Institutional Investors Unprepared for Crypto’s Unique Risk Landscape
Institutional investors from the traditional financial world are missing updated risk tolerance models to deal with crypto, and according to Caitlin Long, CEO of Custodia Bank, this can be difficult during the next bear market. Long’s comments highlight the challenges that traditional financial institutions face when navigating the crypto landscape, where real-time settlement and lack of legacy system tolerances can create a perfect storm for liquidity crises.
“Big Finance is here in great ways, and that seems to drive this cycle. I suspect that he will continue to drive this cycle,” said Long on Friday at the Wyoming Blockchain Symposium. Long’s insights come as institutional investors, including crypto finance ministries, have become a defining characteristic of the current market cycle. While some view this as a positive development driving adoption, others warn that over-leveraging and inexperienced companies may throw crypto into turmoil during the next bear market, triggering a contagion that spreads through the financial system.
Long shares her insights in the Wyoming Blockchain Symposium. Source: CNBC
Legacy Finance Institutes’ Limitations in Crypto
Long noted that Legacy Finance Institutes take on large amounts of leverage due to the failing failures built into the system, such as discount windows and other “fault tolerances.” However, these advantages disappear in crypto, where settlement takes place in real time. The CEO warned that the non-agreement between crypto and legacy systems for these institutions could create a liquidity crisis: “For legacy reasons, these types of rejects are built into the system in which systems have not been updated in real time. In crypto, everything has to be in real time, and it is just another animal.
“I am concerned about how these titans react to the financing when the bear market inevitably comes back. I know some who are optimistic and think that it won’t come back. I’ve been there since 2012, so I know that it will come back,” she added. Long’s concerns are echoed by other industry experts, who highlight the systemic risks posed by the mismatch between traditional finance’s legacy systems and crypto’s real-time settlement.
Industry Experts Weigh In
“The biggest systemic risk in the future is the fact that you have an ecosystem that manages risk and redress in real time and another ecosystem that takes weekends, nights, and holidays,” said Chris Perkins, President of the investment company Coinfund. This non-agreement between the settlement mechanisms can trigger liquidity problems that are the root of all financial crises, Perkins told CoinTelegraph. In June, the Venture Capital firm (VC) published a report concluding that most new Bitcoin (BTC) exchange companies would not survive the next market downturn.
The VC firm warned that the takeover and lower wealth prices create a vicious circle that forces these finance ministries to throw their assets onto the market and further depress the crypto market. As the crypto market continues to evolve, it is essential for institutional investors to develop a deeper understanding of the unique risk landscape and adapt their strategies accordingly. For more information, visit https://cointelegraph.com/news/custodia-ceo-warns-tradfi-firms-first-crypto-winter
