Calling crypto an “immature industry based on an immature technology,” the regulator of national banks called Tuesday for “guardrails and gates” within the traditional financial system (TradFi) to ensure safety, soundness, and fairness and encourage responsible innovation.
In two separate speeches, Acting Comptroller of the Currency Michael J. Hsu focused squarely on the growth of crypto in the financial system and his view on how the Office of the Comptroller of the Currency (OCC) will seek to regulate that growth among national banks.
Speaking first at DC Fintech Week 2022 in Washington, D.C., Hsu noted that in July, FTX, one of the largest centralized crypto exchanges in the U.S., submitted a presentation to the Financial Stability Oversight Council (FSOC) responding to President Joe Biden’s (D) executive order calling for responsible development of digital assets. “The arguments in the presentation caught my attention because they presumed that integrating crypto and TradFi would enhance finance stability.
“I could not disagree more,” Hsu said.
The acting OCC head called integrating an immature crypto industry with a mature TradFi system without guardrails and gates “imprudent.”
“Any incremental gains in efficiency and convenience would be heavily outweighed by the increase in cross-contagion and systemic risk,” he argued.
He told the group that until crypto matures and appropriate guardrails and gates are put in place, “it would be wise to limit the scope of activities commingled within a single crypto firm—a limit on the PD (probability of default)—and to limit integration of crypto and TradFi—a limit on the LGD (loss given default).” He asserted that systemic risk posed by crypto is PD times LGD.
He also signaled that his agency would be relying more heavily on data in determining risk exposure through crypto. He said further enhancements to agency supervisory processes may be needed to track the risk of cross-contagion. “A structured and recurring gathering of quantitative data focused on the nexus between banks and crypto could help ensure that regulators have an accurate and complete view of the risk,” he said. “The OCC is considering ways to support periodic and ongoing information gathering so that we can continue to understand the prevalence and scope of crypto-asset exposures and interconnectedness at our supervised institutions.”
Also Tuesday, Hsu told the Harvard Law School and Program on International Financial Systems Roundtable on Institutional Investors and Crypto Assets that a large segment of the crypto-asset industry continues to rely on hype and bootstrapping to grow. “Promises of innovation and inclusion often mask crypto’s promotion of a gold rush vibe that exploits people’s fear of missing out on the next Google or Amazon,” he said.
He urged financial regulators to stick to their guns and not lower standards when dealing with crypto. He said regulators needed to learn and “smartly adapt” so that that they can ensure safety, soundness, and fairness and encourage responsible innovation. He said guardrails and gates can help to achieve those goals.
“The more novel and riskier an activity, the tighter a bank’s limits and controls need to be to meet supervisory expectations,” he said. “The converse is also true. This means that banks seeking to engage in crypto activities may want to carefully consider the scope of what they want to do, start with what can be most readily risk managed, and impose gates, through limits and other controls, to prevent uncontrolled expansion and growth into higher risk activities.”
The acting comptroller said that, based on its Interpretive Letter 1179, issued late last year, that he saw three areas that need clarity about supervisory expectations in the near term:
- liquidity risk management of deposits from crypto-asset companies, including stablecoin issuers;
- finder activities, especially related to crypto trade facilitation; and
- crypto custody.
He said inter-regulatory agency efforts were “fairly advanced” on the first two.