The foremost U.S. federal banking regulator put the digital-asset industry on notice Tuesday, warning in a speech that he plans a skeptical stance toward attempts to integrate crypto and the traditional financial system.
“Until crypto matures, we need to be careful and cautious in how we allow crypto and [traditional finance] to interact,” Michael Hsu, Acting Comptroller of the Currency,” told an audience at the DC Fintech Week conference.
As head of the Office of the Comptroller of the Currency, Hsu oversees the nation’s largest federally chartered banks, including including Goldman Sachs Group Inc.
GS,
Wells Fargo & Co.
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and Bank of America Corp.
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Hsu argued that cryptocurrency companies often pose risks to the public because they “disguise” their products as akin to traditional banking offerings, even though the underlying technology and regulatory obligations faced by those companies can be very different.
“Until recently companies like Celsius and Voyager Digital encouraged customers to unbank themselves, promised returns referred to as yield, quoted in terms like APY, borrowing a banking term,” Hsu said, referring to the recently bankrupt firms whose users racked up major losses in the wake of their failures.
“In some cases, users were assured that they can reclaim their assets anytime, even if the crypto firms fail,” Hsu added. “I encourage everyone to read the letters that Celsius clients send to the bankruptcy judge in this ongoing case to get a sense of the real-world impacts.”
Hsu described a July meeting between the Financial Stability Oversight Council and representatives of the crypto exchange FTX, where he said the company’s presentation presumed that financial stability would be enhanced through the integration of the crypto economy and the traditional financial system.
“I could not disagree more,” Hsu said. “Integrating an immature crypto industry and a mature traditional financial system without guardrails and gates would be imprudent. Any incremental gains in efficiency and convenience would be heavily outweighed by the increase in cross-contagion and systemic risk.”
Hsu also warned against concentration in the digital asset industry, separate from its integration with existing financial firms. He pointed to the recent failures of Celsius and crypto firm Three Arrows Capital as an example.
Each company “engaged in a range of crypto activities from custody to borrowing and lending to prop trading, which only became fully evident after bankruptcy filings began,” he said.
“They were only as strong as their weakest link,” Hsu said. “The more links there are under a single platform, the higher the risk of contagion across them.”
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