Following the collapse of the crypto market early this month, Acting Comptroller of the Currency Michael Hsu spoke to the Digital Chamber of Commerce to discuss the risks the crypto space poses for modest investors.
“The recent collapse of the TerraUSD stablecoin and associated sell-off in crypto markets has shown that hype-driven growth can lead to bubbles, harm consumers, and crowd out productive innovation,” he said in a speech. “What has become clearer to me is that these developments are indicative of the crypto economy’s dependence on hype. The recent events in crypto should serve as a wake-up call and an opportunity to reset and to recalibrate the problems the industry is trying to solve.”
Michael Hsu says that contagion risks within crypto are real, pointing out how the collapse of Terra spread to Tether and the broader crypto ecosystem. However, he was encouraged that traditional banks weren’t affected. Hsu said the OCC’s work to require banks’ permission to engage in crypto activities played an important role in limiting exposure.
“No banks are under stress or even rumored to be under stress due to crypto exposure,” he revealed.
Hsu once described himself as a crypto skeptic, and he warned that it is highly fragmented. The Acting Comptroller noted that the daily addition of new blockchains creates a need for cross-chain bridges, which expose the system to hacks. The systems are responsible for the transfer of cryptocurrencies between blockchains.
The Acting Comptroller also said there isn’t enough clarity about how custody works and who owns crypto assets bought from an exchange. “Establishing clear standards for the ownership and custody of digital assets would protect consumers while enabling sustainable, long-term growth,” he added.
Michael Hsu also expressed concerns about crypto products that offer “unsustainably high” yields. However, he noted that these kinds of offers are the best way to attract investors to crypto, especially in the decentralized finance space. Hsu compares yield farming or lending one’s crypto with smart contracts in return for yield with Ponzi schemes.
Jaret Seiberg, an analyst for Cowen, thinks Hsu’s comments infer banks will have a challenging time participating in crypto. Seiberg also said that it’s hard to see the OCC issuing limited-purpose charters for financial entities to participate in crypto as Hsu wants to protect the banking system from crypto risks.