Crypto settlement mismatch between legacy finance and blockchain systems creates an institutional liquidity risk that could force overleveraged TradFi entrants to sell assets quickly during the next bear market, Custodia CEO Caitlin Long warns, increasing the chance of market contagion.
Real-time crypto settlement vs delayed TradFi settlement can cause liquidity stress
Institutional investors may lack risk models for instantaneous settlement and high leverage
Breed report and industry executives warn many treasury companies may not survive the next downturn
Crypto settlement mismatch raises institutional liquidity risk, warns Custodia CEO Caitlin Long — read how legacy finance differences could trigger a market-wide liquidity crunch.
What is the crypto settlement mismatch impacting institutional liquidity?
Crypto settlement mismatch refers to the difference between traditional finance systems that settle with latency and fault tolerances and blockchain systems that settle in real-time. This mismatch can create an institutional liquidity risk because legacy firms may be unprepared to meet instantaneous margin and funding demands.
How did Custodia CEO Caitlin Long describe the risk?
At the Wyoming Blockchain Symposium, Custodia Bank CEO Caitlin Long said legacy financial institutions rely on fail-safes like discount windows and delayed settlement processes. In crypto, those fault tolerances vanish because transactions settle immediately, which can produce sudden liquidity shortfalls for firms used to delayed settlement.
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Caitlin Long said mismatches between legacy financial systems and blockchain protocols, which settle in real-time, may impact TradFi firms.
Institutional investors from the traditional finance world lack updated risk-tolerance models to handle real-time settlement. Long warned these firms may face trouble during the next bear market if they are overleveraged or unable to adapt to instantaneous settlement mechanics.
Real-time settlement converts latent operational delays into immediate economic exposures. Firms accustomed to margin windows, discount facilities, and end-of-day processing face sudden funding demands that can force rapid asset sales.
Chris Perkins, president of CoinFund, said the core systemic risk is the coexistence of two ecosystems: one that rebalances in real-time and another that pauses on weekends and holidays. That mismatch can precipitate liquidity freezes, which historically underlie financial crises.
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Source: https://en.coinotag.com/caitlin-long-says-bitcoin-exposure-may-cause-liquidity-strains-for-tradfi-amid-real-time-settlement-mismatches/