- Institutional investors are entering the crypto sector in large numbers.
- Traditional finance firms may not be ready for real-time settlement and risk in crypto markets.
- Custodia Bank CEO warns that legacy systems with built-in fail-safes do not exist in crypto.
- Experts say differences in risk management and settlement speeds could trigger liquidity problems in a downturn.
- Venture capital reports warn that overleveraged crypto treasury firms may struggle if prices fall again.
Large financial institutions are increasing their involvement in the cryptocurrency market, but their current risk models may not suit the fast-paced nature of crypto trading, according to Custodia Bank CEO Caitlin Long. Long made these comments at the Wyoming Blockchain Symposium, raising concerns about how these firms might handle the next downturn in crypto prices.
Long stated that while legacy financial institutions often rely on safeguards such as central bank support and delayed settlement to manage risk, these protections are not present in crypto, where transactions settle in real time. She told CNBC, “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.” However, Long warned that “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.”
She cautioned that this difference could cause a liquidity crunch if legacy investors are not prepared. Long said, “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.”
Chris Perkins, president of investment firm CoinFund, echoed these concerns. He told Cointelegraph, “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.” This aligns with warnings that the difference in speed between traditional banking and crypto transactions could result in market stress during rapid price declines.
A June report by venture capital firm Breed concluded that many new Bitcoin treasury companies—firms holding Bitcoin as part of their reserves—could face significant losses if the market drops. The report noted that overleveraging and low asset prices might force these groups to sell quickly, pushing prices further down.
Some investors see the influx of institutional capital as positive for adoption and market stability. Others believe that inexperienced or overleveraged firms could trigger broader sell-offs if another bear market strikes, leading to a cycle of falling prices and forced sales that could affect the wider financial system.
A related trend at the Wyoming Blockchain Symposium was the launch of a new crypto advocacy group, reflecting rising industry engagement.
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