Comptroller of the Currency Hsu: 'Growth in crypto is driven by hype'

·Senior Reporter
·4 min read

Acting Comptroller of the Currency Michael Hsu has a warning about crypto and stablecoins.

"Stablecoins are not stable...The growth in crypto is driven by hype," Hsu told Yahoo Finance Live. “Part of the reason that Terra was able to grow so quickly, it was hyped and there were some attractive yields that were not sustainable put onto it."

Hsu cautioned that there are risks of contagion within crypto and that the run on Terra and sister token Luna that rippled through crypto markets starting May 9 proves that the pain from one token can spread to other areas of the crypto market, causing losses across the market.

“Risk is real,” Hsu said. “You saw the selloff lead to both a broader selloff in the cryptocurrency market generally… and you saw some pressure on another stablecoin, Tether, which is not algorithmic. I think it reveals fragilities in the space that everyone needs to be careful about.”

While losses cascaded through the crypto space, the traditional financial system remained largely unscathed by the spread of losses in the crypto space — something Hsu chalks up to properly safeguarding the banking system from crypto’s risks.

WASHINGTON, DC - AUGUST 03:  Acting Comptroller of the Currency Michael Hsu testifies during a hearing before Senate Banking, Housing and Urban Affairs Committee at Dirksen Senate Office Building August 3, 2021 on Capitol Hill in Washington, DC. The committee held a hearing on “Oversight of Regulators: Does our Financial System Work for Everyone?” (Photo by Alex Wong/Getty Images)
Acting Comptroller of the Currency Michael Hsu testifies during a hearing before Senate Banking, Housing and Urban Affairs Committee at Dirksen Senate Office Building August 3, 2021 on Capitol Hill in Washington, DC. The committee held a hearing on “Oversight of Regulators: Does our Financial System Work for Everyone?” (Photo by Alex Wong/Getty Images)

Hsu’s comments come as federal regulators write reports on how to regulate stablecoins and the cryptocurrency market overall in response to President Biden’s executive order to study the space and come up with recommendations for how to regulate it. Last fall, the President’s Working Group on Financial Markets recommended that stablecoins be regulated as banks to prevent runs akin to what happened with Terra. At the same time, lawmakers in Congress are coming up with different proposals on how to regulate stablecoins and crypto.

When asked why regulators aren’t using current authorities to write their own rules now to protect investors, rather than wait on Congress, Hsu said: “There are a lot of discussions taking place right now amongst the regulatory community, me and my peers. As you know, the [Financial Stability Oversight Council] has identified … the crypto world as something that the council, of which I'm a member, and others are paying attention to.”

The Financial Stability Oversight Council is watching cryptocurrency markets closely, but has yet to deem stablecoins or other crypto activities as systemic.

“It's very important to protect investors, to understand these things, and that's very important to me and to us in the regulatory community, is protecting people,” Hsu added. “This is big enough now where this is an important thing we have to pay attention to.”

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Hsu believes crypto can be done in a safe and fair way within the banking system, but banks will have to prove it to the Comptroller of the Currency.

“We've taken the approach where if a bank is going to do this, anything in the crypto space, they have to demonstrate to us that it's going to be safe, sound, and fair,” he said. “I think the standard we've applied has really helped to keep these issues contained within the crypto universe and not affect the traditional banking system.”

Hsu said the OCC is still open to dishing out special purpose charters to banks who want to engage in crypto.

“We're open minded about who wants to get a charter and what they want to do with it. We're going to kick the tires on it to make sure it's safe, sound, and fair,” he said. “I want to make sure that the way we exercise our authorities and decisions around charters don't lead to regulatory arbitrage or races to the bottom, and that's another important set of priorities for me.”

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Jennifer Schonberger covers cryptocurrencies and policy for Yahoo Finance. Follow her at @Jenniferisms.

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