Speaking to the Digital Chamber of Commerce, Acting Comptroller of the Currency Michael Hsu said that the recent crypto market crash should be a wake-up call as the crypto space has gained a dependence on hype. He describes the hype as a serious risk, likening certain crypto transactions to Ponzi schemes.
Hsu’s comments come after the collapse of stablecoin TerraUSD on May 9, an event that reverberated throughout the cryptocurrency market. “The recent collapse of the TerraUSD stablecoin and associated sell-off in crypto markets has shown that hype-driven growth can lead to bubbles, harm consumers, and crowd out productive innovation,” he said.
“What has become clearer to me is that these developments are indicative of the crypto economy’s dependence on the hype,” Hsu elaborated. “The recent events in crypto should serve as a wake-up call and an opportunity to reset and to recalibrate the problems the industry is trying to solve.
Michael Hsu emphasized the reality of the contagion risks within crypto, underscoring that the collapse of Terra spread to Tether and the broader crypto ecosystem. However, despite the risks involved, he was relieved that the events didn’t affect traditional banks. Moreover, the OCC’s work to require banks’ permission to engage in crypto activities limited the exposure.
“No banks are under stress or even rumored to be under stress due to crypto exposure,” he revealed.
A crypto skeptic from the beginning, Hsu also warned that crypto is highly fragmented, noting that the daily addition of new blockchains creates the need for cross-chain bridges. These systems enable the transfer of cryptocurrencies between blockchains, exposing the system to hacks.
“It is as if instead of converging on a single standard railway gauge to connect the country, innovators are incentivized to build customized railcar systems from scratch,” Hsu described. The acting comptroller also noted how there isn’t enough clarity about how custody works and who owns crypto assets bought from an exchange.
Michael Hsu also expressed concerns about crypto products that offer what he calls “unsustainably high” yields. These kinds of offers are the best way to attract investors to crypto, especially in the decentralized finance space. Hsu likes yield farming, the act of lending one’s crypto using smart contracts in return for yield, to a Ponzi scheme.
Cowen analyst Jaret Seiberg said he believes the acting comptroller’s comments infer that banks will have a challenging time participating in crypto and that it’s hard to see the OCC issuing limited-purpose charters for financial entities to participate in crypto due to Hsu’s goal of protecting the banking system from crypto risks.
