Acting OCC Comptroller Cautions against "Hype-Driven" Cryptocurrencies
Commentary by Steven Lofchie
Acting OCC Comptroller Michael J. Hsu warned that the cryptocurrency market is becoming too heavily reliant on "hype" to generate interest in crypto investments and cautioned that hype-driven growth causes bubbles that can harm consumers and crowd out productive innovation.
In remarks at the DC Blockchain Summit 2022, Mr. Hsu said that recent events such as the collapse of TerraUSD stablecoin and the ensuing sell-off revealed the deep vulnerabilities investors face in the crypto system. He stated that cryptocurrencies are highly fragmented, leaving them prone to hacking. He highlighted that the collapse of TerraUSD "sparked contagion to the largest stablecoin, Tether, and to the broader crypto ecosystem." He warned that the crypto industry is growing too fast, saying that TerraUSD had tripled its market cap in six months by offering high yields to attract investors (i.e., a "come-for-the-yield" approach) and that yield farming may have more in common with Ponzi schemes than productive innovation.
Mr. Hsu noted that traditional banking and financial markets have not been subject to any contagion in relation to the collapse of TerraUSD. Mr. Hsu attributed that to the OCC's "careful and cautious" approach to regulating banks engaging in crypto activities. Mr. Hsu stated that events like the collapse of TerraUSD should "serve as a wake-up call and an opportunity to reset and to recalibrate the problems the industry is trying to solve[,]" but "[u]ntil then, the OCC will continue to take a careful and cautious approach to crypto in order to ensure that the national banking system is safe, sound and fair."
Mr. Hsu also warned that a lack of clear information on custodial rights of cryptocurrencies could expose investors to disproportionate levels of risk should cryptocurrencies and other digital assets lose value. He emphasized that establishing "clear standards for the ownership and custody of digital assets would protect consumers while enabling sustainable, long-term growth."
Commentary
It is possible that part of the reason that cryptocurrencies are prone to hype is that the SEC and other financial regulators have chosen not to provide a modified regulatory scheme, such as that proposed by SEC Commissioner Hester M. Peirce, for digital assets. (See also The Securities Law Treatment of Utility Tokens.) In the absence of a modified workable regulatory scheme, the creators of both viable and fraudulent projects take their chances going unregulated. If the SEC were willing to propose a disclosure scheme that allowed cryptocurrencies to go to market under a lightened regulatory touch, the real products would have a greater advantage over the fraudulent ones.
Of course, it may be the case that the financial regulators are waiting to move on private cryptocurrencies, given that such currencies may compete with a potential U.S. Central Bank Digital Currency.
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