November 18, 2022

Acting Comptroller Warns Retail Investors of Crypto Risks

Steven Lofchie Commentary by Steven Lofchie

Acting Comptroller Michael J. Hsu encouraged investors to learn about responsible money management given the recent volatility in crypto markets.

In remarks at the Financial Literacy and Education Commission's Public Meeting, Mr. Hsu warned investors that pressure from the online community to make irrational investment decisions have contributed to the losses incurred by crypto investors. Mr. Hsu urged investors to take a step back from social media to evaluate whether to continue investing in crypto assets.

Mr. Hsu also said that despite high levels of volatility in digital asset markets, banks have remained relatively stable, and he urged banks to continue to exercise caution.


One would think investors' alternative to crypto is not putting their money in banks; it is investing in securities. Unfortunately, the SEC's posture on crypto ensured that crypto purchases had to be made outside of the regulated securities brokerage system, and thus without advice from a regulated financial intermediary. As a result, it is not surprising that small investors end up taking their advice from social media because they can't get it from brokerage firms.

Excessive regulation has a negative effect on small investors. When costs and litigation risks are too high, (e.g. Regulation Best Interest,) broker-dealers will be reluctant to provide them with investment advice. Between the explosion of the meme stocks and the implosion of the digital asset markets, we may be seeing some evidence that imposing reasonable "suitability" but not "fiduciary" obligations on broker-dealers in their dealings with retail investors is actually a better course than leaving retail investors to the wisdom of social media, which is where Reg BI and other excessive regulations are driving the market.

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