OCC’s Hsu says banks’ interest in crypto has ‘decline’ since FTX

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As the hype around crypto seems to be fading, Hsu said he thinks some of the underlying technology of cryptocurrencies, namely private blockchains, could hold promise for banks. .

Bloomberg News

WASHINGTON In remarks at a press briefing Wednesday at the Office of the Comptroller of the Currency, Acting Comptroller Michael J. Hsu said he believed the banking system was well insulated from recent volatility in the crypto industry, and declared banks’ interest in the service. crypto clients have retreated since the failure of FTX last November.

Hsu said an inter-agency crypto guideline issued in January has proven to be a sound policy position for bank safety and soundness.

“I think [the guidance has] has stood the test of time pretty well,” he said. “You’ve had quite a stir in the crypto space. Aside from Silvergate and some of the contagion flowing from it, cross-contagion to the banking system has been relatively contained.”

While he says regulators continue to expect banks to responsibly approach digital asset management, he said he’s less concerned about banking forays into digital assets today than he was. wasn’t a year ago.

“THE [fear of missing out] on crypto has gone down this year, and I think a lot of that is due to the events of the last year,” Hsu said. “The crypto winter has been quite difficult for the crypto industry. Those I put in the “crypto curious” bucket on the banking side lost some of that curiosity given some of these events. The issue of scams, fraud [and] hacks have not improved over time. So this issue kind of receded in terms of materiality. It is something that is close to our hearts. This is something we always expect banks to approach cautiously, but I just don’t hear as much noise or demand for banks to get into crypto.”

As the hype around crypto seems to be fading, Hsu said he thinks some of the underlying technology of cryptocurrencies, namely private blockchains, could hold promise for banks. . Asked about potential use cases for crypto technology, Hsu said payment settlement is the most obvious use case for blockchain.

“The main problem [blockchain] is well suited to solving settlement efficiency,” Hsu noted. “If you tokenize things, you can get settlement efficiencies, [as in] cross-border payments. This is a use case for blockchain technology that is both innovative and worth exploring.”

As fellow regulators have stated previously, Hsu has made it clear that regulators don’t like public or permissionless blockchains. They are interested in the potential efficiency that instant settlement of “tokenized” assets could provide, as long as the blockchain is private, centralized and therefore properly regulated.

“Public blockchains are difficult for a whole bunch of different reasons,” he said. “One is that they’re not very efficient, the other is that they’re very difficult to achieve full BSA/AML compliance. [Bank Secrecy Act / Anti-Money Laundering]. Thus, the tokenization initiatives we have seen almost all use private blockchain technology. This is, I think, an area where innovation based on blockchain technology is promising.”

Hsu also responded to recent concerns from commercial banking groups that merger decisions have been stalled indefinitely by demanding more and more information from affected parties. Hsu reiterated that mergers are only of value to the extent that they are beneficial to the institutions and communities they serve, and that legally, regulators must assess the full health and legal compliance of each merger. . He thinks the competition framework the agency and the Justice Department use to assess mergers for antitrust could use an update, but he made it clear that the agency is not bowing to outside pressure.

“The competition framework hasn’t been updated since 1995. And so that’s something we’re working on with the Department of Justice,” Hsu said. “It doesn’t change the underlying legal requirements, or the underlying thesis, that healthy mergers are good. Unsound mergers are not good and we need to apply scrutiny to anything that comes through the door. “

He also referred to recent bank failures, saying the root cause of bankruptcies was ultimately poor corporate risk management. He added that post-mortem reports from the Fed and the FDIC revealed the need to further empower supervisors to identify and act in a timely manner on issues they find in institutions.

“Supervisors have to act, it’s not just good enough to see something, say something and then act,” he said. “That part of risk management and that part of discretion are kind of the main things that would have stopped Silicon Valley or Signature from happening.”

Hsu said that in light of the recent turmoil in the industry, regulators almost unanimously agree on the need for banks to hold higher levels of capital.

“Strong capital is a good thing. I believe that. Between me and my counterpart at the Fed and the FDIC, I think we’re pretty aligned on how we think about this,” he said.

He said regulators would carefully consider banking sector concerns about the new rules and work to ensure businesses can gradually adapt the new rules with minimal negative impacts.

“We have to be thoughtful and smart about how we calibrate what we think the outcome should be and then the transition periods to get there. capital, liquidity, etc.” he said. “We are very careful about how we think about both calibration, the transition period and the trade-offs. Banks have not been shy about sharing their concerns about some of these trade-offs, and we take them into account. .”

Hsu reiterated that, just as he and the heads of the Fed and FDIC testified in the latest round of regulatory oversight hearings, the agencies have committed to releasing a proposal on executive compensation, although he said further details would be forthcoming.

“The direction of travel is pretty clear,” he said. “To strengthen the accountability of leaders.”

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