A Wyomingite has been highlighted as one of the nation’s top three innovators in the American banking sector.
Caitlin Long, CEO of Wyoming-based Custodia Bank, was one of three people singled out for special recognition by American Banker, which earlier this year highlighted 20 innovators in the banking sector.
“Part of the reason they cited for naming me one of the (top) three is that I’m fearless in the face of challenges that Custodia Bank has faced,” Long told Cowboy State Daily Wednesday morning from American Banker’s Digital Banking Conference in Boca Raton, Florida.
Custodia Bank recently survived a third motion to dismiss from the Federal Reserve in a David vs. Goliath case that’s likely to be precedent setting for Wyoming digital asset banks.
“The most important aspect of what Custodia stands for, in my view, is return to the state over the regulatory authority in banking,” she said. “If you look at the history of the United States, it was always the states, from the early years of the United States, who chartered banks. There was no federal authority whatsoever.”
Long has written about that history extensively on her blog.
“In recent years, as with so many other things, Washington, D.C., has encroached on the state’s power,” Long said. “And what the Federal Reserve has done, as well as the FDIC, is voted themselves a veto over states’ decisions.”
Most Banks Are State Chartered
The Federal Reserve was created in 1913 and the FDIC in 1933 as utilities to serve mostly state banks, Long told Cowboy State Daily.
“The Federal Reserve, which operates the payment system, and the FDIC, which is the industry’s insurance company, were both created as utilities,” Long said. “State-chartered banks automatically got access to them. It wasn’t until recent years that the Washington DC banking agencies started to pick and choose, but that’s not what the law says. The law says they shall service the state charter banks.”
That’s created the impression that D.C. has more control over state banks than what U.S. law sets forth.
“Most people don’t understand that the vast majority of banks in the United States are state-chartered, not federally chartered,” she said. “It’s just that the biggest ones tend to be federally chartered.”
Upholding the state’s right to charter its own banks, Long said, is what’s really at the heart of Custodia Bank’s fight.
“That’s what I think Custodia stands for,” she said. “Sending power back to the states from Washington D.C.”
Wyoming Blockchain Laws, Bankman-Fried Warning
American Banker also cited Long for Innovator of the Year recognition because of her extensive work with the Wyoming Blockchain Coalition as one of its co-founders, which led to many Wyoming laws that set up guardrails for digital assets.
It also highlighted her timely warning during a 2021 Bitcoin Conference, where Long publicly warned Sam Bankman-Fried during a panel that FTX was headed for a fall.
That recognition feels like vindication for Long, who has previously told Cowboy State Daily she also warned regulators ahead of the FTX implosion that risky behavior was taking place that could ultimately affect traditional banking as well.
She felt that warning fell largely on deaf ears at the time. Since then, Long has also been warning regulators of another danger that she feels is also falling on deaf ears.
“What Washington, D.C., is trying to do is literally shove (all of crypto) out, including law-abiding companies like Custodia,” she said. “And that’s just wrong in my view. This is powerful technology, and it’s not going away. There needs to be law-abiding companies that can provide services in this industry. And that’s what we sought to do. That’s what Wyoming sought to do. And that’s what Custodia specifically sought to do as well.”
Support From Industry
Long is hearing lots of questions from the audience of banks and credit union officials at American Banker’s Digital Banking Conference directed to regulators about how to provide services that their customers want in a regulatory compliant way.
“What’s so interesting about this digital banking conference are the number of banks and credit unions who are actively pursuing this technology despite regulator pressure not to,” she said. “Everyone recognizes that the U.S. is going to have to, at a federal level, come to terms with the fact that this Bitcoin is not going away. And they’re going to have to find the guardrails to enable companies to provide services, while abiding by all the laws including disclosure, including consumer protection, including anti-fraud, anti-money laundering and all of those laws.”
Negativity about digital banking right now seems to be mostly coming from Washington, D.C., Long added.
“Federal banking regulators have made clear that at least for now, they want no banks engaged with digital assets at all,” Long said. “And that’s coming from Washington DC, it’s not coming from the states. There are a number of states who are much more interested in finding ways to provide services in this industry, precisely because there have been so many fraudsters.”
The lack of a federal regulatory framework that truly applies to digital assets is continuing to create room in the shadows for unsavory practices, such as those FTX has been accused of employing, to continue living and breathing.
“The U.S. is getting the worst of all worlds, where the regulated players who are trying to do right are forced to the sidelines, while the criminals and scammers and highly leveraged business models just keep filling that void,” Long said.
Digital Dollars Vs. Real Dollars
Dollars and securities, Long added, are not yet fundamentally digital as suggested by SEC Chairman Gary Gensler in a recent television appearance on CNBC.
“To me, that underscores that Washington, D.C., doesn’t understand this technology,” Long said. “It really is different technology. The ‘digital’ dollars that exist in the Federal Reserve’s database today are fundamentally not digital. All they’ve done is digitized analog data. That’s basically like creating a PDF of handwritten data and you can call that PDF digital, but the underlying data is still handwritten.”
The dollars Long and other innovators like her are trying to set up are, meanwhile, natively digital.
“That allows them to be used in the Internet in a way that does not require connectivity back to the analog data,” she said. “That’s what’s so powerful about this technology.”
Under that system, a bank would take in a U.S. dollar and issue a blockchain token to represent that dollar deposit.
“(That’s) better because it can be programmed,” Long said. “And because it can settle much faster, more cheaply, and more transparently than U.S. dollars currently can.”
The China Connection
During recent discussions of Wyoming’s stable token, Gov. Mark Gordon suggested the U.S. is losing the superpower race to a digital coin. That is one of the reasons he didn’t veto Wyoming’s stable token law.
Long, meanwhile, has questions about the intent of recent Federal Reserve actions, as well as other actions taken seemingly in concert with agencies like the SEC.
Long points out that the digital dollar Custodia had proposed, and for which it has a patent, was one of two things the Federal Reserve highlighted in its denial of Custodia Bank’s master account with the federal payments system. The other highlighted item was a proposal to hold a de minimusamount of digital assets and $10,000 or less in cash so it could handle some digital transactions.
“We cut both of those things from our business model and resubmitted, and they still voted us down,” Long said. “But the reason I bring that up is there’s a question that is becoming louder and louder as to whether Washington D.C.’s cracking down on all of the private sector activities in this area is meant to get all of the players in the private sector out of the way so the federal government can issue a central bank digital currency.”
Long is among those opposed to this idea. She fears it will be used for surveillance, which is how China is using its digital coin.
Some activities like that have already occurred, Long said, referencing a former state representative from Kemmerer who she said had testified to the Wyoming legislature that Washington D.C. is using the banking system to “socially engineer” politically disfavored businesses out of existence by de-banking them.
Establishment Doesn’t Want Innovation
In the current struggle, Long also sees an echo of 1913 struggles, when the Federal Reserve was first enacted.
“It was facilitating the payment of paper checks,” Long said. “And it became what was known as a clearing house, and it started competing with private sector clearing houses. Ultimately, it was able to shove out all the private sector competitors for the clearing of checks, because it had the implicit backing of the U.S. government and the private sector competitors could not compete with that.”
Long fears the digital dollar struggle may be shaping up similarly and, as she sees it, private sector innovation is clearly unwelcome at the table.
“That’s absolutely one of the themes in the digital banking conference,” she said. “The extent to which the banking industry is even allowed to innovate, given that we have a centralized government agency that is competing with the private sector players.”
Renée Jean can be reached at Renee@CowboyStateDaily.com.