‘Home’ regulator could solve crypto’s ‘fragmented oversight’ problem: Comptroller

Cryptocurrency firms that operate multiple entities in different countries should be overseen by one consolidated “home” regulator to prevent them from playing “games” aimed at bypassing regulators, the acting head of the US banking regulator has stated.

Michael Hsu, acting head of the Comptroller of the Currency (OCC), made the comments in prepared remarks for the March 6 Institute of International Bankers conference in Washington, DC

The OCC is an agency within the Treasury Department that regulates American banks and aims to ensure the safety of the country’s banking system. It has the power to allow or deny banks to engage in crypto-related activities.

In his speech, Hsu provided “useful lessons for crypto” from traditional banking on how to maintain trust globally.

He argued that unless a crypto firm is regulated by one entity, those operating businesses in multiple jurisdictions will “potentially play shell games” by arbitrating regulations and will then be able to “mask their true risk profiles.”

“To be clear, not all global crypto players will do this. But we will not be able to know which players are trustworthy and which are not until a credible third party, such as a consolidated supervisor in their home country, can monitor them in a meaningful way.”

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

The bankruptcy of crypto exchange FTX was used as an example of why the space needed a “home” regulator. Hsu compared the stock exchange to the similarly defunct Bank of Credit and Commerce International (BCCI) – a global bank found to be involved in a number of financial crimes.

Hsu said the “fragmented oversight” of both firms meant no authority or auditor could develop a “consolidated and holistic view” of them as they operated across countries without a framework for information sharing between authorities.

“By appearing to be everywhere and structuring entities in multiple jurisdictions, they were actually nowhere and were able to avoid meaningful regulation.”

In his rationale for advocating for such oversight, Hsu expressed that the arguments in the Bitcoin (BTC) whitepaper were “elegant,” but crypto “has proven to be extraordinarily messy and complex.”

He added peer-to-peer payments are “virtually non-existent” and crypto has primarily become an alternative asset class dominated by trading activity that relies on intermediaries for it 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 the international bodies that identified the need for a “comprehensive global supervisory and regulatory framework for crypto participants” can look to the lessons learned from the BCCI case.

Related: Treasury Secretary Janet Yellen calls for “strong regulatory framework” for crypto activities

The Financial Stability Board (FSB), the International Monetary Fund (IMF), the International Organization of Securities Commissions (IOSCO) and the Bank for International Settlements (BIS) were the bodies Hsu specifically named.

The FSB, IMF and BIS are currently working on papers and recommendations to establish standards for a global cryptoregulatory framework

“Trust is a fragile thing. It is hard to earn and easy to lose, Hsu said.

“Regulatory coordination and supervisory cooperation can help reduce the risk of losing that trust. We’ve learned this the hard way in banking. I think it holds useful lessons for crypto.”