Crypto assets ‘fundamentally incompatible’ with current financial system: Avanti Financial Group CEO

Avanti Financial Group CEO and Founder Caitlin Long joins Yahoo Finance Live to discuss bitcoin being down over 65%, Fed policy, and Sarah Bloom Raskin’s stance on crypto regulation.

Video Transcript

BRIAN CHEUNG: It is time for our Crypto Corner presented by Intuit Turbotax Live. With a macro picture including– it’s really remaining a part of Bitcoin story over the last month or so. You can see the big ups and downs, currently at about 43,500. It’s going to be very interesting to see what Bitcoin does as the Fed actually begins the process of tightening later on this year.

So let’s bring in Caitlin Long, Avanti Financial Group CEO and founder, for a little bit more on the story here. Caitlin, it’s been a rocky month, let’s just say, for Bitcoin and crypto investors at large. What do you see as the biggest story for crypto in 2022?

CAITLIN LONG: Oh, my gosh, we’re only a few weeks into the year, and there have already been a huge string of crazy headlines, which is normal for this industry. And so I think to be honest, no one can predict what it’s going to be, but at a macro level, we will continue to see big institutions come into crypto. Those of us like Avanti, who are building for the next bull market, are building critical infrastructure that big institutions require, in many cases, before they will come in.

We’ve seen some institutions like hedge funds and family offices come in. But the big money, like pension funds, endowments, and foundations, is still largely on the sidelines. They’re waiting for the good infrastructure that they’re used to dealing with, namely bank infrastructure on the custody side, to be implemented. And that’s where Avanti is playing. And we’re optimistic that we’ll be able to bring that.

AKIKO FUJITA: Caitlin, we always like to talk to you about what’s happening on the regulatory front. And I know the New York Fed just released their report on stablecoins. You had a pretty detailed response to that on Twitter, which basically sounds like, there’s a bit of good and bad in there.

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CAITLIN LONG: Right, yes, there’s a lot of wonkiness to the money market plumbing that relates to specifically to stablecoins, which are a US dollar instrument. It’s really a new type of US dollar payment instrument that can move US dollars faster, better, cheaper, more transparently, than traditional payment systems can and it’s all happening outside of the banking system. And so how it’s integrated into the banking system is the specific question that has been studied quite a bit by central bankers, especially the Fed.

And the New York Fed, which operates the Fed’s trading desks, releasing that paper this week, it really was a big step forward. There is still a desire on the part of regulators to have only insured, leveraged banks issuing these instruments. And I laid out, despite the big steps forward that that paper implicated, that, in fact, actually, you don’t want leveraged banks to be the ones that issue these crypto instruments. They settle very fast.

And the traditional financial system is designed for slow settlement. And those two things are fundamentally incompatible. There’s a lot more bank run risk if you have leveraged banks that are at the core of the financial system issuing these instruments. And the main reason is because they’re leveraged and they do what banks typically do, which is borrow short and lend long. And if you start to see mass withdrawals in the span of minutes, which could happen with these fast payment instruments, that does increase the risk of some financial system instability.

BRIAN CHEUNG: And so important to note that the stablecoin space is still growing. It’s not like it’s at massive scale enough for systemic risks. I know that’s something that some people have pointed out. But I want to kind of switch gears here and just kind of ask about the personnel that’s going to be down in DC, when you think about Sarah Bloom Raskin as the Fed vice chair of supervision facing a Senate Banking Committee vote next Tuesday.

The Federal Reserve doesn’t have as direct of a say on the regulation of especially unbacked cryptocurrencies, but did you see anything from a commentary that suggests there might be things to watch for in the regulatory framework as it relates to crypto, if she is ultimately confirmed?

CAITLIN LONG: Not specifically from her, but as you know, in all of the– there are five Fed nominees, including Chair Jay Powell, that are coming up for vote next week. And in many of the hearings, it came up. Chairman Powell, of course, talked about it, as did Governor Brainard, and made some specific comments about them, specifically related to where Avanti is, which is a special purpose depository institution that is purpose built to be a bank for crypto custody, again, solving some of these institutional infrastructure needs of big, traditional fiduciary asset managers. Those have not been approved yet.

And both Chair Powell and Governor Brainard did make comments that they are making progress. And Avanti has been very patiently working with the Fed. There are big policy issues that have had to be resolved. And we’re optimistic that we will get through those.

BRIAN CHEUNG: And kind of related but also not related, Sarah Bloom Raskin was part of a reserve trust, which was a Colorado chartered trust company, that applied and did get a master account with the Fed. And this is kind of inside baseball, fin reg stuff, but it’s relevant because Avanti has also gone through the process of applying for a master account. Give us an update, first of all, on how that’s going.

And then secondly, what are the obstacles to getting around this? Because there were some political interests in the way that maybe Sarah Bloom Raskin had gone about conversing with the Kansas City Fed, which clarified that there was no backdoor dealing here, but ultimately, they did end up getting it.

CAITLIN LONG: Well, this has been a bit of a black box for years. And the different Federal Reserve banks that– there are several reserve banks that each independently have been making decisions about who gets access to what’s called a Fed master account. You’ve got to be a depository institution to be able to get access to a Fed master account. That’s what the Federal Reserve Act specifically says. And so fintechs that are not depository institutions cannot get access to a master account. Those like the Wyoming special purpose depository institutions are expressly depository institutions and therefore eligible.

But it is a bit of a black box process. The Fed last, I believe it was April, put out a number of guidelines for public comment. It’s coming up on almost, what, nine months, and they’re still sitting out there, not finalized. And it is all part of the same question because you’ve got to be a bank under the law, specifically a depository institution under the law, to be able to get access to the Fed’s payment system.

And the extent of the discretion that the Federal Reserve has, and if so, what criteria are allowed to be applied are open questions. And there’s been a lot of discussion among those in the banking world about disparate treatment of the different applicants over the years for specific master accounts.

BRIAN CHEUNG: All right, well, still pending, but we’ll have you on for the updates as you get them. Caitlin Long, Avanti Financial Group CEO and founder, thanks again for joining us.