💸 [Analysis] Wall Street custody and accounting practices will create problems for crypto - Caitlin Long

Wall Street veteran and former Symbiont CEO Caitlin Long is concerned that regulator-required financial industry practices of commingling and rehypothecation are antithetical to cryptoassets. Long explains:

• In the wake of the financial crisis, regulators wanted to be able to more effectively monitor and manage systemic issues. Credit risk was consolidated in a small number of clearinghouses, exchanges, custodians, and other centralized counterparties (CCPs).
• Commingling is the process by which CCPs maintain client funds in a single account. This practice reduces the chance the CCP will fail but also increases the severity if it does.
• Rehypothecation is the accounting practice of pledging borrowed collateral against other liabilities, potentially creating ownership ambiguity. There are currently on average 2.8 parties reporting that they own every Treasury Bond, which is down from 4.0 in the lead up to 2008.

These two practices are key to how the banking system works, but create unique problems when applied to cryptoassets. Centralized custody, combined with digital and pseudonymous bearer assets, creates the risk that the next financial crisis could start with a crypto hack. Avoiding this scenario is easily achieved through P2P transactions and institutional self-custody, but both would require a regulatory sea change.