Podcast Summary: The Next FTX-Level Disaster Is Already Brewing… On WALL STREET | Caitlin Long

The Wolf Of All Streets hosted by Scott Melker delves deep into the evolving landscape of Bitcoin, finance, and regulatory dynamics with industry leaders. In the episode titled "The Next FTX-Level Disaster Is Already Brewing… On WALL STREET," released on February 23, 2025, host Scott Melker engages in an insightful conversation with Caitlin Long, CEO of Custodia Bank. The discussion navigates through Operation Choke Point 2.0, regulatory shifts on Wall Street, the future of stablecoins, and the broader implications for the cryptocurrency industry.

1. Operation Choke Point 2.0 and Regulatory Impact

Operation Choke Point 2.0 has been a significant topic of concern within the crypto industry, representing aggressive regulatory measures that have targeted non-traditional financial entities.

• Acknowledgment of Regulatory Bias: Caitlin Long discusses her firsthand experience with the Federal Reserve (Fed) and high-ranking officials like Jay Powell. She states, “there are still subtle tools that were used to debank disfavored industries, including crypto” [00:26].

• Testimony and Admission of Bias: The conversation highlights Powell’s testimony where he admits the existence of Operation Choke Point 2.0, a move previously dismissed as a conspiracy theory. Caitlin mentions, “Jay Powell not only admit operation to 2.0 was real...” [03:23].

• Ongoing Regulatory Challenges: Despite some positive shifts, Caitlin emphasizes that “the Fed is Trump's Dresden,” indicating a looming threat of intensified regulatory actions [02:34].

2. Changing Regulatory Landscape and Leadership

The episode explores the potential transformation within Wall Street's regulatory bodies under new leadership aligned with pro-crypto sentiments.

• Pro-Crypto Appointees: Caitlin points out the appointment of individuals with pro-crypto backgrounds, such as the new acting chair of the OCC, former BitFury legal officer, “They are choosing people who are pro crypto” [03:37].

• Michael Barr’s Role: Despite stepping down as Fed’s Vice Chair for Supervision, Michael Barr remains influential. Caitlin explains, “This is what the Fed knows... They’ve been undermined at every turn” [05:21].

• Potential for Major Regulatory Shifts: Caitlin theorizes that “the Fed might be Trump's Dresden,” suggesting that the Fed could undergo significant changes under Trump's administration [05:21].

3. Congressional Oversight and Legal Implications

The conversation shifts to the role of Congress in overseeing federal agencies and the potential legal repercussions for regulatory overreach.

• Subpoena Power and Investigations: Caitlin underscores the strength of Congressional subpoena powers, stating, “The subpoena power that Congress has is real” [20:58].

• Erosion of Qualified Immunity: Discussing potential legal outcomes, Caitlin mentions the possibility of ending qualified immunity for federal employees, opening avenues for lawsuits, “Somebody asked me about what Lummis disclosed... there are lawsuits that could be pursued on a cause of action on constitutional grounds” [26:10].

• Case Studies of Retaliation: She cites Custodia’s experience with regulatory retaliation, emphasizing ongoing legal battles, “Custodia chose to fight, Protego did not” [30:15].

4. Stablecoin Legislation and Market Dynamics

Stablecoins remain a focal point, with impending legislation poised to reshape the market structure and banking relationships.

• Current Legislative Environment: Caitlin discusses the similarities between Republican drafts and Wyoming’s laws, highlighting favorable conditions for stablecoin issuers, “The House and Senate bill require that in order to get root access... you have to have a bank charter” [33:49].

• Challenges for New Entrants: She expresses concerns about large incumbents like JP Morgan potentially dominating the stablecoin space, “big incumbents, as we said, not only would they be the only ones who could bank the industry... they’d also be the only ones that could issue a stablecoin” [35:14].

• Custodia’s Position and Future Plans: Caitlin outlines Custodia’s strategy to issue a stablecoin-like instrument called AVIT, navigating through regulatory hurdles, “Custodia does. I don’t know which side you’ll end up on exactly” [30:15].

5. Future Risks and Wall Street’s Potential Collapse

While the crypto industry shows signs of recovery, Caitlin warns of potential new disasters emanating from traditional Wall Street firms.

• Predicting the Next FTX: Caitlin anticipates that Wall Street firms may replicate FTX's downfall through risky financial practices, “there are a couple of big lending facilities that are... going to get themselves fractional” [47:32].

• Concerns Over Leverage and Collateral Mismanagement: She highlights the dangers of leveraging and improper collateral management, “they’re not going to properly segregate and they’re effectively going to do what Sam did” [48:45].

• Stablecoin Stability and Regulatory Compliance: The discussion touches on how improper regulation could lead to bank runs and market instability, “They should be issued only by fractional reserve banks. Can you imagine the bank runs that” [48:55].

6. Technological Innovations and Bitcoin Layer 2 Solutions

Exploring advancements in blockchain technology, Caitlin delves into Bitcoin’s Layer 2 solutions and their potential impact on financial services.

• Emergence of Domain-Specific L2s: Caitlin highlights the development of financial services-specific Layer 2 solutions, “They are a Bitcoin Level 2 with a state machine” [52:54].

• Symbiotic Relationship with Bitcoin: She emphasizes the importance of Layer 2s enhancing Bitcoin’s functionality without compromising the base layer, “we want them to be symbiotic to bitcoin” [55:00].

• Future of Stablecoin Issuance on Bitcoin: Caitlin discusses potential platforms for issuing Custodia’s AVIT, considering the robustness of Bitcoin's security, “for financial transactions, if you can anchor into bitcoin, that’s the ideal” [56:10].

7. Resilience and Strategic Positioning of Custodia

Caitlin reflects on Custodia’s survival amidst regulatory challenges and outlines the bank’s strategic outlook.

• Surviving Regulatory Crackdowns: Despite being debanked, Custodia remains operational, “Custodia survived and wounded, but we’re still here” [27:13].

• Vision for the Future: Caitlin envisions a level playing field where regulatory biases are dismantled, allowing innovation to thrive, “The best case scenario is a level playing field” [28:17].

• Ongoing Legal Battles and Growth Plans: She hints at pending lawsuits and the potential for Custodia to scale operation as regulations become more favorable, “We are waiting for the decision on the appeal. That’s public information” [27:57].

8. Closing Thoughts and Industry Outlook

The episode concludes with reflections on past industry collapses and a cautiously optimistic view of the future.

• Reflection on FTX’s Collapse: Caitlin shares insights into recognizing fraudulent activities early, underscoring the importance of vigilance, “FTX was going to fail... something was wrong at FTX” [46:02].

• Positive Indicators for the Industry: Despite challenges, Caitlin remains hopeful about regulatory changes and technological advancements fostering a robust crypto ecosystem, “I can’t wait to see how the story ends” [56:24].

• Call for Continued Innovation: She encourages ongoing innovation and adaptation within the industry to navigate and mitigate future risks, “stay tuned, we’re not sitting still” [32:08].

Notable Quotes with Timestamps

• Caitlin Long: “There are still subtle tools that were used to debank disfavored industries, including crypto” [00:26].

• Caitlin Long: “The Fed might be Trump’s Dresden” [05:21].

• Caitlin Long: “The best case scenario is a level playing field” [28:17].

• Caitlin Long: “Custodia survived and wounded, but we’re still here” [27:13].

• Caitlin Long: “We are waiting for the decision on the appeal. That’s public information” [27:57].

Conclusion

In this episode, Scott Melker and Caitlin Long navigate the turbulent waters of cryptocurrency regulation, Wall Street's potential threats, and the technological innovations steering the industry forward. Caitlin provides a nuanced perspective on Operation Choke Point 2.0, the shifting regulatory landscape, and the strategic maneuvers necessary for Custodia Bank to thrive. The conversation underscores the resilience of the crypto community and the imperative for continued advocacy and innovation to safeguard and advance the sector.

For listeners seeking an in-depth understanding of the intersection between cryptocurrency and traditional finance, this episode offers valuable insights and expert analysis.