“Reputable members” of the U.S. blockchain and cryptocurrency industry have the opportunity to avoid the troubles that beset past financial innovations – such as the derivative industry – by looking to the past, particularly the 2008 financial crisis, the top regulator of national banks said Tuesday.
In a speech to the Blockchain Association, Acting Comptroller of the Currency Michael Hsu said the promises and growth of blockchain and crypto currency resembles that of the growth of the derivatives industry in the late 1990s and early 2000s. “I applaud your commitment ‘to responsibly building and investing in the next generation of digital services,’” Hsu said, referring the group’s own promises. He indicated that if the industry applies “the lessons from the 2008 crisis – anchor innovation in clear purpose, foster an environment for skeptics to speak up, and follow the money,” then the real promise of blockchain innovation can be achieved.
Much of Hsu’s remarks to the group focused on his experience as a regulator, particularly as the the derivatives industry rose – and then fell – in the ‘90s and ‘00s. He drew comparisons of that era – when derivatives were touted as the latest financial innovation – to the current time, as more and more organizations are promising great expectations for cryptocurrency. However, he urged the group to carefully study that era of derivatives growth, to avoid the failures of the past.
He said there were three lessons to apply that emerged from the past:
- Anchor financial innovation in purpose: “Be clear about the “why” – not just clear about the problem that needs to be solved, but also why it is important to solve it. Just because something can be innovated, doesn’t mean it should,” he said.
- Speak up: “Some have raised difficult and inconvenient questions,” he said. “For instance: What differentiates the core blockchain developers from fiduciaries in banking? Why isn’t miner extractable value seen as front-running? Others have pointed out that ‘trustless’ and ‘immutable’ are false descriptors of blockchains and that much more thought needs to be dedicated to clarifying blockchain governance and crypto law in order for the technology to succeed and thrive in the long term.”
- Follow the money: “One thing I have learned as a banking supervisor is that the most important task when overseeing a trading desk is being able to explain how money is made and lost,” he said. “I have seen my share of trading blow-ups over the years. While the causes have varied, in each and every case, the ability to explain profits and losses broke down at some point.
“How is money being made and lost in crypto/DeFi (decentralized finance)? For the industry to grow in a responsible way, there needs to be a straightforward way to answer this question. It cannot be cloaked in jargon if it is to build trust and resilience over time.”