E87: Caitlin Long on Custodia and How Banks Will Interact with Bitcoin, Stablecoins, and Lightning
Episode Clips
show Notes

Caitlin Long is a Wall Street veteran, and the Founder and CEO of Custodia, a platform for digital asset banking, custody, and payments.

We had a wide-ranging conversation examining how banks might interact with Bitcoin in the future, the importance of stablecoins, Lightning adoption, and much more.

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00:00 - Intro

01:59 - Caitlin Long Intro

05:50 - How Wall Street’s Views on Bitcoin Have Evolved

13:54 - Hal Finney’s Vision for Bitcoin Banks

22:59 - Scaling Bitcoin in Layers

31:34 - Moving Bitcoin or Fiat on Lightning

44:28 - Improving Bitcoin and Fiat Infrastructure

49:28 - Banking Costs vs. Bitcoin Costs

59:32 - Can All Banks Benefit from Lightning Payments?

1:12:06 - The Lightning Round


Caitlin Long - 00:00:00:

It's staggering how hard it is to move money around the world. We need to focus on building the infrastructure, and that's one of the reasons why I love what's going on in Lightning, because I do believe that that is critical infrastructure that is important. The digitization that has occurred in the traditional financial system, both in banking and in securities, has basically just been digitizing the analog data, but we don't have natively digital data yet. Who is the biggest beneficiary? To answer your question, it's the corporate treasurers that have a high cost of capital and have to move money around the world. When you're moving those sats, what you're moving is a U.S. Dollar equivalent. What you're really doing is using Bitcoin as your cross currency. It's an intermediary currency, and if we can solve that pain point for corporates, boy, would we get a lot of mainstream users. This is an incredible threat to the banking system.

Kevin Rooke - 00:00:50:

Caitlin Long is a Wall Street veteran and the founder and CEO of Custodia Bank, a platform for digital asset banking custody and payments. We had a wide ranging conversation that covered how banks might interact with Bitcoin in the future. We discussed the importance of stable coins, lightning adoption, and so much more. Caitlin is also asked to have her share of today's show splits sent to the Human Rights Foundation. So if you enjoy this episode and if you learn something new, the best way you can support this show and the Human Rights Foundation is by sending in sats over the Lightning Network. You can use any Podcasting 2.0 app. There are dozens of them, but my favorite to use is Fountain. Before we get into today's show, just a quick message from our sponsors. Today's show is sponsored by Voltage. Voltage is the premier provider of Bitcoin and Lightning node infrastructure. Today's show is also sponsored by Stakwork. Stakwork is a Lightning powered transcription tool that takes the best of AIS and humans to create better, faster, and less expensive transcripts. We'll have more from Voltage and Stakwork later in the show.

Kevin Rooke - 00:01:59:

Caitlin, welcome to the show. I'm so excited to talk about all that you're building at Custodia, but before we get into all that you're working on, let's start with your background. Maybe you can give listeners a little bit of backstory of your background in finance and how you discover bitcoin.

Caitlin Long - 00:02:17:

Yeah, sure. Thanks. It's an honor to be on, really. As you've probably noticed, been doing a lot more enlightening. I put the little Lightning icon on my Twitter profile a couple of years ago, but it really wasn't rising up to the level of spending a lot of time on it until recently, and, oh, my gosh, is it exciting. So thanks for having me on. So I grew up in Wyoming and spent almost 30 years on the east coast, mostly on Wall Street. 22 years on Wall Street, was a managing director at Morgan Stanley, and before that Credit Suisse started at Solomon Brothers, some old school names there, and left in 2016, where I had been head of the Pension Solutions and Corporate Strategies groups dealing with corporate treasurers in New York. And when I was at Credit Suisse, I worked in Zurich for a year directly for the co CEOs of Credit Suisse, John Mack and Ozzy Gruble. So that's my background. And then found found bitcoin in 2012 and kept my head down initially thinking that I was going to get fired for getting involved with it, but popped my head up around 2014 internally at Morgan Stanley and then the Chief Technology Officer reached out to me and said, get up here and tell me what this is. And so he actually pulled me into a group of five people that was vetting a lot of the early startups in this industry. And then I left to go full time all in on this in 2016 and helped the state of Wyoming, my native state, came back in the 2018 timeframe to create help to literally fix the money transmitter statute that prevented me from donating Bitcoin to the University of Wyoming Foundation, my undergraduate alma mater, to fund an endowment for female engineers and discovered their bad money transmitter statute prevented that. So I said, why don't I just roll up sleeves and help you fix this? And then the whole thing snowballed and it turned into the Wyoming Blockchain Coalition. Now, in five legislative sessions, there have been 29 different laws passed that clarify the status of digital assets, one of which was to create the Special Purpose Depository Institution charter. And when we built it and no one came initially, so I said, all right, we can't have done all this work and no one step up and do it. So I'll step up and start one. And here we are, almost three years into it, still waiting for approval from the Fed, but we're going to be launching at some point relatively soon. And I'm a bitcoiner at heart for sure. Most of you probably know that. And so we're figuring out how to create a way to bridge what I think will be critical infrastructure, bridging the US dollar system with the bitcoin system and doing it in a safe and sound way because I don't think we're going to get hyper-bitcoinization tomorrow. And I think if we did get hyper-bitcoinization tomorrow, there'd be a lot of problems in the world that we don't want to have. I think there should be. It's going to take time. I talked to Trace Mayer recently and he said this is going about at the pace that I expected it to go. I know a lot of us wanted to go faster, but there are downsides to it going even faster. And so part of what Custodia is doing is helping to do this in a, in a safe and sound way so that we don't have a lot of problems along the way.

Kevin Rooke  - 00:05:49:

Makes sense. I want to focus first on the comment you made about discovering bitcoin in 2012 and kind of being worried that this wasn't okay in the traditional finance world. I want to tap into that hostility that traditional finance base might have had towards bitcoin back then, and maybe can you tell listeners how that's evolved over the last ten years now, the hostility that you've seen on wall street in the past, and is that changing today?

Caitlin Long - 00:06:22:

It has changed a lot, actually. And one of the things I've said publicly before is that I was really grateful to work with the then chief technology officer of Morgan Stanley because he was such a skeptic. Boy, did he really push me. And it really got, forced me to get into the weeds. And it's great to be with people who don't agree with you, and we get ourselves into a lot of groupthink, I think, in crypto, Twitter and boy, getting really being pushed by the skeptics for very specific technology reasons, it helped me a lot. But I think there's still a lot of skepticism. Certainly a lot of the folks who like me saw the upside left. They're not working in traditional finance anymore. And we see it in our recruiting pool here at Custodia. A number of people really wanting to leave traditional finance, even now after the debacle in crypto lending and trading. Boy, this technology, especially on a payments use case, it's as great as it's ever been. And frankly, the upside is incredible. And you're seeing announcements like Elon's announcement at Twitter, he's going to use crypto for payments. Forget about the trading and leverage games that a lot of Wall street folks wanted to play when they came into this industry. What we're really here for, especially those of us who've been around a long time, is the technology itself and what it means and what it can do for individuals, for empowering people, for restoring property rights and financial assets. These are all wonderful, wonderful aspirations. And so it's funny because the trading and leverage games side of the business has clearly been set back, I hope permanently, but the payment side is going full bore. And you can see it also, it's interesting from Cory, from Swan Bitcoin was talking about how, hey, really, it's the bitcoin companies that are still raising capital and still hiring, and I would put custodia in that bucket as well. It's the crypto sort of altcoin world that is retrenching massively, and I think you're going to continue to see that. But again, for those of us who've been around a long time, we've seen this before, this is not the worst crypto winter. The worst crypto winter was when Gox went bust in February 2014. That was bad because Gox had 6% of bitcoin trading at that time. It wasn't clear back then that bitcoin itself was truly decentralized and censorship resistant from the perspective of a state actor taking it over. But if we go back in history, it was at the end of 2014 when overstock.com announced that it was taking bitcoin as payment. And I ended up buying most of my christmas presents on overstock.com back in 2014 in bitcoin. And it was funny because we look back on that and think, oh, how expensive all those christmas presents were. But no, in fact, actually, I think the opposite. We all helped build the network at that time. It wasn't clear that it was truly decentralized. And round about that time was when said chair Ben Bernanke also said, hey, this is an interesting technology. And the way he said it in his testimony to congress meant that it was a green light. And that's when Overstock decided to take it as payments. So bitcoin has evolved a lot since then. It's obviously because of the expense of on chain transactions, we don't see the small payments for the most part. I think we're in the large payment network, large payment system use case for bitcoin right now, whereas back then it made sense for small payments, like small $30 payments at overstock.com. It doesn't so much anymore because it's evolved. But this is a wonderful thing. And so to answer your question, it's still a mixed bag on Wall street. A lot of folks who really believe in the technology have already left, and a lot of the folks who are the sort of bitcoin not sorry, blockchain not bitcoin folks are definitely on wall street still trying to make enterprise blockchain work. We can talk about that if you're interested as well, because I did go through a detour for enterprise blockchain there for a little bit and came back.

Kevin Rooke  - 00:10:52:

Well, maybe one thing to touch on for enterprise blockchain is what changed your mind that your focus should be on bitcoin and not this enterprise blockchain stuff.

Caitlin Long - 00:11:05:

It's interesting. Jimmy Song went through that same detour at about the same time I did, actually. And so we are not alone. There are several of us who looked at it and said the history of technology in financial institutions in the United States, really and globally, is that they do move slowly. They're not early adopters, they're certainly not first movers. And the technology has to be tested, right? They're just now getting around to cloud, and we're at the very early stages of APIs in the banks, right? So most of the banks are 4800 banks in the United states right now. Most of them don't remotely have cloud or API based systems. So it's a very slow moving behemoth. And one of the things that I learned by being in the enterprise world and also working with that small group of morgan stanley back in 2014, 2015, was that this is not plug and play technology. These banks are used to when they do upgrades and they buy new software packages. It's plug and play. But the thing about bitcoin and blockchain systems generally, they're shared infrastructure and they don't duplicate and reconcile information because it's all shared in the same ledger. And that is fundamentally incompatible with the way enterprise systems work, where everything is stored internally on their own copy of a ledger and then reconciled. They also have very different architectures from a firewall perspective. Right, bitcoin. I like to quote Andreas Antonopoulos that bitcoin lives in the wilds of the internet every day. It's attacked every day, and it gets stronger and stronger every day that it hasn't, that nobody's found a zero day exploit. All of us have to admit that it's possible someone will still find a zero day exploit in bitcoin. But the lindy effect tells you that every day that that hasn't happened, that it's exponentially going lower. But it's an asymptote. It never hits zero. The probability that somebody finds a zero day exploit, the way Andreas puts it, I think, is very eloquent, because bitcoin isn't protected by a firewall, and it lives in the wilds of the internet every day getting attacked, and it never so far has been breached that it just keeps getting stronger and stronger and stronger. And obviously we see that with the network hash rate hitting all time highs recently, it's going to come down because of what's going on in the mining world, but it just keeps getting stronger and stronger. And so ultimately, this is going to take over. But I think, like Trace said, it's happening at about the pace he expected.

Kevin Rooke - 00:13:54:

Okay, I want to dive right into the topic of bitcoin banking, and I think the logical place to start is one of the first references I ever saw to the topic of bitcoin banking. And this came from Hal Finney in a bitcointalk forum post in 2010. And I want to just read off the post. It's a little bit long, but I'm going to read it off for you, and then maybe we can get into some of the similarities and differences between Hal's vision for bitcoin banking and your vision now about a decade later. So Hal says, actually there's a very good reason for bitcoin backed banks to exist issuing their own digital cash currency redeemable for bitcoins. Bitcoin itself cannot scale. To have every single financial transaction in the world to be broadcast to everyone and included in the blockchain, there needs to be a secondary level of payment systems, which is lighter weight and more efficient. Likewise, the time needed for bitcoin transactions to finalize will be impractical for medium to large value purchases. He says bitcoin backed banks will solve these problems. They can work like banks did before the nationalization of currency. Different banks can have different policies, some more aggressive, some more conservative. Some would be fractional reserves, while others may be 100%. Bitcoin-backed interest rates may vary. Cash from some banks may trade at a discount to that from others. And he goes on to say, George Selgin has worked out the theory of competitive free banking in detail. And he argues that such a system would be stable, inflation resistant, self regulating. And finally, Hal says, I believe this will be the ultimate fate of Bitcoin to be the high powered money that serves as a reserve currency for banks that issue their own digital cash. Most bitcoin transactions will occur between banks to settle net transfers. Bitcoin transactions by private individuals will be as rare as, well bitcoin-based purchases are today. So that was his post he made about a decade ago.

Caitlin Long - 00:16:02:

We're not worthy. Right? Hal is probably Satoshi. So, yeah.

Kevin Rooke - 00:16:07:

What do you think of looking back now at that and having followed the space for the last decade, what are your thoughts on what in that is true today? What part of that you think is going to be true into the future? And are there any differences, any things that Hal kind of believe would come true and are not going to come true or you don't think have come true?

Caitlin Long - 00:16:33:

Amazingly prescient by how he did essentially lay out the need for the Lightning Network, which is the lightweight payments on top of bitcoin, and how bitcoin itself will be a large value payment transfer network. And if you think back to when he wrote that, that wasn't what bitcoin was at all. It was just right. It was back then you got your bitcoin through LocalBitcoins.com and maybe if you were lucky, you happen to be in one of the few places where there was a bitcoin ATM and that's how you got bitcoins. Gox really hadn't taken off at that point. It was incredibly prescient for him to have predicted all of that. That quote I think it's twisted a lot by those who are interested in the free banking debate versus the Rothbard debate. But I would point out that he acknowledged that those two systems could potentially coexist. That's where I would get into some disagreement with him. But I think there's more right in his statement than there is wrong. And he laid out exactly where we're headed, which is bitcoin becomes the high value transfer system because block space is designed to be scarce. And this gets really into the big blockers debate. I went to the first scaling bitcoin conference in Montreal in 2014. I kept my head down because keep in mind, back then, I wasn't telling the world that I was from Morgan Stanley for fear of getting fired. But yet I was so interested in this whole question, and I was quiet throughout the debate, but it was very much on the small blockers side. You have to keep the base layer decentralized. You have to keep it so that it's not possible for anyone to take it over and change the monetary policy. That's one of the debates with Ethereum is that from the very beginning, with that initial Ethereum hack, that basically changing the consensus mechanism, the hard forks in these systems have to be impossible, otherwise someone is going to step in and change the monetary policy. In that case, in the Ethereum case, it was to roll back for that hack of the very first DAO. I've always thought Ethereum and bitcoin are, quite frankly, very different systems with very different use cases. We can come back and talk about that in a bit. But especially for bitcoin, it's critical that that monetary policy never be altered. And so I'm so glad that in the block size wars, that the users of bitcoin, those who control the network, who really showed, who controlled the network, it's not the miners, it's not the large payment processors or the exchanges, it's regular plebs, it's just regular folks, it's the node operators. That USF period was such a fascinating time. And for those who are not familiar with what I'm talking about, there's a terrific book called the block size wars, and I would encourage you to read that. It actually talks about that conference in Montreal in 2014 that I attended. And the whole idea was to make bitcoin antifragile. The t-shirt from that conference says, I am antifragility, and it's fun to wear that t-shirt around. And although, frankly, it's a collector's item, so I don't wear it very much, but it is fun to have people ask you, what does that mean? It's not that I'm against fragility, it's that I'm for building bitcoin to be an antifragile system. And that's exactly what it has become, and it's just a wonderful thing. But back to, back to the point about how he understood that this was not designed for high volume payments. There isn't ever going to be high velocity on the bitcoin blockchain, and you don't want there to be. And so block space is going to be, by definition, very expensive, which means that it is going to be usable by large payments. Now, all that said, if you want to, one of the great things about bitcoin is that anybody can join the network. Like you said, just hook up a raspberry pi. It takes about $100 worth of hardware and a couple of hours for anyone in the world with an internet connection to join the network. And anyone can become a part of this network. You don't have to go ask for permission from from a financial institution to do so. And that's enormously empowering. And the fact that any one of us could move value on the base layer blockchain, even if it's expensive to do so, that is of crucial importance. Nick Szabo, who is one of the other people who is still alive, who could be Satoshi, he made an incredible speech that I continually come back to at bitcoin 2021, where he said, liquidity is a nice to have, but not a must have. You need to be able to transact in bitcoin, but you don't need to be able to do it with liquidity. All this daily liquidity that everybody in the trading world was trying to create so that we have really tight bid offer spreads and really low execution costs. No, I'm opposed to that philosophy. Those are the big blockers who frankly should not be using base layer bitcoin. Base layer bitcoin is designed to do exactly what it's doing today, which is be expensive and to nix point because we all have access to it. Even if it costs us money to move value on the bitcoin blockchain, that's all we need. That gives us the freedom. We don't want the big blockers and the tight bid offer spreaders to come in and corrupt it, which is frankly what several of the short time preference folks who are now going bankrupt did in the last bull market. And I say good riddance to all of them. It's those of us who are building something durable, something long term. We have very long term horizons in what we're doing because we really get the ethos of bitcoin. And it's not about tight bid offer spreads, it's about being able to transact at all on the base layer itself, even if that is expensive.

Kevin Rooke - 00:22:58:

Well said. Now if you think, okay, most transactions are not going to be happening on the base layer. They can, but they'll be expensive and they're going to be limited. If you look out a decade into the future, do you see most transactions happening on Lightning, happening on other platforms, other layers? There's competing kind of layer two solutions, maybe some that haven't even been created yet. What's your sentiment for like, where most activity happens? Looking forward?

Caitlin Long - 00:23:34:

Well, back to Hal's point, it isn't going to be on the base layer. That's going to be the high value bank to bank is the way he laid it out. But it is going to be on the second layer. And that's why I'm so excited about Lightning. Custodia bank, it's publicly disclosed that we intend to issue a US dollar token on a side chain Liquid, which is block streams Liquid that has been in existence for a while because it's not as easy to transact on as ERC 20. Most of the value locked in the second layer, or ERC 20 is not really a second layer for Ethereum. But most of the value locked in these systems ended up going into the Ethereum world. And again, that's where we saw a lot. This is one of the points of the block size war book. A lot of the folks that were more short term oriented, the big blockers, so to speak, ended up moving over to Ethereum. There was a very interesting thesis by the author of that book that said, look, part of the reason why the small blockers won the block size war is because Ethereum was created. Those who were much more interested in the high volume use cases or non monetary use cases had something else to go play with. And I think there's a lot of truth to that. But thank goodness the small blockers won the block size war, because here we are. But that means the onus is on us in the bitcoin community to figure out how to scale. And I wasn't sure that Lightning would take off if we could think back to the Lightning torch and feed the chickens use cases, those are fantastic. But Lightning payments were failing more than they should have been. There was a lot of engineering work that still had to be done to get the resiliency of the network up. We haven't had a lot of the large payment channel operators step up. We're starting to see that now. So it's finally starting to scale and I am really bullish on it. But it wasn't clear, really, I think, until this year that it was going to scale. So to get back to your question, yes, most of the payments, the large volume of payments, are going to be cleared on the second layer protocols that operate but are anchored to. And that's the most important thing. They're anchored to that base layer and so they get the benefit of the monetary policy. That cannot change because it's at that base layer and so decentralized that at this point it's almost certainly not susceptible to take over, even by a nation state actor. I want to go back, though, to the question you asked me about how because I've set aside the whole free bankers versus Rothbard debate and I don't want to wade too much into it, but I think we've seen a lot here in the last six months with all the collapses of the lenders. What Hal was talking about with bitcoin banks is quite different than Custodia. What Hal was talking about was a bitcoin only business that didn't operate in Fiat currencies. He did talk about how they might issue their own token, but he wasn't talking about a dollar, he was talking about a bitcoin IOU backed by bitcoin. And he was giving a nod to George Selgin, someone for whom I have tremendous respect on the free bankers world, and how we could end up with a stable system if we did have fractional reserve bitcoin banks. So, in fact, actually, that's what a lot of these lenders that have just gone bust actually were. They were fractional reserve bitcoin banks. And I come down on the Rothbard side of this. In fact, actually one of my mentors who really helped me think through the different economic schools of thought after the 2008 financial crisis when I went on my intellectual journey. Self-directed deep dive to look at all the different schools of economic thought because I understood what I learned in school wasn't explaining what I was seeing before my very eyes. Sitting on the trading floor at Morgan Stanley in Times Square in New York, as the financial crisis was happening, I understood something was a myth and I did a deep and broad survey of the different schools of economic thought. And my mentor and I disagree. Well, we did at the time. He was a free banker and I was coming down on the no, Rothbard had it right. You really can't allow fractional reserve banking because there's too much information asymmetry between the intermediary and the customer. And oh boy, have we seen that in spades. These fractional reserve lenders were doing things behind the scenes that none of their customers knew they were doing. And as a result, a lot of customers, a lot of people lost a lot of money because they put trust where trust should not have been. And those of us like me who were warning that you cannot safely leverage bitcoin ever, period, we were vindicated. I hate, honestly that a lot of innocent people lost money. And I'm not interested in having been right on that in a scenario like this, because so many people didn't understand what they were into, didn't understand that those high yields that they were being paid did not remotely compensate them for the counterparty credit risk that they were taking on. And there was so much information asymmetry the only way in which that free banking world in a bitcoin backed bank type of system could work is if there's perfect information. But the problem is there is never perfect information. We're learning that today with the debate about proof of reserves. I've been a proof of reserves advocate for years. In fact, it's in the Wyoming special purpose depository institution rules that the special purpose depository institutions do proof of reserves. Cryptographically prove that you control the coins that you say are in your control. But as Jesse Powell has pointed out, and Nic Carter and some people who've been on this like me for years, that just shows that you have access to the assets. It doesn't tell you what your liabilities are. And you can't cryptographically prove your liability. And Jameson Lop has made this point as well. You ultimately still have to have to trust some auditor. It's better than nothing, but you ultimately still have to trust some auditor. And I welcome the trend of the intermediaries in this sector offering cryptographic proof of reserves, but nobody should expect that. It's a panacea. It is trust. Frankly, when you're dealing with an intermediary, there is some degree of trust. It's an aggregation of what's the regulatory regime, if any, that they're subject to. Are those regulators, trusted regulators, given their track record? Are the firms audited? Are they offering cryptographic proof of reserves? And then Jesse Powell made an interesting point. The newer institutions that haven't been through a few crypto winters should not be trusted as much as those who have, because those who've proven that we understand what's going on in this market and how cyclical it can be, and we don't ever get ourselves over our skis in leverage. Those institutions who've been. Around longer, ultimately have a better chance of being around in the future as well. And if you look at a number of the companies that failed beginning in May of this year, all the way up through FTX, most of them were brand new and weren't even around in the last crypto winter. So I think Jesse's point is interesting and also one to think about.

Kevin Rooke- 00:31:34:

Makes sense now on the payment side of things. You mentioned Custodia potentially doing a US dollar token on Liquid. We have Lightning Labs introducing tarot and being able to create assets on Taro. How do you think about the importance of if we think about payments on bitcoin, how important is it that these are payments made in bitcoin or that they are just anchored on bitcoin? Right? Like if it's a US dollar token on Taro or on Liquid, how do you weigh the pros and cons of doing that versus native bitcoin payments from Custodia's perspective?

Caitlin Long - 00:32:18:

See, this is why I think Lightning is such a powerful tool for the transition from where we are now to where we end up. And no one knows where we're going to end up. But I do believe bitcoin is so powerful that it is going to become a reserve currency if it's not already alongside the other reserve currencies. But ultimately, the question you asked is spot on. It's the critical one, because you can move Fiat currencies through Lightning. It's very easy to do. So all you have to do is be able to get into the Lightning Network. And then let's say you and I go out to dinner and I'm going to pay you $50 because you picked up the check and I'll reimburse you the $50 and we'll use Lightning to do it. So how do you do that? Well, if we have $50 in a Lightning, $50 worth of bitcoin in a Lightning channel, then obviously I can just move it to you on Lightning and close out the channel. And then that transaction gets reported on the base layer bitcoin blockchain and we move on. And if it happens that we're friends who constantly go out to dinner and one or the other of us picks up the checks, we keep our payment channels open. It's that simple. But recognize what we just did? We just moved US dollars over the Lightning Network. Now, this is where technically the engineers will say, no, you can't move US dollars over the Lightning Network because what you're doing is moving bitcoin over the Lightning. You're moving sats, satoshis, which is the division of bitcoin into 100 million satoshi each bitcoin, because most of the Lightning payments are small. Right? Now, I think the average Lightning payment I saw a report recently is $42 worth of sats is the average size of a payment on Lightning. That's going to grow over time, in my opinion. But the point is, when you're moving those sats, what you're moving is a US dollar equivalent. What you're really doing is using Bitcoin as your cross currency. It's an intermediary currency. So you get into the system using US dollars, then you move Bitcoin to implicitly move US dollars, but you're actually moving Bitcoin. And then on the other side, to get out of it, you can always cash back to US dollars. What's happened is that stable coins, US dollars, stable coins become really important on off ramps into that system. And that's indeed what's happening right now. That's what some of the Lightning companies like Strike are doing. And this is how remittances are taking place. The folks are legging into Lightning through Fiat currency stablecoins, and so getting in and out of them through Fiat currency stablecoins. I was fascinated by Elon's comments, and I listened to part of his million person Twitter spaces over the weekend, and someone asked him, what did you really mean when you said that payments are coming to Twitter? Peer to peer payments are coming to Twitter? And he said, I think Fiat and crypto should coexist on Twitter. Well, he just answered a question that I've been tweeting at him and he ignored me. But maybe because he doesn't want to answer it yet. What exactly did he mean when he said we're, we're going to be offering peer to peer payments on Twitter? Because those of us who are bitcoiners know that Twitter is already integrated with Bitcoin and Lightning. Lightning. They integrated with Lightning in September 2021. They've been integrated for 14 months with the Lightning Network for Twitter tips. So all he would have to do is flip a switch. But he's getting his licensing in place. One of the things that came out while everyone was rubbernecking at the FTX debacle, he was able to fly under the radar screen that he filed with FinCEN for Twitter Payments, LLC, and is intending to get money transmitter licenses to be able to transmit payments all throughout the United States. And he did clarify that he's planning to get licensed all around the world. That's going to take some time, but the technology is already there. So which crypto he plans to use is now the real question. But I think this is fascinating because while everyone in official Washington DC thinks crypto is dead, and we continue to see more obituaries written for Bitcoin, the 99 Bitcoins.com website has a great history of the Bitcoin obituaries. I think they're up to 446 through mid November. Bitcoin has died 446 times, and I think they're behind. They've got a few more they're going to be adding as a result of the FTX debacle. No bitcoin is not dead. And those of us who understand it's not dead, that's the signal through the noise. Everybody else is rubbernecking on FTX. Frankly, that's roadkill. Let's move on. Let's focus on what's really going on, which is you've got both Twitter and Telegram now announcing that they're going to be doing things with decentralized technologies. This is an incredible threat to the banking system of the world and the bank regulators. If they're thinking that this is all going away, boy, are they going to miss, frankly, what I think might be their last opportunity to keep this in the banking system and keep some control over it. Because once these big tech platforms with huge network effects already created huge user bases, once they're able to turn on payments, boy, is anybody going to use a bank anymore? Is a very good question.

Kevin Rooke - 00:38:03:

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Kevin Rooke - 00:38:53:

When you think about the interface between Fiat Money and Bitcoin, and think about how today it may be necessary for a lot of use cases for people to have payments either starting in Fiat if they don't hold Bitcoin already, or denominated in Fiat if they have contracts and they work with people that require them to pay a monthly salary or something. You don't want that denominated in Bitcoin today. How do you think about the role those two play and how Fiat and Bitcoin payments will interact with each other over time? Is it a gateway to the point where everything is on Bitcoin? Is Fiat always going to play some role in this ecosystem? We'd love to hear your thoughts on how you see that transition unfolding.

Caitlin Long - 00:39:39:

Yeah, this is a great question because it gets to why Custodia started a bank, right? I'm a Bitcoiner, I have been for ten years. And why bother to start a US dollar bank? And it does relate back to your question about Hal, right? He was talking about Bitcoin denominated banks. He wasn't talking about what Custodia is doing because we're a US dollar denominated bank. So why bother? Is implicitly the question. And I think it's because people still want US dollars. If you look at what's happened in the stablecoin market, 99% of the stable coins outstanding are US dollars. That's a lot more than the value of the different currencies around the world. So in a completely free market, where it was completely unregulated, especially at the beginning, and there was nobody telling the users what to do, what did they all walk with their feet to do? They walked towards dollars and there was a very interesting study done in Venezuela a couple of years ago where Venezuelans were getting bitcoin as a means by which to get US dollar stable coins, not the other way around. In the US and developed world like you are in Canada, we tend to think about using the fiat currencies to leg into bitcoin. But in fact, in the developing world where hyperinflation becomes a big issue, in fact it's been the opposite. People are using bitcoin, they're mining bitcoin as a means by which to get US dollar stable coins. But the point is that people have voted with their feet for US dollars. So what that's telling us right now is that we're not at hyper bitcoinization yet. I think that's a fact. And as I think about what that transition to that world is going to look like, I don't think any one of us wants it to be a transition that happens too fast. And let me give you an example. I have a relative who visited us for Thanksgiving who had just bought an electric vehicle and assumed that there would be good charging stations near us for the electric vehicle. In fact, there was one supercharger, but it was out of order. And so to drive a 90 minutes drive back required them to sit for 14 hours at the charger charging the electric vehicle. Okay? The infrastructure just isn't there yet to get to hyper electric vehicles in the world. We don't have the infrastructure yet. Okay? And I think that that is true if you think about hyper bitcoinization, if we had fiat currency collapse tomorrow, which I know a lot of folks would love to have happen, I'm not one of them. But if that happened tomorrow, what would happen? We don't have the infrastructure built, there would be chaos. We need to focus on building the infrastructure. And that's one of the reasons why I love what's going on in Lightning because I do believe that that is critical infrastructure that is important to a healthy transition and it's a healthy competition for the world's existing payment systems. As I think back to my Morgan Stanley times, part of what made me so interested in why I was so when bitcoin came along, I was so drawn to it initially, was that I understood that it was going to help solve the cruft, the absolute mess that the payment systems are in the world. It's staggering how hard it is to move money around the world. And I was working with the treasurers of large corporates and in one case one company had 2000 bank accounts around the world, another one 800. Think about the reconciliation issues. They have whole staff of people in the corporate treasurers area just dealing with moving their own money around the world between one subsidiary to another. I did publish back then a piece with the then CFO of Seagate Technologies, the disk drive maker. They make most of their disc drives in Thailand and it took them six days to move their funds from their Thai subsidiary to the US parent. Right? And so the whole idea and actually if we go back in that time frame in 2014, they made an investment in Ripple and took a board advisor seat. Why did they do that? Because they were looking at this technology as a way to solve a real world problem. Now, thankfully, Ripple didn't work out as the solution to the technology, but that should tell you what the real world use case is. There are a lot of people like that who have real world pain points, not just in cost, but in time and idle expensive capital, sitting on companies balance sheets, waiting for payments to clear because it takes so long and it's so painful to move money around the world. And if we can solve that pain point for corporates, boy would we get a lot of mainstream users. And that's the kind of problem that Custodia is working on solving.

 Kevin Rooke - 00:44:28:

Interesting. I really like that analogy you made about electric vehicles and the infrastructure requirements and how bitcoin I agree with you. We don't have the infrastructure today to onboard 8 billion people. Things were great. You're right. Now when you think about some of the constraints and some of the if you were in charge of unlocking this potential and improving infrastructure for the industry, where would you be focusing your attention? You mentioned Lightning, but any particular point at which you think infrastructure is constrained today or we're really running into issues and onboarding new people today?

Caitlin Long - 00:45:11:

Well, I've talked about this before. The biggest pain point actually is the on off ramps with US dollars. Ryan Selkis at Messari has been pointing this out for years. We have a single point of failure in the broadly defined crypto universe, which is that only a couple of banks have been willing to step up and serve this universe. And the reason is because it's deemed a high risk universe. So what that means is that most banks won't dabble in it because you have to be specialists. You have to have staffs that are specially trained in the customer onboarding the Bank Secrecy Act, all the know your customer requirements, anti-money laundering, sanctions, compliance all of those things are heightened with digital assets. In part because they move so fast, but in part also because, as we have seen, there is more fraud in digital assets. With the FTX debacle being exhibit A. And so as a result, it is deemed a high risk industry. And there have been really only two banks that historically have specialized in it and they have not fared well. If you look at their stock prices, especially since the FTX debacle, their stock prices are down a lot. Again, some of this I say good riddance to all this leveraged, crypto trading and lending. It never was going to succeed. And I really do hope this is where I probably will divide with some of your listeners, I hope that there is reasonable regulation that respects property rights. The fact that there's no regulation at all is what allowed this debacle to occur. But the way that Wyoming took the approach toward regulation which says, all right, this is property, this is digital property, Wyoming defines it as you have a property right in this unique digital asset and laid out what the rights and obligations of parties to a commercial transaction involving that unique digital asset are. And frankly, the rest of the United States has now followed. There's now what's called a Uniform Commercial Code article Twelve, which has been proposed and has to be implemented in all 50 states. Now it's been implemented in, I think five, including Wyoming, which has a very similar version that the national group ended up copying Wyoming after initially criticizing us, they came full circle and said, no, Wyoming pretty much got this right. And the two basic tenets of that law are now going nationwide, which is great. So that kind of regulation that respects property rights and defines what the rights and obligations of parties to transactions are, that's good regulation. And this is again, to go back to Trace, I think he had it right. One of the biggest challenges is that this technology is not what he called backwards compatible with the legal system. And so what you've got to do is create a legal system that recognizes it so that it is backwards compatible with the legal system. And those who transact using these technologies could have their rights and obligations protected by courts of law. And specifically what we're getting at, and again, even the hardest core libertarians probably would agree with me on this. If you have a legal system that defines your property rights and someone violates those property rights, it is a legitimate use of government, a legitimate use of the court system to protect those property rights. And what we have seen is an enormous amount of fraud in this industry. And you've seen me cheering on the regulators and the prosecutors for going after it. And in fact, actually, in part I've been involved in reporting some of it. And some of the reason for that is these are outright violations of property rights. And I don't want to support that. I want all of that gone from this industry and focused on the users who are building real technologies to solve real world problems. In my case, in the payments world, that's what we're after. And all of this fraud and just scammers and risky business models, it's just good riddance to all of it.

Kevin Rooke - 00:49:27:

Makes sense. Now in the banking industry. My understanding of it is that it's a slow moving industry, it comes with a lot of regulation and therefore that is a very expensive thing for anyone to undertake. And I think you guys have raised 44 million to date. Much of which you say use of proceeds is going towards required regulatory capital, as I think the phrase you used. Why is it so costly to set up a bank today? And do you think that on a bitcoin standard? Because we have this auditable ledger that's available to anyone with Raspberry pi. Do you think these kind of like regulatory, if we call them red tape or whatever it is that's causing the costs to be so high today, do you think those costs come down over time for banking more broadly?

Caitlin Long - 00:50:19:

Probably, but not anytime in the near term. If you take the Hal Finney version of a bank, which is a bitcoin bank, which again is not what Custodia is, we're a US dollar bank. But if you take the Halving version, you can already be your own bank. To your point, it's a Raspberry pi. You become a node. You can operate a Lightning payment channel. You can already be your own bank. That's available to those who have the technology skills to be able to do that. And again, this gets back to Nick Szabo's point, just having the availability of that. You don't need liquidity on these networks. You just need to be able to transact when you need it. And that is already available today. So I think that's already there in terms of the big regulated banks. One of the interesting things about digital assets and actually one of the advisors to Custodia just published an op ed today in American Banker saying, look, every bank that gets involved every traditional bank, US Dollar bank that gets involved with digital assets needs to be able to survive a stress test of having 100% of those of the deposits attributable to digital asset customers, whether they be stablecoin reserves or just US. Dollar deposits. For a digital asset company. That bank needs to be able to have 100% withdrawal within 6 hours and survive it. Okay? Most banks couldn't do that because they have a business model of borrowing short term and lending long term. And their definition of borrowing short term is I'll ACH or wire you the payments a few hours or days from now. Right. As opposed to a Lightning payment can literally move at the speed of light. Right? So that's a very different world. And she pointed out that these digital assets are very different. They don't behave similarly to traditional financial assets. And so the banks that bank them, the traditional US dollar banks that bank them, need to be able to survive a 100% bank run in 6 hours. And that just isn't survivable for the vast majority of banks, I would say potentially any banks. But that's why the special purpose depository institutions were set up in Wyoming and we are by law, not allowed to lend and required to hold 100% cash reserves for customer deposits. It's precisely so that the special purpose depository institutions could survive an extreme bank run scenario like that why 6 hours, as I said, two stable coins earlier this year, Terra Luna and HUSD both collapsed in the span of 6 hours. In Terra Luna, it was a true bank run, quote unquote, and in HUSD, it was a managed delisting that went awry. But in either case, that's how fast things move in this world. And the traditional banking system, which is built on analog, analog operational processes, they haven't digitized natively digitized anything. The digitization that has occurred in the traditional financial system, both in banking and in securities, has basically just been digitizing the analog data. But we don't have natively digital data yet. We don't have natively digital securities. We don't have natively digital dollars yet. That's coming, and I think it's going to solve a lot of problems when it does. But as a result, what it means is that these banks are just not ready yet. And that was her point in the op ed.

Kevin Rooke - 00:53:50:

How much of an issue is it that Fiat banks are not full reserve banks? As you mentioned, if you guys are 100% backed, most Fiat banks are much closer to the 0% than the 100%. How much of an issue is that across the banking industry today?

Caitlin Long - 00:54:09:

Well, it is a big issue, but the vast majority of banks don't have liabilities that settle at the speed of light either. So again, if a bank is going to get involved in digital assets, it's entering a very different world. To use a Wall Street term, we would say that the term structure of their liabilities is measured in minutes, whereas a traditional bank's term structure of liabilities is measured in days. I looked it up. The Fed actually discloses aggregate data. The average bank holds right now as of Q3 29.7%. Actually, it's Q2, I believe Q2. Data. So, June 30, 2022, the average traditional bank holds 29.7% of checkable deposits in their Fed Master account. So the reason I point out Fed Master account is because a Fed Master account offers real time settlement only during banking hours, but it does offer real time settlement. So that's the fastest way you can settle a liability is through a Fed Master account. And they do have the ability to offer real time for demand deposits. That's called checkable deposits. Basically the same thing if you walked up to your bank and said, I want to close my account and I want it all now, they're going to tell you you can have $10,000 in cash, and the rest of it they're going to wire or send through the ACH system wherever you send the instructions. Okay, so what does that mean? The wire system is probably going to settle in hours. It's not programmable, and you can't definitively say when it settles. Anyone who sent a bank wire knows that it's a little bit of a black box and oh my gosh, especially if it's going overseas, if it's going through the Swift system, definitely a black box. But then the ACH system, it's at best overnight and typically takes a couple of days. And then there's the risk of clawbacks. Someone can say, no, I didn't mean to send that payment. And then ACH payments can be clawed back for a few months in certain circumstances. So the settlement finality is quite different. So once you start getting a traditional US dollar bank that's handling these liabilities and assets that settle with finality in minutes versus or in the case of Lightning at the speed of light versus these traditional systems that don't settle for at best hours, if not days, you realize you're in a different world, right? And so when you think about the bank run risk, there's a lot more bank run risk. And I think there's probably some degree of learning happening right now with the banks in this industry. And this is part of why the stock prices have been hit so hard, because they were rolling the dice a little bit. I looked at the call report for Moonstone Bank, which has been in the news, and it's been taking some interest rate and credit risk with its asset portfolio. It's not sitting in 100% cash instruments, unlike the Wyoming special purpose depository institutions. And so there's some bank run risk. In fact, there's been some speculation because there has been something like I can't remember the number, $10 billion. I think please don't quote me on that. It'd be easy to find on Twitter. About $10 billion has been borrowed at the Fed's discount window recently. I think the Fed discloses that every week, the discount window borrowings and about 10 billion, that's nothing, right, in the grand scheme of things. But it's not zero. Who's borrowing that 10 billion and what caused them to have to go to the Fed's discount window to borrow that 10 billion? And the speculation that some others have made I'm not making it, but it's not an irrational speculation. The speculation is that it might have been these banks that served the crypto industry. And the reason it's not an irrational speculation is if you go and look at their financial statements, they were invested in longer term assets and assets that had some credit risk. That when push came to shove and they had to cash out those withdrawing deposits on a very short period of time. It turns out that they didn't have the liquidity that they needed. And yesterday I saw Morgan Stanley predicted that in one case, Silvergate's deposits, that 60% of them will have been withdrawn during Q4 2022. That's a big amount of withdrawals from a bank. And if the bank is not sitting in cash that can be settled intraday, then you can see how they might end up in a liquidity problem. So you're asking a very good question. And I would just go back to what Katie Cox, the advisor to Custodia, wrote in American banker today, just letting the banks dabble, traditional banks dabble in this when these assets and liabilities don't behave like traditional bank assets and liabilities is a bad idea. It's a dumpster fire waiting to happen. And she's urging the Fed to actually reverse a policy statement that it adopted in August that allows traditional banks to wave into serving the digital asset community. And she is advising that that's a bad idea, that the bank should be examined first and should have to have technology and policy and procedures and liquidity and risk management in place before they do this. Otherwise there could be some risk to the payment system. And I agree with her. She's right.

Kevin Rooke - 00:59:32:

Now, do you see any benefit for banks that maybe don't even want to serve bitcoin customers or don't want anything to do with it? Do you see a benefit for them to use Lightning rails to have instant settlement of payments just for the fact that then they can settle payments instantly rather than waiting a few days? Does that actually add value to banks? And is there any appetite among non bitcoin banks today?

Caitlin Long - 01:00:00:

Well, I think what's going to end up happening is that this technology is back end technology that no one's going to realize that they're using when they use it. Okay? That's where we've got to end up as an industry. I'm talking about the bitcoin and Lightning community ourselves, specifically. This is back end payment technology, and we've got to be able to make it easy for people to use it. I was very happy to see the new Ledger come out. That announcement was made yesterday. I don't endorse it. But those of us who use those first generation hardware wallets understand that it looks very 1970s in some of the technology to use those. Right. And so now you've got, you've got the new, that the next generation version, which has been designed by a designer who worked for Apple, is what I saw in the headline. So we just need to keep advancing the UI/UX user interface, user experience in this. And what we really want is this should feel like online banking, which most folks are familiar with, but they won't even understand that what they're interacting with is back end technology that instead of going over the ACH or Fed wire system is now going over, say, the Lightning system. And what's fascinating is I don't think that that's necessarily going to cut out the central banks. And again, I don't think it should, not right now, because if it did cut out the central banks, now we're to that electric vehicle problem where we don't have the infrastructure to really make them usable yet. Right. And so this is where I think the banks actually do have a role. And I will defend the banks and the central banks parts of these payment systems, because especially for Lightning, what we really do want and, and those who, who were analyzing the Lightning channels and even that quote from Hell from 2022, we do want liquidity pools in Lightning, not in bitcoin itself, but in Lightning. It does matter that there's good liquidity pools in Lightning so that your payments go through faster. Otherwise, if it just has to keep getting routed channel to channel to channel, then you'll get a higher probability that the payments fail. And I've seen almost there were some statistics that might have even been reported by you that Lightning payments were failing at almost a 50% rate three years ago, and now they're succeeding at almost a 99% rate. And that tells you that the network maturity is starting to get there. This is why I'm so excited and I'm looking at this and saying we now have scaling technology for bitcoin. It's here, folks, and that's really exciting. So now we can start to do some really interesting things. But to answer your question, I think ultimately what we really want is that this is back end technology and it's something that supplements some of the new payment technologies that are coming in the world, such as Fednow, right?

Kevin Rooke - 01:02:54:

Yeah. I think that's an important thing for people to realize that bitcoin enthusiasts today may use Lightning and interact with Lightning wallet and see invoices in QR codes. But over time, I think you're right. It's got to get easy to the point where anyone can use it and they almost don't even realize it's happening in the same way that we have no idea when we type in a website name, we just have no idea what's going on in the back end. And that's fine for 99% of people on the Internet. It doesn't matter. And it actually makes it better as an experience that you don't have to deal with that stuff. Google takes care of it, your MacBook takes care of it. It just works.

Caitlin Long - 01:03:34:

Well, the same thing is true in technology, in telecom. Right. There's a really interesting analogy, which is voice over Internet protocol was invented in 1995 and then nobody used it at all for eight years. Why? Because it wasn't scalable. Then came broadband, and then within two years, those old copper wire networks were completely obsolete. Okay? Lightning is to bitcoin what broadband was to voice over Internet protocol. And the scaling technology is here, folks. This is really exciting. And within a couple of years, will those old creaky legacy payment systems that don't solve those real world pain points for the people who move most of the money around the world, which is corporate treasurers, boy, they have such an incredible incentive to use the new payment systems. Frankly, they're supranational, these big multinational companies. They're not necessarily even if they're based in the US. They're not necessarily going to stick with the US dollar. They have such a strong incentive to use whatever is the cheapest way for them to move money. And right now it's going through those old payment systems. But every one of them is watching very closely the development of these new payment systems because they have such an economic incentive to move money the cheapest and fastest way so that they don't have capital trapped like in that Seagate example, their capital. Their very expensive capital. This is a high weighted average cost of capital company. Back then it was a non investment grade company, essentially mostly equity funded. Equity is a really high cost of capital, much higher cost of capital than debt. And if they're mostly an equity funded business, their capital is extremely expensive and it took them six days to move money, their own money, between their two subsidiaries? It's pretty obvious what the use case for these technologies is. The question is which one of them is going to break through? And that's a real world problem that we're working on. And some of the best, most incredible engineers in the world are working on this very technology and solving these very problems. They're very real world problems and I'm perfectly happy to let the rest of the world rubber neck on FTX while those of us who are serious, we never lost a beat and in fact, we're more bullish than we've ever been.

Kevin Rooke - 01:06:02:

Yeah. Now when you think about the addressable market for improving the payment infrastructure for the world, bitcoiners love to talk about the remittance use case, for example, and how that can just cut down on the cost and the time required to send an international transfer. If you're looking at this from maybe the traditional finance landscape, who are the players that you think are going to most benefit from Lightning payments? And how big is that opportunity? Is there potential for a company to really change the trajectory of their business by shifting away from fiat payments that are slow and expensive to instant and nearly free payments?

Caitlin Long - 01:06:47:

Absolutely. And I would encourage folks to go back to that article I wrote about Seagate. I think I posted it in 2016. It's on my Caitlinlong.com website, which I haven't updated in a couple of years. But I left all that legacy stuff there so that you can see the evolution of the work that I've been doing. And that interview with the CFO of Seagate gets to the answer to your question, which is who are the big beneficiaries? It's the ultimate users of the payment system. And again, corporate treasurers move most of the money around in the world. And so ultimately, they're the ones who are the biggest beneficiaries of this. And as a result, they're watching this like crazy. And to answer your specific question, the high weighted average cost of capital companies like then at the time Seagate, which was non investment grade, which means it was junk rated by the rating agencies, its debt was junk rated, it's now investment grade. But back then it wasn't super high cost of capital. What it meant was that because the banks require the companies to fund their own deposit movement. The way the CFO called it was comfort deposits. His banks made him trap cash in the bank account so that the bank account was never overdrawn. Well, if you think about how many hops a payment moving from Thailand has to go through, it's probably going to go from the Thai bank to the Thai central bank to the super regional central bank which is in the Asia of the bank of Japan. Then over to the Fed, then over to their US bank and maybe through a correspondent bank to another bank in the US. Right. How many hops was that? I lost track. Six or seven?

Kevin Rooke - 01:08:31:


Caitlin Long - 01:08:32:

Anyway, okay. And this is why it takes so long because each one of them, up until, I don't know, 15-20 years ago, they were updating their books and records only once a day. Now the big banks have the ability to update books and records pretty close to real time, but it's still not real time. And some of the central banks still only update books and records once a day. Right. So you think about how many in that example that hits three central banks and it all has to be done in sequence. You can't do it all simultaneously. Okay? That's why cash gets trapped. And then the banks don't want the corporate treasurers to overdraw their accounts. Why? Because that's basically extending credit. Well, for a high risk company, a high risk borrower, that's non investment grade, that's a super high cost of capital thing for the bank to do to extend credit to a risky borrower like that. And as a result they don't ever want the account to be overdrawn. And so the agreement that they have with the corporate treasurers is that the accounts have to have comfort deposits. So if they're moving their own money from the Thai subsidiary to the US parent, each account that that goes through has to have excess funds in it. But this is a high cost of capital company. It's an extremely economically inefficient way to move money. Okay, so who's the biggest beneficiary? To answer your question, it's the corporate treasurers that have a high cost of capital and have to move money around the world because for their ability to be able to move money around the world at the speed of light, boy, does that change a lot of things in their capital structure. And all this deadweight loss with this trapped cash that's sitting in bank accounts just to fund the latency in payments. The banks love it because they earn the float on the cash, but the corporate treasurers have a direct incentive to circumvent those banks for exactly that reason the moment that the payment technologies become available. And what's fascinating is that the bank regulators, I've said this in a comment letter that I sent to the Bank for International Settlements about their proposed capital treatment for digital assets. They're very anti public permissionless protocols and I laid out for them. If you go down this path, you will have obsoleted the banks because the technology industry will, it's got better technology and it's just going to go around you. And so frankly, the bank regulators are the ones who are potentially the biggest losers from all this. And the corporate users, corporate treasurers are the biggest winners from getting cheaper, better, faster, more transparent payment technologies that they can use in real world instances to move real world money in place. And that's exactly the problem that Custodia Bank is working on solving.

Kevin Rooke - 01:11:17:

Nice. I want to finish this off with a segment I do at the end of every show. It's called the Lightning round. Got a few rapid fire questions for you.

Kevin Rooke - 01:11:25:

I hope you're enjoying the show so far. Just a quick message from our sponsor Stackwork. Stakwork is a Lightning powered platform for generating high quality transcripts of all your audio or video content. They combine AI engines and hundreds of human workers all over the world who are paid over the Lightning Network to assemble these transcripts. And that's what lets Stakwork, create better, faster, and less expensive transcripts. To see the results for yourself, you can check out my personal website where I host transcripts for all my podcast episodes. If you want to learn more about Stakwork, visit stakwork.com. That is stakwork.com.

Kevin Rooke - 01:12:06:

In five years, will there be more dollars flowing on Lightning or bitcoin flowing on Lightning?

Caitlin Long - 01:12:14:

Oh boy. I think dollars.

Kevin Rooke - 01:12:17:

Okay, how come?

Caitlin Long - 01:12:20:

Because people still want dollars. We're still in a dollarized world and I don't think the dollar is going to collapse anytime soon. And as a result people will vote for their with their feet. I just point to exhibit A being the stablecoin market which wasn't regulated and 99% of it is dollars. People still want dollars and I don't think that's going to change in the next five years.

Kevin Rooke - 01:12:39:

Makes sense. Right now it looks like we have about 5000 bitcoin of public capacity on Lightning in five years. What's that number?

Caitlin Long - 01:12:49:

Okay, that's a trick question though, because as you know that's the public disclosed nodes and there are a lot of nodes that are not publicly disclosed and I think a lot of big operators, I know a lot of big operators in Lightning don't want their nodes disclosed. So the answer is a lot more, many multiples more. Lightning is scaling faster than US dollar stable coins scaled. And that again makes me super bullish on Lightning. I think you're looking at some of the most rapid adoption curves in technology starting to show up in Lightning. But just everyone needs to realize Lightning like chain analysis, supports Lightning. There are ways that the surveillance firms, which are the firms that frankly, whether you like them or not, enable the banks to be able to transact and large intermediaries to comply with the know your customer rules. Again, the large payment channels, I think, are all going to be lit. What we're getting at is the dark versus lit markets. There will be markets that are not disclosed. The public channels that you're talking about, those are the lit channels. The big financial institutions are going to be operating in lit channels, but they will be providing the liquidity in these large payment channels that are going to make the scaling of Lightning, I think, faster and faster. To be clear. By the way, I should note Custodia does not have a plan to implement Lightning. Now I'm looking at it a lot. We've got engineers internally spending a lot of time on it. It is not part of our business plan, though, just to be clear, it's not ready yet. In my humble opinion, it still needs to go through more testing before. Again, remember what I said, that the traditional banks aren't first adopters and they're not even early movers. They tend to be a little bit later because the technology they adopt has to have gone through a lot of market testing first. But long story short, I think there's going to be huge lit markets enlightening that there will be dark markets too, where privacy is totally preserved, but there will also be, I think, far more lit markets enlightening. And that's what gets me excited, for solving these real world problems.

Kevin Rooke - 01:15:07:

I think you mentioned at the beginning that there's about 4800 banks in the US. In a decade. How many of them will be able to accept or store Bitcoin deposits for their customers?

Caitlin Long - 01:15:21:

It depends on if they are using a third party like Custodia that wants to help them do that. But most of them will not be able to do that on their own. So most of them through a third party will be able to, but only a handful, I think, will invest in the time and technology and security. The technology. We talked about this earlier, how the reason enterprise blockchain never took off is because it's rip and replace. It’s such a different technology architecture. It doesn't just plug and play into traditional banks enterprise, it architectures. So as a result, very few banks, I think maybe less than a couple of dozen, will actually be able to custody bitcoin and to provide the infrastructure for other users to offer it to their customers. But that doesn't mean that the other users can't offer it to their customers if they can, if they partner with banks like Custodia that have the capability and the risk management to be able to do so safely.

Kevin Rooke - 01:16:27:

Right now, if we look at the supply of 21 million bitcoin and we have to guess what percentage of that supply will be custody by individuals holding their own keys, what percent of it will be handled by custodians, third parties?

Caitlin Long - 01:16:46:

Oh, I would guess that we'll probably end up with about 20% of it handled by custodians. And 80% of it handled by people who are self custody or, frankly, who lost it. There's a big percentage, as we know, in that 21 million that have been lost permanently, I would guess it would get up to 20%, but that's not very much right now. It's around 10% right now. 10 to 12%. And in bear markets, that number tends to go down. In bull markets, where people are more actively trading it, it tends to go up. But this is a feature, not a flaw. The fact that the vast majority of bitcoins will never come out of the hands of individual hodlers like us means that big banks will never be able to control it. Even if we're transacting on it, it means we won't ever be able to control it. That's a feature, not a flaw, right?

Kevin Rooke - 01:17:38:

Are there any books that have changed your view of the world?

Caitlin Long - 01:17:43:

When Money Dies by Adam Ferguson. I read that back in, I think, 2009, and, boy, it opened my eyes to what happens to fiat currencies that collapse in hyperinflations. And we've seen a few of those around the world since then, unfortunately, and just the real human suffering that occurs when that happens. The other big takeaway that I took from it was just how volatile things are as the fiat currency is collapsing and how you could see towards the end, 50% intraday moves between the German currency and the French currency and between the German currency and gold back then. Huge volatility at the end, and just rip roaring rallies that made everyone say, oh, that is finally over. And it wasn't. What it was was that that's the pattern of collapse. And we've seen that repeated again in a number of hyperinflation in small countries recently. Let's hope to God that we can solve these problems with these new technologies and that human suffering doesn't take place ever again.

Kevin Rooke - 01:18:49:

Yeah. Who's one person you'd like to give a shout out to for doing great work in the bitcoin or Lightning ecosystem?

Caitlin Long - 01:18:57:

Oh, Jack Dorsey. He's underappreciated. Hey, Jack. Someday we'll hopefully meet. We follow each other on Twitter, but we've never met.

Kevin Rooke - 01:19:07:

Awesome. Love it. All right, this was an awesome conversation. Thank you for taking the time. Where can listeners go to learn more about you and Custodia?

Caitlin Long - 01:19:19:

@CaitlinLong_ on Twitter. Very active on Twitter. Also on LinkedIn. Different audiences there and then also custodiabank.com. Well, stay tuned. We're beavering away and hope to have some announcements at some point coming up in the relatively near future.

Kevin Rooke - 01:19:36:

Awesome. Well, thanks again for the time and can't wait to follow along with progress.

Caitlin Long - 01:19:41:

Appreciate it. Thanks for having me on. This was fun. Great questions, and it's fun to start talking about the future, looking forward and stop talking about the roadkill that we hope we all move on from very quickly in FTX.

Kevin Rooke - 01:19:55:


Caitlin Long - 01:19:56:

Thanks so much.

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