Custodia Bank CEO Caitlin Long is warning that traditional finance (TradFi) firms may face significant challenges as they navigate their first true crypto winter. Long suggests that these institutions, new to the crypto space, often lack the necessary risk management frameworks to handle the volatility and unique characteristics of the cryptocurrency market.

Long voiced her concerns at the Wyoming Blockchain Symposium, stating that TradFi's reliance on established safety nets and fault tolerances within traditional systems may not translate effectively to the crypto world. These safeguards, such as discount windows, are designed to address the slower, non-real-time updating of legacy systems. However, in the crypto market, settlement occurs in real-time, presenting a different operational landscape. This mismatch could lead to liquidity problems for TradFi companies.

She notes that institutional investors are a major part of the current crypto market cycle. While some see this as a positive sign of growing adoption, Long and others worry that inexperienced and overleveraged firms might trigger a widespread financial contagion by dumping crypto assets during a bear market.

Echoing Long's concerns, Chris Perkins, president of investment firm CoinFund, highlighted the systemic risk arising from the asynchronous nature of risk management between the traditional and crypto ecosystems. He pointed out the difference between an ecosystem managing risk and rebalancing in real-time versus one that operates on traditional business schedules, "that takes weekends, nights, and holidays off".

Long advises TradFi institutions to learn from past crypto winters, which have primarily affected retail investors. She emphasizes the importance of staying calm during downturns and viewing them as potential buying opportunities, a strategy employed by seasoned investors. She also cautions against panic-selling, which could lead to missed opportunities.

Furthermore, Long stresses the need for TradFi firms to understand the specific risks associated with crypto markets, especially concerning asset security and custody. Conducting thorough due diligence is crucial for safeguarding investments during market downturns. She also suggests looking at projects that have utility, like DeFi and stablecoins, and diversifying investments.