Acting Comptroller Hsu Seeks Global Supervisory Framework to Address Crypto Risk

In an address to the 2023 Institute of International Bankers Annual Washington Conference, Acting Comptroller of the Currency Michael J. Hsu highlighted parallels between jurisdictional and "supervisability" risk in global banking and in crypto.

Mr. Hsu focused on (i) risks due to jurisdictional differences in banking regulation "which can enable regulatory arbitrage by banks and drive races to the bottom by local authorities" and (ii) risks of limited regulatory visibility into and regulatory influence over global banks - i.e., "supervisability" risk. In combatting these key risks, Mr. Hsu emphasized the importance of (i) coordination to mitigate the risk of jurisdictional differences in regulation and (ii) collaboration to address supervisability risk.

Mr. Hsu raised parallels between the failure of the Bank of Credit and Commerce International ("BCCI") in 1991 and the fall of the cryptocurrency exchange and crypto hedge fund FTX. He said that both matters demonstrated regulatory shortcomings including (i) fragmented supervision by state, federal and foreign regulators, and lack of a lead or "home" regulator to holistically supervise the firms; (ii) operation across jurisdictions that lacked an established framework for regulators to share information on the firms; and (iii) use of multiple auditors to evade holistic supervision of the firms. Mr. Hsu argued that because of these failings, the firms were able to "evade meaningful regulation" and carry out fraudulent activity.

Mr. Hsu warned that without a comprehensive global supervisory and regulatory framework, crypto firms will be able to engage in regulatory arbitrage and avoid meaningful regulation. He stated that while the "actions needed to fix the problem in the crypto arena will have to take place outside of bank regulatory channels," international bodies like the Financial Stability Board should "look to the BCCI experience as a model" and address the fact that there are currently no crypto platforms subject to consolidated supervision.