had some thorny issues we had to solve in this industry. One of the biggest ones is that the legal status of crypto assets is not clear. Wyoming was the first state to step forward and clarify that.
So, again, if you end up in a dispute and you end up in court, a judge has a roadmap for adjudicating that dispute now. In other states like the Cred bankruptcy in Delaware, there’s no law in Delaware regarding what digital assets are. So, it’s a little bit of a crapshoot because a Delaware judge doesn’t have a roadmap for adjudicating that dispute.
Then the other big problem that we knew we needed to fix, which may be on a resurgence again is that the banks were all debanking crypto companies. A lot of startups literally had to close their doors in 2017 because the banks closed their bank accounts in the fall and they didn’t have enough time to get a bank account at Silvergate or Signature because they were overwhelmed by everybody trying to get through the door at the end of the year at the same time. So, there were dozens actually of examples of startups that testified in Wyoming that losing their bank account caused them to have to close their doors. It’s turning out…I saw a tweet from somebody who had his bank account closed in the UK. I posted because I’ve been hearing about this and seeing it in chat channels. I think there might be a resurgence of this.
By the way, I know something I can’t share yet because I can’t prove it but there is a resurgence of this going on. Sure enough, guess what, when I put the tweet out I asked if anybody else having very recent experiences with this and a whole bunch of stuff came out. So, this has been a problem for quite a while that the traditional banks don’t want to deal with customers, even individuals who’ve been customers for 15, 20 years and they send a payment to a crypto exchange and then the bank closes their account. There is a reason why it’s resurging again. I’m trying to get a little bit to the bottom of what’s actually going on, but it’s one of these behind-the-scenes things in the banking industry. It’s not good for the crypto industry overall.
Laura Shin:
Was that Peter McCormack of “What Bitcoin Did” that you’re talking about?
Caitlin Long:
Yes.
Laura Shin:
But it seems so counterintuitive because now with the interpretive letters saying that banks can custody crypto assets, you would think that actually now the kind of taboo against dealing with bitcoin or other cryptocurrencies is old. So, why do you think? I mean I know you’re still kind of investigating it but what’s your theory?
Caitlin Long:
Well, it’s a great question and I know the reality is that the OCC is only one of three federal bank regulators and the FDIC didn’t sign on to those letters, to my knowledge, and the Fed didn’t sign on to those letters, to my knowledge. They were OCC letters. Usually, when the bank regulators move they move in tandem but that was not the case. And so when one goes out and makes a major policy change it doesn’t necessarily mean that the other two are on board. They all have power over the banking system. So, what you really need to watch is what is the FDIC doing and what is the Fed doing, and are they as friendly as the OCC? Part of it is just knowing how to navigate this labyrinth. We have a really labyrinth(y) financial services system because you really have five bank regulators. You have the OCC, you have the Fed of course which runs the payment system, you have the FDIC which of course insures most of the banks in the United States. The OCC is the national bank regulator but then you’ve got state regulators.
All 50 states have a regulator and banks can either be state or federal and then you’ve got the CFPB, the Consumer Financial Protection Bureau. Plus FinCEN and the Treasury Department. I mean actually, if you start broadening out the definition the alphabet soup of agencies that actually have regulatory jurisdiction over banks is pretty incredible. You’ve got to understand how all those pieces fit together. I’ve definitely seen a lot of jumping to conclusions in the crypto industry because of reading a headline without fully understanding how all the puzzle pieces fit together to know is this really actually a sustainable change or does this mean that one of the agencies did something without the other agencies being onboard?
We’ll know over time. One of the interesting things that came out that I haven’t seen anyone talking about is that the Banking Trade Association sent a letter to the OCC, this is public, demanding that because the OCC made a major policy change without putting it out for public comment two days before they granted Anchorage the OCC Trust Bank Charter that the charter’s invalid. The same thing with Protego. On the Protego Charter what’s interesting is that was granted after the regulatory moratorium and the Biden administration. So, what you have now is the traditional banks challenging what was done by the OCC. Will those challenges work? I don’t know. But there are some substantive issues there or procedural issues probably is a better way to say it.
When the OCC made that major policy change, should that have been put out for public comment? It’s really funny because it’s the shoe on the other foot. In the crypto industry, when FinCEN put out a major policy change at the end of the Trump administration without having much of a comment period there was a huge outcry. When the OCC did it in the opposite direction in a way that was favorable to the crypto industry there was no outcry. So, we’ll see how the process plays out. Very much it all depends on what the new OCC head will do, but where I’m going is on this whole notion of seeing more evidence that people are having bank accounts closed just for sending wires or ACH payments to a crypto exchange, there is something going on and it’s not the OCC that’s doing it. It’s one of the other agencies.
Laura Shin:
Okay. I guess we’ll have to keep an eye on that and see what happens. Just to clarify, this isn’t talking about the original interpretive letter saying that they can custody digital assets, it’s about the bank charter.
Caitlin Long:
Right. It’s about regulatory exams for the existing banks. What happens is the regulators will typically never say you can’t do this, unless it’s a violation of the Bank Secrecy Act. What they’ll say is I want information on your activities in this area. In the regulatory exam, if that’s deemed high risk then it hits you in your safety and soundness rating. If you get hit in your safety and soundness rating it’s called the CAMELS Score. Reputation risk is part of that.
So, what happens is just by a regulator asking questions of the banks it’s an indirect way for the regulators to say we really don’t want the banks to be doing this. So, the banks naturally would step back and say I don’t want my capital charge to go up. I don’t want my reputation risk score to go down. I don’t want to have challenges in my audit. So, now I’m going to go through my entire book of business and see who has sent a wire to a crypto exchange and closed their account because it’s just not worth it to take the risk of servicing those customers. Luckily, that’s not every bank but it does appear…especially I saw a number of people came forward seemingly with Bank of America experiences where Bank of America actually asked the customers to confirm that they were not a money transmitter. So, that’s definitely coming from their compliance department for sure.
Laura Shin:
Wow. All right. Before we move on from this, one last thing is earlier when you were talking about some of the changes that you got in Wyoming, I don’t know if you were kind of alluding to this obliquely, but it was so fascinating to me when I read about it. You were able to get past a law that prohibits judges from compelling disclosure of private cryptographic keys. Can you tell us more about that law and why you felt that was important?
Caitlin Long:
Well, that one didn’t pass. It’s actually coming up this year. Yeah. We did get a free speech protection for developers passed so that the developers aren’t liable in the State of Wyoming for open-source code that they write that’s used by someone else in a crime unless the code was actually malicious. So, it’s designed to help prevent developers from being held responsible for putting something out there that they didn’t necessarily foresee that could be used nefariously. But we didn’t get the other one passed yet. Of course, law enforcement is not necessarily supportive of that. Last year, that bill didn’t go through but it’s coming up again and that’s the whole idea that there is something special about a private cryptographic key.
It is actually not just a password. It is actually the asset and therefore if you can compel a private cryptographic key then everything related to that private cryptographic key, even if it’s more…say it’s a divorce settlement, you can compel disclosure of the key and let’s say that the bitcoin was going to be split 50/50 between the divorcing parties but the court now has access to the whole thing and the court is not set up to keep a private key private. There’s nothing that can be done around it, and as you know, once a private key is disclosed it is permanently not useful anymore. There may be forks and airdrops that may come in the future that are now no longer secure. There are a lot of things in the future that you don’t know will be able to trace back to your private keys.
As I’ve rolled my own private keys over time, I’ve kept my old devices because you just never know. In my case, they’re secure but you just never know when those old private keys that are no longer actually securing any of my coins will actually be useful again because there might have been an airdrop or a fork or something like that. Who knows what’s coming in the future? We don’t know. Private keys are in a category of their own, and we’re trying to get that one through so that they can’t be compelled in civil litigation. The Judiciary Committee was pretty strong that they still want to allow compelled disclosure in criminal litigation.
Laura Shin:
That one was so philosophically interesting to me. We’ll have to keep an eye on that. So, in a moment, we’re going to talk about Avanti Bank and all kinds of other things but first a quick word from the sponsors who make the show possible.
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Laura Shin:
Back to my conversation with Caitlin Long. So, later this year you are going to be launching Avanti Bank. How did you come up with the idea for it?
Caitlin Long:
Well, it gets back at what we were just talking about before the break. Solving a real problem for the industry, which is access to the US dollar payment system and having been a financial services regulatory person I’ve done a lot of work in and around life insurance companies and ERISA in my career and reinsurance rules. So, it was more insurance-focused than banking focused, but it’s not that difficult once you get the skillset to really dive deeply, and I dove deeply to try to figure out how do we actually keep it so that banks in the United States can’t debank the crypto industry in that same way that they did in mass in 2017.
I learned that was in reaction to regulatory pressure that the banks were getting. It wasn’t explicit. It was never announced, but it was implicit pressure and the banks looked at it and said I just don’t want the hassle of dealing with somebody who’s in the crypto industry. Thank goodness the ones that did dug in and said I’m going to take that extra risk and extra hassle because I can service customers and earn a good return for their shareholders doing that. Specifically, that was the Silvergate’s and Signature’s of the world. But that’s why you saw specialization among the banks because most banks just figured it’s just not worth it to take that extra regulatory hassle. I’ll just close these accounts and then they all ended up in a small number of banks and now we’ve got a single point of failure risk for the industry because there’s so much concentration among these few banks that have been very successful.
So, we knew we needed to solve that problem and we created a new type of bank charter that was specifically designed to solve that problem and designed for providing custody services around digital assets.
Laura Shin:
From our conversation earlier, obviously, I’m sure there are a lot of ways that Avanti will function differently from other types of banks. What are the principles you’ve been following in developing your crypto bank?
Caitlin Long:
Well, it follows the principles of the charter. Nebraska, I think, is going to be a fast follower, so we’re going to have company pretty soon. They literally have almost exactly word for word the same legislation as Wyoming passed. So, what are the principles? One is they’re non-lending banks? Why are they non-lending banks? Because the FDIC was not, at the time, interested in ensuring banks that handled digital assets. That’s part of the reason why it’s been such a slow process. The Swiss banks actually not only can provide custody services for digital assets but they can actually own them and hold them and trade them not even the Wyoming SPDI banks can do that. So, you have other major countries whose banking systems and bank regulators are much more welcoming to crypto than the US. That’s been an FDIC point.
The Wyoming SPDI banks can get FDIC insurance but they’re not required to. So, therefore, to the extent that the FDIC has issues with crypto, it’s just not relevant for the Wyoming SPDI banks. So, that’s one but as a result of that, these are nonlending banks because if there’s no insurance then the natural extension of that is then you can’t take the kind of asset risk that a bank typically takes. You can’t lend. So, that’s just the inherent nature of the charter and it’s inherent in the business model. It does happen to very strongly align with my strong commitment to property rights because while a dollar deposit at Avanti is going to be an IOU, that’s the way the financial system works. It at least is backed 100 percent with high-quality liquid assets.
So, Avanti is not a lending bank. It’s not taking the typical credit and interest rate risk, doing maturity transformation, taking a demand deposit and turning it into a mortgage loan that a typical bank would do. Avanti’s not doing those things and that’s a function of the ban charger, but it does philosophically align with this commitment to property rights. We also have specifically in the trust area, so just to clarify, the Wyoming SPDI banks cannot take deposits of bitcoin. We can hold bitcoin in trust. That may sound like a distinction without a difference but it’s a big difference because banks can only take US dollar deposits and if they’re a clearing bank to get access to the Fed that’s where that distinction makes a huge difference. You have to be a depository institution to become a US dollar clearing bank. The OCC trust banks are not depository institutions. Wyoming SPDI banks are, so we actually are held to a much higher standard, which is part of the reason why it’s taking longer for us to get through the process as well. But we’ll be able to do more when we actually open.
That all very much philosophically align with the whole approach of we should go back to the structure of banks that we had before the modern banking system arose and assets were all bearer assets and that is banks were merely service providers. They were not counterparties. We can’t quite go back to that because of the way the Fed system works. So, yes, your dollar deposits are an IOU but when you put your bitcoin on deposit in the trust department that’s not an IOU. In Wyoming, we are just keeping it safe for you as a service provider. We are not your counterparty. You retain legal title to the asset. It works the same way under the same law as a coat check or a valet parking arrangement. You don’t turn over the title to your car when you park it in a garage. You just give the safe keeper temporary possession of it.
That’s the structure we have in Wyoming. It’s very different than the structure of securities custody.
Laura Shin:
And this is the concept that’s legally called bailment and this is sort of how you’re fulfilling the not your keys, not your coins ethos.
Caitlin Long:
That’s right. We may be in temporary possession of the keys but we don’t actually own legal title. We’re splitting that legal title and who possesses the keys because they don’t have to be the same thing. You can still get the legal title. You can still have legal title to the asset even if someone is temporarily safekeeping the private keys for you.
Laura Shin:
There’s another principle that you’ve been advocating for, which is no commingling of funds. Why is that important? What are the problems that can stem from commingling customer funds in digital assets?
Caitlin Long:
Well, this is so interesting because I read the New York attorney general settlement yesterday with Tether and this was one of the things that they really were going after. They have to prove that the funds are not commingled. When there’s no light shining on financial institutions they tend to want to commingle everything because it reduces…it allows them to take more risk, shall we say. Sometimes undue risk and putting their customer’s assets at risk more than their customers understand, right. We saw that in the bankruptcy of a bitcoin lender, Cred. They were commingling their assets with their customer’s assets and doing all kinds of things and there was no disclosure. Of course, as it typically comes out when intermediaries in this industry go bankrupt it turns out that they were insolvent for a long time before they finally went bankrupt and that was the case with Cred.
So, one of the most important things about solvency, again, it’s a commitment to property rights. It’s a commitment to fundamental solvency is that no co-mingling is about a requirement of that. If you’re going to comingle you have to tell the customers. They have to have clear disclosures of the risk. You can’t throw a word that is not understood by most like rehypothecation into a contract and have everybody sign the contract not knowing what it means. Those words that obfuscate what’s really going on are very common in traditional financial services terms of service. But not in Wyoming. We actually have a requirement under Wyoming law to give plain English terms of service and really explain what the risks are.
Laura Shin:
I like that. I feel like that’s why a lot of people listen to…well I’ve heard from my listeners they listen to this show because at least I try as much as possible to always explain all the terms. So, I also wondered, Avanti Bank is going to serve institutional investors. So, what kinds of problems do you see Avanti solving for them? I was wondering what kind of money you’re seeing on the sidelines now while institutions like Avanti are preparing to launch.
Caitlin Long:
Well, there’s a lot of interest. We’ve been deluged. We’re in the thousands now of customer inquiries. More than two thousand customer inquiries, most of which are not going to actually become customers. It’s a lot of people who are individuals, and as you said, we’re serving businesses first. The reason for that…a lot of people ask us, why can’t I open an account at Avanti? The compliance requirements to serve individuals are many multiples of the compliance requirements to serve businesses so that’s why we’re starting with businesses first. But what problems are we solving? The big one in the crypto industry is one that most folks probably don’t really understand because it has to do with the way that UD dollar payment systems work.
When you send an ACH payment, which is the most common form of payment by far in US dollars, it can be reversed by the consumer for 90 days. Let’s say that you’re a Coinbase or a Kraken or a Bittrex or a Binance and you sell a bitcoin to a customer and you accept an ACH payment for it. They might take that bitcoin off-platform and then turn around and reverse the ACH payment and then the service provider is out both sides of that trade. That’s a huge risk issue and it’s simply a function of the way thing US dollar payment system works. It doesn’t match in timing and in reversibility to the crypto assets. Crypto assets settle in minutes with irreversibility. US dollar payments can settle sometimes in days with absolute reversibility or up to 90 days.
So, those two things are fundamentally different and those are the kinds of things that we as a bank are working to solve. We’ll be offering different alternatives that can really help the crypto industry solve that fundamental risk problem.
Laura Shin:
Yeah. It reminds me of what you were saying earlier about how with enterprise blockchain you realized that the way financial institutions work it’s just fundamentally different. Anyway, we can get more into that later because I do still want to talk a little bit about GameStop, etcetera, but we’re going to do it after Avanti and Avit. So, for Avanti, how will you decide which crypto assets you’ll offer?
Caitlin Long:
Well, we’ve announced that we’re starting…in Avit we’re starting with the liquid side chain of bitcoin as well as Ethereum. So, those are the two most common, by far the most secure because they’re the proof of work right now for Ethereum anyway, and are by far the biggest network effects by far. Others are interesting. We may add them over time. We’re not committed to just those, but because that’s where we’ll be issuing Avit we will over time be offering custody services in those assets as well.
Laura Shin:
Have you figured out any kind of standards by which you’ll judge whether or not to add something new or is that still being developed?
Caitlin Long:
It’s a good question. It’s all Brian Bishop’s decision. I will not interfere with somebody who received Satoshi’s original email in 2009. It’s interesting, we call ourselves a tech company with a bank platform, bank charter rather. It really is true. Brian is on the board and I am not a technologist. I know I don’t know enough to make those decisions, and those decisions are absolutely his and I’ll take his recommendations. So we’re going to service our customers and of course if there’s huge demand for something new we will put it on the platform. We are a customer-driven entity. We are not a sell-side-driven entity.
A lot of the exchanges and service providers in the crypto industry have really more served the sell side, so to speak. By that I mean the platforms who wanted their coins listed and were willing to pay exchanges to get their coins listed. We won’t do that and we won’t accept that from any of the platforms. It’s a customer-driven decision, not a provider-driven decision. It’s buy-side rather than sell-side that we are focused on.
Laura Shin:
So just to give a sense of who your customers will be I’m expecting crypto companies but then also it seems like you would also serve institutions that are interested in getting into crypto. Is that right?
Caitlin Long:
Absolutely, yes. If you look at who our team is, all of us have worked in regulated financial services in the past. There are three of the five of us who are Morgan Stanley alums and one who I specifically recruited, our chief operating officer, Zev Shimko to work with me because we covered corporate treasurers together. Yes, we are actually working on some things for traditional financial services as well as for the corporate treasury role.
Laura Shin:
I’m sure especially that. Did you speak at the Microstrategy event?
Caitlin Long:
I did not. I was not invited to.
Laura Shin:
Maybe next year. All right. You have called Avit, which is the new coin that will be issued by Avanti, “bank money that happens to be issued on a blockchain.” So, from what I’ve gleaned it looks like it might be some kind of new stablecoin not exactly pegged to the US dollar but it will be some kind of stablecoin that gets around the problems that consumers face with existing stablecoins. Can you give us an outline of what it looks like?
Caitlin Long:
Well, I can’t say much about it. You’ll learn a lot more when a white paper comes out.
Laura Shin:
Well, what existing problems with stablecoins do you see that could be resolved?
Caitlin Long:
Yeah. The biggest ones are legal and accounting attacks. They are not friendly in any of those three disciplines. From a legal perspective, as I said earlier, crypto-assets fall through the buckets of traditional assets. Are they commodities? Are they securities? Are they property? Are they money? So, when it’s issued by a bank you know exactly what it is and the structure that we’ve chosen is different and the details around that. We filed a patent for that. The details around that will come out.
As a result of that, there are accounting and tax implications for that. That’s pretty much all I can say. I can talk about the problems. I alluded earlier that the terms of service from some of the stablecoins don’t…they actually have a disclaimer that we’re not sure that transactions in the stablecoins are legally enforceable anywhere in the world. USDC is the one that actually has that in its terms of service. I don’t mean to single them out because I think it’s true of all of them. They don’t fit in existing legal buckets and so you don’t know under commercial law what their real treatment is in the event that you get into a dispute. They’re just being responsible and warning people about that. But as you can imagine, in the institutional world, when the lawyers go and look at something like that and say I don’t know if this is legally enforceable, boy, that keeps most of them away even though they love to participate because of the payment system benefits that they’d get.
Same thing with the accounting. There was a lot made of the accounting for bitcoin, which is really ugly and needs to get fixed but accounting for stablecoins is not as favorable as you might think, depending upon the facts and circumstances of how the coin is set up, most likely it’s an investment, which has to get to market through the balance sheet or a receivable but it’s not a cash equivalent. So, most businesses really care about having a cash equivalent. A bank deposit is a cash equivalent. It’s not cash. Cash is physical dollar bills. Most of what in US GAAP financial statements for publicly traded companies is reported as cash is actually a cash equivalent. Usually, it says cash and cash equivalents on a balance sheet line item.
But you cannot, from with I’m hearing from the accountants necessarily treat a stablecoin as a cash equivalent. Michael Saylor is definitely an exception to the rule. The other companies really do care about that because that’s how credit analysts look at their balance sheet. That’s how banks understand the liquidity profile of the business. They’ll look at the cash line item and investments are not deemed to be liquid enough to be considered cash and if they’re not presented as cash under accounting standards then it limits the usefulness of those. So I set about to specifically create a structure that is true to the technology, the open permission was backend systems but solve those structural problems.
It’s just an example of where the innovation happened driven by the technology and it wasn’t backward compatible with what the users really needed but yet look at how successful they’ve been in spite of that. If we can actually get them to be backward compatible to what the users, a different group of users really need, the users, i.e., who are not using stablecoins today but would love to be able to have access to that technology, that’s what we’re trying to solve.
Laura Shin:
Yeah. Just when you were describing that and then thinking about what we were saying earlier about how corporate treasurers move huge amounts of money. I was just like I don’t know what you’ve created but I’m very excited to see it because if it does what you’re saying it does then I really think it would be huge.
Caitlin Long:
Well, it’s going to take time though. I am definitely cautious that corporate treasurers…it’s just like big banks, they don’t move fast. There’s a lot of inertia. In order to switch systems or to switch to something new the switching costs really have to be justified by a substantial increase in efficiency. A lot of people have been trying to solve some of these same problems in the payment system for a long time. They all fundamentally trace back to inefficiencies in ACH and Fedwire. But that’s the best that’s available for US dollars right now to the mainstream users who have to report under US GAAP and really do have to pay attention to the geography on their balance sheet of where their cash is.
They can’t put a lot of cash into something like bitcoin or investments or receivables. They want it in cash equivalents. Yeah. That’s what we’re working for.
Laura Shin:
I’m really glad you brought this up because I have been trying to learn more about how it affects accounting when companies put bitcoin on their balance sheets.
Caitlin Long:
It’s ugly.
Laura Shin:
From what I can tell. Just out of curiosity, is Avit going to launch when Avanti launches or do you expect that that will happen later?
Caitlin Long:
We’ll have announcements about that a little later. It’s coming.
Laura Shin:
Let’s circle back now to the GameStop thing. What do you think was the core problem that happened there?
Caitlin Long:
There were a lot of core problems but the fundamental one is that GameStop was 138 percent sold short. What does that mean? It means that there were 38 percent more claims to GameStop shares than there were actual GameStop shares. So, Wall Street’s accounting systems went haywire and created more supply of GameStop shares than there were actual supply and that artificial supply of course suppressed the price of GameStop shares, so I actually think that the fundamental problem had nothing to do with Robinhood. That was a secondary problem. It’s kind of like the mortgage problem in 2007. That was a symptom, not the cause. Robinhood was a symptom, not the cause. The cause, the fundamental cause was GameStop’s stock should never have been allowed to be sold 138 percent short.
The real legitimate owners of GameStop stock had their pockets picked as a result of that. They had the price suppressed because any time you increase the supply of something artificially, all else equal, it’s going to suppress the price. Think back to your supply/demand curves. You push the supply curve out to the right it pushes the price down. That’s what happened to GameStop stock. The WallStreetBets folks figured it out and realized that they could fight back and did, but the fact is that that situation would never have arisen had GameStop not been sold 138 percent short in the first place.
Laura Shin:
Then what about the settlement time of two days, some people have been saying, particularly Chad Cascarillla, who was on my podcast recently. He was talking about that. Do you feel like if that were eliminated…see, this is actually why I wanted to talk about your experience at Symbiont because he has this Paxos settlement service. Not he but the company. It’s a private permission chain for stock trading and given your experience I kind of wondered do you feel like that might go somewhere or do you feel like that probably won’t?
Caitlin Long:
Sure. And I wish them well, absolutely. There’s a lot of innovation happening in this area and I do believe that Gary Gensler, at the SEC, the new SEC likely commissioner if he is confirmed, he’s been officially nominated by Biden. He’s a former MIT cryptocurrency professor and so he’s obviously very familiar with this technology and here comes this whole GameStop thing that you know is going to make his confirmation hearing a CNBC news story and he’s going to be asked about it and what is he going to do about it. One of the questions is going to be are you going to greenlight blockchain versions of securities. Paxos has been working on this for years. It takes a long time to get inroads in some of these infrastructure plays. Absolutely hats off to everybody who is trying. He’s absolutely trying to solve the same problem that I’ve been trying to solve for years.
Part of the reason why I’m focusing a little bit more on payments is in part because one of the reasons I think we’ve never gone faster than T plus two in securities settlement the big reason is that too many people are making money off securities lending in that two-day period. They don’t want to close it down but this is exactly what causes the GameStop-type problems. But the other reason is that US dollars settle really slowly. If we can actually get a faster US dollar settlement I think that’s going to drag the securities industry into fast securities settlement, too.
So, Chad and I are working on the same problem from different angles and absolutely I would expect him to meet and hopefully work with them.
Laura Shin:
Oh, interesting. Future announcement. Avit and Paxos….
Caitlin Long:
No. You know what’s fun about being in the position that we’re in is literally we’re frenemies with everybody in the industry. We may be competing with them in certain areas but we’re also going to be in a position where we can actually help them solve their problems, too.
Laura Shin:
I’m not trying to either get you to criticize a competitor or anything but I am still just curious about this idea that as you were saying when you worked in traditional finances you felt like the tech stack was just so completely different and the mindset was so completely different around closed source versus open source and all these things. I just did wonder in general I do think that means that it is not likely that these kinds of problems that we saw with GameStop and Robinhood would be solved with blockchain technology or do you think potentially it could be?
Caitlin Long:
Oh, I think they absolutely will be. I think it’s really hard to get decentralized stock trading platforms because by nature a security has an issuer. So, by nature of the fact that there’s an issuer, it really is tough to be decentralized. I mean we’ve seen it. The SEC has implied that Ethereum, even though it had an issuer, became decentralized, but I don’t think securities, even for the largest companies, the giants like Apple. I don’t think they’ll ever be sufficiently decentralized to take the issuer out of the equation. Keep in mind for corporates things like dividend payments and corporate actions like murders and acquisitions, stock buybacks, those kinds of things are inherently issuer-focused functions. So, absolutely I think that is more conducive to the private blockchain systems. However, one of the interesting things that I learned about the tech stacks of the big banks is they’re just all very centralized and layered. They’re designed for a delayed net settlement system with multiple intermediaries.
Even private permission blockchains are decentralized a lot more than that. They are set up for something closer to real-time gross settlement as opposed to delayed net settlement but they’re really not that…they are still pretty fundamentally different. The point I was making isn’t necessarily that the tech stacks are so different that it’s permissioned versus permissionless. It has to do with the degree of centralization and the degree of the layers of intermediaries and all the netting that happens. That’s the fundamental system difference that even permissioned blockchains were running into. They just weren’t supplementation of existing systems. They were rip and replace and for a company to rip and replace entire systems, I mean the Australian Stock Exchange is doing it. Look how long it’s taken for them to do it because they’ve basically had to rebuild it from scratch. These are not incremental upgrades.
Laura Shin:
So we will see how this all plays out but certainly, I do think that this has put a spotlight on the potential for blockchain technology, but I do sometimes also think just the open system is moving so much quicker.
Caitlin Long:
It absolutely is, for good reason.
Laura Shin:
All right. So, switching gears. With your background heading up Morgan Stanley’s pensions group, I was curious when you thought we’ll start to see pensions investing…well, no, I guess…I realize we just had one or two that did.
Caitlin Long:
Well, a number of them have through their venture capital allocations. So Pomp, for example, I think he announced there was a fireman’s pension fund in Virginia, as I recall, that was one of the first ones. We’ve seen endowments invest. A lot of endowments have invested through their venture capital arms. We’re starting to see endowments actually directly own crypto. I don’t know much about pensions. I don’t know a lot of examples of the pensions directly owning crypto. Mostly, they’re doing it through either a VC fund or some sort of a fund structure like even GBTC.
Laura Shin:
So what hurdles do you think we’ll need to overcome before we’ll start to see that happen where they own crypto directly and in a big way?
Caitlin Long:
Well, the biggest hurdle is operational. Asset managers are not set up to custody their own assets, and a lot of that has to do with the Investment Company Act and Investment Advisors Act of 1940, two different acts that were passed after the Great Depression in response to fraud that was taking place where asset managers were custodying customer’s assets and then making off with them. So, there’s been a fundamental approach to separate asset management decisions from custody. That’s why you have the SEC custody rule. Now, bitcoin is not a security. But what has happened is that as best practice a lot of asset managers will apply the same standards for non-securities because they have to do it for securities anyway and so if something’s not a commodity they may as well just use a third-party custodian.
They didn’t build up their custody capabilities internally and that’s the biggest hurdle is getting true institutional qualified custodians that meet ERISA standards. That’s a higher level of service and a higher level of legal protections than is generally available right now. For example, the things I like to point to is there’s a reason why the big securities custodians are banks with Fed accounts, State Street is technically a trust company but it was grandfathered in so long ago. They all have Fed clearing capabilities. They are full depository institutions. Trust companies are not. It was the best that was available. State-chartered trust companies, that was the best that was available to the crypto industry until last year when the SPDI banks came along. We are depository institutions and then the OCC Trust Bank Charter is not depository institution but it is a step above a state-chartered trust bank.
Laura Shin:
All right. So, I know Avanti is launching later this year. You have tweeted that Avanti will bring together strange bedfellows. So, I wondered if you wanted to elaborate a little bit more on that and give us a sneak preview of what we could expect and when from Avanti?
Caitlin Long:
Well, we’re sitting at the bridge of the traditional financial services industry and the crypto industry. So, even already our shareholders who have supported us in our early stages are an eclectic mix of bitcoin OGs, so to speak, and the traditional financial services world. Yes, everyone should expect to see that. We have to live in that traditional world. It is really important that our executives, our board and our shareholders understand that traditional world and come from there. But of course, we also have very crypto-committed folks, too. It creates interesting fault lines because the banking world is very regimented and very rules-based and the crypto world is the opposite of that. So, it creates strange bedfellows, yes.
Laura Shin:
All right. So, maybe there will be a launch in the summer or when do you think?
Caitlin Long:
We haven’t put out a specific date yet. It’s coming though. The light is at the end of the tunnel, yes.
Laura Shin:
Congratulations, early congratulations. So where can people learn more about you and Avanti?
Caitlin Long:
On Twitter. I just joined Clubhouse a few weeks ago, too. I’ve been fairly active on that as well. Then obviously avantibank.com.
Laura Shin:
Perfect. Thank you so much for coming on Unchained.
Caitlin Long:
Yeah. Appreciate it. Good to see you again, Laura.
Laura Shin:
Thanks so much for joining us today. To learn more about Caitlin and Avanti, check out the show notes for this episode. Don’t forget, you can now watch video recordings of the shows on the Unchained YouTube channel. Go to YouTube.com/see/unchainedpodcast and subscribe today.
Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Ness, Mark Murdock, Dan Edlebeck, and the team at CLK Transcription. Thanks for listening.
