- June 5, 2021
- Posted by: Stratford Team
- Category: Markets
- Caitlin Long is the founder of Avanti Bank, a crypto bank that serves the digital asset industry.
- A 22-year Wall Street veteran, she came across bitcoin while digging into the 2008 financial crisis.
- Long explains why Wall Street doesn’t matter to crypto markets and shares the real value of crypto.
- See more stories on Insider’s business page.
Now that cryptocurrencies have become a trillion-dollar force to be reckoned with, Wall Street is eager to get in on the action.
But long ago, in the dawn of bitcoin’s creation, there were already many bitcoin enthusiasts inside the big Wall Street banks. One might remember when Blythe Masters, a storied JPMorgan banker who was credited with creating credit default swaps, left the bank in 2014 to join the still-nascent crypto industry
Caitlin Long, the founder and chief executive of Avanti Bank, was another one of them. In 2012, she was running Morgan Stanley’s pension solutions business and was trying to identify the cause of the 2008 global financial crisis.
To her, the mainstream explanation that the crisis was caused by contagion from a credit bubble in the mortgage market was the symptom but not the cause. In her day job, she had been conducting large pension transactions and came across a number of settlement issues in the traditional financial industry.
In the securities industry, settlement refers to the gap in time between an order is executed in the market and when a trade is considered final. Historically, a stock trade could take up to five business days to settle, now it takes two business days to settle in electronic trading.
Long was initially skeptical of bitcoin but when she went back to the cryptocurrency with these settlement issues in mind, it was a eureka moment.
“All these settlement problems in the traditional financial services industry could be solved by the blockchain technology underlying bitcoin and by bitcoin itself,” she told Insider in an interview.
By late 2014, Morgan Stanley had set up its internal blockchain working group, but there was still scant information about bitcoin and even fewer legitimate venues to purchase the cryptocurrency other than Tokyo-based bitcoin exchange Mt. Gox.
“I wasn’t sophisticated enough back then to understand the counterparty risk I was taking on by leaving my coins in an exchange. And to me, that is the single cheapest tuition I’ve ever paid that I lost money in Mt. Gox,” she said. “I didn’t put much in, but oh boy did I learn a valuable lesson when Mt. Gox went bust.”
The real value of cryptocurrencies
Today, as cryptocurrencies become part of the mainstream consciousness, enthusiasts have put out price targets for a single bitcoin that range anywhere from $100,000 to $1 million.
“Price is the least interesting aspect of these markets,” Long said. “Most speculators, of course, focus on nothing but price and during bull markets that captures the headlines, but the real value is the technology itself and what it can do.”
What bitcoin and its blockchain technology allow users to do is (1) transmit money across the planet at the speed of light and get confirmations within a few minutes, (2) ensure irreversibility in the sense that once a transaction goes on a public blockchain, it cannot be reversed, and (3) it’s programmable money and users can write software to program them.
“Those three features do not exist in fiat currency systems, so those three things matter,” she said. “And that’s what’s going to solve a lot of the settlement issues in traditional financial services.”
Long, who started her Wall Street career with Salomon Brothers and later held senior roles at Credit Suisse, knows the proverbial “market structure debt” within the financial and banking system all too well.
“We are stuck with this layered market structure where each intermediary has to process transactions in sequence, they can’t do it simultaneously,” she said. “Because of these market structure issues that need to delay settlement, it creates counterparty risk and ties up capital. And one of the fundamental tenets of finance is if you can turn your capital more frequently, you increase your returns.”
Wall Street vs. decentralized crypto markets
Because of the promising blockchain technology and indisputable performance of major cryptocurrencies, it is no wonder that institutional investors have become more interested in getting exposure to the asset class.
However, in Long’s view, there is a limit to the role that Wall Street can play in providing the institutional-grade infrastructure for the crypto markets.
“The assumption that Wall Street matters to these markets is a fallacy because the information frontier in these markets is not in New York. It’s not in Silicon Valley either,” she said. “These markets are decentralized and Wall Street will never be able to control them.”
She explains that 75% to 80% of bitcoin and ether, on average, are held by individuals rather than intermediaries, and during bull markets, even less crypto is held by intermediaries.
“It means at the end of the day that Wall Street will never be able to have some clearing for digital assets,” she said, “because Wall Street will never be able to get its hands on a sufficient amount of the collateral to create a true clearinghouse.”
For example, Long’s Avanti Bank aims to “serve as a compliant bridge to the US dollar payments system and a custodian of digital assets that can meet the strictest level of institutional custody standards.” Based in Wyoming, which is increasingly becoming the crypto hub of America for its crypto-friendly laws, the bank is a special purpose depository institution in the state.
“The biggest challenge in 2017 for the industry was that banks wouldn’t bank the industry and legitimate startups were losing their businesses right and left because banks would not bank them,” Long said. “In the United States, if you don’t have a bank account, you’re not a legitimate business… the lack of banking services to this industry in 2017 was the biggest issue that the industry was asking for help on and that’s why Wyoming stepped forward and provided it.”