Bank Insolvancy/ Bankruns

• As I understand it, the simplest definition of insolvency is when your liabilities are greater then your assets. You owe more then you own.
• In 2023 the American Banking system saw several banks declared insolvent, and banking regulators closed them down.
• In 2023 we also saw the third largest cryptocurrency exchange in the world FTX declare bankruptcy and close it's exchange due to insolvency.
• The brilliant Founder, CEO of BInance , the worlds largest cryptocurrency exchange by voiume, CZ or Mr. Changpeng Zhao, provided wisdom in the setting of the FTX collapse:

The Bank customer in the US is protected from a bankrun like FTX by FDIC insurance and financial guarantees from the Federal Reserve Bank, for other member Federal Reserve Banks. Banks can legally take customer deposits and loan out or invest 90% of those deposits, knowing that if those investments fail and the bank becomes insolvent, the FDIC and the Federal Reserve will provide the funds to replace the customers funds, lost by the bank. In cryptocurrency there is no FDIC nor a Federal Reserve, this is why FTX failed. If cryptocurrency exchanges make bad investments with customers funds, and then enough customers ask to withdrawal those funds, to exceed the exchanges cash on hand and cash obtainable quickly, the cryptocurrency exchange is insolvent, and has no choice but to close it's doors and go out of business . And the customers invatiably lose most, if not all the money they have depositied there. That is why Binance doesn't invest customer funds.

• Now while it is my understanding that what he said is true to a degree, because some banks who become insolvent aand experience a run on the bank, are given funds by the FDIC and Fedederal Reserve to stay in business. But it is also true that FDIC insurance and the Federal Reserve don't always save banks from insolvency, and the banking regulators do close some banks permanently, due to insolvency, from essentially bad investments.
• A case in point would be the three large banks, who were invested in low interest Federal Bonds, before the Federal reserve raised interest rates at a historical pace, which devlued the low interest bonds so much that the banks were insolvent on paper, and when news of this paper insolvency leaked to the public, the sudden surge in withdrawals made the banks insolvent in reality, and the government banking regulators chose to shut them down.
• The simplest explanation for this failure of the banks is they retained to small a portion of their custormers deposits to pay withdrawals, while investing to large a portion of customers deposits. This brings us to the Custodia Bank, whose application for Federal reserve Bank charter was declined by the Federal Reserve Bank Administration.

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Custodia Bank

• As I alluded to in the title, Caitlin Long, CEO of Custodia Bank, has built a 100% always solvent, bankrun-proof bank. This would make Custodia Bank, one of the safest places to deposit your life savings and your company payroll deposits, because Custodia will never invest your money, so they can't lose your money. And you can rest at night knowing your life savings is safe and the money you pay your company payroll and company bills with is safe. This assurance is something the customers of the three large banks who failed this year didn't have.

Arbitrary and Capricoius

• It is with that background that the true irony of the Custodia Bank situation is apparent. It appears that Caitlin Long, and the backers of Custodia Bank had built in a bank, that would be 100% solvent, 100% of the time. Because the bank charter states it will never invest it's customers funds to earn income. It would only custody them, as in hold them in customers accounts until the customer asks for them. This bank, unlike all other banks, would not only provide audits to prove Proof of Reserves, as in the money the customers deposited was actually in their accounts, but it would earn income by charging it's customers for custodying their money, and provide banking services for that money.
• Please pause here to reflect on this concept.
• They are building a safer bank, which should never become insolvent, at a time when several large, high prifile banks had gone out of business, ruining the lives of hundreds of customers and businesses. And their application for Federal Reserve Status was declined by American Gvernment Banking regulators, because their banking model was considered unsafe banking practice.

Then add insult to injury, by the Federal Reserve Board also condeming the future plans to custody BItcoin as an unsafe practice, which would connect cryptocurrency to the banking system, and their association with cryptocurrency could cause them to Run A Foul translated by me as the regulators expect Custodia to break existing Anti-money laundering laws due to poor KYC practices in the cryptocurrency industry.

• They then added to these harsh and demeaning statements that many other financial services businesses involved with the cryptocurrency industry are suspected of helping fund Terrorist Organizations due to poor AML and KYC practices.
• The Federal Reserve Bank Board then rejected Custodia Banks application as if it had already committed these crimes.

Irony

• The First irony of the Federal Reserve rejecting the application of a bank, whose banking charter makes it safer for retail and business customers then all existing commercial banks, for banking safety reasons is so preposterous as to be laughable. But once again a Government Organization has issued a decision which defies all reason and logic, and seems arbitray and capricious.
• The second irony, is that there are financial companies operating without government consent, or regulation, who don't apply for certification and approval. Yet here was a bank which has complied with all existing banking laws, did the hard work of a three year process to obtain a banking charter by showing it was in compliance with all existing Anti-Money Laundering, Know Your Customer, FInancial Transactions Regulations, and obtained a difficult to obtain banking charter. Then they were attempting to obtain Federal Reserve Bank Membership, which would make their bank business model more profitable without risking customer funds.
• They were literally doing all the right things and were having all their actions guideed by the Banking regulators in a full transparent fashion.
  Custodia was literally meeting with regulators for three years to be honest, transparent and compliant.
• And then they were refused membership to the Federal Reserve Banking System and criticized as irresponsible and risky, when they did everything they were suppose to do, and followed every rule.
• In the cryptocurrency world we call this a rugpull. But in the real wprld we call this deceitful treachery.l

Last words

• In deference to the banking experts of the world, please excuse my perhaps simplified version of the concepts here, but after listening to interviews and reading articles written on this subject, I think these are the essential pieces of this drama.

• I think we can learn a lot from this case, as it illustrates the problems with the banking system very clearly, and illustrates the value of the disrupotive technology called Bitcoin, cryptocurrency, blockchain and smart contracts.

• I know Custodia Bank CEO Caitlin Long has not given up the fight to build the safest and most technologically advanced bank in history, by following the rules and coming through the regulatory front door. In this season of gift giving and well wishes, I wish for her good lawyers, and fair judges..