In remarks at DC Fintech Week 2022 on October 11, Acting Comptroller of the Currency Michael J. Hsu said that recent developments had exposed severe weaknesses in the risk management practices of some crypto firms, putting consumers and the industry at risk. Hsu offered three approaches or “lenses,” as he termed them, to help regulators identify and monitor crypto risks effectively in order to shield the public and the financial industry from these risks.
Firstly, Hsu described skeuomorphism, a design concept that applies features from an existing industry or technology to new and emerging industries. Hsu noted that in crypto, skeuomorphic representations may be no more than facades that mask unanswered questions about possession, custody, and control. Custody, for example, is well-defined in traditional financial dealings, where a brokerage firm or bank acts as the responsible, legal custodian of its customers’ assets; but in crypto, where user assets are generally commingled directly with platform assets, custody sounds familiar but does not, in reality, fall within the legal bounds and protections of traditional custody. In this case, and in the case of other concepts like “crypto savings accounts,” ownership, and control, skeuomorphism lulls consumers into a false and misleading sense of comfort and security.
The second item introduced by Hsu was integration of crypto with traditional finance, which the acting commissioner views as misguided and imprudent. Hsu said that the risk of cross-contagion is too great to justify the integration of immature technology with the mature and well-regulated traditional financial industry. Until crypto matures, and safeguards are established, it would be wise to limit to the scope of commingled activities within individual crypto firms, as well as integration of the industry as a whole with traditional finance.
Thirdly, Hsu pointed to gaps in data about crypto and its relationship to traditional finance. He outlined the current system whereby firms seeking to engage in permissible crypto asset activities must obtain a non-objection from the Office of the Comptroller of the Currency (or follow a similar process to obtain permission from the Federal Deposit Insurance Corporation or the Federal Reserve). In order to ensure the safety and efficacy of this approach, Hsu suggested that a structured and recurring gathering of quantitative data should be undertaken. This would promote understanding among regulators, and enable better surveillance of financial stability risks. While the Office of Financial Research of the US Department of the Treasury could perform this monitoring task domestically, Hsu noted that international cooperation is needed because of the borderless nature of crypto.
In conclusion, Hsu favors a measured, cautious approach to crypto, and advocates the institution of “guardrails and gates” to protect consumers and the financial sector, before crypto can be brought safely and properly within the regulatory perimeter.