The Breakdown - Caitlin Long on Coronavirus, Crypto Custody and Building a Bank

Episode Date: February 24, 2020

An incredible amount of work has gone into convincing institutional investors that bitcoin and crypto should be on their radar. Now that many are convinced, however, they face some significant limitations in the infrastructure.  A new crypto bank out of Wyoming is designed to address those problems. Founded by Caitlin Long, Avanti is apply for a special purpose depository institution (SPDI) charter and already has 8 products in its pipeline not currently available to US investors.  In this interview, Caitlin and @nlw discuss: Why Avanti is needed Why Avanti will have 100% of assets in reserve at all times Why the right model for crypto custody is more akin to valeting a car than current financial market models  Why building a crypto bank is important in the context of macro market turmoil How Coronavirus is exposing pre-existing problems in the global economy

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Monday, February 24th, and today we have an interview with Caitlin Long. Caitlin is one of the best-known commentators on Bitcoin and Crypto, particularly as it relates to traditional markets. She has a background on Wall Street that expands decades and is one of the most cogent thinkers at the intersection of traditional markets and Bitcoin, and in particular, what Bitcoin and crypto assets can do to address some of the problems that we're facing in the macro markets.

Well, today it was announced that Caitlin is building a crypto bank in Wyoming. The bank is called Avanti, and it's focused on providing payment custody and security and commodity activities for institutional customers using digital assets. They currently have eight products in their pipeline that are not available in the U.S. market based on regulatory requirements. And the interesting thing about Caitlin's thesis, as you can hear in this interview, is that we've reached the point where for many institutions, the question isn't whether they're interested in being involved with crypto assets, but what the actual infrastructure allows them to do. The interview focuses, in large part on what makes Avanti different in terms of its vision for how it interacts with its

customers' assets. This is not the same type of relationship that you might see with commercial banks, but involves much, much stricter requirements such as full reserve assets at all times. One thing that I find so interesting about this is that in a world where institutionalization of Bitcoin and crypto assets is inevitable, a lot of the type of work being done by Avanti seems to try to align that institutionalization with the fundamental principles underlying Bitcoin, rather than just having it approximate the way that people interact with current financial institutions, which of course Bitcoin was created in large part to critique. Towards the end of the interview, we also get into Caitlin's thoughts on the larger macro markets.

As of this recording, the Dow is down a huge amount, something like 1,000 points based on coronavirus fears. And as Caitlin discusses, it seems that the markets may be finally reacting to the vision of coronavirus as a larger economic issue and something that can't just be contained by central bank policy. There is a ton of interesting insight from Caitlin in this interview, so I hope you enjoy it. And without any further ado, let's dive in. All right, we are here with Caitlin Long, newly announced as the founder of Avanti. Caitlin, thank you so much for taking some time on what I'm sure is a very busy day to join us and talk through this exciting new project.

Hey, it's my pleasure. I'm very glad to be able to talk about it publicly now. Yeah, I bet. Well, so for those who haven't heard the news, maybe you can just tell us a little bit about what Avanti is and why you decided to throw yourself into building this new financial institution. Avanti is a company that's been formed to apply for a Wyoming Special Purpose Depository Institution Charter. That is a special type of bank charter that will enable a digital asset focused bank to exist. There are eight products that we've identified that due to regulatory issues currently existing in the United States are not able to be offered by either existing U.S. banks or U.S. trust companies.

Avanti will be able to offer those once it gets its charter. And the specific focus is, of course, going to be on serving fiat on and off ramp demands for the institutional investor community and on providing custodial services around Bitcoin and other crypto assets, specifically for the type of institutional investors who require the highest standards. Those are fiduciaries for their customers like pension funds, endowments, foundations, corporations, sovereign wealth funds. They're really not yet in Bitcoin. And I've spent a lot of time in my career with exactly that type of investor. And they need a higher level of service that doesn't exist in the U.S. market right now. And they specifically either are required to or prefer to

work with a bank as a custodian. This will be the first, well, the Wyoming SPDIs will be the first ones. Whether Avanti is the first one through the door to get its charter remains to be seen. There are others coming, but this is the first one that's focusing, to my knowledge, on the institutional market specifically. And so it sounds like your thesis in this is that we're at the point where there's some number of institutions or a sufficient number of institutions at this point who are no longer held back by thesis or lack of education or lack of interest, but who are actually disincentivized by the existing infrastructure. Is that, is that fair? Yes. And in fact, I just spent time last week with one of them that's going to be involved with Avanti, not announced

yet, but it's a big institution. And they had two things they were focused on. One is that it's a $300 billion asset class. It's not appropriate for institutional investors to ignore it anymore. So they have to have a strategy. And the other one was that they were actually getting donations in crypto and really struggling with how do they handle those donations. I heard a horror story about how a university, not the University of Wyoming, had real problems handling a major gift of cryptocurrency. And there just isn't a service provider out there enabling them to handle that and that they would be able to accept more donations if such an institution existed. So it's pretty clear there's a need here, and that's exactly what Avanti is designed to fill. So, okay, so I wanted to

ask then or follow up about how this relates to the work that's gone into Wyoming. I know a lot of what makes the SPDI so different is that it has a different and more rigorous set of registration requirements. Could you speak to that a little bit? Yeah, well, it's worth noting that the SPDI law is open source, right? It's available for anybody to come in and use it, but it does have the strictest requirements. And the 100% reserve requirement is a function of the fact that these banks are very unlikely to have FDIC insurance. The FDIC insurance is optional technically, but given that the reserve requirement is 100%, none of the applicants to my knowledge are planning to get FDIC insurance. And in fact, actually, the FDIC has been one of the most conservative with respect to allowing banks to

get involved with crypto. And an FDIC insured bank in the United States right now cannot even provide trust services around crypto. That's become a major blocking point for the industry. So what this bank, what all SPDIs are going to look like is probably relatively small on balance sheet US dollar deposits and then much bigger off balance sheet assets under administration through their trust powers. But they're required to be 100% reserved in both sides of the bank's business. the traditional deposit division and the traditional trust division. Got it. And so the other concept that I thought was interesting that you shared in the thread where you announced, Devante, is this bailman concept, which is basically a different

conception for how assets are handled. Yep, it's analogous to valley parking for your car or a coat check. When you turn your property over to someone for safekeeping, you don't give them legal title to your asset. And when you want it back, they have to give you your actual asset back. They're not allowed to do anything other than what you direct them to do with it while it's in their possession. We're separating the concept of legal title and possession. That doesn't exist in the traditional securities industry because the legal title of all the securities rests with, in the U.S., the depository trust company, for example. And so you can't get a bailment that actually has that teeth in the U.S. And the traditional asset managers actually really want

that because they don't want to have to be forced into a debt or creditor relationship with their custodian, which is exactly how the securities industry works today. This is why when the Lehman Brothers and MF Globals of the world go down, there's a long bankruptcy process for customers to get their assets back because everybody's forced into a debtor-creditor relationship. And so we've rethought that in Wyoming and said, these digital assets are bearer instruments. There's no reason why there should ever be a debtor-creditor relationship with a service provider. Let's go back to the old trusted idea of money warehouses where someone actually deposits an asset into the money warehouse for safekeeping, but does not become a creditor of that money warehouse.

And when you want your asset back, the service provider has to give it right back to you. So I think the thing that's so interesting about this, and a lot of what has gone into, obviously, the thinking that's been done in Wyoming, there feels like this inevitable financialization and institutionalization of Bitcoin and of crypto. But what's so fascinating is that a lot of the work that you guys, guys have done there can be summed up almost in trying to ensure that that institutionalization happens in a way that is cogent and coherent with the principles of Bitcoin versus just adopting the norms of today's financial system, which may not be best serving the individuals

at any part of the system. Is that a fair way to put it? I mean, it's a little bit philosophical, but it just seems kind of an interesting take on the institutionalization process. Yes, it's very philosophical. And in that regard, it is consistent with the not your keys, not your coins ethos. You don't actually have to turn over sole control of your digital asset to a custodian. You could use the custodian as a signatory and a multi-sig arrangement, for example. Or if you are trying to, if you are an institution trying to comply with those custody rule requirements where the SEC wants exclusive control of the private keys, you end up in a bailment relationship where, again, you're not a debtor creditor. So we were rethinking this. I must say it's

very consistent with Wyoming's approach toward property rights. The state of Wyoming was actually one of the places where there was a minor civil war called the Johnson County Cattle War, fought over the fencing of the West, which was all about whether property rights could be enforced. And those that wanted to fence the fence off their property and keep others from trespass one in that instance. So that's one example of the ethos of Wyoming dating back many, many years. And also there was a Supreme Court case in Wyoming where someone actually tried to defraud their bank by re-hypothecating an asset that had already been pledged as collateral for another loan. As many of you know, re-hypothecation happens to the tune of billions a day in the financial market.

and yet in Wyoming, based on this Supreme Court case, it's technically a felony. It's not like we rewrote anything in Wyoming law. There's a long history of respecting clear property rights in Wyoming law, and this fit just very, very perfectly right within that same ethos. So one more question about Avanti, I guess. You announced that you would be partnering with Blockstream on the technology side. What does the technology side actually look like and what is the nature of that partnership? Well, we will be releasing more details later, but they were very interested in aligning with us as a delivery vehicle for some enhancements that they will be releasing to certain parts of their platform. And again, it fits very closely with the notion that if there's going to be

a 100% reserve required financial institution delivering services around Bitcoin, that using the block stream approach actually makes perfect sense because of the platforms that block stream has created. And I won't put any additional details around that. We will release over time. But I think people can anticipate that there are going to be some enhancements to existing platforms and that there will be, again, a 100% ethos, a 100% reserve ethos that is applied to the products that Avante releases in conjunction with blockstream. I guess one of the other things that's fascinating to me about this is that you have chosen to focus on this as the next big move. I know that a lot of your time is spent thinking about the challenges that we face in traditional markets. And I'm wondering how

you see this emergent Bitcoin ecosystem as addressing some of those challenges, how you connect the dots between what we're facing more broadly with this particular work? Well, I think more people are starting to realize the instability of the traditional financial system. And maybe not as many people are realizing the unfairness of it. But there's certainly, you know, we're recording this on a day when the Dow is down approximately a thousand points. Now, that's obviously due to the coronavirus virus scare, but that scare would not be such a big deal from a financial perspective if the financial system weren't so leveraged. I tweeted out about this in, I think the third week of January, when I started watching this, because I come from a life insurance background,

I've worked on catastrophe bonds related to pandemics earlier in my career. So when this started coming out, I was watching it a lot sooner, probably than it hit the mainstream. And I was pretty concerned about this. This has been something actuaries have been concerned about for a long time. We're overdue for a pandemic. And understanding that this is coming out of China, which is actually where a lot of the credit creation in the traditional financial industry is coming from these days, the credit is created out of the economic activity through trade that's happening mostly between China and the United States. That's where the U.S. dollar credit is originating. And so if we're going to see a slowdown in just regular trade volume, that's going to have an impact on how much credit is going to be able to be created through the financial system, which is what helps prop up asset values.

I drew the analogy at the time that this has the potential in China to be what Chernobyl was to Russia. Chernobyl in a healthy economy would not have actually tipped over the country's economy and caused the damage that it did do, the breakup of the Soviet Union. Gorbachev admitted that that was the real precipitating factor was Chernobyl. It was clear to me when I did some research on that a few years ago, why that was the case? Because it just had such an unbelievably broad and deep impact on the economy, but they had a bad balance sheet to begin with. and so it wasn't difficult to tip over the economy. And I think the issue with China and coronavirus is potentially the same, that this is a weak balance sheet. China has had an enormous credit bubble. Here we have the situation now where a potentially broad and deep economic disruption

is coming. And that has potential to tip over that economy, but the spillover effects all around the world, in particular to the United States, could potentially be pretty high as well. And again, these extraneous events, unforeseen black swan type of events, we could handle them in the economies if we add strong balance sheets. But when you combine the fact that the balance sheets are weakened by being towards the end of likely end of a multi-decade credit bubble on top of something like this, it's a dangerous brew. We're starting to see financial, the traditional financial markets start to recognize the potential here for that. Yeah, I mean, one of the things that's fascinating is that it feels like, you know, I was just listening to Hidden Forces this morning with Ben Hunt. And they're talking about how fully the coronavirus situation demonstrates the decoupling of financial markets in terms of an asset price function, actually showing the function of pricing. or showing economic fundamentals as compared to just existing on their own, right?

And the example here being hundreds of millions of people quarantined and unknown futures and, you know, stocks continuing to reach all-time highs. And obviously today we're seeing more of a reaction, but it still has felt this incredible demonstrative psychic fracturing almost in a strange way. Well, and it's been delayed. And what has delayed it is that the central banks around the world have, especially in China, have thrown enormous liquidity at the situation, which until arguably today, it really wasn't deemed to be something that was a real threat from the financial market perspective. And so

the injection of more of the same drug in terms of banking sector liquidity coming out of the central bank in China certainly put a Band-Aid over it for a while. But a Band-Aid doesn't stop a hemorrhage. And I'm not saying we're going to be at that level yet, but if your listeners are interested, go back and look at my tweet storm. I think it was the third week of January. So it was a while ago talking about the impact of what this could become because of just how leveraged the Chinese markets are. And so the decoupling only lasts as long as the, as long as the drug injection from the central banks actually still has some umph, so to speak. And I think we're starting to see that this is, this is starting to overwhelm the ability of central banks to counter this.

You cannot solve a pandemic if that's indeed what we're facing with liquidity. It's just not going to work. We're glad that you're working on Bitcoin related and crypto related institutions. So congrats on the launch of Avanti and we'll be watching it closely. Thank you so much. I really appreciate everyone's interest. It's hard on days like today where there's. is such a dominating macro market story to focus on anything else and figure out where the

connection point to crypto and to Bitcoin lies. What's so interesting about Caitlin is that she is someone who's watching those macro markets and actually applying her critique in the type of institution, the type of company she's trying to build. So hopefully through that interview, you got a little bit more of a sense of what Caitlin and her partners are trying to build with Avanti and how they see it addressing some of the challenges that we might face. So that will do it for this episode of The Breakdown. We will be back tomorrow with more on crypto, Bitcoin, and everything else that matters. Cheers, guys.