Hsu: Crypto needs leading regulator, global regulations

Crypto companies need a consolidated regulatory authority and a global regulatory framework to reduce risk, Acting Comptroller of the Currency Michael Hsu told bankers Monday at a Washington conference.

Until such a framework is established, crypto companies with international subsidiaries will “will be able to arbitrate local regulations and potentially play shell games using interconnected transactions to obfuscate and mask their true risk profiles,” Hsu said.

The need for crypto regulation has steadily increased since the end of 2021, but has particularly escalated since the spectacular collapse of crypto exchange FTX and its more than 130 international subsidiaries in November.

Hsu compared FTX’s collapse to the failure of the Bank of Credit and Commerce International in 1991, which the Los Angeles Times called at the time “the biggest bank fraud scandal in history.”

Before its closure, BCCI had $23 billion in assets and 380 offices in 72 countries. Four of the subsidiaries operated in the United States Although BCCI was subject to some local host regulations, there was no lead regulator overseeing the entire enterprise.

“This meant that oversight of BCCI was highly fragmented, with no single supervisor having a clear picture of BCCI’s consolidated activities,” Hsu so. “To make matters worse, BCCI’s parent holding company was not subject to supervision in the jurisdiction in which it was chartered, allowing the bank to engage in inter-related transactions that facilitated money laundering and obscured its true financial condition for years.”

Ultimately, its billions of dollars in losses led to “significant changes in how global banks are monitored,” Hsu noted Monday.

Although BCCI was a bank and FTX is a crypto exchange, their similarities are many, he said. Both faced fragmented oversight, lacked a “home” regulator, operated across jurisdictions without an established framework for regulators to share information about their firms’ operations, and used multiple auditors to ensure no one had a holistic view of their operations, said Hsu.

“As a result, BCCI and FTX were able to … operate with an astonishing lack of basic risk management and internal controls for an extended period, despite being ‘regulated,'” Hsu said. “By appearing to be everywhere and structuring entities in multiple jurisdictions, they were actually nowhere and were able to avoid meaningful regulation.”

Hsu added that “not all global crypto players” will mask their risk profiles.

“But we won’t be able to know which players are trustworthy and which aren’t until a credible third party, such as a home country consolidated supervisor, can monitor them in a meaningful way,” he said, adding that no crypto platforms are currently subject to consolidated supervision.

Hsu also pushed back against the notion that crypto could replace the traditional banking system, as Bitcoin inventor Satoshi Nakamoto hypothesized was possible in his 2008 white paper. Crypto has primarily functioned as an alternative asset class, Hsu said, with trading dominating user activity.

Intermediaries, Hsu said, are “required for crypto to work at any scale.”

“The events of the past year have shown that trust in these intermediaries can quickly be lost, large numbers of individuals can be harmed, and there can be consequences for the traditional financial system,” Hsu said.