Caitlin Long, CEO of Custodia Bank, expressed concern at the Wyoming Symposium about how traditional financial institutions may face challenges in the next crypto bear market. She noted that outdated safety mechanisms may not cope with the unique risks of the crypto market.
Challenges for Traditional Banks
Long pointed out that traditional banks are used to operating with large amounts of leverage relying on mechanisms such as discount windows and backup systems. This helps them manage risks without immediate consequences.
Real-Time Settlements and Liquidity
In the crypto space, every transaction settles instantly, leaving no margin for error or delay. Long warned that this mismatch could create serious liquidity challenges if markets turn bearish. "Those kinds of fault tolerances are built into the system because of legacy reasons, where systems were not updating in real-time. In crypto, everything has to be real-time, and it’s just a different animal," she said.
Problems for Institutional Investors
Institutional investors, including corporate crypto treasury firms, have had a significant impact on the current market. Some experts see this as a sign of growing adoption, while others worry that inexperienced or overleveraged players could worsen losses during a downturn. Liquidating large amounts of assets under pressure could trigger a ripple effect, amplifying losses. Chris Perkins, president of CoinFund, also noted that the difference between real-time crypto settlements and the slower pace of traditional finance could create liquidity crises, which are often at the heart of financial instability.
Long's warning emphasizes the need for traditional financial institutions to adapt to how cryptocurrency markets operate to avoid potential liquidity crises.
