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Look To the Past to Avoid Future Crypto Mistakes: OCC Hsu

Michael Hsu, Acting Comptroller of the Currency, called upon bankers and regulators to look at past mistakes in the fiat banking industry to help avoid future ones when dealing in crypto.

Hsu, who also discussed the importance of trust in the global banking community, delivered his remarks at the Institute of International Bankers Annual Washington Conference earlier this month at Washington D.C.’s Ritz-Carlton. Topics including cybersecurity, digital assets, tax implications and political considerations.

Hsu used his time at the conference to highlight how past oversights in the global banking industry provided the impetus for many changes to the regulatory landscape, and he emphasized the importance of using those lessons going forward. Notably, Hsu pointed to the 1991 collapse of the Bank of Credit and Commerce International (BCCI) as an example of what happens when supervision and regulation of the global banking system are too fractured and fragmented.

At the crux of his thesis is the now-defunct FTX cryptocurrency exchange. Hsu drew comparisons between the bank, which at one point controlled $23 billion in assets with 380 offices in more than 72 countries, and the failed crypto exchange. “Both faced fragmented supervision by a combination of state, federal, and foreign authorities. Both lacked a lead or ‘home’ regulator with authority and responsibility for developing a consolidated and holistic view of the firms. Both operated across jurisdictions where there was no established framework for regulators to share information on the firms’ operations and risk controls. Both used multiple auditors to ensure that no one could have a holistic view of their firms,” said Hsu in his remarks.

From Twitter 

Sanjeev Sanyal @sanjeevsanyal

"Now Moody’s cuts outlook of the entire US banking system!! Evidently rating agencies were also unaware of duration risk..... unbelievable .... what did they think happened to bond prices when rates went up ?"

The result in both cases, said the acting comptroller, was a climate that facilitated fraud and allowed for a lack of basic internal and risk management controls. In short, decentralization allowed these entities to seemingly be everywhere all at once, and in doing so, from a regulatory standpoint, were simultaneously nowhere.

“To be trustworthy, global crypto firms need a lead regulator who has authority and responsibility over the enterprise as a whole,” Hsu said. “Until that is done, crypto firms with subsidiaries and operations in multiple jurisdictions will be able to arbitrage local regulations and potentially play shell games using inter-affiliate transactions to obfuscate and mask their true risk profile.”

Considering some of these concerns, Hsu also took aim at the concept that cryptocurrency and its underlying distributed ledger technology can serve as a replacement for traditional global banking. “Satoshi Nakamoto’s bitcoin white paper is elegant in its arguments. Crypto in practice, however, has proven to be extraordinarily messy and complex,” he said. “Nakamoto’s vision of peer-to-peer payments never took hold and has been virtually nonexistent. Rather, crypto has served primarily as an alternative asset class and the dominant activity has been trading.”

All told, these systemic issues highlight the value and importance of trust in the global banking community, and Hsu called upon lawmakers, regulators and bankers to cooperate to build that trust for consumers. “Trust is a fragile thing. It is hard to earn, and easy to lose. Building trust and maintaining it take time and effort. As international bankers, you know that this time and effort are worth it,” he added. 

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