Caitlin Long of Custodia Bank Accuses Washington D.C. of Ignoring Crypto Fraud Warnings: ‘Shame on You’

In the tumultuous world of cryptocurrency, where fortunes are made and lost in the blink of an eye, one voice has been consistently ringing the alarm bell. That voice belongs to Caitlin Long, the CEO of Custodia Bank. But is Washington D.C. listening? Long is now publicly accusing government officials of turning a deaf ear to her warnings about “substantial fraud” within the crypto industry, warnings she claims were delivered months before the collapse of numerous crypto giants. Let’s dive into this unfolding drama and understand what’s really going on.

Caitlin Long’s Explosive Accusations: Did Washington Ignore the Crypto Cassandra?

Caitlin Long hasn’t held back in her criticism. In a strongly worded blog post titled “Shame On Washington, DC For Killing A Messenger Who Warned of Crypto Debacle,” she lambasted Washington D.C. regulators and lawmakers for what she calls a “misguided attack” on the crypto industry. She alleges that her attempts to highlight massive fraud risks within the sector were not only dismissed but actively undermined.

According to Long, instead of protecting investors and fostering responsible innovation, Washington’s approach is doing the opposite. She argues that the current regulatory environment is:

• Driving risks underground: “Washington’s misguided enforcement will merely push hazards into the shadows, leaving regulators to play whack-a-mole as dangers continue to sprout up in unexpected areas,” she stated. This suggests that overly aggressive and misdirected regulation isn’t eliminating risk; it’s simply making it harder to detect and manage.
• Punishing the good actors: Long believes regulators are “murdering the high-integrity entrepreneurs” while failing to effectively address the actual fraudsters. This creates a chilling effect, discouraging legitimate businesses from operating within the U.S. regulatory framework.
• Ignoring warnings: She emphasizes that Custodia Bank, designed as a compliant and regulated institution, has been actively “calling out the worst of crypto.” However, these warnings, she claims, were disregarded, leading to preventable investor losses.

Custodia Bank: A Case Study in Regulatory Frustration?

Custodia Bank’s story seems to be at the heart of Long’s frustration. She paints a picture of a company actively seeking federal regulation, precisely what policymakers claim to desire for the crypto industry. Yet, instead of being welcomed and supported, Custodia faced resistance and, in Long’s words, “attack.”

She recounts instances where Custodia’s efforts to collaborate with government authorities were met with hostility. She highlights a particularly striking example:

“The White House simultaneously attacked Custodia, the Federal Reserve Board of Governors, the Kansas City Fed, and Senator Dick Durbin (who in a Senate floor address equated our non-leveraged, 100-percent liquid and solvent bank with FTX),”

This quote underscores Long’s central argument: that even companies proactively seeking compliance and transparency are being unfairly targeted, sometimes even being compared to entities like FTX, which became synonymous with crypto fraud.

Echoes of Concern: Armstrong and Powell Join the Chorus

Caitlin Long isn’t alone in her critique. Her sentiments resonate with other prominent figures in the crypto space, most notably Brian Armstrong, CEO of Coinbase, and Jesse Powell, co-founder and CEO of Kraken.

Armstrong has repeatedly voiced concerns about the Securities and Exchange Commission’s (SEC) approach, describing a lack of regulatory clarity and a strategy of “regulation by enforcement.” This means companies are often penalized without clear guidelines being established beforehand, creating a climate of uncertainty and fear.

Following the SEC’s crackdown on Kraken’s staking services, Armstrong questioned the very nature of regulation in the U.S., highlighting the difficulties companies face in navigating the current landscape. Jesse Powell of Kraken echoed Long’s frustration directly, stating on Twitter:

“I can’t tell you how annoying it is to have pointed up major red flags and blatantly unlawful activities to authorities just to have them disregard the issues for years.”

This shared frustration from industry leaders suggests a systemic problem – a disconnect between regulators and the crypto industry, potentially hindering innovation and effective consumer protection.

The Hunt for “Scalps” and the Danger of Throwing the Baby Out with the Bathwater

Long believes that Washington D.C. is now in “scalp-hunting” mode, reacting to public pressure and the fallout from crypto collapses. She argues that the current calls for a crackdown are coming from the very policymakers who were initially “duped” by the con artists in the industry.

Her concern is that in this rush to appear tough on crypto, regulators are resorting to broad-stroke measures that could stifle innovation and harm legitimate businesses. She uses the metaphor of “throwing the baby out with the bathwater,” suggesting that valuable aspects of the crypto industry are being sacrificed in an overzealous attempt to eliminate the bad.

Furthermore, Long reveals a significant detail: she claims to have provided law enforcement with information about potential crimes committed by an unnamed crypto firm months before its collapse. This raises a critical question: If warnings were indeed given and ignored, what could have been done differently to prevent the massive investor losses that followed?

Key Takeaways and Questions for the Future

Caitlin Long’s accusations and the shared concerns of other crypto leaders paint a concerning picture of the current regulatory environment in the United States. Here are some key takeaways:

• Missed Warnings: There are credible claims that regulators were warned about potential fraud in the crypto industry well before the major collapses of 2022.
• Regulatory Overreach?: The focus seems to be shifting towards broad crackdowns, potentially harming legitimate businesses and driving innovation overseas.
• Lack of Clarity: The crypto industry continues to grapple with a lack of clear regulatory guidelines, leading to confusion and “regulation by enforcement.”
• Erosion of Trust: The adversarial relationship between regulators and the crypto industry is eroding trust and hindering constructive dialogue.

Moving forward, critical questions need to be addressed:

• Can regulators and the crypto industry find common ground? Is it possible to create a regulatory framework that protects consumers without stifling innovation?
• Will Washington D.C. heed the warnings of industry experts? Will regulators become more receptive to proactive dialogue and less reliant on reactive enforcement?
• What is the long-term impact of the current regulatory approach on the U.S.’s position in the global crypto landscape? Are we at risk of losing out on the potential benefits of this technology due to a heavy-handed approach?

The crypto industry is at a crossroads. The path forward requires a nuanced and balanced approach to regulation – one that learns from past mistakes, listens to informed voices, and fosters responsible innovation rather than stifling it. The stakes are high, and the choices made by Washington D.C. in the coming months will be crucial in shaping the future of crypto in America and beyond.