In a Twitter thread, Custodia Bank founder and CEO Caitlin Long said she provided evidence to law enforcement regarding a crypto crime months before the company collapsed and left behind. million customers in trouble. She noted:
“I turned over evidence of probable crimes committed by a major crypto fraud to law enforcement, months before this company imploded and suffered losses for its millions of customers.”
She also added that she had warned banking regulators of the impending risks of bank runs at banks serving the crypto industry before the real bank runs took place. But Long believes his “warnings have been buried in the bowels of bureaucracy”.
Jesse Powell, co-founder and CEO of crypto exchange Kraken, which recently settled with the Securities and Exchange Commission (SEC), share a similar experience. Powell said he finds it “maddening” that regulators are ignoring the “massive red flags and blatantly illegal activity” he has pointed out for years.
According to him, regulators noted the red flags and said “it’s complicated” because the companies are offshore, but they were “looking at everyone”.
Powell and Long have expressed annoyance that their companies are being used as an example of fraud when they have always tried to do the right thing.
Long said the Custodia Bank came under fire on multiple fronts when the White House attacked the Federal Reserve Board of Governors, the Kansas City Fed and Sen. Dick Durbin. Last month, the Federal Reserve Board rejected Custodia Bank’s application to become a member of the Federal Reserve System.
In a senate speech, Long claims that Senator Durbin “implicitly” compared her and Fidelity CEO Abigail Johnson to FTX founder Sam Bankman-Fried. Fidelity angered regulators last year when it announced it would allow customers to invest a portion of their retirement investments in bitcoin.
Long ago added in a blog post:
“Custodia tried to become federally regulated – the very result bipartisan decision makers claim to want. Yet Custodia was denied and now maligned for daring to walk through the front door. “
The approach to crypto regulation needs a rethink
Long said crypto today is comparable to the mutual fund market in the 1930s, when it was plagued by bad actors and fraud. But instead of completely thwarting the market, President Franklin D. Roosevelt proposed groundbreaking regulations that helped weed out bad actors without killing mutual fund potential. And the US needs to do the same with crypto, Long said.
The SEC has intensified its enforcement actions since the fall of FTX, and many have criticized its “regulation by enforcement” approach. According to Long:
“Washington’s misguided crackdown will only push risks into the shadows, leaving regulators to play the mole as risks continually crop up in unexpected places.”
Therefore, the country and regulators need to sit down with credible people in the crypto industry to develop a regulatory approach that doesn’t thwart the innovation potential of the industry, she said.