 Freedom in banking. This should not be politicized. Caitlyn Long wants to start a new kind of bank. A 100% reserve bank that would keep all of our cash at the Fed. In March of 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. The loss of over $1 billion, there were fears of a run on this bank. It was a classic run on the bank, which is the 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 need to make sure that they have enough cash on hand to cover any withdrawals. The system works fine until there's a panic and everyone comes for their money all at once. The libertarian economist Murray Rothbard 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 times. And that's exactly what Long has set out to do. The concept here is let's just turn this into a basic money warehouse to the maximum extent possible within the law. Long, who has a law degree from Harvard and a public policy degree from the Kennedy School of Government, had a conventional career on Wall Street, working at Morgan Stanley, Credit Suisse, and Solomon Brothers. Then came 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 Austrian School of Economics and Rothbard. A lot more people in the world now recognize that the money in their bank is an IOU to a leveraged institution. Most people didn't think about that until recently. So she founded Wyoming-based Custodia Bank, which will hold 108% of its customer deposits in cash at all times, serving as a true Rothbardian money warehouse. But there's a problem. 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. And what I'm standing up for and saying is that it shouldn't be politicized, period. Reasons sat down with Long at the Bitcoin National Conference in Miami to talk about her case against the Fed. Why she believes in full reserve banking, the instability of our financial system, and why Custodia could help Bitcoin go mainstream. What is Custodia Bank? Why did you start it? Well, started it to solve a couple of problems in the industry. One is a non-fractional bank that will not create fractional interest in Bitcoin and not rehypothecate Bitcoin to use the big Wall Street term that essentially means fractional reserve banking on something other than money. And then also not a fractional reserve bank in money. The proposal was to be a 100% reserve bank that would keep all of our cash at the Fed. So just basically a pure service provider in the sense that some banks were at one time money warehouses where they were gold depositories that issued gold receipts. And in some cases those gold receipts circulated at par. And so the point is that some banks were viewed as more honest than others. And the honest, the dishonest banks had bank runs and failed. And the way the US went was to put the deposit insurance into place in 1933. But if you look at the history, there were many attempts to put deposit insurance in place before that to try to stem these bank failures from the dishonest banks. But there were honest banks all along. And so this is a nod to those honest banks that were really just service providers. There's no reason why your bank needs to be a counterparty. There's no reason why you have to have an IOU. It's just like the law of bailment, which is how a valet parking garage works or a coat check. When you park your car, you're not turning legal title to your car over to the garage. And if the garage happens to go bankrupt while your car is parked there, you can still get your key and drive your car away. That's not how security custody works. It's not how banking works. You are forced into becoming a counterparty. You are forced into turning title to your property over to your financial institution. And if your financial institution goes bust, you may or may not be able to get it back. So the concept here is let's just turn this into a basic money warehouse to the maximum extent possible within the law. And have a nod to Satoshi's vision. Satoshi issued money that is no one's IOU. And there's no reason why your bank or your securities broker has to give you an IOU. It's just the way the system evolved. But let's go back to the old first principles of being a safeguarding entity that doesn't take title to your property. My understanding is that your primary customers would be large companies that hold a lot of crypto assets. Why would they choose to store their money at your bank rather than somewhere else? So our proposal has always been just Bitcoin and Ethereum, so not crypto broadly. And the only reason, interestingly, that we proposed Ethereum is because we had proposed, and this was turned down by the Fed, to issue a digital dollar on liquid, which is a side chain of Bitcoin. And as a risk management matter, we needed to have a backup in case there was a failure of the blockchain. From an IT risk perspective, you need to be able to essentially take all the tokens that were issued on one protocol and reissue them on another if the protocols fail. Let's be honest, this is still relatively new technology. And it's not guaranteed that someone won't find a zero day exploit in these protocols. They're getting Bitcoin and Ethereum are getting pretty mature, but it's still possible every day. It goes down asymptotically, but it never reaches zero probability that someone finds a zero day exploit. So it was really a risk management matter that we wanted to have too, but of course, really primarily Bitcoin. And we're going to start with that. Now, what's different about Cassodia? The Wyoming law, we're a Wyoming chartered bank. The Wyoming law, which if we can, there will be limited in some states. So we won't be able to do business in all 50 states initially. But to the extent that the Wyoming law can apply to the custody relationship, here's the point. Remember, I described what abailment is, where it's the law of valley parking or a coat check, you're not turning over title to your property. That does not exist in custody in the United States right now. No one can give abailment unless they're a Wyoming entity. Moreover, because Cassodia is a bank, in the event of the failure of the bank, you see what's happening. There is a receivership process that the bank regulators step in and provide the receivership on. It does not go through US bankruptcy court. This is going to get a little esoteric, but I think it's an important point. A bankruptcy judge in bankruptcy court can break a contract. So you can put your Bitcoin in a trust company. And the trust company says, well, we'll segregate your assets. And of course they do. But if the trust company goes bankrupt and they're in front of a bankruptcy judge, and there are not enough assets to pay out everybody, guess what? Those assets might get pooled and you might take a haircut. Whereas in a Wyoming bank that is subject to these special receivership rules, the statutory segregation, the segregation of assets rather is protected by statute. And a judge, first of all, there won't be a bankruptcy judge because there's a special receivership statute. So the contracts cannot be broken if they're protected by statute. But the Wyoming receiver is ultimately, the bank regulator is ultimately the receiver in the event of a failure of the bank as opposed to a bankruptcy judge. Two totally different processes. And here's the point. If I ended up going a little bit too deep there, the point is it's a more investor friendly regime in Wyoming. It's a nod to Satoshi's vision of what Bitcoin was supposed to be. Now I am also a big proponent of not your keys, not your coins, a big proponent of that. And so a lot of folks have asked, why are you a big proponent of self custody that you can't own Bitcoin through an intermediary and safely counted as your own Bitcoin versus now starting a custodian? How do you square that circle? The answer is there are a lot of businesses, especially fiduciary businesses like SEC 40 act mutual fund managers, investment companies, registered investment advisors, corporate treasurers, pension fund managers, they have fiduciary obligations and either by statute or by best practice, they segregate the management of the assets from the custody of the assets. This has been the law in the mutual fund and registered investment advisor world since 1940 to segregate the management of the assets from the custody. And so this is a nod to that marketplace that we're setting up a bank that is designed to mirror as much as possible the vision of outright property right ownership. You are not required to turn over legal title of your asset into a Wyoming special purpose depository institution custodian. However, it is actually a private key management service. So this is not something where we would expect the customer to keep the private key. They are taking some risk, of course, on the private key management. The insurance markets are not mature enough to ensure 100% of the value. And so it's market practice that some percentage of the value is insured by an insurer. And that's ultimately the risk custodian is providing the safekeeping services. But the legal title remains with the owner. So the main thing that would differentiate you from an exchange like Coinbase, let's say you have a lot of Bitcoin, you want to store it on you want to have a custodian, you want to have Coinbase or custodia bank. The main difference there would be what happens in the case of bankruptcy. You go to the bankruptcy court with Coinbase, you go straight to the Wyoming regulator if custodia bank were to fail and they would have the investors back. And the Wyoming law recognizes bailment. No other state in the United States recognizes a bailment for a digital asset custody. We're here at Bitcoin Miami 2023. People have a lot of ideas about what Bitcoin is, what its value is, what its purpose is. What's your answer to that question? What do you think the purpose of Bitcoin is? Well, Bitcoin has many purposes, but to me the simplest is the most basic which is it's an honest ledger. No one controls the ledger because everyone controls the ledger. And in terms of what is money to people, why do people save? They want a store of value that's honest and cannot be manipulated. And as a system that coin is anti-fragile, we are learning that the traditional financial system is fragile. I would argue that it's been fragile all along. It's just that more people are waking up to the issues. So at bottom, Bitcoin is simply an honest ledger. And it's been a tumultuous year or so for crypto as a whole. How do you think about Bitcoin in particular in that context? Good riddance to the vast majority of what happened in crypto. In fact, I still think there's a big chunk of crypto that needs to burn on a raging funeral pyre. There were criminals, scammers, grifters, over leveraged business models that should never have been implemented. And it was a bubble, no question. And of course, Bitcoin got caught up in all that. And in fact, actually in my last interview with Reason, we were talking about the financialization risks as Bitcoin would become financialized. It would become fractionalized. There would be people who like, for example, FTX, we now know, took in US dollars and promised Bitcoin back but didn't actually own the Bitcoins. So what did they do? They created more claims to Bitcoin than there were actual Bitcoins because they gave people Bitcoin IOUs and yet didn't have actual Bitcoins to back them up. And so we know that it was getting fractionalized and that had a big impact on the price. It made it more volatile. It made the cost of capital go up for everyone of us in the industry who are operators trying to provide services around the protocol. Everybody's cost of capital went up because it became a lot more volatile. It didn't, it clipped the top off the price, all the old models that predicted that the peak of the bull market would be a lot higher than it actually was. I think it is a function of the fact that it got financialized and that suppresses the price. But it also on the downside can, and the leverage unwind can actually cause that leverage flush to move the spot price even lower. So it's asymmetric. You don't have as much upside when you get a financialized asset and the downside can be worse when you get the corrections. And that happened. I long for the days when Bitcoin was not the hot thing and we had a pure market. And frankly, there are very few financial assets, if any, in the world that actually are pure markets. So those are the main factors that you see as pushing Bitcoin's price down at the moment because you would expect one of the propositions of Bitcoin is that it's an inflation hedge. When the money printer goes burr, Bitcoin is there and now we've had the money printer do that. We have inflation yet Bitcoin is flat or on a decline. So is that your explanation for that? Bitcoin has bounced pretty hard off the bottom. It's actually one of the best performing asset classes this year. And of course, it's very volatile. Peak to trough. I never give investment advice, but I think the bottom is probably in. It's hard to say for sure. I mean, there are certainly a lot of things stacked up against it, but we're heading into another happening. So, yes, the leverage unwind no doubt and the damage that was done by the criminals, they still need to get flushed. And most of crypto, I actually agree with the critics, most of this is just scams and ultimately will go away. But for those of us who lived in the dot-com bubble, frankly, it's repeating. A lot of those businesses never turned a profit much less were cash flow positive and they ended up getting flushed and markets work and boy did markets work here. That fractionalization that you were talking about being the primary problem with FTX that it was just saying it had all these reserves and really didn't is what your bank is designed to fix. Looking through your proposal and the Federal Reserve's response to that proposal, it looked like your plan was to start off with 108% of reserves in cash. How would that affect the security of someone's investment? Right. Well, actually, our proposal was to keep 100% of it in cash at all times at the Fed. I'm interested in fortress balance sheet, not interested in taking investment risk. This is not a yield play. This was always a fee-based business model, a service provider. A lot of fintechs make a lot of money charging fees to their customers and not earning an interest spread. The interest spread is where the risk starts to come into the banking business, as you know. If you could have a fee based bank, it will never be the low cost provider, but the design is to have a fortress balance sheet. Before we get into your battle with the Federal Reserve, let's talk a little bit more about Wyoming. The governor appointed you back in 2018 to head up the Wyoming Blockchain Task Force, which the state legislature created to advise on crypto regulation. That board made a number of recommendations and the legislature ended up passing 13 different crypto laws. What were the most important laws to come out of that process that makes Wyoming a particularly appealing place for crypto, for Bitcoin? It actually kept going. They're up to something like 33 laws now because they turned it from a task force into a select committee. What Wyoming did was very simple basic stuff that I know the reason audience cares a lot about. Wyoming defined digital assets as property, and so if it's stolen, then theft laws apply, for example. Moreover, it also defined the legal rights and obligations of parties to commercial transactions involving digital assets. You may wonder why anyone cares about that. Bitcoin itself exists in a vacuum. It doesn't have any nod to any legal system anywhere. The code itself just runs, and it runs in all legal systems all around the United States, all around the world right now. But the issue that we spotted is that none of us lives in a vacuum. Everyone lives in a place where there is some rule of law, and unless you live on a c-stead, you're not in a completely libertarian utopia. So the law itself could be an attack vector on Bitcoin holders. I have to give a nod to Trace Mayer, who was one of the original Bitcoin OGs, so to speak, who understood that this would eventually become an attack vector, that you would have courts coming after people for their Bitcoin in divorce situations, or if the government decides that they want to confiscate it, FDR's confiscation of gold, that absolutely could happen. So how do we get ahead of that? How do we make sure that the technology is so called backwards compatible with the legal system was one of the questions? So this is foundational boring stuff, but those are ultimately the most important things Wyoming did. And they ended up leading the rest of the United States. There's now been a proposal, albeit a controversial one in a couple of red states, to recognize controllable electronic records as a digital asset. Now, this would be beyond just crypto. This is anything that is in digital form. For decades, we've actually just been sort of bandating the commercial law system in the United States, which was written for everything to be in paper. This is why when you get a check, you now have to take a picture of it, that is deemed to be the paper version. So instead of just, you know, instead of everything just being electronic, there still has to be some sort of, there's an analog paper version of it, and they'll accept it if it's a photograph. It's crazy. That's all designed to be able to comply with these old laws that required for everything to be in writing. And then about 20 years ago, the Uniform Electronic Transactions Act, UEDA, was passed that that was a band aid. It just was an appendix that basically said, all right, certain things can be in digital form. But we needed to go to a recognition that some assets will never be in analog form. They will be natively digital at issue. And that's what a digital asset is. And so it didn't really fit within the legal structure. And ultimately, what this means is that the rest of the United States followed suit. Now they went a little further than Wyoming. Wyoming recognized that Bitcoin itself can be money under commercial law. But you might have seen this has become a hot potato in South Dakota, Florida, and Texas, and Alabama, I believe there are a few other states now that are getting on this bandwagon of, we don't want to recognize a central bank digital currency in our commercial law. And the way that the National Committee wrote this, it did foretell that eventually there would be digital dollars and digital yuan and digital, there already is a digital yuan, but digital yen and digital Swiss francs, right? And so there was a recognition that there would be central bank issued money in digital form. And at that point, you started to see the politics enter and the anti CBDC crowd, by the way, I'm very anti CBDC. But I think vetoing that particular provision of the legislation doesn't stop a CBDC. Is there a way to separate the CBDC component and just protect things like Bitcoin across the board? That's what Wyoming did. And is that something that you think will be scaled up to the federal level? Ultimately, the CBDC thing is a hot potato, and it may indeed be one of the reasons why the Federal Reserve shot a bazooka at a bunny rabbit in how it treated custodia, because custodia had proposed to issue a digital dollar, it would have been a bank issued digital dollar, not going back to the wildcat banking era where there would have been a custodia dollar, it would have been a actual dollar issued by a bank just like any sort of instrument like a check. Those are ultimately negotiable for dollars. So a pure dollar just issued on a different payment rail, not Fedwire or ACH. But custodia actually was granted last July the patent on a bank taking in a U.S. dollar deposit and issuing a token against it. And so there's some thought that maybe the Fed not only didn't like the idea of a bank doing this, but that because the regional Federal Reserve banks are private entities, if the Fed ever wanted to issue a CBDC and somebody had a patent on a bank taking in a U.S. dollar deposit and issuing a token against it, that that might actually get in the way. So this digital dollar, which is called AVID, what the Federal Reserve had to say about that in denying your application, was that it could possibly become a tool for persons around the world to access the stability of the U.S. dollar instantly and anonymously. And by setting a precedent for tools like that to be used by other banks, create a new meaningful and volatile source of demand for Federal Reserve liabilities, is there a concern that AVID is a threat to the integrity of the Federal Reserve system and the stability and the volatility sound? Well, it's their concern, but I think what they ought to do is take a look at what the market is actually doing. Look at Tether. Look at USDC. Look at the demand for these. There are real transactions. Admittedly, most of that, most of the volume is speculative, but there are real world uses of these new payment rails. So, I mean, it's so funny. You go back and look at the history of the Fed. The Faster Payments Initiative, I recall, was around in 2016. And here we are in 2023 coming out with their new payment rail called FedNow. I mean, a few engineers got together and created Tether and look at what it turned itself into without any permission. It's a new payment rail. And so, absolutely, is that something that the Fed's not happy about? Sure, they've made that crystal clear. They only want themselves and regulated banks to be issuing U.S. dollars. However, what we brought to the Fed was a proposal to do just that, be a regulated bank that issues U.S. dollars and get this into the so-called regulatory perimeter. You see Federal Reserve governors all the time complaining that financial technology companies that are not licensed as banks and therefore not subject to bank capital and bank supervision are doing certain things in the financial industry. And they keep saying that they want them to come into the regulatory perimeter. So, when one actually tried, they rebuffed us in a nasty way. How would they ensure that a bank issuing a digital dollar would not be fractionalizing those digital dollars? And I mean, we've already seen other stable coins lose their Tether to the U.S. dollar dropping in value. What do you do about that? Well, this is why having a bank that was sitting 100% in cash plus the extra 8% you alluded to earlier was our shareholders' equity. So, literally put all of the assets of the company other than intangibles and furniture or office furniture, those sorts of things, all the financial assets of the company would have been in our Fed master account. That's how the proposal was to ensure that it never sort of broke the box, so to speak, unlike what we've seen with the algorithmic stable coins, which certainly have, and then the ones that are asset-backed basically, which is the proposal that Custodia made regarding Abbott. They've not traded it exactly one dollar. We just saw the example when Silicon Valley Bank failed. One of the parties that got bailed out, let's be honest, was a crypto company called Circle because they had their deposits at Silicon Valley Bank and it worked out that about 12 cents of their deposit of every dollar of deposit of every USDC stable coin was at Silicon Valley Bank. And guess what the market did? Very swiftly started trading USDC at 88 cents on the dollar once they disclosed 12 cents of their reserves were at Silicon Valley Bank on the weekend of a bank run. And then as soon as Silicon Valley Bank got bailed out and all the uninsured deposit holders, including the Circle Reserve holders, got bailed out, loam hold went right back to a dollar again. So markets work. Let's talk about then the denial of your application, which happened on January 27th of this year after two years of waiting to get that master account. What was your reaction to getting that rejection? We were blindsided. We had been making a lot of progress with the Fed and then something clearly changed. Why were you seeking a master account with the Federal Reserve? What would that allow you to do? To be able to keep cash directly at the Fed. Like any depository institution, federal law says the Federal Reserve shall provide services to depository institutions, either an insured depository institution or a depository institution eligible to apply. So essentially an FDIC insured bank or a bank that's eligible to apply for FDIC insurance. We actually did apply for FDIC insurance and they were not interested in anything related to digital assets. And candidly, as I've said before, I agree with them. And here's why. We saw how fast the money can move in the digital asset world. The traditional banking system is not set up for that yet. I mean, holy cow, just online banking movement is enough to take down a bank in today's day and age. When you get crypto, which moves so much faster than traditional payment rails, so an Ethereum transaction will settle in three minutes, a Bitcoin transaction in 10 minutes. ACH can take up to three days. Fedwire, you can do it in hours, but you can't program it. You can't use software to direct it. And you'll never know exactly when it's going to settle. So now you're talking about all these settlement mismatches. And if the trade doesn't settle simultaneously for both parties, somebody's carrying an uninsured counterparty credit risk. So I started warning about this. In fact, actually, my Kato Institute monetary conference keynote in 2020, I talked about how dangerous it was to have the stablecoin issuers holding reserves at fractional reserve banks, that it was going to cause a bank run. And sure enough, the bank run came. It wasn't because of mass withdrawals from stablecoins, which is just plain online banking. I didn't disagree with the denial on FDIC insurance for that reason. So without that FDIC insurance, why would an investor want to put their money in your bank? Wouldn't they be afraid? Well, the whole idea, again, is that this is back to back to the Federal Reserve. So actually, the opposite was that I think the Federal Reserve was more concerned that it would be too safe. Why would they be afraid that's too safe? If a bank is too safe, it's not welcome, because we need to, we need to pigeonhole everybody into the banking system that isn't really safe. Fractional Reserve banking has always been fundamentally unstable. It's go back to, it's a wonderful life. Where's your deposit? It's in Joey's car, and it's in Jimmy's house, because the bank has lent the money. It's always been that way. It's fundamentally unstable, and it's fundamentally a confidence game that relies on the assumption that not everybody will go withdraw their deposits at the same time. When you get a bank run, which is what has happened to some of these banks recently, because information travels at the speed of light, that old bottle of borrowing short-term and lending long-term, which is what the banks do, it just doesn't work anymore. And now we're speeding up the speed of bank runs, not just to online banking speed, but with FedNow coming online this year in July. Can you imagine what the Silicon Valley Bank, Bank Run weekend would have looked like? If everybody had had 24, 7, 365 access, Silicon Valley Bank lost 25% of their deposits in the span of four hours. That would have kept going that night and over that weekend. So here's the punchline. Banks are massively under liquid. They're going to have to hold a lot more cash because their liabilities turn over a lot faster than anyone has ever realized they could. You believe that part of the reason they denied this is because to allow it would be to expose or wake people up to the weaknesses of the current fractional reserve system, and they would flock to a safer bank. Well, that sure is one interpretation. There's been a lot of discussion among macro analysts that I read, for example, like Lin Alden saying, the Fed can never acknowledge that the system in aggregate is insolvent because it will just trigger a bank run immediately. But by the way, this is not new. This has been this way all along. It's just that more people are waking up to it because social media and there's a lot more free movement of information and it moves at the speed of light now. So there's a debate within libertarian circles about fractional reserve banking. Right now we're existing in a world where we've got a central bank. There's the libertarian world where there is no central bank, there's just competing banks. And on one end of free banking, on one end of the spectrum, there's people like Murray Rothbard who said fractional reserve banks are fraud. They should not exist in a free society. On the other end, you've got people like George Selgen who says that actually in a free banking system, fractional reserve banks would exist and they have a legitimate reason for existing. They can supply the money or the credit to meet demand, especially in recession type environments. Where along that spectrum do you fall philosophically? Oh, much closer to Rothbard. I started as a free banker and then pretty quickly realized anytime you create anything out of thin air, it creates a distortion in the market price. This is the distinction between commodity credit and circulation credit that Mises wrote about. A commodity credit is debt that is backed up by prior savings. Nobody created any credit out of thin air. In the free banking world, you will have credit created out of thin air. And ultimately that distorts the price of credit in the marketplace and that's the bigger issue. So I ended up evolving very, very strongly towards the Rothbardian side of things. And now with the world I just described where transactions are settling even faster, that fractional reserve or free banking model is inherently more unstable because if there's going to be any maturity transformation where the bank takes the deposit in short term and lends it long term, that bank is inherently insolvent when everyone comes and gets their money back. It's done. So how is credit generated in that world? Great question. Here's if we were starting all over again and we wanted to get to a truly digital, natively digital and fair system, what would we do? We would have pension funds make long term loans like mortgages and the like because pension funds are long term money. We would very carefully duration match. There's a long term demand for a long term loan. It should be provided by a long term saver like a pension fund. I cut my teeth in my Wall Street career on the life insurance and annuities and pensions businesses. Those are the longest term, right? You're, you know, somebody's buying life insurance in their in their 20s because or 30s because they have a child. Their life expectancy is still probably 50, 60 years, right? And so the cash flows on something like that are super long term. And what you need to do is find super long term investments to invest against that. The opposite is true on the annuities world. With annuities, you're basically paying out somebody or a pension fund. You're paying out somebody a monthly payment for the rest of their lives beginning typically at age 65. The duration of that could be 20 years. Now, with banks, you're dealing with a shorter duration business mix, right? You tend to be, yeah, sure, there may be some 30 year mortgages in there, but mostly it's going to be student loans or credit cards, right? And so having cut my teeth in things that are 20 to 50 year duration and then coming into the banking world where you're looking at the maturity mismatches of two to five years, it was so clear to me, you just never want to have an asset liability mismatch. So here's the point. That's your question. How do you, how is credit created? It's created on an asset liability matched basis, but we have to get out of the crazy regulatory regime that prevents that right now. Right now, the crazy regulatory regime tells the banks take in a demand deposit and make a 30 year mortgage loan. And it tells the pension funds go buy stocks. Would the, let the solution be to make it so that if you're a bank to get a bank charter, you are not allowed to make those kinds of loans. Correct. That's the Wyoming speedy structure. It's a non lending charter. By the way, Wyoming is not a loan. There are five states that have uninsured bank charters in the United States. There is no reason why you fundamentally need to have a bank borrowing short-term and lending long-term. Markets can clear. And the only reason why that exists right now is because of the central banking structure that guarantees it. So the rationale that the Federal Reserve Board gave for denying your application was that your novel business model and proposed focused on crypto assets are highly likely to be inconsistent with safe and sound banking practices. What is your reaction to the idea that because your bank has Bitcoin and Ethereum that it's just too risky to integrate into the system? I think that's a hilarious statement. Keep in mind, the Bitcoin and Ethereum were all in assets under custody, not on the bank's balance sheet. What was the bank's balance sheet? It was proposed to be 100% invested in cash on deposit at the Fed, as vanilla and boring as it possibly could be. Now the Federal Reserve very clearly is not interested. They joined the, the all of government crackdown that the Biden administration, the Biden White House started on crypto. So that is them saying they do not like crypto. And they do admit that you have the capital on hand to run a full reserve bank for now. But they worry you won't be solvent in the future because they say they would never approve a bank that has your business model for making money partly off crypto fees. So it's kind of a catch 22 with what they're putting there. Why should the Fed allow this sort of unorthodox model into the system just given the uncertainty? So let's get back to is crypto going away? What the Biden White House has chosen to do is hope that it goes away. We don't want anybody, including the big banks, big companies like Coinbase, right? They're every one of the U.S. service providers in this industry has had a regulatory action against them in the last few months. It's part of an all of government approach. Okay. So they just want it to go away. Well, when it doesn't go away, what next? Okay. What they've now done is shove it off shore. Businesses are still going to get their U.S. dollar services. They're just going to get it from non U.S. banks. So we just saw a bank in Gibraltar that is offering U.S. dollar isn't basically the same business model as Custodia. Now, what's the impact of that to the Fed? They're going to be playing whack-a-mole for the next several years as risks come back into the U.S. in places they don't expect, can't measure, have no visibility. It would have been better. Again, remember we started at the beginning with them saying all of this needs to be in the regulatory perimeter and all these companies need to come get bank charters and get licensed as banks and get federally regulated. And then when one of them came and said we are willing to do all of that, not only was it proverbially shot, it was done in a nasty way, including some very nasty press leaks. Obviously, a lot of this nervousness around crypto in general is coming in the wake of the FTX melt meltdown. Absolutely. What do you think are the big lessons to take away from FTX meltdown? Well, that was out allegedly outright criminal. So what's the big lesson from that? Unfortunately, greed exists and people can get taken in by fraudsters. I think you know from the interview on stage that I did with Sam Bigman Freed at this conference, Bitcoin 2021, two years ago, where I was pretty clear that I knew his business model was going to fail and he and I were arguing over whether leverage was good. Leverage is never good in crypto period. All of those crypto lenders I knew were going to fail. Why? Because there's a finite number of Bitcoin. All you're doing is creating fractional reserve Bitcoin and that's all going to come back to haunt you when inevitably there's going to be a price correction and everybody wants the real thing and then those lenders that were running fractional go bust. Now, we saw all of those and that absolutely happened in the case of FTX. It does appear from the bankruptcy filings, but on top of that, there was outright fraud. Allegedly. You published a Twitter thread in February disclosing that you handed over evidence to law enforcement of probable crimes committed by a big crypto fraud starting months before that company imploded. Yes. Can you say more about that tweet? Not much more. I will say that law enforcement is doing its job and did come back and ask for more and I had access to more. It was not evidence that I gleaned myself. It was someone who came to me who was a participant in some of the private chat rooms, saw illegal activity, took snapshots of it. Same thread you said that it is not partisan to clean up crypto fraud. It's the right thing to do. Correct. Are you advocating for more regulation of the crypto industry? Well, a lot of the laws already exist. They should be enforced. So this gets back to the question we were just talking about. Is this better to be in the regulatory perimeter or is it better to be shoved offshore where there's even more fraud because scammers can like, by the way, Sam Pinkman Frieda FTX went offshore for a reason. He would never have qualified for a Wyoming bank charter. So keep in mind, this was an offshore entity. That's where the vast majority of the activity took place and they did not have the regulatory oversight nor did they have laws they had to comply with that prevented the outcome that occurred where they were running fractional. It seems like your project is in many ways to make Bitcoin play better with the state and vice versa, whether that's the state of Wyoming or the Federal Reserve system. Bitcoin grew out of the cypherpunk movement and there's people from that movement who believe it should just be a completely parallel system and have nothing to do with the state. How do you reconcile those things? Well, so I think most even the cypherpunks, the hardest core libertarians would say there is a role in government to enforce private property rights. The fraud that occurred was an encroachment on private property rights. So there is absolutely a role for law enforcement to enforce the private property rights of those who were scammed. So I think we can set that aside. And candidly, I've been trying to clean up this industry for a while because I firmly believe that there are affronts to private property rights. And ultimately, candidly, I'm happy that AI has come along because I'm watching a lot of the scammers go there and a lot of them have left Bitcoin. Putting aside FTX, Custodia Bank really would be a direct bridge from Bitcoin into the Federal Reserve system. Why build that? And some of the cypherpunks don't think it's necessary. Here's where I think it is. And ultimately, all of them are still paying their employees and their rent and maybe not their employees, but certainly their rent and their vendors and dollars. They need access to dollars. So ultimately, here's the issue. We're not ready for hyperbitcoinization today. I don't want to live in a world where we have hyperbitcoinization today because what does that imply? It implies the US dollar system imploded and all of the things that came with that. I do believe the world will transition to Bitcoin, but I prefer a world where it's peaceful. I would much rather build a bridge that allows these two systems to coexist without hurting each other. There's a very good argument that both systems hurt each other because there was no safe and sound bridge between the two. How worried are you that we're getting close to that point where things are just going to dissolve? Because the other, obviously, background to all this that we talked a little bit about earlier are the bank failures, Silicon Valley Bank. What is your analysis of the current state of the banking system? Very unhealthy. Because on a mark-to-market basis, again, there's not equity there, and that's acknowledged. So you'll hear the bank regulators say the system is safe and sound. What's the difference? Are they lying? Not really, because they're presuming that all of the depositors won't show up and withdraw their money at the same time and reveal the extent of the insolvency. But a lot more people in the world now recognize that the money in their bank is an IOU to a leveraged institution. Most people didn't think about that until recently. And oh boy, on social media, especially the younger generations, that makes them want Bitcoin even more because it's something they can own, they can control. I was just talking to Dylan Leclerc today on our panel. Dylan's never written a check. He has once set foot in a bank branch. Again, he's a different generation because he never had to. Everything's digital. So when they see these things where we're trying to all be pushed back into that analog world, they just roll their eyes and say, that's boomer stuff. And they're not wrong. Yeah. Let's wrap up with a brief discussion of the status of the lawsuit. How do you feel about how things have proceeded so far in the legal process? Well, I can't comment on the lawsuit. It is in existence. Kastodia filed against both the Kansas City Federal Reserve Bank in June of 2022. And I've seen you say that you think it really is the Federal Reserve Board and maybe even some players above them who is kind of pulling the strings or managing things, not the local branch. Kastodia applied for our Federal Reserve Master Account in October 2020 right after we got the bank charter. And a few months later, a senior official at the Kansas City Fed said there were no showstoppers. And then all of a sudden, it all just stopped. You alluded to the allegation that it might have even come from above. Yes. When our membership application was denied, remember, the membership application is different than the Master Account application, two different applications. When the membership application was denied, there is no question the White House was involved in that. And part of that was because of the press leaks I alluded to earlier. There were reporters calling us two days before the Fed was voting on our application telling us it would be voted down. And we subsequently heard through the grapevine in Washington, everybody talks, there were folks who knew what happened, who came forward and who gave us names. And when I went subsequently to the Congressional Oversight Committee, they were interested in hearing what had happened. And when I shared what I knew, they all knew it already, who was in charge and who at the White House was orchestrating this all-of-government crackdown on crypto. Why the Fed played ball with the White House on that is a question I don't know the answer to yet. What is at stake in this case beyond the future of custodia bank in a bigger sense? If we go back in the history of the United States, we have something called the dual banking system. Historically, states chartered all the banks. And then Lincoln created a federal chartering authority in 1863 with the National Bank Act. The deal that got cut was both the federal bank chartering authority and the state bank chartering authorities coexisted. And they had equal powers. And then the Fed was created in 1913. And then the FDIC in 1933, Congress did not give either one of those agencies the authority to charter banks. It kept the chartering authority with the states and with a federal agency called the OCC, the Office of the Comptroller of the Currency. So the chartering authorities are made by those separate entities, and they are to have access to those utilities. That was not controversial until about 10 years ago when Operation Choke Point came in. And then you started to see the FDIC starting to push certain industries out of the banking system. And then the Federal Reserve started to deny certain state chartered banks access to the payment system. What's at bottom here is a 10th amendment kind of approach. Does the dual banking system still exist? Or are these federal agencies who have just voted themselves vetoes over state chartering decisions by saying, no, we don't want these banks FDIC insured. No, we don't want these banks to have federal payment system access. They're basically creating a federal veto that has never in the history of the United States existed. Banking just becomes something that is at the federal level or nationalized and states are just cut out of it. What worries you most about that future? Well, you see the degree of control that the federal government has tried to exert. Cleaning up fraud is not political. Banking should not be political either. We should not be using, we collectively, all the people should not be using the banking system as a political hammer. What I'm standing up for and saying is that it shouldn't be politicized period. And so if this is federalized, what do you think happens to a state like Texas with their oil and gas industry? What do you think happens to Wyoming with oil and gas and firearms and the like? The fights that were happening, we're seeing just the federal power grabs everywhere. And so it is absolutely imperative for states to defend their rights. And I'm not saying this is a red state, blue state thing. I think all states need to defend their rights because power changes in Washington DC. And we've seen abuses on both sides, especially in the banking world. It's been coming from the left, but I'm warning, it absolutely could come from the right. You're seeing these efforts to ban TikTok, for example. And these companies start getting debanked. In the United States, if you don't have a bank account, you are not a business. There needs to be freedom in banking. And one of the interesting developments that I've seen is that the challengers, if you will, in both political parties for the presidential race, have come out in favor of freedom in banking. Biden's obviously cracking down on it. And I've seen some crackdowns from Trump as well, but Kennedy on the Democrats and DeSantis on the Republicans have both come out pretty hard in support of Bitcoin and against central bank digital currencies and against this federal overreach in banking. And that's a wonderful thing. I hope they can both drag the lead candidates in both parties towards freedom in banking. This should not be politicized. Caitlin Long, thank you very much for talking with us. Thank you.