Caitlin Long's Custodia Bank will hold 108 percent of customer funds on deposit... if the Federal Reserve will allow it to open. | Lex Villena

Caitlin Long wants to start a new kind of bank…based on a very old model.

"A 100 percent reserve bank that would keep all of our cash at the Fed," she says. She was influenced by the work of Austrian economist Murray Rothbard, who saw fractional reserve banking as "a shell game, [and] a Ponzi scheme," arguing that banks should work exactly like safety-deposit boxes, or "money warehouses," required to keep all of their customers' money on hand at all time.

Long has a law degree from Harvard and had a conventional career on Wall Street, working at Morgan Stanley, Credit Suisse, and Salomon Brothers. After the 2008 financial crisis, she thought all of the standard accounts explaining the meltdown fell short. In search of a better framework, she discovered the Austrians and Rothbard.

"The concept here is, let's just turn this into a basic money warehouse to the maximum extent possible within the law," Long tells Reason.

In March 2023, when rumors started circulating on Twitter that Silicon Valley Bank might be in trouble, its panicked customers withdrew $42 billion from their accounts in a single day, leaving it with a negative cash balance. In short order, regulators shut it down.

It was a classic run on the bank, which is a phenomenon that's only possible because of a standard practice known as "fractional-reserve banking," in which the money in your account isn't actually sitting in your account. The money banks hold for you is mostly loaned out or invested. They just need to make sure that they have enough cash on hand to cover any withdrawals. The system works fine—until everyone comes for their money at once.

"A lot more people in the world now recognize that the money in their bank is an I.O.U. to a leveraged institution," says Long. "Most people didn't think about that until recently."

So she founded Custodia Bank, based in Wyoming, which will hold 108 percent of its customers' deposits in cash at all times, serving as a true Rothbardian money warehouse that will also custody bitcoin for interested customers.

In January, the Federal Reserve Board denied its application for a master Fed account, which would allow them to store cash and transact using Fed payment rails like every other major bank. Custodia has sued the Fed to force it to reverse that decision.

"They're basically creating a federal veto that has never in the history of the United States existed," says Long. "And what I'm standing up for and saying is that it shouldn't be politicized, period."

Reason sat down with Long in Miami at the Bitcoin 2023 conference to talk about her case against the Fed, why she believes in full-reserve banking, and how Custodia could help bitcoin go mainstream.

Photo Credits: Minh Nguyen, CC BY-SA 4.0, via Wikimedia Commons; Tony Webster, CC BY 2.0, via Wikimedia Commons; Lian Yi Xinhua News Agency/Newscom; Richard B. Levine/Newscom; Nicolas Economou/ZUMAPRESS/Newscom; Stefan Fussan, CC BY-SA 3.0 DE, via Wikimedia Commons; Ken Cedeno/Sipa USA/Newscom.

Music Credits: "Time to Move," by VESHZA.

Editor: Adam Czarnecki
Graphics: Regan Taylor

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