michael hsu

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‘Home’ regulator could solve crypto’s ‘fragmented supervision’ issue: Comptroller

March 7, 2023 Coin Telegraph

banking regulations

During a speech at a banking conference in DC, acting comptroller Michael Hsu said FTX was an example of why a "consolidated home country supervisor" is needed.

Cryptocurrency firms operating multiple entities in different countries should be overseen by one consolidated “home” regulator to stop them from playing "games" aimed at skirting regulators, the acting head of the United States banking regulator has opined.

Michael Hsu, the Acting Head of the Comptroller of the Currency (OCC) made the comments in prepared remarks for the Mar. 6 Institute of International Bankers conference in Washington, D.C.

The OCC is a bureau within the Treasury Department that regulates U.S. banks and aims to ensure the safety of the country's banking system. It has the power to permit or deny banks from engaging in crypto-related activities.

In his speech, Hsu provided “useful lessons for crypto” from traditional banking on how to maintain trust globally.

Good to hear from Acting Comptroller @USOCC Michael Hsu. #IIBAWC2023 pic.twitter.com/SWFGaUC0yv
— IIB (@IIBnews) March 6, 2023

He claimed unless a crypto firm is regulated by one entity, those operating with businesses in multiple jurisdictions will “potentially play shell games” by arbitraging regulations and would subsequently be able to “mask their true risk profiles.”

“To be clear, not all global crypto players will do this. But we won’t be able to know which players are trustworthy and which aren’t until a credible third party, like a consolidated home country supervisor, can meaningfully oversee them.”

“Currently, no crypto platforms are subject to consolidated supervision. Not one,” he added.

The bankruptcy of crypto exchange FTX was used as an example of why the space needed a “home” regulator. Hsu compared the exchange to the equally-defunct Bank of Credit and Commerce International (BCCI) — a global bank that was found to be involved in a litany of financial crimes.

Acting Comptroller of the Currency Michael J. Hsu discusses the failure of the Bank of Credit & Commerce International in 1991 that led to significant changes in how global banks are supervised & its similarities to the crypto exchange FTX. Learn more at https://t.co/HD1T3KHcss pic.twitter.com/7e45zgMbE6
— OCC (@USOCC) March 6, 2023

Hsu said the “fragmented supervision” of both firms meant no one authority or auditor could develop a “consolidated and holistic view” of them as they operated across countries with no framework for information sharing between authorities.

“By seemingly being everywhere and structuring entities in multiple jurisdictions, they were effectively nowhere and were able to evade meaningful regulation.”

In his reasoning for advocating such oversight, Hsu expressed that arguments in the Bitcoin (BTC) whitepaper were “elegant” but crypto “has proven to be extraordinarily messy and complex.”

He added peer-to-peer payments are “virtually nonexistent” and crypto has primarily become an alternative asset class dominated by trading activity that relies on intermediates for it to “operate at any scale.”

“The events of the past year have shown that trust in those intermediaries can be quickly lost, large numbers of individuals can be hurt, and knock-on effects to the traditional financial system can result.”

Hsu said the international bodies that identified the necessity for a “comprehensive global supervisory and regulatory framework for crypto participants” might look to the lessons learned from the BCCI case.

The Financial Stability Board (FSB), the International Monetary Fund (IMF), the International Organization of Securities Commissions (IOSCO) and the Bank for International Settlements (BIS) were the bodies Hsu named in particular.

The FSB, IMF and BIS are currently working on papers and recommendations to establish standards for a global crypto regulatory framework

“Trust is a fragile thing. It is hard to earn, and easy to lose,” Hsu stated.

“Regulatory coordination and supervisory collaboration can help mitigate the risks of losing that trust. We have learned this the hard way in banking. I believe it contains useful lessons for crypto.”

Regulators are ‘spending too much time’ on crypto: Comptroller

October 14, 2022 Coin Telegraph

Coin Telegraph

Michael Hsu stated that it is starting to worry him that “we’re not spending that time and attention on some other things," like fintech, which he described as the “future.”

United States Acting Comptroller of the Currency (OCC) Michael Hsu has expressed concerns that regulators are spending “too much time on crypto," rather than more pressing issues, such as technology and banking.

The crypto skeptic OCC head made the comments during an interview with Reuters on Oct. 13, as he outlined a worry that crypto is “occupying a lot of brain space for an awful lot of people” in the regulatory community.

Hsu has been at the helm of the OCC since May 2021 and serves as the administrator for the federal banking system and chief economic officer of the OCC.

During his tenure, has called for greater supervision of crypto firms and standards around stablecoins, while also stressing the need for a cautious approach to crypto regulation due to “red flags” with the sector’s rapid growth.

"We're spending too much time on crypto," he told Reuters, adding that "it's interesting, it has thorny issues... but relative to other technology and banking issues, I think we're now kind of overweight crypto."

Hsu went on to explain that there are other areas that need to be focused on at present, specifically relating to fintech, something which he emphasized last month required immediate oversight to avoid a “severe problem or crisis” due to the sector’s rampant expansion, adding:

"The persistence of the occupation of brain space, it’s starting to worry me now that we’re not spending that time and attention on some other things."

The OCC head said he thinks fintech is the future, and therefore it needs proper time and considerations to help the sector thrive sustainably.

"This is the future, so let's do the future right," he said.

These sentiments are in stark contrast to Hsu’s views on crypto, given that he described the sector as “an immature industry based on an immature technology,” during a lecture at a Harvard Law School roundtable on Oct. 11.

Hsu also outlined concerns with the crypto sector's apparent fear of missing out (FOMO) syndrome which he argued fosters wild speculation as opposed to innovation.

“Promises of innovation and inclusion often mask crypto’s promotion of a gold rush vibe that exploits people’s fear of missing out on the next Google or Amazon.”

“My skepticism of crypto stems from a frustration that the most promising innovations have been crowded out by hype and a fixation on trading,” Hsu added.

Acting OCC comptroller calls for standards on stablecoins

April 27, 2022 Coin Telegraph

Coin Telegraph

According to Michael Hsu, representatives from the crypto industry as well as within the U.S. government could work toward setting standards on stablecoins.

Michael Hsu, the acting head at the United States Office of the Comptroller of the Currency, said stablecoins need standards comparable to the early internet.

In a written statement following his appearance at the Artificial Intelligence and the Economy event in Washington D.C. on Wednesday, Hsu said stablecoins lacked “shared standards,” were “interoperable,” and needed standards similar to those set by the Internet Engineering Task Force and World Wide Web Consortium. According to the OCC head, representatives from the crypto industry as well as within the U.S. government — including the OCC and National Institute of Standards and Technology — could work toward such goals.

Acting Comptroller Issues Statement on Standards for Stablecoins https://t.co/QthxNECOo9
— OCC (@USOCC) April 27, 2022

As the U.S. government bureau tasked with supervising federally licensed banks, the OCC is one of the regulators in the country whose purview crosses into the digital asset space, in addition to the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Last Friday, the OCC issued a consent order against Anchorage Digital due to its “failure to adopt and implement a compliance program” in accordance with the Anti-Money Laundering requirements agreed upon by the bureau in January 2021.

In the United States, both lawmakers and government agencies have been grappling with how to handle stablecoins on a regulatory level in a type of legislative tug-of-war. In November 2021, the President’s Working Group on Financial Markets released a report suggesting that legislation on stablecoins was “urgently needed” and issuers should be subject to “appropriate federal oversight” akin to that of banks. House of Representatives member Patrick McHenry has proposed a state-centered regulatory approach for stablecoins, while Senator Pat Toomey drafted a bill in April suggesting “payment stablecoins” be exempt from many U.S. securities regulations.

OCC Chief Says Government and Academics Need To Help Set Standards for Stablecoin Regulation

April 27, 2022 The Daily Hodl

Acting OCC head warns that ‘fools gold’ in DeFi reminds him of lead-up to GFC

September 24, 2021 Coin Telegraph

Coin Telegraph

While crypto has been mostly weathered past hacks, scams, and crashes, acting OCC head Michael Hsu warns the risks may be multiplying as the technology goes mainstream.

Acting head of the U.S. Office of the Comptroller of the Currency (OCC) Michael Hsu has warned that the exotic financial products developed in some quarters of crypto and DeFi were reminiscent of those that precipitated the 2008 Global Financial Crisis (GFC).

Speaking before the Blockchain Association on Sept. 21, Hsu warned that “innovation for innovation’s sake [...] risks creating a mountain of fool’s good,” drawing analogies between the rapid proliferation of digital asset derivatives and the explosion in mortgage and debt derivatives such a Credit Default Swaps (CDS) that preceded the 2008 global financial crisis:

“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 (crypto) and decentralized finance (DeFi) [...] Crypto/DeFi today is on a path that looks similar to CDS in the early 2000s.”

Hsu notes that “it was nearly impossible to hedge the risk of a borrower defaulting” prior to the creation of CDS in the mid-1990s. However by the time he joined the SEC in 2004 the acting OCC head recounted that credit derivatives promised investors higher risk-adjusted returns using innovative products that “relied heavily on math and financial engineering."

“They believed they were leading a financial revolution, creating an entirely different asset class, using an entirely different set of models. Sound familiar? Today, programmers and coders, instead of quants and financial engineers, are the core innovators.”

Hsu asserts that by the time the crisis unfolded, the original mission of CDS “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.”

Drawing parallels between exotic DeFi derivatives and the systemic risk that underpinned the collapse of the U.S. housing market in 2008, Hsu noted that “most innovation seems focused on enhancing trading” in crypto today rather than realizing the vision for greater financial autonomy articulated by Satoshi Nakamoto in the Bitcoin Whitepaper

Hsu cites several risks that could destabilize the crypto sector including “a run on a large stablecoin [...] forks, hacks, rug pulls, vampire attacks, and flash loans.” While acknowledging that crypto so far withstood all of the aforementioned incidents thus far, Hsu warns that such threats could loom larger as the cryptocurrency user base grows:

“My hypothesis is that until recently, most users have been hardcore believers in the technology and thus are both understanding of the risks and willing to forgive them. As the scope and reach of crypto/DeFi expands, though, more mainstream users, with regular expectations of safe and sound money, will dominate and drive reactions.”

Ultimately, Hsu’s outlook for crypto isn’t entirely bleak, with the official concluding that if the industry “applies the lessons from the 2008 crisis — anchor innovation in clear purpose, foster an environment for skeptics to speak up, and follow the money — the risks of fool’s gold can be mitigated and the real promise of blockchain innovation can be achieved.”

However, the days Hsu’s tenure heading the OCC appear numbered, with the Biden administration reportedly moving to nominate law professor Saule Omarova to lead the institution.

If nominated, analysts believe Omarova will oversee a tightening of regulations overseeing both the crypto and mainstream financial industries. Omarova previously described digital assets as a tool for private interests to abuse that are outside of regulatory purview.

US regulators must collaborate on ‘regulatory perimeter’ for crypto: OCC head

May 31, 2021 Coin Telegraph

Coin Telegraph

Acting OCC head, Michael Hsu, wants greater inter-agency cooperation in establishing regulatory guidelines for the crypto sector.

The Acting Comptroller of the Currency, Michael Hsu, has expressed that regulatory agencies in the United States should establish a “regulatory perimeter” for digital assets and cryptocurrencies.

In an interview with Financial Times, Hsu indicated U.S. regulators will look to take a more active role in policing the crypto asset sector with an emphasis on minimizing the associated risks faced by investors and consumers.

"It really comes down to coordinating across the agencies,” Hsu said, adding: “Just in talking to some of my peers, there is interest in coordinating a lot more of these things.”

Hsu noted that the first meeting of the inter-agency, crypto-focused “sprint” team took place earlier this month. The team comprises representatives from the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.

Hsu described the group as “small” but “senior,” adding it is tasked with presenting “ideas in front of the agencies to consider” rather than formulating policy. Hsu emphasized the speed of growth and innovation in the crypto sector, asserting that a failure to begin acting now will only make policing the sector harder in future:

“The idea is that time is of the essence and if it’s too big that gets harder.”

Hsu is not alone in thinking the United States lacks robust regulatory guidelines for crypto assets, with SEC chairman, Gary Gensler, highlighting “gaps” in the “current system” regarding crypto while speaking to a House committee last month.

Gensler noted the U.S. Treasury Department has recently focused on “anti-money laundering and guarding against illicit activity” in the digital asset industry.

Top US Banking Regulator to Review Cryptocurrency Standards Under New Leadership

May 20, 2021 Bitcoin.com

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