U.S. banking regulator reaffirms cautious approach to cryptocurrencies

The Terra collapse confirmed the propriety of the ‘thorough and cautious’ approach to cryptocurrencies by the Office of the Comptroller of the Currency (OCC) within the U.S. Treasury, according to interim agency head Michael Hsu.

In speech at DC Blockchain Summit 2022 he noted that the decline in crypto market capitalization by about half a trillion dollars after the Terra collapse did not lead to contagion into traditional banking and finance.

“The resilience of the banking system to recent events in the crypto industry is not accidental. Rather, it is, at least in part, linked to regulators’ focus on safety, reliability, and consumer protection,” said Hsu.

In the OCC this emphasis was made in the November-issued explanatory letter, the official noted. In it, the regulator warned banks that previously permitted activity in the crypto space is only permissible with security controls and compliance with consumer-protection laws.

“I believe these reminders have contributed to the safety and reliability of the banking system, despite rising volatility and the recent upheavals in crypto markets,” said Hsu.

He reaffirmed his scepticism about crypto and emphasised that the digital asset economy hinges on hype. Hype is the main generator of interest and investment for growth of projects, he said.

“The recent collapse of the Terra stablecoin and the related sell-offs in crypto markets show that hype-driven growth can lead to bubbles, harm consumers, and crowd out productive innovation,” he said.

Hsu also noted a number of fundamental problems plaguing the industry. Among them, he cited fragmentation due to multiple blockchains and the emergence of cross-chain bridges that are vulnerable to hacks.

In his view, there are risks of contagion to the crypto industry, as evidenced by sell-offs and the temporary loss of the dollar peg of Tether’s USDT to the dollar, although the coin uses a stabilization mechanism different from TerraUSD.

Hsu argues that custody and property-rights regimes for cryptocurrencies are not sufficiently developed for the scale and ambitions of the industry.

“The industry has grown too fast, and suffers from a hype-driven approach of ‘shoot, prepare, aim’ to innovation and value creation. The recent events should serve as a wake-up call and an opportunity to restart and recalibrate the problems that must be solved. Until then, the OCC will continue a thorough and cautious approach to cryptocurrencies to ensure the safety, reliability, and fairness of the national banking system,” concluded Hsu.

In January, he admitted a bank-run scenario among stablecoin holders.

In April, Hsu said it was necessary to bring issuers of stablecoins under the same umbrella as depository institutions with mandatory deposit insurance.