in Notes At DC Fintech Week on October 11, 2022 and in a keynote Tabuk Later in the day at a Harvard Law School Program on International Financial Regulations roundtable, Acting Currency Controller Michael J. Hsu expressed concerns about risks to consumers and the financial system posed by crypto industry participants.
Acting Controller Hsu identified the risks arising from crypto firms’ use of bank-like terminology; Integration and consolidation of services between banks, crypto companies and within the crypto industry; and data gaps needed to understand the risks posed by crypto-asset exposures in conventional banks.
Regarding the terminology and marketing tactics used by crypto companies, Acting Controller Hsu cautioned that by using “skeuomorphism,” a design concept where a new product or process is manufactured so that it looks similar to a familiar product or process, cryptocurrencies “mimilate” familiar concepts associated with products and traditional financial services in order to suggest to the public that crypto products are similar to banking products. For example, Mr. Hsu referred to the “crypto savings accounts” that crypto companies offer on their platforms. These accounts promise consumers returns paid in additional units of cryptocurrency sometimes referred to as “yield” and quoted in terms of “APY,” indicating a stable and predictable return. In some cases, consumers are assured that they can get their assets back at any time, even if the crypto company fails.
While Hsu did not refer to the claims of crypto companies as “misleading” or “deceptive,” his comments reflect his skepticism about the methods the crypto industry has used to lure consumers away from traditional banking relationships. He pointed out that “[a]Many are now learning the hard way, and the risks of these arrangements are fundamentally different from their representation,” he cautioned.[i]In these examples, skeuomorphism is not a bridge, but a camouflage. Using the familiar to introduce something new can reduce or mask the risks involved and establish false expectations. Over time, people get hurt.” In a later statement, Hsu reiterated the same theme: “A large segment of the crypto-asset industry continues to rely on hype and primer for growth. Promises of innovation and inclusion often mask crypto’s promotion of the dynamism of the gold rush….”
Regarding integration and intertwined concerns, Mr. Hsu noted concerns not only about cryptocurrency consolidation and traditional finance, but also about abuse by crypto companies that want to offer an increasingly wide range of services, such as: “digital wallets. The buying and selling of cryptocurrencies; Crypto custody; storing cryptocurrencies for yield; crypto margin lending; trading crypto-derivatives; fiat holdings for borrowing and credit card payments; direct deposit of payroll checks; facilitating peer-to-peer payments; issuing stablecoins and creating, collecting, and connecting to NFT networks.” He expressed the view that until cryptocurrencies mature and appropriate protection barriers are put in place, restrictions must be placed on the scope of mixed activities within a single crypto company and on the integration of cryptocurrency and traditional finance.
Regarding the lack of data availability to identify, understand and monitor the risks posed by crypto activities, Mr. Hsu referred to the supervisory processes in place to monitor the exposure of banks to cryptocurrencies and to gain insight into crypto activities, such as requirements that institutions first obtain a supervisory no-objection before engaging in any asset activities. encrypted code that the OCC has determined is permitted. To receive a no-objection, the organization must demonstrate its ability to conduct the proposed activity safely, soundly and fairly. He noted that the FDIC and the Federal Reserve have adopted a similar approach, which helps maintain a level playing field across the banking system. He also warned that while this approach has been effective in monitoring bank crypto-related activities, further improvements may be needed to track “contagion” risks. He noted that the OCC is considering strengthening supervisory processes to understand “the prevalence and scope of exposure to crypto assets and the interconnectedness of our supervised organizations.”
Acting Comptroller Hsu went on to suggest alternatives to impose oversight, and eventually regulation, over the cryptocurrency industry, while not specifying how best to achieve this goal, or which regulator(s) should be responsible. It was suggested that collecting data from crypto companies and platforms on their activities with traditional financial institutions would give financial stability regulators a fuller picture, thus enabling more effective monitoring of financial stability risks. He also suggested that in the United States, such monitoring could be conducted by the Office of Financial Research (OFR) and that given the unlimited nature of cryptocurrencies, international coordination should be considered.
Mr. Hsu also discussed other considerations for “bringing crypto into the regulatory environment”. He noted that “cryptocurrency participants (and financial firms in general) can choose from a list of regulators and regulatory oceans” and that “[t]The line between well-adapted regulation and gratuitously facilitative regulation can be blurry [with the possibility that] Attracting licensees and crypto activities could be a sign that the regulator may have oversold the industry.” He noted that “[c]Cooperation and coordination among financial regulators can be an effective mitigating factor for the risk of over-facilitation and is particularly important as long as the crypto business is not subject to oversight oversight where a single authority has a line of sight on the overall activities of the company. “
Mr. Hsu concluded his remarks by commenting that while he is skeptical about the usefulness of cryptocurrencies in the real world and concerned about the risks they pose to consumers and the financial system, he is not prepared to “say with certainty that cryptocurrency is useless and should disappear.” He stated that his role as regulator The bank “is to ensure that the banking system is safe, sound and fair – not picking winners and losers from among emerging technologies.”
We note that Mr. Hsu is not the only federal regulator expressing growing concerns about cryptocurrencies. Recent FDIC and CFPB releases have included warnings about the deceptive advertising practices of crypto companies, as discussed in our talk. Blog post And the audio notation.
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