Institutional investors in traditional finance lack updated risk tolerance models to handle crypto and may struggle during the upcoming bear market, according to Custodia Bank CEO Caitlin Long.
“Big Finance is prominently involved, which appears to be driving this cycle. I think it will continue to shape this cycle,” Long expressed to CNBC at the Wyoming Blockchain Symposium on Friday.
Long highlighted that traditional financial institutions are willing to take on significant leverage because of safety nets built into the system, such as discount windows and other “fault tolerances.”
However, she cautioned that these advantages vanish in crypto, where settlement takes place in real-time. The CEO indicated that the disconnect between crypto and legacy systems could lead to a liquidity crisis for these institutions:
“Those kinds of fault tolerances are built into the system due to 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.
I am concerned about how those financial giants will respond when the bear market eventually returns. I know some who are optimistic and believe it won’t happen again. I’ve been around since 2012, so I expect it will return,” she added.
Institutional investors, including crypto treasury companies, have been the most notable aspect of the current market cycle.
Some investors see this as a positive trend that drives adoption forward, while others warn that overleveraged and inexperienced firms may abandon crypto during the next bear market, instigating a contagion that spreads throughout the financial system.
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Custodia CEO reflects common concerns of industry leaders and analysts
“The main systemic risk moving forward is having one ecosystem that manages risk and rebalances in real-time, while another ecosystem takes weekends, nights, and holidays off,” Chris Perkins, president of investment firm CoinFund, stated.
This discrepancy in settlement processes can lead to liquidity problems, which are the source of all financial crises, Perkins informed Cointelegraph.
In June, venture capital (VC) firm Breed released a report indicating that most new Bitcoin (BTC) treasury enterprises would not survive the next market downturn.
The VC firm cautioned that overleveraging and declining asset prices will create a vicious cycle compelling these treasury firms to liquidate their assets on the market, further sinking the crypto market.
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