This week, Acting Comptroller of the Currency Michael Hsu spoke to the Digital Chamber of Commerce to discuss the recent crypto market crash, warning that the crypto space can be dangerous for investors of modest means. He also liked certain crypto transactions to Ponzi schemes, outlining his warning.
“The recent collapse of the TerraUSD stablecoin and associated sell-off in crypto markets has shown that hype-driven growth can lead to bubbles, harm consumers, and crowd out productive innovation,” said the acting comptroller. “What has become clearer to me is that these developments are indicative of the crypto economy’s dependence on hype. The recent events in crypto should serve as a wake-up call and an opportunity to reset and to recalibrate the problems the industry is trying to solve.”
Hsu also outlined how real the contagion risks are within crypto, pointing out how the collapse of Terra spread to Tether and the broader crypto ecosystem.
Still, the acting comptroller was relieved that traditional banks weren’t affected by the cryptocurrency rout. He said the OCC’s work to require a bank’s permission to engage in crypto activities was instrumental in limiting its exposure. “No banks are under stress or even rumored to be under stress due to crypto pressure,” Hsu revealed.
In the past, Michael Hsu shared how he was a skeptic of crypto, and he warned that it was highly fragmented. Hsu noted that the daily addition of new blockchains only led to a need for systems that enabled the transfer of cryptocurrencies between blockchains or cross-chain bridges. The bridges would then expose the system to hacks.
“It is as if instead of converging on a single standard railway gauge to connect the country, innovators are incentivized to build customized railcar systems from scratch,” Hsu described. He also said there wasn’t enough clarity about who custody works and who owns crypto assets bought from an exchange.
Michael Hsu also expressed his concern for products that offered “unsustainably high” yields, which is an effective way to attract investors to the decentralized finance space. He compared yield farming (lending out one’s crypto using smart contracts in return for yield) with a Ponzi scheme.
Cowen analyst Jaret Seiberg believes Hsu’s comments infer banks will have a challenging time participating in crypto. He also says it’s hard to see the OCC issuing limited-purpose charters for financial entities to participate in crypto because Hsu wants to protect the banking system from crypto risks.