Note: This is part 1 in a multi-part series exploring the dangers of rehypothecation and commingling in Bitcoin and other cryptocurrency assets that could occur once Wall Street begins offering crypto products. Part 1 is an interview with Caitlin Long and subsequent parts will ask the question, “How did we get to a place that where laws look like this?” Stay tuned for part 2.
Caitlin Long is a 22-year Wall Street veteran with an impressive career inside of and outside of the cryptocurrency space. She started out as an associate at Salomon Brothers (now Citigroup) before becoming a managing director at Credit Suisse and finally heading up Morgan Stanley‘s Pension Solutions Group. As it turns out, Long’s extensive experience on Wall Street (in addition to her Harvard Law degree) give her some unique insight into things that most cryptocurrency investors aren’t going to have top of mind but that institutional investors have been dealing with for years. At the beginning of our conversation, Long says that everyone’s “backgrounds bring them to who they are today and bring them the knowledge base for recognizing trends.” It is Long’s impressive background, combined with a unique recognition of the opportunity to make Wyoming a “crypto haven” and a passion for doing what was necessary to achieve this goal, that put her in the unique position of understanding everything that is wrong with our current system and the opportunity blockchain — and specifically Bitcoin — give the financial services industry to ameliorate its past mistakes.
Note: The following has been edited for clarity
CCN Interviews Caitlin Long
CCN: How did you get into cryptocurrencies and how has your background allowed you to enter the space?
CL: Well, like everyone, their backgrounds bring them to who they are today and give them the knowledge base for recognizing trends, and I just happen to have a slightly maybe a typical background because I’m not a technologist but I actually have the legal background as well as having worked on Wall Street for 22 years, most recently running the pension business at Morgan Stanley [where I] really got into the weeds of how assets are custodied, cleared, and settled when they transfer.
The system that we have is very unstable. It’s not fair to investors, and I’ve learned from experience not to trust my brokerage account. My brokerage account itself is not inaccurate, but there’s so much that goes on in these commingled pools of assets behind the scenes that you can’t see. In other words, if you own 100 shares of Apple stock you don’t know that the leveraged institutions of Wall Street haven’t promised those very same 100 shares out to someone else too — and they also show up on that person’s brokerage statement. That kind of stuff really hit me in the gut as just unfair and morally wrong and there’s a lot to be said for pension fiduciaries upping their game and for the investor protection regulation to up its game because frankly, regular investors are the losers from all of these issues in the system.
CCN: Would you talk a little bit about the crypto problem? How the regulations allow that to happen?
CL: Well, there’s fault tolerance in the system. It stems from the fact that trades are not required to be settled instantly, which, for your crypto listeners is going to sound really strange because your trades literally go in the next block. If you’re talking about the Bitcoin blockchain, you can see them within minutes, on the ethereum blockchain, your actual trades are right there, and that’s not the way Wall Street works.
Wall Street just settles trades. When I started in 1994, the industry was five days after the trade date [T+5] and now it’s two days after the trade date. We just went from T+3 to T+2 this year, but it’s still two days. Obviously, [delayed settlement is] not a technology problem. It’s long since not been a technology problem anymore. So why is it that Wall Street is stuck with this crazy practice of not settling trades in near real time? The answer is it has to do with the market structures.
Now all these crazy market structures that we’ve let been left with, that were designed to do — to try to help Wall Street settle the increasing trading volumes on the New York Stock Exchange in the 1970s — which essentially said, “Why don’t we immobilize shares, instead of literally running share certificates back and forth across all the brokerage firms?,” which is why if you go down to the New York Stock Exchange in New York, that’s why all the brokerage firms were located right there because they literally were running paper securities back and forth to each other every day. And then they got overwhelmed it and they said, “Why don’t we just immobilize them in a vault somewhere, and everybody will actually own a certificate. That’s a claim against that share.” So instead of owning the real thing,…