Eight years ago, Caitlin Long was a card-carrying member of the financial establishment. As head of Morgan Stanleys pension advisory group, she oversaw the retirement funds for dozens of employers. The dust from the impact of the Great Recession, which wiped out billions of dollars in market value from her clients, was just beginning to settle.
The Harvard Law grad, who cut her teeth doing mergers and acquisition work at Salomon Brothers, tried to understand what went wrong and if anything could be done to prevent another collapse. The problem was, no one really knew what happened. Loans had been made to lenders who loaned to lenders ad nauseum, until the providers of capital, like her own clients, had been lost between the cracks of countless ledgers.
And then, in 2013, she discovered bitcoin, the countercultural currency that relied on a single, shared ledger, called a blockchain, controlled, not by the centralized authorities that failed to prevent the 2008 meltdown, but by a community of coin owners. It appealed to Longs rebellious, libertarian streak, who bought some bitcoin for $30 from cryptocurrency exchange Mt. Gox.
In spite of bitcoins promise to let investors own their own assets, Long trusted the exchange with her password, and when it lost $500 million a year later, some of her investment vanished too. Not long after, a client of hers, a pension fund for 30,000 people had a similar experience. She discovered that several billion dollars in bonds listed on the account statement werent available for sale. While Mt. Gox lost its customers funds through a hack, the pension fund had loaned out the client securities.
While securities lending is kosher if the client permits itand shares in the lending fees in this case the client had explicitly forbidden the practice. It struck me as very unfair to mom and pop pensioners, she says. She gave the custodian until the next day to fix the problem, or she would be calling the cops at the Securities & Exchange Commission. Magically, the assets came back.
Long poses in front of a sign in Yellowstone National Park.
Longs experience with bitcoin had given her a new way to understand what was happening to her clients, and how blockchain could solve it. Investors relying on third parties dont actually own their assets as much as they might think they doothers were profiting on their hard-won investments. The solution, she hopes, is a new kind of financial institution that crosses the divide between cryptocurrency custodians and traditional dollar-based banking.
This is not an easy task, given the natural antipathy between banking authorities and crypto. If there is one place where it can be done however, it would be Wyoming, where Long grew up and to which she returned last summer after two decades on Wall Street. We have a history of breaking ranks, she says, from a home on a dirt road where traffic means a herd of antelope and self-sufficiency means a Colt .223 rifle. Thats the culture I grew up in, and it never left me.
Long, 50, is the daughter of a professor of electrical engineering and an elementary school teacher who taught the children of miners. She earned a bachelors degree in political economy at the University of Wyoming, which she proudly declares has been bucking the system since 1866. As an undergrad, she joined in the state of Wyomings fight against a federal push to raise the legal drinking age. After earning degrees in public policy and law from Harvard University, she spent 22 years at Salomon, Credit Suisse and Morgan Stanley. Then she spent a year and a half as president of enterprise blockchain startup Symbiont in New York City.
We have a history of breaking ranks. Thats the culture I grew up in, and it never left me.
In spite of her Mt. Gox losses, Long came out well in the bitcoin market and, in August 2016, set out to donate some of her bitcoin to the University of Wyoming, whose new motto, appropriately enough, is the world needs more cowboys. State banking law made the transfer difficult, however. So this cowboy, who twice hit a target with her rifle from 850 yards, decided to change the law.
Two years ago Long proposed a new regulatory regime that would make it easier for banks to open accounts for cryptocurrency businesses. Next she landed a spot on the Wyoming Blockchain Task Force, which inspired the legislature to enact 18 laws to facilitate crypto financing. One of those statutes allowed her to make a six-figure donation to the university to fund female engineers. Another permits state charters for a new kind of institution that can handle both dollars and crypto.
This year Long cofounded an enterprise that aims to get the first of those charters. If all goes according to plan, Avanti Bank & Trust will open up sometime next year, with an office in Cheyenne and the right to do business in at least 40 states. Part bitcoin custodian, part traditional bank, Avanti aims to be able to take custody of cryptocurrencies the way exchanges like Coinbase do while also holding dollars on deposit at the Federal Reserve. By virtue of this asset crossover, Avanti would be positioned to service corporate customers that do business on the blockchain but need to cover payrolls and tax bills in dollars.
Avanti, of course, has to deal with not just the cowboy regulators in Cheyenne but the straight-laced ones in Washington, D.C. The strict regulations of the Federal Deposit Insurance Corporation, aimed at preventing bank failures, get in the way. Long will end-run the FDIC by not having FDIC insurance. Instead, her bank will keep customers dollar assets safe by investing them entirely in deposits at the Fed and in a narrow list of eligible Treasury and federal agency securities.
The economic chaos now engulfing the globe as a result of COVID-19, may play into Avantis hands. In the traditional banking system, large depositors with amounts beyond FDIC coverage get their protection via a banks equity cushion. That cushion, representing the losses that bank shareholders have to absorb before depositors are exposed, can be as little as 8% of assets, with further reduced requirements already in the works. Were moving to a financial system, where solvency is really going to matter again, she says. And provably solvent financial institutions are ultimately going to win in the marketplace.
Long pets a baby bison at a ranch in Utah.
As a result, Long thinks that banks like Avanti, that dont lend out depositors money, could prove attractive even to clients that dont deal in crypto. Instead of making money by lending money, Long says, Avanti will charge fees for services. While the bank will take customer deposits in U.S. dollars, the trust side of Avanti will custody bitcoin and perhaps more importantly, securities issued on a blockchain, similar to how State Street custodies traditional securities. There are eight products weve identified that Avanti will be able to offer that do not exist in the marketplace today precisely because traditional banks cant custody crypto and trust companies dont have access to the Fed directly.
She goes on: We have had so many experiences with banks and correspondent banks that dont want to do business with [crypto]. The institutional investment community wants to know their custodian has direct access to the Fed and isnt reliant on a third party for liquidity.
While growth of these banks will likely be slow, the potential is huge.The state best known for its cattle and coal industries is following a playbook written by Delaware in 1899, when it created a freewheeling law that gave it an outsized share of the work of incorporating businesses. Similarly, in 1981, the largely agricultural South Dakota crafted credit-friendly legislation that attracted the likes of Citi and Mastercard, $2.3 trillion of deposits and 29,000 jobs, more than mining, logging and construction combined. It is noteworthy that both Wyoming and South Dakota lack a personal income tax.
Perhaps the largest obstacle to Avantis success is technology. Bridging a crypto trust to a U.S. bank, and then connecting that bank directly to the Federal Reserve, is no small feat. While Long and her cofounders write the state charter application, chief technology officer Bryan Bishop is hard at work on how to securely link Avanti to the Fed and to repositories of cryptocurrency.
Were moving to a financial system, where solvency is really going to matter again, and provably solvent financial institutions are ultimately going to win in the marketplace.
Last year Bishop, a former bitcoin core developer who wrote code still used to select bitcoin from a wallet, published his work on a new kind of bitcoin vault with an internal claw-back mechanism making it easier to recover stolen bitcoin. Another project would give customers access to their private keys, even while the bank maintained some responsibility for the funds. In partnership with another of Bishops former employers, Victoria, British Columbia-based Blockstream, which raised $101 million to build out the bitcoin ecosystem, Bishop believes the technology could enable a new era of security in crypto. The idea of fixing and improving this whole pipeline is really appealing to me, says Bishop.
The more Avanti looks like a bank, the more competitors it will face. In custodying crypto it will compete with Coinbase, BitGo, Gemini and Paxos. In serving the dollar-banking needs of bitcoin businesses it will compete with Silvergate, Signature and Metropolitan. In the race to create the crossover entities permitted by the new Wyoming law, it is joined by four other outfits, says Chris Land, the general counsel of Wyomings banking department. Cryptocurrency exchange Kraken says its one of those four.
Long raised venture capital in February. She wont say how much, but allows that it can cost $25 million to get a bank going. She plans to submit the companys application this spring, and expects a nine-month process of background checks, a business plan review and a penetration test of cybersecurity.
Wyoming decided to create a special type of banking institution that could specifically solve the problem of limited access to banking services for the digital asset industry, Long says. And do it in a way that is compliant with the banking system, and so it truly is a bridge between the digital asset financial system and the traditional financial system.
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