Institutional investors from the traditional finance world lack the updated risk tolerance models to deal with crypto and may face trouble during the next bear market, according to Custodia Bank CEO Caitlin Long.
“Big Finance is here in a big way, and that seems to be driving this cycle. I suspect it will continue to drive this cycle,” Long told CNBC at the Wyoming Blockchain Symposium on Friday.
Long said that legacy financial institutions are comfortable taking on large amounts of leverage due to fail-safes built into the system, like discount windows and other “fault tolerances.”
However, she warned that these advantages disappear in crypto, where settlement occurs in real-time. The CEO said that the mismatch between crypto and legacy systems could create a liquidity crunch for these institutions:
“Those kinds of fault tolerances are built into the system because of 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 do worry how those titans of finance will react when the bear market inevitably comes again. I know some who are optimistic and think it won’t come again. I’ve been around since 2012, so I know it’s coming again,” she added.
Institutional investors, including crypto treasury companies, have been the most prominent feature of the current market cycle.
Some investors view this as a positive development driving adoption forward, while others warn that overleveraged and inexperienced firms will dump crypto during the next crypto bear market, triggering a contagion that spreads through the financial system.
Custodia CEO echoes widely-held concerns of industry executives and analysts
“The biggest systemic risk going forward is the fact that you have one ecosystem that manages risk and rebalances in real-time and another ecosystem that takes weekends, nights, and holidays off,” Chris Perkins, president of investment firm CoinFund, said.
This mismatch between settlement mechanisms can trigger liquidity issues, which are the root of all financial crises, Perkins told Cointelegraph.
In June, venture capital (VC) firm Breed released a report concluding that most new Bitcoin (BTC) treasury companies would not survive the next market downturn.
The VC firm warned that overleveraging and lower asset prices will create a vicious cycle that forces these treasury companies to dump their assets on the market, further depressing the crypto market.