OCC’s Hsu Suggests Crypto Needs a ‘Consolidated Home Country Supervisor’

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Acting WASHINGTON Currency Comptroller Michael Hsu says crypto companies need a single, consolidated supervisor, domestically or internationally, saying regulatory loopholes create conditions for excessive risk .

Banking regulators like Hsu have consistently pointed out their own limitations in regulating the crypto market, especially after the collapse of crypto exchange FTX and the ensuing turmoil in the industry. The Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp. can take some steps to insulate the banking sector from crypto, but cannot oversee the greater risks that they believe the sector poses to the financial system.

In a speech at the Institute of International Bankers conference in Washington DC, Hsu reiterated the need for a global oversight framework for crypto and warned of the dangers that could arise in its absence.

“Until this is done, crypto companies with subsidiaries and operations in multiple jurisdictions will be able to arbitrate local regulations and potentially play fictitious games using cross-affiliate transactions to obscure and mask their true profiles. risk,” he said. “To be clear, not all global crypto players will do this. But we won’t be able to know which players are trustworthy and which are not until a credible third party, such as a consolidated in-country supervisor origin, will not be able to meaningfully oversee them.”

“Currently, no crypto platform is subject to consolidated supervision,” he added. “Not one.”

To make the point, Hsu compared the collapse of FTX to the failure of Bank of Credit and Commerce International, or BCCI, in the 1990s, a shadow bank that was once called the “Bank of Crooks and criminals” that hid his wrongdoing. , in part, by operating multiple affiliates in different jurisdictions, avoiding giving a single regulator a holistic view of society. The comparison of BCCI and FTX, and the response from Congress and regulators around the world, could be a model for how to treat crypto exchanges that may operate similarly with disparate regulatory scrutiny, Hsu said.

“Both faced fragmented oversight by a combination of state, federal and foreign authorities,” Hsu said. “Both did not have a primary or ‘home’ regulator with the authority and responsibility to develop a consolidated and holistic view of business. Both operated in jurisdictions where there was no Established framework for regulators to share information about business operations and risk controls. Employed multiple auditors to ensure that no one could take a holistic view of their business.”

And similarly, BCCI and FTX could conceal their fraudulent activity using these strategies, Hsu said.

“By being seemingly everywhere and structuring entities in multiple jurisdictions, they were effectively nowhere and were able to escape meaningful regulation.” Hsu said.

Notably, any changes to address similar concerns in the crypto industry will have to happen outside of the banking system, Hsu said. He suggested that international bodies such as the Financial Stability Board, International Monetary Fund, and CPMI/IOSCO use the BCCI situation as a model to identify problematic crypto players.

Congressional action may be needed, Hsu suggested. He noted that after the failure of BCCI, Congress passed the Foreign Bank Supervision Enhancement Act, prohibiting any foreign bank from entering the United States unless it was subject to comprehensive and consolidated supervision. by an agency in the country of origin.

Hsu also pushed back against some arguments made by crypto advocates and said that crypto is being heavily used as an asset class rather than what some early proponents hoped would replace traditional banking. And crypto, like most asset classes or any attempt to participate in financial markets, requires intermediaries, which often end up being banks.

“Intermediaries are necessary for crypto to work at any scale,” Hsu said. “Events of the past year have shown that trust in these intermediaries can be quickly lost, large numbers of people can be harmed, and ripple effects on the traditional financial system can result.”

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