← The Wolf Of All Streets
The Wolf Of All Streets
The Next FTX-Level Disaster Is Already Brewing… On WALL STREET | Caitlin Long
00:57:07
The Next FTX-Level Disaster Is Already Brewing… On WALL STREET | Caitlin Long
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- [00:00]
A
It used to be, we were told, don't sue your federal regulator. While I was in the room sitting, you know, 10ft from Jay Powell and sitting from, you know, 10ft from the people who lied about Custodia at the Fed and who tried to kill us, and also part of the Fed attacking us using its regulation by enforcement. And guess who has the patent on tokenized bank deposit issued on public permissionless blockchains using this smart contract.
- [00:26]
B
Do you see on your radar anything else that could be the FTX or the Celsius? Sort of the voyager of the next cycle.
- [00:35]
A
The Fed is Trump's Dresden.
- [00:37]
B
The crypto industry spent years screaming about operation choke point 2.0, the debanking of the crypto industry. Nobody suffered more or shared more than Caitlin Long, the CEO of Custodia Bank. Now, with the Trump administration, we're getting a lot of clarity that Operation Choke Point 2.0 did, in fact happen. It was much worse than even we expected. Caitlin and I had a compelling conversation about the past, what happened with operation choke point 2.0, and the very bright future now that it's being lifted. That's dope. That's dope. Caitlin, we have so much to talk about.
- [01:26]
A
Yes, as always. I can't believe how fast it's all happening.
- [01:30]
B
Yeah. I try to remember when the last time we spoke was. Matter of weeks, if not just a couple months. And literally everything has changed.
- [01:38]
A
Yeah. Yay.
- [01:40]
B
Yay. Right, well, okay, so I want to start with the yay. Obviously, we now have pretty mainstream exposure of the existence of Operation choke point 2.0, many would have said was a crypto conspiracy theory and that we were all crazy for saying that the banking industry was debanking and showing prejudice against the crypto industry. So now that's all out in the open, you have Jerome Powell being grilled about it in testimony and admitting that it's real. Yeah, across the board. Right. Okay, so what does that mean for you?
- [02:17]
A
Don't know yet. Tbd. There is a lot that still has to be done. The subtle tools that were used to debank disfavored industries, including crypto, still exist. They're still on the books. And I've said this before, Michael Barr at the Fed, who's the Fed vice chair for supervision, is going to hold over. He didn't step down from the Fed. He stepped down from, as of the end of this month, from the vice chair for supervision role. And so he's still there. And we haven't had new folks installed yet at the other banking Regulators. So the Tri Party Agency, Tri Agency guidance between the three federal banking regulators, occ, Fed and FDIC still exists. There are now acting chairs of the Fed and fdic, but I'm sorry, of OCC and fdic, but Michael Barr is still there at the Fed. So all this stuff is still in existence. I, I think it's a little premature for the crypto industry to conclude we're out of the woods yet, clearly.
- [03:24]
B
But it does seem like the acting chair people and the likely incoming chair people, like almost every position seemingly in the Trump administration, are so far exactly who we would want.
- [03:37]
A
Yeah, I mean, you know, one of the things with the new acting chair of the OCC, he was the chief legal officer of BitFury. He's a Bitcoin miner. Nobody's reporting that. They're just talking about his work with the National Credit Union association in the past. But he was, I mean, BitFury was one of the early bitcoin miners in this industry. He's got some chops, having been around for quite some time. So it's pretty clear that they are choosing people who are pro crypto. What's that going to mean? And what's the exact sequencing of the stablecoin bill, the market structure bill, tearing up, the Biden Warren guidance? How does that all happen and in what sequence and how fast? We just don't know yet. So still tbd, but yay, because it's clearly trending in the right direction. And I was in the room. You in fact reached out to me while I was in the room, sitting 10ft from Jay Powell and sitting 10ft from the people who lied about custodia at the Fed and who tried to kill us. And you know, because I know some of the Fed staffers who were sitting there never met him in person. They didn't see me sitting there. But. But you know, there they were and it was kind of surreal to be sitting there during that session hearing Jay Powell not only admit operation to 2.0 was real, and I forget the phrase he used, but it was something like myself and my colleagues were disturbed. That wasn't the word. Something like that, right, Exactly. He's pretty clearly setting up to blame this whole thing on the Biden appointee Michael Barr at the Fed.
- [05:22]
B
What does Michael Barr's future look like? I mean, you obviously spoke about the fact that he's still there, but you've got to imagine that he's slightly handicapped if he doesn't have allies and if the mandate comes down from the top that you know things need to change.
- [05:35]
A
Well, so here's the thing. It's not just the top, it's also the Congressional Oversight committees. Right. It's very clear both the House and the Senate Oversight Committees are mad. And today, Senator Scott, the Chair of Senate Banking met with bank CEOs and they clearly pointed the fingers at the regulators. They didn't take responsibility. And I've said this before, operations choke 2.0 is 90% the regulators. I think it was 10% the banks, but 90% the regulators. And so he came out with a statement not naming Michael Barr by name, but talking about the things that Barr has been blasted by the banks for the Basel three end game, the failures of Silicon Valley bank, and then of course, everything that happened with the crypto industry. He did all that in two years. It's a pretty ugly record and pretty easy to blame it all on him too, because he did it all. And so no surprise that Powell is distancing himself from there. But back to your question, is it all over? People have talked about this in the last week. The Fed is one of these agencies that is overwhelmingly Democratic in its political contributions, more than 90%. And so I happen to know a lot of the staffers underneath. In fact, actually, let's go back Nick Carter's March 2023 who's who of the Operation Choke 2.0 architect had a career staffer, Michael Gibson, on it, not just the Biden appointees. Right. Well, I happen to know one of the career staffers talks to Elizabeth Warren a lot. Right. That person is clearly a Warrenite. That person is still there. And you know, that person is, is going to be pulling these same levers to try to get. Well, sure. Right. She is too. Right. So they just, she just doesn't have any power anymore because she's. That's the way the House and Senate work. The majority really controls pretty much everything. And it happens to be majority Republicans in both House and Senate right now. But long story short, we got a ways to go, I think, and I don't know, I have a theory and I haven't used this phrase yet, so it's the first time I've used it. I think the Fed is Trump's Dresden. And the reason I think that is the Allies saved Dresden in World War II so that they could understand just how impactful their new weapons were. And when they came in and carpet bombed Dresden, man, they just like, exactly. They understood, you know, there wasn't much left. And I think Powell senses that. I mean, again, I about fell out of my chair when I saw how much he caved on the debanking issue. He knows Trump is upset about this. He knows the Republicans are going after it, and he's pretty clearly gonna be throwing the Democrats at the Fed under the bus over it and trying to distance himself from it. So I think he senses something big is coming. We're seeing, of course, the reports about rolling the FDIC into the Treasury Department. The FDIC and the Fed are supposedly independent agencies, but it's crystal clear they both got very politicized under Biden Warren and Trump wants to reverse all that. And now all these regulatory failures at the Fed, you've now got Jay Powell really distancing himself from that, especially yesterday in the House testimony. So I just, I see a lot of reasons to believe that, that the Fed knows something big is coming, Trump is planning something big, and I think the Fed might be Trump's Dresden.
- [09:16]
B
Yeah, Powell looked decidedly uncomfortable in that portion of the hearing. Usually, obviously, you know, he's usually common collected and it's talking points. And as you pointed out, and went quite viral, I think on X he lied. Right. So I think that he admitted to the bulk of it, but he made that comment, we're not telling banks that they can't bank certain people.
- [09:43]
A
Yeah, well, I don't. So it's an interesting question. I don't know. I don't know what he knew. I know what that. I know what he said is not true. And Aaron Klein, who was a Democratic witness during the debanking hearing, came forward and said, you're right, of course, the Fed has been telling banks not to bank certain industries. And he gave the example of Fourth Corner Credit Union. The Kansas City Fed told the Fourth Corner Credit Union in Colorado, you can't bank the cannabis industry. So, I mean, it's just prima facie wrong that Powell said that, even leaving crypto out of it. But he caught himself to your point, he was very visibly uncomfortable, not the usual confident person that he usually is. And again, just, it's pretty obvious, putting all the puzzle pieces together, they're trying to bring all this independent regulatory apparatus that got so politicized under Biden Warren, under the control of the Trump Treasury Department. And it's going to be interesting to see how far they're willing to go. And it's pretty clear because I spent the day on Tuesday up at the Hill both talking to House and Senate people in the, in the debanking investigations. They're gunning for these federal agencies. There was a lot of Wrongdoing. The investigations have begun and we'll see what comes out of it and if there are any criminal referrals that come out of it as well.
- [11:12]
B
I wouldn't want to be a banking regulator right now, because you're in the crosshairs now between Operation Chokepoint 2.0, which is this very specific thing, and also the very just idea of deregulation and Doge and Chevron being overturned, got to be a very uncomfortable seat to be sitting in. I mean, you had Travis Hill acknowledging that this was real and they need a shift in approach. I mean, all of them are bending the knee at this point to some degree.
- [11:39]
A
Absolutely. And that's why I was really surprised that Powell bent the knee as well. He did, interestingly, say Doge has not been in at the Fed. I am really interested to see what's going to happen when Doge goes into the Fed, because look at the Fed's balance sheet. I don't know off the top of my head how big the other assets line item is, but last I looked, it was several hundred billion dollars. What's in that? It's an interesting question. And I would guess that when Doge gets around to the Fed and they go looking, that there's going to be some interesting stuff in there. I don't know what it is. It's a big number. Don't quote me on the exact number, but just know that it's a big number and it could be hiding a lot of real estate. It could be hiding a lot of assets that are vanilla. And it just. The Fed's balance sheet is so big that it's not material enough to break those out. But it could also be hiding some interesting things that the Fed doesn't want to disclose. And this whole audit the Fed movement has been going after for a long time, and Doge has certainly uncovered some interesting things. The limestone cave. You know, it's funny, I used to work with the insurance industry and I remember when they all digitized their records in the late 90s. And here we are, you know, 35 years later or so. You know, the government is still waiting to do all of that. It's just insane.
- [13:05]
B
I don't have the number of documents released. Hundreds and hundreds of pages now. Have you seen a comprehensive summary of that? Obviously it's too much reading for one individual, because I saw that it was dropped, it all came out. And I haven't actually seen much about what was in there.
- [13:22]
A
This is what AI tools are great for. But here's the other Thing, Scott. It's happening so fast. It's so fascinating that I used to look at alternative news sites that had breaking stories, and I've noticed that their breaking stories are now about a day after the news breaks on X. So if you aren't watching X, you're out of touch. But it's fascinating that I'm talking to people who are also watching X and they're getting different things than I'm getting, and it's all breaking news. The news cycle that we're in is just so fast. I mean, that tragic D.C. plane crash feels like ages ago. The terrorism attack in New Orleans, there.
- [14:05]
B
Was a plane crash in Philadelphia the day after that one that almost nobody.
- [14:08]
A
Heard about because the news cycle is so fast and it's just bewildering right now. It will slow down at some point, but not yet. And I mean, our space. It seems like there's something new still every day coming out. Today we saw RFK Jr and yesterday Tulsi Gabbard, two bitcoiners who were, up until about nine months ago, Democrats, and now they're Cabinet members in Trump's Cabinet. Who would have predicted all this a year ago? You couldn't have.
- [14:40]
B
Yeah, I want to get into the bitcoiners across the board in a minute, but I don't want to stop on Operation Chokepoint 2.0 yet. I actually spoke with Chris Giancarlo, who is the former, obviously, chairman of the CFTC today, just randomly. I spoke to him earlier and we had a brief conversation about the fact that we have this situation where it's sort of all systems go. Right? Not necessarily with operation choke point 2.0, but everybody feels like they can come back to the United States, innovate, do what they want to. Ask for forgiveness, not permission. I think was sort of the idea that we had that the doors are open, but there's this interesting state of ptsd, I think, from the last four years, and for this industry, even way beyond the last four years, I would say. I would imagine that even if banks feel like they're open for business with the crypto industry right now, that there might still be a hesitation and it might take time for them to actually get the engines running again.
- [15:37]
A
But stay tuned, because everybody sees where the puck is going as opposed to where it is today, and so stay tuned.
- [15:43]
B
Right. So, I mean. Yeah. So in that regard, then, how much does the overturn of SAB 121 by Hester Persh in the SEC? How much does that matter, even versus Operation Choke Point 2.0.
- [15:55]
A
Operation 2.2.0 is still bigger, has always been bigger. It's just that it's been in the shadows. Everybody was super focused on Gary Gensler. But now I think everyone who's dug in understands the bank regulators hurt this industry far more than Gensler did. They both did, of course, but it just that Gensler was so visible because a lot of there's more transparency to what happens at the SEC and, and the. And what was happen behind closed doors in the banking world. There's zero transparency even still. But stay tuned because the Fed has been approving the very, very large banks. Of course. Right. It's funny, the Maxine Waters bill came out in a today. Stablecoin bill came out today. And it's just I saw a very thoughtful attorney write, God, this looks like it could have been written by the American Bankers association to protect the large incumbent banks.
- [16:45]
B
And that's when JP Morgan jumped in and said tether's gonna have to sell their reserves or whatever statement they made.
- [16:50]
A
Y. Yeah, I mean I just had to laugh about it because this gromace is underway. And guess who has the patent on tokenized bank deposit issued on public permissionless blockchains using a smart contract? We do. Custodia does. I don't know which side you'll end up on exactly. We got this granted to us because the banks were too afraid to think back then when we applied for it in 2020, about anything other than permissioned blockchains. Right. They were. JP Morgan was thinking about Onyx. So I know that there's other banks out there looking to do this, but I think it's going to be really fun to, you know, watch how this all transpires and stay tuned. We're not sitting still. Yeah.
- [17:33]
B
And there's so there's so much more to this because in my mind I was thinking even just allowing the industry to have access to banking, right? Like we can go, like go open a bank account. Coinbase doesn't need to scramble for a banking partner. Right. Those kind of things. And it goes so much deeper to your point when you start talking about the actual innovation and the way that this will be used to disrupt the systems. It was also a major facet of Operation Chokepoint 2.0. Like tokenized finance.
- [18:00]
A
Oh, absolutely.
- [18:01]
B
Or what Signature bank was doing. Do we ever get, you know, do. Is there any recourse for Signature bank that wasn't even insolvent and literally just got taken out on a Sunday?
- [18:11]
A
Okay, so here's the interesting thing, um, Austin Campbell has an interesting theory on this, that because the FDIC had settled the first Operation Chokepoint lawsuit, every FDIC person was on notice and they were being trained that what they were doing was violating that lawsuit settlement. Because the, as part of the lawsuit settlement, they were training examiners not to give verbal guidance and put everything in writing. And so when they got that training and then they went and got, did it anyway, gave the verbal guidance, the wink, wink, nod, nod, didn't put it explicitly in writing. And essentially the punchline is they lose something called sovereign immunity. They lose their, what's called qualified immunity as government employees, and they can be sued individually. That's Austin's theory. I don't know how this is all going to play out. A lot of it is going to depend upon the evidence that comes out in the investigations which have already begun. A couple of things that make it difficult to get that information through any way other than through Congress. Number one, the Freedom of Information act, you know, limits, again, this smokescreen of confidential supervisor information, attorney client privilege. They'll, the agency will just throw a lawyer in the meeting and say it's, you know, attorney, attorney client, privileged advice. There's something called deliberative process privilege as well. And then it's public information that when Custodia sued the Fed, which is a federal agency, you get only what's called the administrative record, and you don't get all of the deliberations leading up to the final product. Well, Congress can get all of it. So that's why the Republicans having power and specifically having subpoena power. And it's interesting because it's not just the Banking and Financial Services Committee in the Senate and the House respectively. It's also the Government Oversight, Oversight and Government Accountability Committees in both the Senate and the House. And one has unilateral subpoena power. So if the federal agencies try to hide some of this stuff that we know is there, the subpoena power is very strong. I know where to look. I know where the agencies are looking because they've been listening to people like me and to the insiders who've come forward. There are bank CEOs who are talking to the Hill investigative committees. And I think that a lot is gonna come out. And look, the other reality is it's crystal clear from some of the stuff that's come out with DOGE that these agencies never expected to have any of this stuff become public. That thing that came out from Thomson.
- [20:59]
B
Reuters USA never thought that anybody was gonna look at their books. Right? I mean.
- [21:04]
A
Correct. And the Thomson Reuters thing that it was, it was. What do they call it? Large scale social engineering or something like that. And it was on the invoice. Okay. Nobody ever thought this was going to come public. And somebody tweeted last night, I thought it was just perfect. They really shouldn't have killed that squirrel. And my response was, they really shouldn't have raided Melania's underwear drawer. I mean, they really pissed off a lot of people who saw the incredible overreach and how crazy and unfair it was. And, man, there's just a. What's the phrase? Awaken the sleeping giant and stealed it with a. I'm butchering it here, but sealed it with resolve. And that's what's happened here. I think they're. You know, as people are saying today, they pissed off the wrong billionaire. Elon's got a chip on his shoulder to go find his stuff. There are equivalent people in our little world who are just like dogs with a bone. Not gonna give up until we find out what really happened. To answer your question, is every federal employee immune? Absolutely not. Does that mean anybody's gonna go to jail over this? We don't know. It all depends. But when Coinbase. When Senator Lummis sent that letter out saying, don't destroy documents because whistleblowers had come forward saying the FDIC was destroying documents. Holy cow. It turns out they really were because they disclosed in the Coinbase litigation that the FDIC ignored the litigation hold letter and now can't verify that documents weren't disclosed, weren't destroyed, rather. Exactly. Are you kidding me? This is basic stuff for lawyers. And if the lawyers were in on it, then. Whoa. Okay. And so what are the judges gonna do? It does go so deep, Scott. It's so deep, what I'm seeing. And I knew it was bad. It's so much worse than even I thought it was. And that's why I think we have to see what proof comes out. But here's the punchline from this whole last few minutes of our conversation. The subpoena power that Congress has is real. And they can get at things that you and I couldn't get at through the Freedom of Information act or that even a plaintiff in a lawsuit couldn't get at in suing a federal agency. Congress can get it. And I loved that. Senator Lummis puts Powell on the spot leading up to how much the Fed just ignored all attempts at congressional oversight, said, that's none of your business, even though they conceded When Lummis asked him, who do you report to? He said, well, we don't report to the President, but we do defer to Congress. And then she lays out. It was brilliant. She lays out the number of times the Fed just ignored attempts at congressional oversight, essentially saying, the Fed is acting above the law. And he conceded to her when she asked him, will your staff cooperate and get us the documents that we're about to ask you for on a timely basis? And his response was, sure. And he said it kind of that way. Right.
- [24:08]
B
It was kind of dejected, like he Beaten down dejected.
- [24:11]
A
Yeah, exactly. Like he knows what's going on. Right? He knows.
- [24:14]
B
And you've made the point that obviously the Congress and the Senate, they have the power of this subpoena, and the right party is in power to go after those subpoenas. But you keep bringing up Lummis. The right people are also magically in the right spot to care enough to go after the subpoena power. I mean, it really is crazy when you look at the people in this industry or who are obviously cheerleaders of this industry or champions of this industry and the positions that they ended up in. It's across the board in every single agency.
- [24:47]
A
Yes, exactly. And someone asked today about the retaliation that the federal regulators have been retaliating against Custodia, pursuing our rights in court and asking, is that going to continue? And my response is there's going to be such wholesale turnover in the staff at these agencies. It's already starting. And we'll see. The cautious words are a lot of those people who are still talking to Elizabeth Warren every day inside the Fed are still in their jobs, but for how much longer is the point? Right. And it's now crystal clear to me, and to an even bigger extent than I imagined possible, that the Trump people get it. They understand that they have been undermined at every turn and that these folks deep in the bowels of the agencies, I'm not talking about the people on the ground. I'm talking about the sort of middle and upper management career staff at these agencies have not been his friend and they're going to be stymying him at every turn. And he is looking very, very quickly to cut those people out. So we'll see. He definitely has a number of those people at the Fed and at the FDIC very clearly that he's gonna have to deal with in some form or another. And let's see whether he does just something small or whether really it's Dresden.
- [26:16]
B
Dresden doesn't Feel like the small type to me generally goes big when he's angry. Clearly, for better or for worse. You sort of mentioned to my question about signature that people could be punished. Obviously maybe people will go to jail. We have no idea. But none of that brings Signature bank back. Right. And so for sure, maybe I'm wrong, maybe I'm wrong.
- [26:40]
A
It doesn't bring it back to where it was before. But this is my point. If qualified immunity goes away, there are takings that can be pursued. Somebody asked me about what Lummis disclosed during the debanking hearing about restrictions on free speech. There are lawsuits that could be pursued on a cause of action on constitutional grounds. Right. So it's not clear yet, Scott, I don't know how this is all going to play out, but is it plausible that there are monetary damages? Absolutely it is.
- [27:13]
B
Oh, sure. It's just for them to be back in full operation servicing the crypto industry. Right. I don't see it. And the point I was going to make is that through all of this you survived. Right. Wounded and went on the offensive.
- [27:30]
A
Right.
- [27:31]
B
But. But now you're here to see, see what happens.
- [27:34]
A
Yes.
- [27:34]
B
So I guess the next question is let's suspend conjecture. You know, we don't know what's going to happen, what the turnover will look like, but let's say that this trend continues in a positive direction. You get your master account. Right. Because I would imagine that's still very much in play, is that.
- [27:52]
A
Well, our lawsuit is. We're waiting for the decision on the appeal. That's public information.
- [27:58]
B
Right. So what's your best case scenario? If everything goes our way and this industry is fully embraced in the United States, the banking system fully embraces, what's our best case scenario for you and for the industry as a whole over the next few years?
- [28:17]
A
The best case scenario is a level playing field. I know that sounds crazy and sounds simplistic, but that's what it is. Right now you're seeing two things going on. You're seeing the crumbling of the Biden Warren attempt to kill the industry and the unwinding of all that we talked about earlier, that that's going to take some time, but it's going to happen. And then the next question is, with the Fed green lighting the big banks over smaller banks and the tech based startups, what comes out of that scrum? Is the Fed going to so advantage the big banks that nobody can compete, not even the coinbases? And all we end up with is JP Morgan, BNY Mellon and State Street Yeah. Dominating the crypto industry. I don't know. And you know, the sad thing about the last few years is Coinbase obviously was able to keep a bank account at one point. Anchorage only had one, and that's what Nathan McCauley testified last week. So they had a real scramble, but they survived it, clearly. Right. Those big guys can. But a lot of the companies that Custodia was banking, we banked some of the big guys, but we also banked some startups. And I am not 100% sure that when we closed their accounts that those startups got backup bank accounts. We did everything we could to help them get backup bank accounts. But at the time. Right. You know, last August, it was tough. And everyone at the time was worried that Biden was just going to double down in a second term. You know, it was just tough back then for the really small startups to find bank accounts. So you couldn't.
- [30:03]
B
You're a bank and your bank account, your banking relationships were cut off. That you said that in that tweet about follows lying is that you have it. The Fed directed Custodio's partner banks. Yes, plural. To close our accounts.
- [30:15]
A
Correct. And. And we know things. We. There's a reason why I said that statement and it is. It is plural. We know things. So we can't. There's only so much that we can disclose for litigation reasons. But I will say that as this all plays out, it should become pretty clear that. And again, our situation is interesting. This is why I brought it up earlier. The folks on the Hill were looking at us and saying, all right, yes, there's clear debanking. Yes, clearly targeted. Interesting question is, were we targeted because they were retaliating against us for suing or was this run of the mill.
- [30:55]
B
Debanking operation choke point 2.0 writ large or Operation Choke Point Custodia?
- [31:00]
A
Right, right. How does Marc Andreessen call it? What? Think he's got like the two word sentence to ask a rhetorical question. So I'll leave it there.
- [31:14]
B
Yeah, we'll leave it there. So interesting that we could still have a situation where the government picks winners even when regulations, legislation are in our favor. Listen, before SAB121 was even over overturned, bank of New York Mellon got an exemption.
- [31:31]
A
Exactly. And they got approved by the Fed. The Fed kept that very quiet. So it's not enough to get SAB121 overturned. Now the banks actually have to go get. Because again, that old guidance is still in place. They still have to get prior written supervisory Non objection from their federal supervisor. So the Fed gave that to bank of New York Mellon last fall. And the, the question is, who else has gotten it since then? And we'll find out very soon.
- [31:59]
B
So for Custodia, say that it's all systems go. What does Custodia look like in two years as you're running it? Full function.
- [32:08]
A
Yeah. Well, the original play, our true north, our mission was to provide durable banking services to this industry. And obviously we didn't succeed in that mission because we kept getting debanked ourselves and we didn't solve the debanking problem for our customers. And they knew that. So I hope to be able to fulfill that mission number one. And number two, the play for our investors is the stablecoin we've had since 2020. We've had it in our business plan to issue a tokenized bank deposit. It's a stablecoin like instrument called avit, rhymes with havit, because you can have it, you can take it from the bank into your possession, into your self custody wallet. And that got blocked by the Fed when actually in that interagency guidance in January 2023 that got blocked by the Fed and also part of the Fed attacking us using its regulation by enforcement with the 86 page order when the longest ever Fed denial order was three pages and ours was 86. There was a lot of policy that was disclosed in that 86 page order that was anti stablecoin. But stay tuned, stay tuned, stay tuned.
- [33:17]
B
Well, now we have a stablecoin battle, right? So I think everybody assumes that stablecoins are the lowest hanging fruit for legislation for this industry. Easiest thing for them to get done, then maybe market structure after and then who knows what pass will go down. But stablecoins, once again, as much as we have a favorable environment, there's still a lot of nuance as to how stable coins could be regulated or what kind of legislation. We'll see. Could that be damaging to you? Right, We've seen no.
- [33:50]
A
In fact, actually the House and Senate Republican drafts are very similar to the Wyoming law. And it's no accident because Senator Lummis, bill drafter, is the bill drafter of the Wyoming laws and he's now working for her in D.C. he went from Wyoming four years ago or so to work for her in D.C. so it's no accident that a lot of the negotiation that has been happening and he's the staffer on the committee for the Digital Assets Subcommittee now. So it is the Wyoming Special Purpose Depository Institution law and custodes extremely well positioned. Here's the interesting thing though. Both the House and the Senate bill require that in order to get root access, as Balaji calls it, to the payment system, the US dollar payment system, you have to have a bank charter so all the crypto companies are going to have to get bank charters. And here's the other piece. Bank regulators can slow walk it so their friends at the big banks get to leapfrog.
- [34:55]
B
That's my fear.
- [34:56]
A
Well, of course, and the other piece is if they start a bank from scratch, you have what's called a three year de novo period where you, you are restricted in what you can do. You have to hold more capital, et cetera, et cetera, because you're, you're brand new Custodia is almost through that because we've been operating for almost three years.
- [35:14]
B
But you have this sort of like the, you know, the tethers and the circles and everybody's issuing a stablecoin, let's be, let's be honest. But they have this huge head start on you and you had the idea before a lot of them, well, of.
- [35:26]
A
Getting the bank charter. I saw where the puck was going to go because I didn't think that they would allow non banks to get access. The US hasn't ever allowed non banks to get access to root access to the US dollar payment system, which is the Fed master account. Only banks can do that. And actually the Maxine Waters bill, which everybody was laughing about, only incumbent banks get to do it and it has to be federally chartered incumbent banks.
- [35:53]
B
That was all, I mean that, that's been a fear of bad legislation. Of course Biden administration was always oh, we might get the wrong stablecoin legislation during that administration and then it would just be sort of the large incumbents, as we said, not only would they be the only ones who could bank the industry or custody the assets or do lending, but they'd also be the only ones that could issue a stable coin tether would go offshore, even maybe USD if they didn't play their cards right, would be pushed out of the United States.
- [36:21]
A
They're not a bank, they're not even a trust company. Right. Coinbase and Anchorage Nydig, they're all trust companies. But Circle is money transmitter licensed, not trust company licensed. And so yeah, I mean, but both trust companies and money transmitters, including even Anchorage, it's a national trust company. They call it a trust bank, but it's not legally what's called a depository institution, which you have to be a depository institution legally. To be eligible for a Fed Master account. And there's exactly one Finance. Actually two. Kraken has a letter or two. Two in Wyoming. Well, interestingly, we're both from Wyoming, but that's it. Two crypto native companies have legal eligibility. Letters from the Fed saying that we are legally eligible to get that root access to the US dollar system. That's it.
- [37:07]
B
Has Kraken applied for Massive?
- [37:08]
A
Yeah. Oh yeah, they applied before Custodia did. They just didn't sue. But their application's been sitting out there since the fall of 2020.
- [37:15]
B
Also denied. Yeah.
- [37:17]
A
Well, again, like you know, the Fed would say they're still considering it almost five years later.
- [37:24]
B
Put in the pile over on the other side. The do not ever look at pile.
- [37:28]
A
Yeah, Correct, correct.
- [37:29]
B
Well, right. Where all our ETF applications were going under Gensler for all those years. Yeah, the kick it can down the road pile.
- [37:36]
A
And I laugh at, you know, the whole controversial activities and controversial comments restriction. Jesse has not been afraid to criticize either.
- [37:47]
B
Nobody's afraid to speak their mind anymore.
- [37:50]
A
Well, at this point, here's the thing. It used to be we were told, don't sue your federal regulator. The world has flipped. The only ones who actually had any rights were the ones who did speak out and criticize, like Coinbase suing the FDIC and Custodia suing the Fed. These are the ones that are getting somewhere. Now, what level of retaliation has already happened as a result of that? There has been in our case. I don't know how much in Coinbase's case, but that was what I was talking about with somebody this morning. Is there going to be retaliation against us for having pursued our rights in court? And when I say us, I'm including Coinbase in that. It's, it's those of us who did go on, go on offense legally. And there were several against the SEC as well. It wasn't all defense, but you know, Coinbase, to your point with Circle right now, if the stablecoin bill that, that either the House or the Senate Republicans have proposed goes through and becomes law, they're going to have to get a bank charter. Right. So is the FDIC going to be the regulator? All this is tbd, but they're going to have to get a bank charter. And so the question is, are they going to go through the occ, which has been very anti crypto, or are they going to go through the states, some of which have been pro crypto and those both of those bills equalize the state and federal charters. They are Absolutely on par with each other. And they have what's called federal preemption. So if you have a state charter, you can do business in all 50 states. If it's a state bank charter. So it's literally on par with the federal charter. So what kind of retaliation might they be facing for having sued the fdic? We don't know because there's been almost. There will have been 100% turnover in the political appointees and I think there will have been very high turnover among the career staff at these agencies too. I think the world, to your point, has changed. Right. Sitting back and doing nothing. Portigo, unfortunately did not survive. It was, at the time, it was one of Custodia's competitors and they were asked to withdraw their application from the occ. At the same time we were asked to voluntarily withdraw our application from the Fed. Right. Custodia chose to fight, Protego did not. Protego is not around anymore. Custodia survived and wounded, but we're still here. So I don't know. I'm not so sure that this whole old way of thinking about things where you were always deferential to the regulators and you just didn't fight them. I think it's over. That's the point. I mean, even Jamie Dimon's talking about this. The big banks sued the Fed over Basel III endgame. So I mean, that just didn't happen in years past. Right. So I think the world has changed so much and the balance of power has gone back to the people and gone back to. If you are a law abiding citizen and you meet the requirements, you get in.
- [40:48]
B
Yeah. I want to talk outside banking about other things that could change now, obviously, with this less contentious favorable environment. We keep talking about Lummis, she got an incredible appointment. What do you think the odds are of the strategic bitcoin reserve with her in the position of power where she is and being the one that drafted the legislation?
- [41:09]
A
Yeah, I think it's less than 50%, but let's call it 40%. I'm not in the it's not going to happen camp, but I'm also not in the it's likely camp. I think it's a tough.
- [41:21]
B
I think that makes sense.
- [41:22]
A
Yeah. But by the way, it depends on what you define it as, because I think if they just stop selling the Silk Road and Bitfinex bitcoins and call that a strategic reserve, then it's a win. Yeah, exactly. Right.
- [41:34]
B
But the government actually buying. I would put in this sub 25 personally yeah, yeah, I think it's higher.
- [41:41]
A
Than that because there is, There is an impetus for it. Right. And you saw Trump announce a sovereign wealth fund. I'm not a fan of that at all. What Howard Lutnick said, hey, if we're buying vaccines, we should get warrants. The government should get warrants in the company because the government is making the company successful.
- [42:00]
B
Conflict of interest on the vaccine. Yeah.
- [42:03]
A
He's not capitalist. Right. And this is. You know, Howard is one of the many former Democrats in Trump's administration who are not necessarily, if you look at their record, not necessarily committed to free market capitalism and looked at that askance like a number of bitcoiners did. This whole idea of a sovereign wealth fund and the US government taking a 50% stake in TikTok. It was controversial when the US government bailed out GM and then ended up selling its GM shares under Obama. But it took like four or five years for that to happen when GM went into bankruptcy and got bailed out by the government. Right. And now we're actually talking about having this as a, as a tactical strategy where the US Government is taking stakes in private companies. I think that's a step too far.
- [42:53]
B
Some have said that the sovereign wealth fund, though, could be sort of a proxy for a strategic reserve.
- [42:58]
A
See, I think bitcoin's different, although, by.
- [43:00]
B
The way, that's different because if they buy bitcoin in the sovereign wealth fund, they kind of have a fiduciary duty to sell it if, if it goes up and take the profit and pay down the debt or however they would. So it's a little different than a strategic reserve with no commitment to sell A sovereign wealth fund. You can't make a commitment to never sell.
- [43:14]
A
Well, correct. But it's a little bit of a distinction without a difference because the way that Lummis drafted the bill is you can't sell for 20 years.
- [43:23]
B
Right.
- [43:24]
A
So, you know, essentially getting way. Getting to the point where we're, we're really close to the 21 million limit, will be certainly over 20 million. Well, well into 20 million in another, in another 20 years of bitcoins outstanding. And at that point, bitcoin becomes even scarcer than it is now because every four years, the inflation rate is getting cut in half with every halving. Okay, we all know all that. So that's what she's playing for. As you go through five epics in five four year epics in bitcoin, basically the whole idea is you just let it grow, you stop selling it, and because by definition, it's got a lower inflation rate than the US dollar over 20 years, it should outperform the US dollar by a lot and therefore pay down the debt. That's the theory. You probably saw that I put out a blog post warning, though, that it has to be done so carefully. Even these at the state level, so that they don't end up becoming clearinghouses that bail out over leveraged players or scammers like Sam Bankman. Fried And I revealed an anecdote I heard exactly one month before FTX filed for chapter 11. I heard Sam call out at DC Fintech Week in 2022 publicly that. That there should be a bailout fund for crypto. There should be a crypto. TARP is what he called it. Okay. So at that point I already knew FTX was, was a criminal enterprise.
- [44:54]
B
He was lobbying for his own bailout a month in advance.
- [44:56]
A
Yeah, Bingo. But I also read it interestingly that he didn't show up for his keynote speech and instead did it from the Bahamas by Zoom. A keynote speech. And that guy went to everyone in D.C. so he missed an opportunity to be in D.C. and by then again, I had already reported to the FBI the evidence that I had of probable crimes committed by ftx. I started putting puzzle pieces together. It's a little bit like me kind of putting the breadcrumbs together and thinking that the Fed might be Trump's Dresden. I knew at that time that FTX was going to fail. And I had so much. That was one of those things that probably went over the head of a lot of people in the audience. But I remember saying to Kate Rooney in the green room off stage, because she interviewed him on stage and I was on stage right before him. And then after she came off stage, I said, did you hear him call for a bailout? I said, something's wrong at ftx. I couldn't explain to her at that time that I knew something was wrong at ftx, but she hadn't caught it either. And then I said, look, there's. I explained to her some of the other things that I thought were wrong.
- [46:09]
B
I guess if you didn't, if you didn't have the con, if you still believe that SBF was a golden boy, that FTX was the most powerful player in the industry. Sure you wouldn't understand that him saying that was angling for his own bailout because you'd have, to your mind, believed that they were about to fail or know that.
- [46:25]
A
Correct. And I. What I didn't understand was how imminent it was, yeah, I just knew something was very wrong. But I mean you've, I've known about, you know, things being very wrong at financial institutions and they can stay as long as they stay liquid. They can stay in business for, for years, if not decades, even if they're insolvent. Clearly they were insolvent. And then what put them over the edge was that they became illiquid, they being ftx. Right. And we just didn't know how fast the illiquidity was going to hit that caused the insolvency to become clear. But in retrospect it's chilling to listen to that clip of Sam saying that we need a crypto tarp for this industry because he knew at that point in time very clearly that his company was in trouble.
- [47:09]
B
Yeah, I hate to turn towards negativity when everything is tailwinds right now for the industry. Do you see on your radar anything else that could be the FTX or the Celsius or the Voyager of the next cycle? Anything that even like giving your spidey senses a little tingle because it seems to be that somebody always flies a little too close to the sun, gets caught, blows our industry up.
- [47:33]
A
Yeah. So I actually, I actually think that it's the Wall street firms this time. There are a couple of big lending facilities that are, you know, it's the same issue all over again. They're going to get themselves fractional, they're going to co mingle collateral with their own funds and their other customers funds. So they're not going to properly segregate and they're effectively going to do what Sam did, which is use customers funds to keep themselves in business. And you don't know that the company's insolvent until they have a liquidity event and then they hit the wall really fast. I think it's going to be, it's going to be Wall street firms this time. It's going to be hedge fund type firms, kind of asset managers that get involved in the lending business and don't stick to a one for one backing. And it's just in the DNA of Wall street to use leverage on everything. It's just not in their DNA to stick to one to one backing. We've made huge progress as an industry convincing the regulators not to let fractional reserve banks issue stablecoins. And keep in mind the Biden president's working group recommended that that was what stable co be. They should be issued only by fractional reserve banks. Can you imagine the bank runs that.
- [48:45]
B
Would have happened if that's what we believe a bank should be. Then of course they would be the trusted ones to issue stablecoins because fractional reserve banking apparently is totally fine.
- [48:55]
A
Well, they would have been walking into bank run after bank run after bank run had that policy been implemented. But it clearly kept the startups out and they were mad at all the startups at that point, except for ftx, so. So we'll see. I mean, we've made huge progress, but I still think those Wall street firms in particular are where the next concern is going to be. And then I have been thinking, until somebody said it out loud, I've been wondering what's going to happen with Tether? Because if the stablecoin bill passes, it's even offshore issuers of US dollar stablecoins that are going to be restricted.
- [49:30]
B
And keep in mind, the worst case for them, I would think, would be not being able to operate in the United States, but they would still exist elsewhere. But maybe I'm wrong.
- [49:39]
A
No, no, no. This is, this is, this is the stablecoin bill is requiring all US dollar stablecoin issuers, including foreign entities, to become licensed.
- [49:49]
B
Something like that. I'm not saying it would happen, but something like that could be the black swan of the. If you had to sell down. I'm not saying this is going to happen to the audience, but I'm saying an event where Tether had to sell half their reserves or something.
- [50:01]
A
Right now they have a hell of a protector in a cabinet. Member of Trump's cabinet or soon to be confirmed Howard Lutnick. I don't think he's been confirmed yet. Probably the base case is that they're left alone. That was what Nick Carter was arguing today. They're left alone and they just operate offshore and they keep their US dollar reserves onshore because they are too big right now to liquidate. But it was Alex Thorne at Galaxy who was warning. This is one of the black swans. And I think it was, based on what JP Morgan said this morning, if that ever works, forced to liquidate, then there could be some forced selling. And it could be, ironically coming from US regulators trying to create a regulated pathway for stablecoins that does that. I really hope that's not the case and I so applaud what Tether has done with issuing on lightning. That to me is so exciting. And it's funny because I didn't know that they were going down that path. That's a path I've been going down personally.
- [51:03]
B
I hope it gains traction.
- [51:05]
A
I hope so too. Right because we wanted to come back to Bitcoin. Tether started on the Omni layer and there is a liquid version of Tether. If you go back to what Custodia looked at for US dollar stablecoin issuance years ago, we were going to do IT as an ERC20 token and then a liquid token on Bitcoin. Well, liquid hasn't taken off as much as one would have hoped. The PEG in peg out time timeline is not fast enough. So I have gone back and looked. I mean obviously now we've got ordinals and the like on bitcoin, right? There are L2s that are new because of Taproot and we now have frankly more L2s coming. There's an L2 that I know of that's really exciting that is domain specific for financial services contracts. It's the original counterparty engineers who I worked with at my prior startup Symbiont. And here's the aha for the bitcoiners, it is a Bitcoin Level 2 with a state machine. We don't have that yet. So we can literally put arbitrary business logic like smart contracts for financial services onto a bitcoin level 2 and they're setting up a domain specific language. So it's not going to be like Ethereum, which meant to be and same thing with Solana, it's not domain specific for financial applications. This one will be. So will it take off? I don't know. But there's a lot going on in Bitcoin is my point. And I needed to go down and take a deep dive into everything that's happened with stacks and the like. And understand is Liquid still the right place? If we were going to issue our stable token like instrument, Avid on a Bitcoin L2, what would it be?
- [52:51]
B
I love the stacks guys. Yeah, absolutely.
- [52:54]
A
Well, we're looking at all that, but none of them have state machines and in fact I think Stacks is the one they're talking about an upgrade to put in a state machine. It's an interesting situation because it's evolving fast. And by the same token I look at what Tether did and when I saw their announcement I was like, oh this is great because they're going down the same path that we were going down, which is we need to bring some of this back into the safest and most secure. I think even non Maxis would acknowledge Bitcoin is the safest and most secure for financial transactions. Ethereum is doing other things, Cardano is doing other things. Right. They're Apples and oranges to me. But for financial transactions, if you can anchor into bitcoin, that's the ideal. And one of the AHAs of these engineers, it's called, their company's called Contour, it's not out yet. They're in there. They're in their early rounds right now. But they have learned from what happened with the Ethereum L2s which became parasitic to the L1. And that's part of the reason Ethereum itself has underperformed versus Bitcoin in this bull market. Because so many of the fees have been taken away for the L2 transactions which has taken away from the security of the base layer. We don't want the L2s to be parasitic to bitcoin. We want them to be symbiotic to bitcoin. And what's fun about Counterparty is look at how Counterparty got issued. It was the first altcoin issued ever. I think it was 2013. And they did proof of burn. They actually burned bitcoin to issue Counterparty. They did not do an ICO where they were pulling in the proceeds and no pre mines. Exactly. And so that's the philosophy that they're bringing to Contour. So stay tuned. I can't wait.
- [54:42]
B
Smart. I'd never even heard of it.
- [54:44]
A
Well, it's brand new, Scott. It's brand new. You should have them on Adam Krellenstein and Evan Wagner. They were the original two of the three original co founders of Counterparty. And they were I think teenagers when they first started working in bitcoin. Like, you know, savants, just like so many of the bitcoin core developers. But they've been working on the same problem that I've been working on, which is how do you use this technology to streamline the back office of financial services companies? Companies and market structure. Just streamline market structure. They've been working on it since 2013. Yeah, and here we are then it's going to be their third iteration and I think because they've learned so much about. They were the ones who got into production with Vanguard and Citi and State street for market data and then for foreign exchange using a private blockchain platform called Symbiont. That was my previous startup and it was fascinating working with them back then. They've learned so much because they've been working with the large financial institutions trying to figure out how to solve the duplication and reconciliation problem that we know this technology can solve. And from here forward, if you're going to be putting large dollar value transactions on blockchain, which we know is coming then. And what is the base layer that you want to use? Is it Solana, is it Ethereum, or is it Bitcoin? And for high dollar value transactions, it's pretty obvious it should be Bitcoin.
- [56:11]
B
So many more questions. We'll just have to do it again. But listen, I can't wait to have more positive conversations with you now moving forward about all the progress that we're making and all the good things that are happening for you in Custodia.
- [56:24]
A
Thank you. I can't wait for that either. Our time, it seems like it's coming and we're on the verge. And I'll close by saying one of the investors that we've been talking to calls us an N of one because we did survive as a bank, as a depository institution. So let's see what happens to us. I can't wait to see how the story ends myself.
- [56:44]
B
0 to 1 is the hard part. Now I just got to go 1 to 10. So perfect. Thank you so much, Caitlyn, as always.
- [56:49]
A
Yeah. Good to see you. Thank you for having me on. That's dope.