To that end, Hsu recently addressed the Blockchain Association and highlighted the similarities between the mistakes made leading up to the housing market and economic collapse that took place more than a decade ago and the ones he fears are burgeoning in the cryptocurrency industry right now.
“Innovation that is guided by clear purpose can bring enormous benefits. The problem of persistent inequality, for instance, could benefit greatly from purposeful innovation. Innovation for innovation’s sake, however, risks creating a mountain of fool’s gold,” Hsu said. “I have seen one fool’s gold rush from up close in the lead up to the 2008 financial crisis. It feels like we may be on the cusp of another with cryptocurrencies and decentralized finance.”
According to information from the Blockchain Association, it aims to strengthen public policy so blockchain networks can succeed in the U.S. “Innovators face regulatory minefields while lawmakers must navigate complex consumer protection and security concerns. We’re committed to creating deep partnerships—within and between industry and government—to share knowledge, identify opportunities, and co-create a digital future that’s more transparent, inspiring, secure, and equitable,” according to its website.
Specifically, Hsu said in his remarks that innovation that relies too heavily on financial engineering and complex mathematical equations is often an indicator that innovation is overly convoluted, and perhaps, destined for “pervasion.” Hsu warned there are many parallels between those who sought to create a new, high yield asset class in the mid-2000s and those driving decentralized finance and blockchain-based financial innovations today.
“The original idea–to create an instrument that could improve risk management and thus lower the cost of credit–had been turned onto itself, cloaked in impenetrable math and jargon, and supercharged with yield and fees to ensure growth. This was not innovation with a clear purpose. It was innovation for innovation’s sake,” Hsu said.
"We applaud Treasury’s move against virtual currency exchanges that facilitate ransomware attacks and other illicit activity. As noted, the majority of such exchanges operate within law, and have in fact improved their compliance efforts in recent years. https://home.treasury.gov/news/press-releases/jy0364"
Hsu pondered if the crypto/DeFi sector could similarly be “morphing into perversion.” One example he pointed to includes advertisements from several exchanges recently offering “stablecoin savings accounts” with annual yields ranging between 4% and 14.5%.
“How are the returns generated? It is hard to get straight answers that don’t quickly devolve into cryptospeak. If one follows the money, what lies at the end?” Hsu asked.
Overall, Hsu made a point to note several times he feels it is extremely important to assess not only the capabilities of financial innovation, but the underlying causality. “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,” he said. “Just because something can be innovated, doesn’t mean it should.”