OCC's Hsu Addresses Need for Cryptocurrency OversightCalls for Global Cryptocurrency Regulation Escalate as US Explores Options
Amid growing calls for cryptocurrency regulations worldwide, the U.S. acting comptroller of the currency has made a definitive statement on safeguarding investors and the intersection of cryptocurrency with traditional financial institutions.
Appearing before the Exchequer Club, a Washington, D.C.-based group of economic and financial policy professionals, acting Comptroller of the Currency Michael Hsu discussed trust in banking and pointed to the meteoric rise of cryptocurrency and a need to eliminate the siloed nature of U.S. regulatory bodies. Hsu said it is necessary for regulators to "ensure that crypto/decentralized finance activities that take place within the banking system or are facilitated by banks are trustworthy."
This follows a string of global activity around cryptocurrency, including new restrictions against cryptomining and trading in parts of China, according to the South China Morning Post. Additionally, U.S. Securities and Exchange Commission Chair Gary Gensler made his first appearance before the Senate Banking Committee on Tuesday, where he defended enforcement of securities laws against certain crypto transactions and addressed regulatory clarity (see: SEC Chair Pushes for Additional Cryptocurrency Regulations).
Similarly, the American Bankers Association wrote to the Basel Committee on Banking Supervision - which sets global standards - on Friday regarding "supervised financial institutions’ involvement in the crypto asset market" and "rational supervision."
OCC Weighs In
OCC's Hsu, who was appointed acting comptroller of the currency in May, said Wednesday the surge in cryptocurrency and DeFi transactions is driving structural change in banking. His office, an independent bureau of the Department of Treasury, supervises national and federally licensed foreign banks.
"Banking is again being disintermediated," Hsu said. "Instead of securities firms and capital markets, it is fintechs, technology platforms, crypto, and DeFi. Instead of lending, it is payments. Instead of financial engineering, it is application programming interfaces, machine learning and distributed ledgers."
He added: "The public is counting on the financial regulatory community to work together to ensure the stability of the system and fairness to its participants."
Hsu cautioned federal regulators against becoming too siloed and thus "complacent," problems he says exacerbated the 2008 financial crisis.
"While controlling the growth of crypto and DeFi is challenging given their nature and in light of market demand, it is imperative that financial regulators work together to ensure that crypto/DeFi activities that take place within the banking system or are facilitated by banks are trustworthy," he added.
With DeFi transactions operating outside the bounds of these intermediaries, it is unclear if the OCC intends to add DeFi applications into its purview. As of Thursday, DeFi held a total value of $91.1 billion in assets, according to DeFi Pulse.
A spokesperson for the OCC declined to comment further.
Hsu also said the President's Working Group - spanning Treasury, the Federal Reserve, SEC, Commodity Futures Trading Commission, Federal Deposit Insurance Corp. and OCC - is expected to issue a report on stablecoins, which are cryptocurrencies pegged to the U.S. dollar, this fall. The findings are set to determine how much authority federal agencies currently have, or what powers they may require from Congress to oversee these tokens.
"The federal banking agencies have been collaborating via a 'crypto policy sprint' to agree on definitions, use cases, risks and gaps, and to discuss policy options related to digital assets," Hsu said. "Innovation is important, but safeguarding trust is paramount."
ABA on Global Standards
The ABA, a Washington, D.C.-based trade association for the U.S. banking industry, which wrote to the Basel Committee on Banking Supervision this month, says proper oversight of banks' roles in the cryptocurrency space requires a global approach that does not stifle innovation.
In its letter to the committee - which is headquartered in Basel, Switzerland - ABA Vice President of Banking Policy Hu Benton says, "Market participants and supervisors should acknowledge the need for and work to develop a broad, common understanding of key features of the many existing crypto assets, as well as the principal risks they present, as the basis for prudential treatment of these assets."
Benton notes that as customers increasingly desire exposure to cryptocurrencies, "national regulatory and supervisory authorities must permit prudent innovation to accommodate [them]. Authorities should be careful to avoid preempting technological innovation by being overly prescriptive. … Inflexibility would constrict financial inclusion and other benefits of emerging technology."
Benton says the "overall stability of the global financial system will benefit from … a significant share of the crypto asset market [conducted] through supervised financial institutions."
In highlighting recent action taken by New York State Attorney General Letitia James and the State Supreme Court against crypto platform Coinseed, Michael Fasanello, who has served in various roles within the U.S. Justice and Treasury departments, including for Treasury's Financial Crimes Enforcement Network, or FinCEN, tells Information Security Media Group, "Specific regulations placing oversight and transparency obligations on beneficial owners and control persons in the digital asset broker/dealer/custodian space are essential for the control of market volatility and the overall protection of market participants."
Fasanello, currently the director of training and regulatory affairs for the firm Blockchain Intelligence Group, notes that recent actions from regulatory enforcement bodies have largely been to "dismantle more passive fraud and abuse such as classic Ponzi schemes in the form of ICOs, or investigating allegations of fraudulent 'stablecoins.'"
And on the SEC's earlier warning against crypto-based fraud scams, Neil Jones, a cybersecurity evangelist for the security firm Egnyte, tells ISMG, "Over time, I'm confident that financial regulation of cryptocurrency providers will become more aligned with regulations that apply to other financial investments, and the U.S. SEC has already stated that Bank Secrecy Act requirements apply to cryptocurrency exchanges."
Still, Jones notes, meaningful change may not ensue until crypto platforms no longer represent a "safe haven" for payments to ransomware attackers.
During the annual SALT Conference in New York on Wednesday, which was held by financier Anthony Scaramucci and addressed finance, technology and geopolitics, several panelists acknowledged that crypto custodians must provide the same types of investor protections as other asset classes, according to InvestmentNews.