The Pomp Podcast - 346: Caitlin Long On Federal Banks and Bitcoin

Episode Date: July 27, 2020

Caitlin Long is the Founder and CEO of Avanti Financial Group. She spent 22 years on Wall Street, including Morgan Stanley, where she was Head of Corporate Strategies and Pension Solutions. In this conversation, we discuss the macro economy, bank balance sheets, monetary stimulus, inflation, impact of the OCC decision, an update on Avanti, and the potential effect on Bitcoin and banks from the Presidential election.  ===============================  Choice is a new self-directed IRA product that I'm really excited about. If you are listening to this, you are likely part of the 7.1 million bitcoin owners who have retirement accounts with dollars in them, but not bitcoin. I was in that situation too. Now you can actually buy real Bitcoin in your retirement account. I'm talking about owning your private keys and using tax-advantaged dollars to do it too. Absolute game changer. https://www.retirewithchoice.com/pomp  ===============================  Did you know only 1% of day traders actually turn a profit? So why are so many of us mistaking picking stocks for serious investing? You can’t control the markets, but you can control your risks. So how do billionaire investors control their risk? They invest in blue-chip art. If that sounds unusual to you, you’re not alone. But the ultra-wealthy have been investing in art for centuries. And since 2000, art has outperformed the S&P by an incredible 180%. Just a few years ago, a single work sold for $450 million! Imagine...Being able to invest in the very same paintings as millionaires and billionaires, at a fraction of the cost. Masterworks.io is an exclusive platform that makes it as easy as trading stocks online. And the best part is: you don’t need to know anything about art. Their experts will create a custom portfolio to meet your investment needs. With Masterworks.io you don’t have to choose between big risks and big returns. Sign up today, select PODCAST and you can skip the 70,000 waitlist to get first dibs. Just go to www.masterworks.io and select PODCAST. Hurry, this offer expires soon. ===============================  Pomp writes a daily letter to over 50,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Caitlin Long is the founder and CEO of Avanti Financial Group. She spent 22 years on Wall Street, including Morgan Stanley, where she was the head of corporate strategies and pension solutions. In this conversation, we discussed the macro economy, bank balance sheets, monetary stimulus, inflation, impact of the OCC decision, an update on Avanti, and the potential effect on Bitcoin and banks from the presidential election. I really enjoyed this conversation with Caitlin, and I hope you do as well.

Before we get into the episode, though, I want to quickly talk about our sponsors. The first is Masterworks. Did you know only 1% of day traders actually turn a profit? So why are so many of us mistaking picking stocks for serious investing? You can't control the markets, but you can control your risk. So how do billionaires' investors control their risk? They invest in blue-chip art. If that sounds unusual to you, you're not alone. But the ultra-wealthy have been investing in art for centuries.

And since 2000, art has outperformed the S&P by an incredible 180%. That's right, since 2000, art outperformed the S&P by an incredible 180%. Just a few years ago, a single work sold for $450 million. dollars. Imagine being able to invest in the very same paintings as millionaires and billionaires at a fraction of the cost. Masterworks is an exclusive platform that makes it as easy as trading stocks online. And the best part is you don't need to know anything about art. Their experts will create a custom portfolio to meet your investment needs. You can head to masterworks.io and you don't have to choose between big risks and big returns. You can sign

up today, select podcast, and you can skip their 70,000 person waitlist. That's right. They have 70,000 people on their waitlist. But if you select podcast, when you go to masterworks.io, that will allow you to skip the entire waitlist and start investing in blue chip art today. So masterworks.io, hurry up and go do it. The next sponsor is Choice. They're a new self-directed IRA product that I'm really excited about. If you're listening to this, you are likely part of the 7.1 million Bitcoin owners who have retirement accounts with dollars in them, but not Bitcoin. I was in that situation too. Now you can actually buy real Bitcoin in your retirement account. I'm talking about owning your private keys and using tax advantage dollars to do

it too. That's right. An IRA product that you buy Bitcoin, hold the private keys and use tax advantage dollars. Absolute game changer. Head on over to retirewithchoice.com slash pomp. Again, retirewithchoice.com slash POMP. Self-directed IRA, buy Bitcoin, hold the private keys, use tax advantage dollars to do it. retirewithchoice.com slash POMP. Lastly, don't forget that I write a daily letter to over 50,000 investors about business technology and finance. I break down complex topics into easy to understand language while sharing my personal opinion on various aspects of each industry. You can subscribe at pompletter.com. Again, pompletter.com. All right, let's get into this episode with Kaitlin.

I hope you guys enjoyed this one. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

All right, guys. Bang, bang. Caitlin is back. She is, I think, maybe the only person who's been on three times now. Thank you so much for doing this. Thank you, Pomp. It's awesome to be back. Absolutely. So Caitlin and I didn't know each other many years ago. We met, hit it off, have talked a bunch about crypto, legacy finance stuff. We eventually became investors in Avanti, which is the new business that she is building. We're super excited about that. And it just so happens to be directly related to the latest OCC decision. So I wanted to bring her back on.

And before we kind of get into the details and updates on Avanti and the OCC, maybe let's just talk about the economic kind of macro environment. What have you seen in terms of how this has played out? What has gone how you thought it would? Any surprises? Maybe just talk to us a little bit about kind of the macro environment. Well, I guess the one thing that I would highlight is a report that came out. And I apologize, I don't remember who wrote it, but it was awesome.

And I did tweet about it. So kudos to the author about commercial mortgage-backed security delinquencies. In Minneapolis, 47% of commercial mortgages are in default. And it's 69% in Syracuse. These numbers might not be precise, but they are staggering numbers. Interestingly, New York was only at 7%, which isn't that much worse than sort of a steady state. Um, but, uh, um, but of course, because the dollar value of mortgage loans in New York

is so much greater, that's where the bulk of the delinquencies in the commercial mortgage area are. But, um, you really can see some, some just stunning weakness from the, um, after effect of COVID and where's that going to show up. It's going to show up in bank balance sheets in 2021. Um, we've done, you know, I talked about this, uh, back when we did the last show that, you know, the bank balance sheets are, are, are definitely an area to watch because right now, um, the, the, the banks have been, uh, given some degree of flexibility. They've been told by the government, just, you know, support the economy, just make loans. We'll deal with the fallout later. And, uh, you know, that's probably the right policy decision,

but what it means is there's going to be, um, a lot of recapitalization necessary once these, delinquencies actually do hit. And it's interesting to see the Fed, multiple Fed governors now saying, look, the banks need to raise more equity capital. They're not allowed to pay dividends anymore. I remember back when the repo crisis started hitting in spring of 2019, I started saying, look, the banks are undercapitalized, the big banks are undercapitalized. We got problems here. And there were some Fed governors, I remember Governor in the decision to allow the big banks to buy back stock in the spring of 2019. And just recently in the last month or so, the stock buyback programs were halted by the Fed. And now

it looks like the banks are probably going to be raising more equity capital, but they're not doing it right now. My advice to all the big banks is do it now. Your stocks have recovered really well. And this is when you need to, as a publicly traded company, you raise capital when you don't need it because when you need it, it's not going to be available for you. Now, the flip side is they might just wait for the government to bail them out because every time they've needed to be recapitalized. I mean, how many times the Citigroup needed to be recapitalized in its history? I think three or four. So maybe they're just waiting for the Fed put, so to speak. But the responsible thing for them to do is to raise equity capital. The big

banks, the community banks, not so much, but the big banks. How does this change with, you know, JP Morgan and others reporting like record revenues and kind of really showing up in their financial quarterly earnings? Does that change any of this conversation or kind of how do you see that affecting the balance sheets and also their need to raise capital? Well, it is helping for sure, right? Because if all those profits are dropping to their bottom line and they're not paying any of those out in dividends to shareholders, that's effectively raising capital. And again, that's why the Fed probably isn't putting as much pressure on them to recapitalize now.

But look what's coming down the pike. And they know all this, right? What they're doing is doing the game theory of, do we really need it? No one ever wants to have to raise equity capital. It dilutes your existing shareholders. But if you end up having to raise equity capital, you want to do it when your stock price is at a high price because the dilution is lower, right? So I'm sure every one of them is thinking that through.

What I think, what I hope they recognize, though, is that, you know, Governor Branner was proven right. And those, I think it's Neil Kashkari also, the Minneapolis Fed governor, who's now said, listen, the banks need to be recapitalized. Yeah. And, you know, there's dissent among the Fed. And I think those that have been concerned about bank balance sheets are right. They just don't want to spark a concern in capital markets, but I'm sure all the bank boards are thinking about this, and I just hope that the risk people are not looking at the world with rose-colored glasses. Obviously, the government has stepped in, printed a ton of money to try to deal with a lot of the COVID-related kind of more economic-type issues, not just at the banks. We see 52 million Americans lost their jobs over the last four and a half months. We see PPP money going all over the place. We've had the direct stipends, the unemployment insurance kind of additional beefing up is going to expire at the end of July. Maybe just talk a little bit about like, how do you think the Federal Reserve and the U.S.

government has done so far in terms of their intervention? And then how do you see that either continuing or will it end here kind of over the next couple of months? Oh, well, it very much depends on how things play out. But I think what you're, you know, what we're seeing now are leading indicators of problems that are going to be coming down the pike in, you know, six to nine months with these loan delinquencies. You're starting to see it also in, you know, the number of people not paying their credit card bills and rent as well, but it's coming. And so it, but it all depends on how

badly it hits. It does look like the country's kind of going into a soft shutdown. A lot of things are being canceled that were pushed into the fall. And so, yeah, it's, it really just It just depends on how deep that downturn is. Right now, we're sitting at about, call it $3 trillion, give or take, that they've gone ahead and put out there in monetary stimulus. I'm assuming you're of the belief that we're going to see trillions more, or maybe I'm incorrect with that? Yeah.

No, I think the Fed's balance sheet is ... I think the base case is that the Fed's balance sheet is 10 trillion by the time this is over. But you've got to realize this is where some of the Austrians miss the point. You have to understand that what the Fed is doing right now is not actually putting more credit into the economy. What they're doing is backfilling for the hole that has appeared because the private sector credit creation is declining. And so what you really need to understand, and nobody's got the numbers to figure this

out because you really can't measure the shadow banking system, you can't measure how much leverage there is in the repo market, the data just doesn't exist. But we kind of know it's there. We definitely know it's there. We kind of can triangulate how big the hole is. But they're backfilling for a hole. And this is what the Austrians have missed multiple times when they talk about hyperinflation coming now as a result of the Fed expanding its balance sheet.

If the Fed's expanding its balance sheet into a true economic growth scenario, absolutely, they are adding to the total amount of money and credit outstanding in the economy. if they're expanding their balance sheet, when a private sector balance sheet is contracting, what they're really doing is just trying to offset that contraction, which is why we haven't seen the dollar collapse that some folks have predicted. And, you know, the private sector is where the vast majority of credit creation happens. It's in the big banks and it's in the securities markets where, especially the repo market, there's just so much credit, so much offshore credits. What's called the Eurodollar market, is the market for dollars offshore. The Fed doesn't directly

regulate that. It's foreign bank regulators that regulate that, and also hedge funds and securities firms, right? And so there isn't anybody who's got great numbers on that, and we just don't know how big that market is. Dr. Manmohan Singh at the IMF has been following this for years. And actually, we worked on a chapter for his most recent book, and he will be releasing that chapter through a paper that hopefully is coming out soon. I've seen the draft of it, and I think folks are going to really be interested in seeing that because we got a couple of academics, including Dr. Singh, as well as myself, who's not an academic, but a practitioner who's been watching this for years and talking to Dr. Singh about it for many years. And

interestingly, Dr. Singh is now interested in Bitcoin and CBDCs and the like. So we've crossed paths in a couple of different ways. And it's all related, right? We're trying to figure out what is the size of this offshore collateral market? He's the one who's estimated what's the size of the leverage in the shadow banking system. But he can only estimate it using year-end financial statements. What we know is there's a lot of balance sheet window dressing that happens at quarter-end and year-end. We don't know what it looks like intra-period and even intra-day. No one knows. That's the piece that's hard for the Fed to figure out. They're backfilling. Clearly, they've prevented a total meltdown here. We certainly, given the numbers

that are coming out in the economy, we were headed for that, clearly. So they've definitely prevented that. The question is, it's going to get a lot trickier going forward to try to figure out how to size the Fed's balance sheet to offset that hole in the private sector credit creation. How worried are you about inflation or any of the long-term effects of all of this money printing? Well, see, this is the thing. Inflation comes in in so many different forms, but all the money and credit that was created. I haven't looked at the latest Z1 from the Fed, but we shouldn't measure money and credit just with the Fed's balance sheet itself, because so many assets became money-like, especially U.S. Treasuries, right? And so the Fed's balance sheet at $6, $7 trillion right now

is small compared to the total amount of Treasuries outstanding. What is a Treasury bond? it's a dollar that pays interest, right? So it's really not that different. They're both effectively full faith and credit of the US government. I know legally that's not the case, but that's how the market treats them, right? And then on top of that, you've got the big banks that have issued credit. And then the repo market takes those treasury bonds and multiplies them, right? This is what Dr. Singh's work has looked at. There are three people who record that they on the very same treasury bond. It's called collateral reuse. And the way that repo accounting works is that the auditors look and say, all right, my client's got this treasury in their

brokerage account. Great. So I confirm that it's on their balance sheet. The problem is you've got that happening three times. You've got three different auditors looking and saying, my client's got a treasury. What you don't realize is that behind the scenes, there's really only one treasury and there are three people reporting it on their financial statements, right? So that's a problem because the bank regulators at the top can't figure out. And by the way, Chris Giancarlo, when he was chairman of the CFTC, talked a lot about this. He still is, of course, but he recognized this, that it's really tough to look down into the entire financial industry because there's so much double and triple counting of assets. You don't really know

how solvent the industry is collectively as a whole. You can't rely on the individual financial statements because you've got to be able to back out all that double counting at a macro level and we don't have the data to do it. That is part of the reason why he's so interested in blockchain because it allows you to figure out who really owns that asset or if it is rehypothecated or reused in any form. How many times has it actually been reused? Right now, nobody knows. It's a black hole. The office of the controller of the currency is now run by Brian Brooks, who was the former chief legal officer at Coinbase, as you know. And within the first 60 days of him being on the job, he issues the clarification that came out

this past week. And essentially what he said is, hey, if you are a bank, you should be able to custody the value of assets or valuable assets for your customers. That includes everything from safety deposit boxes to virtual vaults, is kind of the language they used. And that includes cryptocurrencies being part of those valuable assets of your clients. And so really issuing kind of a clarification. Walk us through kind of your understanding of like, what does this mean? And what are the ramifications? It's a big deal. And it's a bigger deal than most folks in the crypto industry understand. And, you know, look, the OCC copied Wyoming. His first pronouncement was looking at a special type of payment charter. I knew that wasn't going to go anywhere because

he would really have needed congressional authorization for that. He can't just change and interpretation of an existing law. And so I figured, all right, if that's what we're up against, that's not going to change anything. But this announcement yesterday or two days ago now absolutely changes everything. Because as of two days ago, national banks can custody digital assets. And it's just, it is what it is. They don't need to go through a special process unless this is a material part of their business. The way the banking regulation works is if it is a material part of your business, then you really have to go through a procedure with your regulator where they review what your business plan is and the impact on the bank from a safety and soundness

perspective. But if it's one of the behemoths, literally they can be in the business tomorrow because it's not going to be material. It's not going to have a big impact on the bank from a safety and soundness perspective. So yeah, we've got ears to the ground. We've got a lot of people multiple people who are inside the circle. I did not know this was coming. Most people didn't. They kept it a big secret, but it's here. And it's a much bigger deal than folks realize, in part because of some pieces that haven't fallen into place yet. But every US bank is now able to custody crypto. And when I say every, some are probably thinking, wait a minute, what about the state banks? Only a relatively small fraction of the number of banks in this country are regulated by

the OCC. The OCC regulates national banks, and then there are 50 state regulators that regulate state banks. At the end of the day, they're not different. There's maybe a perception that a national bank has an advantage just because it's national, but here's the difference. State banks have the exact same master account at the Federal Reserve that a national bank has. They can do the same things, and that state member banks, by law, can do everything that a national bank can do. So this is why I say every bank in the country now can custody digital assets as a result of that interpretive letter. The interesting question is, who put that interpretive letter in? That would have had to have been one of the national banks. And my first

reaction was, I was assuming it was Goldman Sachs. Goldman Sachs is a state bank. They're not a national bank. So I poured through the list of national banks. And by the way, we've got a couple calls from national banks as well, because not everybody realizes yet how meaningful this is, because I've seen some comments from some of the native crypto companies that indicate to me they don't understand what really happened yet, but they will. They'll figure it out. The entire landscape in the US just shifted, and now you need a bank license in order to be competitive. That's the bottom line. I'll also point to Fidelity Digital put out a tweet yesterday that indicates they get what's going on. And I'll paraphrase it. They said, you know,

congratulations to the national banks for coming into this industry. We'd be happy to be your sub-custodian. That tells you what they know. They know what's going on. And for Fidelity to be a sub-custodian to a national bank, it's one of the big ones. So there's kind of two components here, right? So a national bank basically asked and said, can you clarify for us what their current rules are. The OCC has clarified and said, yes, you may custody cryptocurrency. There's the implications on the legacy kind of financial organizations, and there's an impact on the crypto companies. Let's start with the crypto companies, because I think that's kind of more cut and dry. You previously said that now it's going to require a bank license for people to

be competitive on the custody side. Kind of elaborate on that a little bit and explain it. Well, custody and prime brokerage, and maybe even exchange. You know, again, it's sort of funny. I figured out a couple of years ago when I was in Wyoming working, you know, spitballing on what should a state do to grab a competitive advantage? We figured out that you needed to have a bank license in order to have a competitive advantage here. And the basic simple observation is crypto settles very quickly. Dollars settle very slowly. It's not complicated. And if you're trying to do crypto to fiat, you've got some settlement problems, which injects something called Herstadt Risk, which is, Herstadt was a big German bank that, that failed in the financial,

in the foreign exchange market and triggered a cascade of, of losses among a lot of, a lot of banks. And really what it is, is basically you just got settlement risk. If you don't have, it's like, you know, trading a baseball card, right? Both, both people hold onto the baseball card and then they let go at the same time. That's, that's, you know, you're, again, kids, Kids tend to have the better understanding of the way the world should work, right? And the adults screwed it up and set up these very different settlement cycles for dollars. And then there are a lot of wrinkles inside of it, too. FedWires can be reversed.

Most folks don't know that. You don't have settlement finality with FedWire. And then ACH is a very big deal because ACH transactions for consumers, they can reverse an ACH transaction for 60 days beyond the statement period. And if you're at the beginning of your statement cycle, that means your ACH transaction isn't actually settled for 90 days. So this is the reason why the crypto companies have, you know, if you put if you if you ACH a dollar payment into one of the crypto exchanges, they typically don't give you access to it right away. They want to know if you're going to try to take it back. And there's a lot of ACH fraud. You know, we I think most folks are aware of the chargeback risk in credit cards, but there's chargeback risk in dollar payments, too. So those are a lot of the real world problems.

And when we started working on some of our products, we spent a lot of time talking to institutional traders, but also just users of the payment system. Keep in mind, I came from a corporate world, corporate treasury world, working with corporate treasurers when I was on Wall Street. And they live this pain every day. There's a lot of problems with the fact that U.S. dollar payments are delayed. So I figured out pretty early on, and I haven't even talked about the securities piece. What does it take to be a qualified custodian?

A trust company doesn't cut it because of the way the laws are written. You've got to be a bank, and a bank in one part of the custody rule says you can be a trust company, but in the part of the custody rule that really matters, it does not include a trust company, and the definition of bank means takes deposits and makes loans, or you've got to be a state chartered bank, which is what a warranty is. But you've got to fit into those categories in order to be a true qualified custodian. And trust companies, unless they do fiduciary business, which there's only one trust company that custodies crypto that I know of that does fiduciary business. Fiduciary business means you're exercising discretion

over company assets. You're taking fiduciary responsibility for those assets. That is not what typical crypto custody is. So this is a long convoluted answer to say the trust company licenses are now obsolete. If a bank can custody crypto, particularly if it's one of the big guys, all the native crypto companies now need to get bank licenses. And it's funny, I was screaming this from the mountaintop long before I started Avanti, get a bank license, right? President Trump told Libra, get a bank license. It's not like folks weren't warned, get a bank license. Well, it's here now. Everybody's going to have to get a bank license. And it takes nine to 12 months to get a bank license. I don't like the fact that it does, but it does. It's an unbelievably difficult

process, which is why probably a lot of folks looked at it in Wyoming and didn't get it started. And I'm very glad I did because, you know, now I think Avanti's in the pole position. We're in a really interesting position relative to the shift that just occurred in the industry. Absolutely. And so with this OCC decision, that's the impact on crypto. Obviously, there's this massive impact on the national banks and kind of what I'll call legacy institutions. Many of them just got approval or permission or a green light, however you want to describe it. Okay, here we go. But I think a lot of these banks are either going to say one of two things. One, oh, shoot, we haven't been educated on this. We haven't done our work. We got to get up to speed. Or two is, we actually are convinced that this is the future. This is an innovative part of finance. We want to play here, but we don't have the talent to actually execute on this.

We don't have the institutional knowledge. We don't have the muscle memory and that expertise. And so maybe talk a little bit about how you see, what do these banks do? They've got the green light, but like what in practice, what is the impact? Well, for one thing, they're all fractional reserve. Okay. So I was thinking about the user activated software in the Bitcoin world that showed who really was in control of Bitcoin. It wasn't the miners. It wasn't the whales. It was the regular mom and pop users of Bitcoin. That's probably a misnomer because it's probably mostly 20 somethings, but in any event, you get the point. It's the regular users of it. And I think the big guys don't understand that. Just look at what happened when CBOE and CME came in,

when Bakkt came in. By the way, both times, Bitcoin's price went down. Why? Because the big guys are fractional reserved, right? They're not set up to be 100% reserved. They're not set up that their systems inherently rehypothecate assets, right? They are going to rehypothecate Bitcoin, right? And one of the interesting things that is going to come out of this is, do they really understand that? And do they, you know, what kind of risk protections are they going to put into their systems to ensure that they don't blow up? This literally could blow them up. And so they really need to be careful. And I'm sure the regulators understand that. One of the other pieces is the basic commercial law clarifications related to digital assets have

not been made in any state but Wyoming. And they understand that. They recognize that. We actually put some phone calls through folks into the regulators. And one of the pieces of feedback was we understand that there's legal risk in this because the digital assets fall through the cracks in existing commercial laws in the United States. They don't fit in the existing categories. That's what Wyoming did. We mapped them to existing categories. So you've got statutory protection in Wyoming that you don't have in any of the other states. And it hasn't mattered that much because intermediary to intermediary, there is statutory protection. But citing one of Nick Carter's studies, only 20 to 25% of Bitcoin and Ether are estimated to be held by intermediaries.

So the vast majority of digital assets are actually held by individuals. And they're the ones, when you have an individual involved in a crypto trade, that's not clearly legally enforceable. And the responsible attorneys, one of the stable coins actually warns this, that it's not clear that your transaction is legally enforceable anywhere in the world, because it's not clear where it fits within existing commercial law. I don't mean to call them out, because I think what they're doing is responsibly warning people, right? So with that in mind, how headlong do you think the banks are going to be going into this industry? And how comfortable do you think the examiners of the banks who understand this are going to be with

them going into it in a very big way? But then to come back around to answer where I think your question is going, this is complicated stuff, right? And you've got to have people who know what the heck they're doing. And it was interesting how Bakkt came out and they were going to be in Bitcoin right away. And they made some very big claims two years ago, I think it was two years ago, two summers ago when Bakkt came out. And then guess what? They didn't open for more than a year later. It all got delayed, delayed, delayed. And a lot of that was because I think they got in it and figured out, oh boy, this isn't what we thought it was. It doesn't actually map very well to our existing businesses. And our skill sets are really not ready for this. And they went

out and hired Bitcoin people. So now let's fast forward to whoever this bank is and those national banks that now are scrambling, and they are. There are only a handful of engineers in the world who know how to do this right. And I think the skill set, having been inside one of the big Behemoth Banks and worked on their blockchain working group with the CTO of the company, I will say that the skill set is just different from an engineering perspective. There's a culture difference, massive culture difference, but the skill set's really different too. And the best way that I explain it is the organization of the traditional financial services industry is very designed towards delayed net settlement. And you've got all

these layers of intermediaries who settle with each other, and everybody owns their own data. And so you're batching, you're still really batching transactions, not in the old sense, but you're not getting legal final settlement until after, well, it can be days, but the banks themselves settle with the Fed after hours every night, but they're each batching. So they're net settling on a delayed basis against each other every day. And so that's, that's a very, that's the architecture of traditional financial services. And they use, you know, traditional centralized SQL type databases. They, they, they have very, very, very, very, very strong firewalls. And then once you get, if a bad actor gets inside the firewall, they get everything because it's

unencrypted. Why does it need to be unencrypted? You're dealing with, you know, HFT trading customers. It's just their architecture is not designed for decentralization. So what I just described is this layered delayed net settlement system with centralization and everybody owns their data. Now we're going to decentralization, no layers whatsoever, really fast settlement cycles, and everybody shares their data. It's a totally different skill set and really a totally different mindset. And then again, when you start putting Bitcoin into the collateral pool, and all of a sudden repo accounting comes in, and you start thinking you actually own the Bitcoin that's on your financial statement, because it's in IOU form, and your auditors look and say, yeah,

I've got that IOU. But maybe you really don't own it, because maybe that Bitcoin got rehypothecated. At least with Bitcoin, you're going to be able to have a better sense than with traditional securities, how rehypothecated that Bitcoin was, but it's still a danger, right? So there's just a lot that the traditional financial institutions either, well, they need to understand it. I don't know if they do yet. We'll see who, you know, when this big guy comes out and starts getting into digital assets, we'll see if they really understand it. I think if they had been picking off the right engineers all along, that we would have known that. It's kind of like with the ASIC miners. If a big government were coming after Bitcoin, the ASIC miners would suddenly start

disappearing from the market, the chips, because they're so specialized. It's just like with the engineers here. They're so specialized that if the engineers started disappearing from the job market and suddenly appeared in one place, I think we'd kind of know about that. We kind of knew about Square before it happened. We don't know about that with this big bank, whoever they are. So it's going to be fun. Grab the popcorn. And it feels like this is definitely going to be a build or buy analysis by whatever bank put in the request, but also all of their competitors as well. And I get the feeling that you're on the same side as I am, which is there's going to be a lot more buying than building because of this. We have to. Yeah. Sorry to talk over you. That

is exactly what the point. We're vehemently agreeing with each other. Yeah. Because of all the reasons I just laid out, they're going to have to buy. And here's where the culture difference starts to become a really interesting issue. A lot of the crypto companies were started by natively crypto people who've never worked in the financial services industry. A few of them have, for sure. So they have some sense. But they've also got huge teams of people who are kind of anti-bank, right? And now if a big bank comes in and buys them, you know, we'll see how this whole thing plays out. Again, you know, grab the popcorn. It's going to be fascinating. But I guarantee, I know firsthand, there's just a lot of phone calls being made. There's a lot of activity

happening right now. And I also know there's some native crypto companies who don't yet understand the magnitude of the landscape shift that just happened. They will figure it out in the next few weeks as the pieces fall into place. There's a reason why I've always said long Bitcoin short the bankers. You know, it's funny. I was thinking about that because obviously you're invested in Avanti, right? I mean, it's like everything in life. Nothing's quite black and white like that. And some folks on Twitter were trolling you for that statement. The bank wrapper around traditional crypto, traditional is a misnomer. The bank wrapper around crypto businesses makes perfect sense. The traditional bankers coming into crypto, that's where we've got a

bit of a risk. So we want the traditional crypto companies to be able to compete in the US and they need a bank wrapper to do it. The trick is, to my knowledge, I mean, it's possible Coinbase, Obviously, Brian Brooks came from Coinbase. It's possible Coinbase already has a bank application in. But, you know, it's thousands of hours of work and it's typically nine to 12 months to get your charter approved. And even if you go out and buy an existing bank, you're still going to have to go through that same process. It's actually even a longer process if you buy an existing bank because you've got a change in control. Right. And so, frankly, I think what will end up happening is that the banks will buy these companies because it doesn't trigger that whole change in control process. But the culture clash is going to be fascinating. There's just going to be a massive upheaval in the landscape of the crypto industry. And like I said in the tweet storm yesterday, the VC funds are the biggest winners.

And I think the consumers, the crypto consumers are also really big winners, too. As you know, I've been pretty critical of the terms and conditions that the existing crypto providers have been sharing, have been offering their customers. And the big banks are definitely, and the regulators are not going to let one-sided terms and conditions be out there in the marketplace. So the consumers, the regular folks who trade with crypto companies are going to be winners too. And that's another one of the reasons why native crypto companies who don't have a bank license are going to have to do something here because they're just going to get elbowed out by the bank license and bank license companies. And they're also, you know, by offering

more respectful terms and conditions that are not so one-sided to themselves. Again, you know, markets work. The institutions are going to trade with the banks that have better terms and, more respectful terms and conditions. Yeah. You're nailing the reason why I don't say long Bitcoin, short the banks. I say short the bankers, right? Because the ethos is different, right? In terms of, I actually think there's going to be an entire kind of coalition or demographic of people who say, hey, look, I need to use the bank legal structure and that wrapper, as you talked about, but we just want to do it a different way, right? And obviously you guys are leading the charge there. Give us an update in terms of Wyoming and Avanti. What has transpired?

Last time we talked, you hadn't raised money yet. There's a lot that's gone on. Just walk us through what you've been up to. Well, I'll point to the public announcements we've made on our website. Like I said, again, it takes nine to 12 months to get a bank license. We're going to be on that short end. It started in January, and we should have it in October. I didn't actually have the bank application in at that time, but we were doing a lot. I was, when it was just me doing a lot of work with the regulators of, um, uh, we were going down the path by the way of, of the Abbott, uh, um, uh, proposal. I was working with the regulators on that. Um, that's been in process since January, but, uh, but, uh, it, it does take time for sure to get, um, to, to get a bank

license. And, uh, so when we last talked, I think it was right after the markets were exploding with COVID and we were laying out from a macro perspective what was going on at that point we didn't have our bank uh charter application in uh we do have to have the bank oh don't hear my light just oh okay sorry that's funny um my uh the bank charter application uh is uh it's funny it's a new gig I just a new setup I just got and it's not very stable obviously I need to worry need to figure out figure that out uh anyway uh that's funny um we have our charter application in, we raised money. And like I announced yesterday, the charter application process has been accelerated. I didn't want to announce last week, but you knew as an investor in Avanti

that we actually got that official letter that our application has been accepted. What does that mean? It doesn't mean that we're chartered, not at all. So we still have some risk that we're not going to be able to get chartered. What it means is that all of the major legal issues and operational issues and examination issues that bank examiners care about, we've passed all those hurdles. And there's just been extensive, extensive, literally when I say thousands of hours, we were trying to estimate it. And I was like, man, I don't even know how to estimate it because we've been burning midnight oil. There was one point where the regulators asked us to get something in faster than we'd planned. And for literally 24-7 for

about 10 days, somebody in Avanti was working. It was nuts. And the team has just been absolutely amazing. We've just, because we were doing this, we're just, the whole thing has been a sprint. And we realize now the value of what we've done because we've got that bank charter application that's been accepted, which is in this environment is golden, given that the world is going to be shifting to banks. And so as this occurs, like you've got two kind of key pieces, right? So you've got the bank charter application that's in, that looks like that's going to get granted on the shorter end of that nine to 12 months. That seems pretty clear cut. I saw a couple of questions online, just like who is going to be the target customer there? Is that consumers and retail? Is

that institutions? How do you think about kind of the breakdown of the customer base? Yeah, we're definitely going after institutions. That's my background. And that's where I think, especially being a bank, it's just so hard to be a bank that serves consumers. Trust me, I've been deep in the weeds of all those decisions. We made the decision to go ahead and serve high net worth individuals because some of the crazy regulation that we would face if we served regular consumers is not something we have to take on. The complexity involved with that is staggering. And just the magnitude of regulation involved in serving consumers as a bank is just really stunning. There's just so much compliance cost in serving a bank. And by the way, it makes me really take my hat off to Silvergate, especially, because they were first, and then Signature and Metropolitan. Man, they took on a lot of risk in serving this industry, and boy, are they ahead, too, given what's happened.

It's going to be interesting to see how the landscape shifts vis-a-vis them, because they've got the policies and procedures in place. They've been through the regulatory ringer on serving crypto, and now they can custody crypto. I know in Silvergate's case, it was publicly disclosed that they were applying for a New York trust company subsidiary so that they could custody crypto, which you may think is kind of strange because banks have trust powers. Why weren't they doing it within the bank? Well, it's because of the regulatory issues that were until two days ago in place, and now they can. So Godspeed, um, they, they, they, they paid their dues and, uh, and now they get to ride that wave.

Uh, yesterday in the announcement that you made, uh, you mentioned Avid. I know that there's, um, a lot of, uh, kind of things you can't talk about, but, uh, you mentioned it. And so maybe kind of just whatever you can elaborate on there. Uh, what, what exactly is that? And kind of what's the thought process? Well, it's, uh, so, so I'll step back by saying my whole career, I started three businesses within big banks.

So I know what it takes to do that. And the last business, actually all of the businesses I started were in some way designed to solve problems that regulation created and do it by figuring out how to use a different set of regulations and meld the two. You know, find the way to work on a compliant basis in between the two regulations. And so an example was the large-scale pension businesses. All of these business ideas are very simple. And frankly, great business ideas are always very simple.

what I realized is that a pension and an annuity are the same thing economically. It's just that they're regulated in very different ways. And so I figured out how to take corporate pension obligations and get them restructured in a way that life insurance companies could provide as an annuity and do it in a way that was a win-win-win for everybody, a win for the pensioners because they got a fully funded pension with a much more solvent counterparty. We did them all in separate accounts that are legally segregated on the balance sheets of the insurance companies. But because of the efficiencies that we were able to eke out, it's like an all-stock M&A deal where both stocks go up because you have real efficiencies that accrue to both sides.

And you just have to figure out which efficiencies go to which counterparty. So we were playing in, I figured out a way to have win-win-win business opportunity. And it was a product structure that took an unbelievable amount of detailed structure. And what I will say here, when I said I don't think that Avid will end up with a counterpart, there are a couple of very particular reasons why that I won't lay out. But this is very analogous to what I've done in those other businesses. Really deep, detailed understanding of regulation. It's something that only a bank can do. A broker dealer can't do it. You've got to have a bank license to do this. and it's something that can only be done because of a legal precedent in a certain part of the country. And, you know, you've got to have an engineering team to do it and then structure it

in a way that is a cash equivalent. There is no analogy to this. And oh, by the way, you've got to be in a jurisdiction where the commercial law is clear and you've got to also be a 100% Reserve Bank, right? So to be able to pull something like this off, it's a very narrow universe. But we've been working with, we haven't announced this yet, but we've been working with the retired treasurer of a very, very, very large Fortune 10 company. And he's been helping us. And again, I want to solve problems as much in the crypto world as in the end user world. The buy side and businesses are the users of the of the payment system and centering corporate treasurers are uh are are not as well known as hedge fund managers because you don't see them talking about

the state of the financial market on cnbc but they actually control a lot more flow than than big institutional investors and so and they live this these the issues of the payment system and how, uh, their, the payments are delayed. Um, I, I did on my, on my website, uh, publish an interview with the CFO of Seagate technology, uh, now for almost four years ago, he's no longer there. Um, but he, uh, he talked about, um, one of the challenges that they had was that they would get, um, uh, you know, multi hundred million dollar vendor payments and they, and they'd get it, um, once a quarter and it was due on a particular date and they always got it the next day. And that one day of delay in payment, the customer always blamed it on the payment system.

That one day delay in payment for the working capital that a company had to finance for that one day multi-hundred million dollar delay in payment was staggering in cost. And so I think that businesses, if they have the ability to use real-time payments or certainly same-day payments, give them a choice let's let them do it uh and i will say also one of the interesting things about the way we structured this is it's not a competitor to the existing payment systems the fed has got fed now um that is that is coming this actually complements fed now it doesn't replace it and so um this is this is a really fed now is going to speed up settlement cycle so it's definitely going to attack the problem i just i just talked about but if you're a trader and you

want your trade to settle fast so you don't have counterparty risk or you don't have capital tied up in an unsettled trade, then you like something like this. If you are a corporate treasurer who's got a payment that you really, really need to be able to track and not get lost in the system, you really, really, really need to be able to know that it got to the right place at the right time, then this is going to help you. So that's what we're working on. It's big stuff. I am obviously a huge fan so much so that we invested. You've done a fantastic job laying out kind of the OCC's decision and Avanti and kind of how that decision will affect both the crypto companies and legacy institutions. One of the things that I think is not yet being talked

about a lot in the crypto community and also kind of into the banking world is we're in an election year. And so obviously there's a very specific kind of posturing that comes from a Republican led presidential administration who cares who the actual president is, but just there's certain things that come from a Republican-led one versus a Democratic one. If there was a shift back to a Democrat-led administration, do you foresee impact, whether positive or negative, on any of this? Or do you feel like this somewhat is insulated from kind of who is actually in control of the presidential office? No, it's definitely not insulated. And keep in mind, Brian Brooks, who's done a lot of great things for crypto and just literally, even if nothing ever ends up

coming of this, he certainly helped mainstream it. But needless to say, he's a political appointee. He was actually, he's the acting controller. He's not even been confirmed as controller. So one of two things is going to happen. Either he leaves in January if Biden wins, or he gets another four years, and then presumably he'll be formally nominated for the confirmation process. But think about that, right? You've got a whole staff of career people, and now an acting commissioner comes in and definitely shakes things up. As you can imagine, that's a difficult position for him to be in. But the career people are the ones that have the continuity. And they're also the ones on the ground who are examining the banks. So that's going to be interesting to see. Is this just

coming from the top, from somebody who's temporarily in their job, and it's more PR than substance? Or is this real? And we just have to watch this play out. But there's no question that it does matter now. To your point, will a Biden administration be any different? The Trump administration has been schizophrenic on this, right? You had Trump himself attack Bitcoin last summer. You had Mnuchin essentially say, hell no, right? And now here we've had this very big U-turn from the bank regulators in the United States. And by the way, the head of the FDIC is also a political appointee. The only one that's somewhat insulated from it just because of the different cycles and appointee cycles and governance is the Fed. The Fed's definitely

more insulated from the political process than the OCC and the FDIC are. But there was a big U-turn that just happened. So I don't think that the Biden administration, to come back and answer your actual question, is going to be any different. There are going to be folks in the Biden administration who hate this, and there are going to be folks in the Biden administration who love this. So is there a world where, you know, Trump does not get reelected, there's a Biden led administration, Brian Brooks is out as kind of the comptroller of the currency, and there's actually a reversal of this clarification, or kind of could we go backwards in some way? Well, I mean, having an interpretive letter come out for a particular bank, it's kind of like an SEC

no action letter, they don't reverse those. So, so yeah, no, this is this is this is this is for sure by putting an interpretive letter out, this is going to stick. But it is the case that it may get cut back. So one of the things that hasn't happened here, we haven't talked about this yet, is the rules. There are no rules. There is no supervisory manual. The bank regulators have no idea how to supervise this. And banks go through regular examinations. That's one of differences between a bank and a trust company. They go through regular examinations. The trust companies, I happen to know that most of the trust companies in the crypto industry have not been examined by the regulators yet. They don't know if they ever have a regulatory exam. They don't

really understand the magnitude of what that's going to be like. It's a lot more invasive than an audit. But part of the reason I think that some states like Nevada and South Dakota haven't examined their trust companies. New York has. But part of the reason they haven't examined them is there's no supervisory manual. They don't know what they're examining. So I happen to know that literally there is exactly one supervisory manual out there in the United States, and it's in Wyoming. So ultimately, the regulators share things with each other. The Wyoming supervisory manual, the finishing touches are being put on it right now, and they will end up sharing that through different regulatory means.

So that's going to accelerate things, but they don't have it now. And then you've also got the point of training, right? The Wyoming folks have been working on this for two years. There are people who really are deep into crypto and have been working with the applicants and advisors in crypto for years now. And that doesn't exist at the OCC.

So I think that this is definitely going to take more time. And even though the interpretive letter is out there, that does not mean that the examiners are going to let this through very quickly. And I think they may take their time. And frankly, time is on the examiner's side precisely because the commercial laws are not clear. I should have mentioned earlier that there is a process that will clarify commercial laws. The Uniform Law Commission, a group that Wyoming got into a bit of a tussle with because they were critical of us for jumping out in front, they have a working group that has been now underway for a year. And they're looking at revising the commercial code for digital

transactions of all types, including virtual currencies. And it's coming, but that's going to be probably a three-year process, at least. And for example, I happen to know in the state of New York, there's one part of the Uniform Commercial Code where New York never adopted the update that was put out more than 20 years ago. So sometimes it takes 20 years for these things to get through the state legislatures. They've got to go through all 50 state legislatures. This isn't something that Washington, D.C. can just by fiat, you know, say I'm changing things and every state has to follow. Commercial law is state law. And so every state has to update it. And so this is a long process. And again, the regulators are going to be looking at that

thing. How do I know that I've got legal enforceability of these contracts? You are a bank, you have to operate in a safe and sound manner. You're not allowed to take this risk. And unfortunately, I will say, though, the impact of what I just said is that the really, really, really big banks are the ones that are going to be able to do this. And the regulators will let them do it because it's not going to have an impact on their safety and soundness of their bank. I will say, though, when I talked about the blow-up risk previously, the reason why there's blow-up risk here is there's no lender of last resort in Bitcoin. Nobody's creating any more of it. And so if they don't understand that and they don't get the controls in place to be

sure that the Bitcoin is not being rehypothecated and it's not just an accounting illusion that you've got the Bitcoin, you've got to actually have the Bitcoin, then they're in for some trouble. And again, the regulators, I think, are probably going to do that. Wyoming's statute requires proof of reserves as part of the audit process. Can you imagine if the banks had to do proof of reserves on their securities book? They couldn't because, you know, number one, it's not provable. And number two, the securities don't exist. We all know there's so much collateral reuse that somebody is going to come up short in the game of musical chairs. But in Bitcoin, you can't play that game. There is no more Bitcoin that's going to be created.

And so all these issues, these very, very real hurdles are going to be there, and the bank regulators know it, and they're not going to make it easy. Again, I started three businesses inside big banks. I dealt with regulators. They're not going to let the big banks off the hook very easily. But by the same token, though, they're not going to put them through the enormous upfront pain that a small bank that's taking this on or a de novo bank like Avanti that's taking this on is going to have to go through. And we've gone through that pain already. It feels like there's a tectonic shift in kind of the finance world, legacy world, and crypto is at the center of it. And kind of Bitcoin as an asset is growing up.

It's maturing. The last question I have for you is just talk a little bit about maybe the downsides to the financialization of Bitcoin, right? You're talking a lot about kind of how this will change the banking infrastructure and business model. What does this do to Bitcoin in kind of the long term? Yeah, it's the same thing. When I wrote the Forbes pieces a couple of years ago about backed getting into it, you know, Bitcoin is going to get financialized. It's going to get rehypothecated. Um, it, it, you know, part of some folks were, were scratching their heads.

Why did Bitcoin's price not go up? It's for the same reason that Bitcoin's price actually went down, um, when backed got announced. Um, and when the futures, uh, um, companies entering the space got announced because this is gonna, they're going to financialize it. And the, the misnomer about financialization is that it actually helps price. It actually suppresses price. Um, yes, you get more liquidity. That's a, that's a positive.

Yes, you're going to have a new 10-ton gorilla in the industry, it seems. And some might say that's positive. Some might say that's not. They're going to be bringing more liquidity, no doubt. But they're also going to be doing the same tricks that Wall Street does because they can't avoid it. That's the way their systems are designed. And as a result, Bitcoin is going to get financialized even more.

And that's not good for Bitcoin ultimately long term. At the end of the day, though, again, the real users control it. And so I'm not worried about Bitcoin one bit. If they want to come in and suppress the price, I'll just buy more. But you got to realize that the game just changed, right? With a 10-ton gorilla coming in. And I'll close by saying, you know, a lot of your listeners are probably just hearing all this. And it's like nails on a chalkboard to them because it's a regulatory game. And

Bitcoin wasn't supposed to be involving banks. And why are we talking about regulation? We're trying to decentralize things. The reality is that you're right, Bitcoin is decentralized, but there's a lot of money out there in the universe that has to be held by third parties. about 80% of the financial market is in institutional hands that are subject to the requirement that a third-party custodian be involved. And because of that, the operational systems, for those that even don't have that requirement, they all just de facto do it. They don't custody their own assets. They hire State Street or Bank of New York to do it, right? And then the manager manages them. But by law and by tradition and by operational

real-world constraint, that's the way the world works. And so if we're going to have that big money coming in, we're going to have to find ways to provide those services in a way that doesn't violate the Bitcoin ethos. And maybe last statement, if a really big bank did get the U-turn in Washington, D.C. done with Brian Brooks' help, what does that say, right? Again, I think the UASF analogy is a really good one. And for Avanti, in the position that we're in, the Fed master account is the same Fed master account the bank has, the big bank has, right? So as a small state bank, we're not disadvantaged relative to them. It's just that maybe they're, as Patrick used to say, they've got the regulators on speed dial. And as a small bank, certainly in DC,

We don't. So there's a David and Goliath thing about to go on. I know who the traditional crypto industry is going to support, the one that actually really, truly holds their ethos. But I also know who the speculators are likely to support. They're going to support both because they want to see more liquidity. And it's all to them. They've got to be mercenaries. It's all about best price. It's all about who's giving them liquidity. uh and if and if the big bank comes in and starts lending and rehypothecating you know frankly the hedge funds that are in this space are going to do business with them uh but beware because at the end of the day they will never control bitcoin uh the the end users control bitcoin and uh and so i'm not worried about it but boy it is going to it's a massive shift of the landscape i think folks who are listening to this podcast are going to get that sense now, that even if they don't yet, and they don't believe you and me, they will see it in the next few weeks. Caitlin, I could talk to you literally forever about this stuff. Thank you so much for taking

the time to do this. You have one of the best commands, I think, in terms of all the intricacies and nuances of it. Where can we send people to follow you or learn more about Avanti and stay updated on all the progress you guys make. Yeah, we will continue to put press releases out at AvantiBank.com. And then obviously on Twitter and LinkedIn, I also have a website, Caitlin-Long.com, but I haven't had time to update it. So apologies that it looks kind of crappy right now. We'll get it fixed eventually, but I got bigger fish to fry right now. So awesome to talk to you again. Thanks, Pomp. Absolutely. We'll have to do this again and keep going. The rest of us are cheering you on. Thank you so much. I appreciate it.