Traditional finance institutional investors are lacking updated risk tolerance models for handling crypto, which may lead to challenges in the next bear market, according to Custodia Bank CEO Caitlin Long.
“Big Finance is significantly involved, seemingly driving this cycle. I believe it will continue to influence this ongoing trend,” Long stated in an interview with CNBC at the Wyoming Blockchain Symposium on Friday.
Long noted that legacy financial institutions are comfortable taking on substantial leverage due to built-in fail-safes in the system, such as discount windows and other forms of “fault tolerance.”
However, she cautioned that these advantages diminish in crypto, where settlement happens in real-time. The CEO pointed out that the disparity between crypto and legacy systems could lead to a liquidity crunch for these institutions:
“Such fault tolerances exist due to legacy reasons, where systems did not update in real-time. In crypto, everything must be real-time, making it a different scenario.
I am concerned about how these financial giants will react when the bear market inevitably returns. While some remain optimistic and believe it will not happen again, having been involved since 2012, I recognize it’s coming,” she added.
Institutional investors, including crypto treasury companies, have prominently featured in the current market cycle.
Some see this as a positive sign for driving adoption, while others caution that overleveraged and inexperienced firms may liquidate their crypto holdings in the next bear market, leading to a contagion effect throughout the financial system.
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Custodia CEO expresses shared concerns among industry executives and analysts
“The primary systemic risk moving forward is the presence of one ecosystem managing risk and rebalancing in real-time, while another system takes weekends, nights, and holidays off,” remarked Chris Perkins, president of the investment firm CoinFund.
This mismatch in settlement mechanisms could lead to liquidity problems, which are the root cause of all financial crises, Perkins commented to Cointelegraph.
In June, venture capital (VC) firm Breed published a report indicating that the majority of newly established Bitcoin (BTC) treasury companies would struggle to survive the next market downturn.
The VC firm warned that overleveraging and declining asset prices could create a vicious cycle, forcing these treasury companies to offload their assets onto the market, which would further depress the crypto market.
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