Custodia Bank CEO Warns TradFi of Liquidity Risks in Next Crypto Downturn

Custodia Bank CEO Caitlin Long has issued a stark warning to traditional financial (TradFi) institutions about their exposure to the crypto market, particularly as they may face significant challenges during the next bear market cycle. In a recent interview with CNBC at the Wyoming Blockchain Symposium, Long noted that many institutional investors lack the updated risk tolerance models required to navigate the fast-paced and volatile nature of digital assets [1]. She emphasized that the real-time settlement nature of crypto contrasts sharply with the slower, more forgiving systems used in traditional finance, which often include mechanisms such as discount windows and other “fault tolerances” that allow for temporary relief during periods of stress [1].

According to Long, the structural differences between these two ecosystems could lead to liquidity crunches for TradFi firms when the next crypto downturn occurs. “In crypto, everything has to be real-time, and it’s just a different animal,” she stated. Her concerns align with those of other industry figures, including CoinFund’s president Chris Perkins, who has pointed out that the mismatch in settlement mechanisms could be a root cause of future liquidity crises [1]. This perspective is supported by a recent report from venture capital firm Breed, which concluded that most new Bitcoin treasury companies would struggle to survive the next market correction [1].

The warning from Long comes at a time when institutional adoption of crypto is accelerating. However, many of these new entrants—particularly those from the traditional finance sector—remain underprepared for the rapid and unpredictable nature of market corrections. Long, who has been following the crypto space since 2012, stressed that the next bear market is inevitable and could expose significant vulnerabilities in the current risk management frameworks of TradFi institutions [1].

Industry analysts have echoed these concerns, with some highlighting that overleveraged and inexperienced firms may be forced to offload assets during a downturn, potentially triggering a cascading effect across the market. This, in turn, could lead to broader financial instability if not properly managed. The current environment, characterized by a mix of optimism and caution, underscores the need for more robust infrastructure and risk models tailored to the unique characteristics of the crypto market.

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[1] Custodia Bank CEO warns TradFi firms first crypto winter (https://cointelegraph.com/news/custodia-ceo-warns-tradfi-firms-first-crypto-winter)