Crypto ‘needs adults in the room’, expected to pass regulations before crisis hits

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As regulators encircle the cryptocurrency, Acting Currency Controller Michael Hsu has warned that the United States could be heading into another financial crisis if industry oversight is not stepped up.

If the crypto industry does not evolve or is more responsible, we will be heading for a potential 2008 recovery, Hsu told Yahoo Finance in an exclusive interview. The official is one of many crypto skeptics within the Biden administration who have taken a harder line to regulate the burgeoning movement of digital coins.

Hsu sounded the alarm, but noted that there was still time to guard against a seizure. He doesn’t expect the industry to explode in the short term. But we’re at a point where there must be adults in the room guiding this industry to a more responsible place, he added.

Hsu said the encouragement about crypto and how it will change the world overshadows a more responsible conversation about how the product works and how it should be developed more responsibly to meet consumer needs.

One of those cheerleaders, Elon Musk, CEO of Tesla (TSLA), said this week that when it comes to crypto regulation, the US government should do nothing, believing that official intervention could put the brakes on the growth.

“It’s not possible, I think, to destroy crypto, but it’s possible for governments to slow its progress,” Musk told the Code Conference in LA.

Hsu seemed to send a warning to the industry on your own before the government over-regulates you.

I’m telling the industry today, you know what the best practices are. You should force this on yourself now before there is a crisis and people lose money, Hsu said. There are real people now investing their money in this industry and if they are not responsible these people will lose money.

Hsu applauded the original bitcoin premise that creator Satoshi Nakotomta was trying to solve: a system where there can be valuable peer-to-peer electronic exchanges to meet these needs at low cost without resorting to middlemen.

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I totally agree, Hsu said, but argued that this is not what is being developed at the moment.

Its all business assets. And business assets are not a medium of exchange, he added. You can’t really pay anything in bitcoin, but you can invest in it, you can lend it, and you can borrow it, but it falls away from its original purpose.

Drawing a parallel with the 2008 financial crisis, Hsu said that Wall Street had all of these products that started in one place and that innovation added to innovation and created a whole mountain full of things that leads to crisis. We know it happened and it didn’t happen so long ago. So why do we repeat it? Let’s avoid these mistakes.

Hsu pointed out a few different areas that could collapse, including the high interest rates consumers can earn on crypto savings accounts. He suggested that many people don’t read or understand the fine print.

It looks very appealing compared to putting your money in a regular bank account or even a stock exchange, he said. But peel the onion and it’s hard to figure out where the high return on a crypto savings account comes from.

Hsu is concerned that those who might get hurt in the crypto space may not fully understand the risks they are taking and may be the least able to bear them.

He fears that underbanked people with bank accounts who also depend on alternative financial services to meet their needs, like payday lenders, own crypto in significantly higher percentages than fully banked people. According to a recent Morning Consult poll, 10% of crypto owned entirely in banking, while 37% of crypto owned underbanked.

Regarding regulation, Hsu also said it was important for the crypto industry to play a role, specifically citing the Blockchain Association.

The official pointed to the development of derivatives in the late 1990s, saying the industry knew about best practices for hedging against counterparty credit risk losses with hedge funds.

However, this industry did not implement these standards as it would have harmed its activities. Hsu drew a parallel with the circumstances that led to the collapse of the Long-term Capital Management hedge fund in the late 1990s, which nearly sank the financial system.

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Another area that concerns Hsu and many other regulators is the potential for races on stablecoins, cryptocurrencies whose values ​​are tied to fiat units like the US dollar, precious metals or short-term securities in order to ” mitigate the inherent volatility of cryptocurrencies.

Once a race starts, you can’t stop it, Hsu explained. You want your money back and that’s why it’s so important to have rules, a regulatory structure around it because you want people to trust it.

Stablecoin issuers hold massive amounts of commercial paper or other short-term securities such as treasury bills or certificates of deposit. According to Hsu, investors could choose to withdraw their money suddenly if cryptocurrencies plunge, causing losses for investors or worse, potential rushes on the financial system.

There have been stablecoin races in the past, although they have been relatively small. Hsu warms up every week. Stablecoin races are becoming larger and more integrated into the world of decentralized crypto finance (DeFi), which is increasingly merged with the traditional banking universe.

There are more and more connection points and that’s what worries me, he says. If these were totally separate universes, I’m not sure I care that much. But the fact that these are mingling and increasing amounts of links of increasing complexity is starting to worry me.

Meanwhile, the growth of the crypto space has been extraordinary: the total market cap exceeds $ 2 trillion, with stablecoins well above $ 100 billion and growing.

And according to Hsu, what differentiates crypto from the credit default swaps (CDS) that brought the global financial system to its knees in 2008 is that crypto has become widespread. CDS were instruments used on Wall Street, but only between banks and institutional investors.

The big question facing the crypto industry now is what would regulations look like in the crypto space?

Hsu told Yahoo Finance that regulators can take some principles from the existing regulatory manual. But given the uniqueness of these digital assets, new rules need to be crafted and tailored specifically to the space, and more authority will be required from Congress, he said.

The OCC is working closely with the Presidents’ Task Force on Financial Markets, a group of financial regulators comprising the Treasury, the SEC and the Federal Reserve, on a proposed new regulation for crypto, particularly stablecoins. , imminent.

Hsu says that this time around, it’s important that regulators tackle the problem together so that each agency knows what another agency’s role is. Before the financial crisis, a key criticism was that each regulator did not know what the other was doing.

This was part of the problem because industry players could arbitrate between different agencies, Hsu explained.

They could and did, and it led to gaps and a build-up of vulnerabilities, which in part amplified the crisis. There is a strong recognition this time around that we need to lock our arms and attack this together, he added.

The OCC is also currently considering issuing national banking charters for crypto players like Circle, but Hsu said these are still under review and no final decisions have yet been made on this. topic.

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