Custodia Bank Founder and CEO Caitlin Long joins Yahoo Finance Live to discuss the collapse of FTX, crypto regulation, a Twitter payments system, and the outlook for crypto exchanges.

Video Transcript

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BRAD SMITH: Welcome back, everyone. Let's get a check on some of the major cryptocurrencies today, as we've been keeping a close eye on them throughout the week. We are a little bit mixed right now, but Bitcoin, you're seeing that down by about 290 bucks, 1.7% here over the past 24 hours. Ethereum or Ether, that's down by about 1.4%. But you've got some bright spots. That is FTX token, interestingly. Well, you can only fall so far, I suppose. And Solana, you're seeing that getting a bit of a reprieve.

This as FTX's dramatic fall continues with regulators in the US and EU. They're putting the squeeze on its subsidiaries. The news capping a tumultuous week in crypto, starting from a liquidity crunch at FTX and now scrapped bailout from rival Binance.

Let's take a deeper look into the space with Caitlin Long, Custodial Bank founder and CEO. Caitlin, great to have you here with us this morning. First and foremost, if we have to wrap up what has taken place this week for us, what is the way that you'd describe this to somebody who is just trying to figure out what's going on in crypto right now?

CAITLIN LONG: There was a massive amount of hidden leverage in the crypto markets that built up over the bull markets, and it's being flushed. And good riddance to it, to be honest. I know it's causing a lot of pain for individuals, and I don't wish ill on anyone. But this was inevitable and foreseeable, and here it is. Let's just get it done with and be able to build again.

BRIAN SOZZI: Caitlin, is regulation, you think, a good thing for this industry? We've heard this for a couple of years now, notably really being championed by Coinbase's founder and CEO, Brian Armstrong. But could cryptos go up if the government is going to come out here and hammer the space?

CAITLIN LONG: Yes, I think this is one of those situations where it's a couple of steps backwards and then potentially a step forward. I know there are some purists in the industry who really don't want regulation at all. But the reality is that into the void of lack of clarity of regulation filled a whole slew of scammers, fraudsters, and risky business models that would never have been allowed, had regulation taken place.

There are a number of companies like myself, like Custodial Bank and others, that have been knocking on the regulatory door to get bank and broker dealer licenses in this country for years. And they have not been successful. And into that void filled an awful lot of bad actors, unfortunately.

BRAD SMITH: So who are the good actors left in crypto?

CAITLIN LONG: Well, it's the folks who, frankly, didn't play these leverage games. It's so interesting how many of the folks who've blown up in crypto were ex-Wall Street traders. And they came in thinking that crypto is really no different than any other traditional financial asset and applied some of the trading strategies that they learned on Wall Street.

And there are-- I spent 22 years on Wall Street. There are subtle skimming mechanisms that are not fair to mom and pop in traditional finance, and they brought those approaches into an unregulated crypto market and made, in the short-term, big fortunes. But in the end, what they all learned is a very, very hard lesson, which is that it is not possible to leverage Bitcoin more than 1 to 1. The moment that you do that, you are insolvent.

And it's only a matter of time before the liquidity crunch gets you. And when the liquidity crunch happens, all it's doing is revealing an insolvency that was there all along. There is no difference in crypto between a liquidity crunch and an insolvency. And the fundamental reason for that is really simple. There is no central bank that can act as a lender of last resort. There are no bailouts, no concept of privatized profits and socialized losses.

When they blow up, they blow up big, and let's get rid of them and allow the builders, who have been here all along, to continue to build on the technology. This was never a trading game. It was always a technology. And most of the folks who were here for a long time always have, nevertheless, lost sight of that.

BRIAN SOZZI: Caitlin, that was a strong word, insolvency. But taking it back, we've been talking all week long about the financial crisis. To that point, is there a future for this industry, and what is that future?

CAITLIN LONG: Oh, yes. Actually, it links the first two stories that you have this hour, the crypto collapse, but also what's happening with Twitter. The signal through the noise this week is that Elon Musk announced that he's making good on what many of us thought the Twitter acquisition was all about all along, which is payments. And he's going to allow peer-to-peer payments among Twitter users around the world. He will not be using traditional bank payment rails to do that.

So those of us who are building on the technology, we've been around for a decade and weren't here for just this simple trading flash in the pan for the last couple of years. All of us got excited about that. That's the signal through the noise that broke through this week.

BRAD SMITH: Caitlin, I want to get your reaction to some news that's just come across, as FTX has filed for bankruptcy, saying in a statement here that they're going to commence voluntary Chapter 11 proceedings in the United States and begin an orderly process to review and monetize assets for the benefit of global stakeholders. It goes on. But is this something that you expected to happen? And as we continue to see some of the downfall or the fallout of FTX, what takes place next at this point in time?

BRIAN SOZZI: Yeah, Caitlin, real quick, I should note as well, Sam Bankman-Fried has resigned his role as CEO. He is just now assisting the company in this orderly transition. But, you know, like Brad just mentioned, Caitlin, I mean, do you see other crypto companies filing bankruptcy here?

CAITLIN LONG: Oh, sure, and again, good riddance to them. These are the leveraged players who were just rolling the dice. This was a casino. And these were companies that are not-- that really don't have anything to do with the underlying technology at all. The Bitcoin blockchain continues to add blocks every 10 minutes on average. It doesn't care what the market structure and what all this leveraged mess was all about. And so good riddance to it all.

I'm not surprised that the bankruptcy filing came. There were a lot of bankruptcy attorneys speculating whether the filing would happen offshore or onshore. It's going to be probably the most complex Chapter 11 filing in US history, given all of the offshore companies and given the ambiguity in the law about what crypto assets even are in the United States.

There's even been some talk on the Hill about potentially getting a crypto bill passed before the end of the lame duck session and staying this bankruptcy because of the ambiguity in US law about what digital assets even are, that this is going to be a very difficult Chapter 11. I would guess it will take years.

And just like in the Celsius bankruptcy, there were 29,000 individuals who were docked by the bankruptcy court because they're unsecured creditors. That's going to happen here as well. There will be thousands of individuals whose personal information, unfortunately, is going to be listed in the bankruptcy court filings as a result of the fact that they're unsecured creditors of this Chapter 11 filer.

BRAD SMITH: Does what's played out with FTX this week remove any possibility for crypto moving forward and some other developed countries that have been kicking the tires, or at least, evaluating what blockchain or what crypto could mean for their economy?

CAITLIN LONG: Absolutely. These crypto winters, this is-- I've been in it for 10 years now. This is my third crypto winter. Everyone always spells the death knell. And it's because of the excess. It's in part because it's an unregulated industry, and the mercenaries could come in, like they did, and leverage it up and then have these spectacular crashes. But the rest of us who were here for the technology and have been here all along are continuing to build.

And the amount of activity-- just last week, there's something called the Lightning Network, which is a second layer Bitcoin protocol that allows the transfer of US dollars for essentially free and essentially instantly anywhere in the world. And I saw a South African grocery chain, Pick and Pay, has just integrated with the Lightning Network. And McDonald's in Switzerland just integrated with the Lightning Network. These are real payments use cases for the actual technology. That's what I'm bullish about.

And again, watch Elon Musk because the Lightning Network is already integrated into Twitter. And so he already has that tool to be able to flip the switch. That's the sort of thing that will take off in the next bull market. These bear market cycles-- and what I'm alluding to here is Bitcoin goes through four-year cycles. We're at the typical bottom of the bear cycle.

And they're tied to what's called the halvenings, where Bitcoin's inflation rate gets cut in half every four years, and Bitcoin gets enforceably more scarce. And that's going to happen in approximately March 2024. That sets up for the next bull cycle. And I expect that payments will be the next big thing. Thank goodness, that's more sustainable than the crap we've had to deal with in this industry in the last couple of years. Good riddance to it all.

BRIAN SOZZI: All right, way to bring that fire for us there, Caitlin. Again, reporting right now, just filing for bankruptcy. Sam Bankman-Fried, the one-time billionaire leader of FTX, now he has resigned, handing over his post. He will assist in this process. We also saw a tick down-- we were just showing on the screen crypto prices. They were holding up in the early going, now have ticked lower. Custodial Bank founder and CEO Caitlin Long, thanks so much for the perspective. Have a great weekend.