OCC’s Hsu Suggests Crypto Needs ‘Consolidated Homeland Supervisor’

WASHINGTON — Acting Comptroller of the Currency Michael Hsu said crypto companies need a single consolidated supervisor — whether at home or abroad — and said regulatory gaps create conditions for excessive risk.

Banking regulators such as Hsu have consistently pointed to their own limits in regulating the crypto market, especially after the dissolution of crypto exchange FTX and subsequent turmoil in the industry. The Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp. can take some action to isolate the banking industry from cryptobut cannot monitor greater risk they say that the industry presents to the financial system.

Speaking at the Institute of International Bankers conference in Washington DC, Hsu reiterated the need for a global regulatory framework for crypto, warning of the dangers that could arise in its absence.

“Until that is done, crypto firms with subsidiaries and operations in multiple jurisdictions will be able to arbitrage local regulations and potentially play shell games using inter-affiliate transactions to hide and mask their true risk profiles,” he said. “To be clear, not all global crypto players will do this. But we won’t be able to know which players are trustworthy and which aren’t until a credible third party, like a consolidated overseer in their home country, can monitor them meaningfully.”

“Currently, no crypto platforms are subject to consolidated supervision,” he added. “Not one.”

To make this point, Hsu compared the collapse of FTX to failure of the Bank of Credit and Commerce International, or BCCI, in the 90s, a shadow bank it was once referenced as the “Bank of Crooks and Criminals” that concealed its wrongdoing, in part by operating multiple affiliates in different jurisdictions, and avoiding giving any regulator a holistic view of the company. Comparing BCCI and FTX, and the response from Congress and regulators around the world, could be a model for how to deal with crypto exchanges that may similarly operate under disparate regulatory scrutiny, Hsu said.

“Both faced fragmented oversight by a combination of state, federal and foreign governments,” Hsu said. “Both lacked a lead or ‘home’ regulator with the authority and responsibility to develop a consolidated and holistic view of the firms. Both operated across jurisdictions where there was no established framework for regulators to share information about the firms’ operations and risk controls.” used multiple auditors to ensure that no one could have a holistic view of their firms.”

And similarly, BCCI and FTX can hide their fraudulent activity by using these strategies, Hsu said.

“By seemingly being everywhere and structuring entities in multiple jurisdictions, they were actually nowhere and were able to avoid meaningful regulation.” Hsu said.

In particular, any changes to address similar concerns in the crypto industry would have to happen outside the banking system, Hsu said. He suggested that international bodies such as the Financial Stability Board, International Monetary Fund and CPMI/IOSCO use the BCCI situation as a model to expose problematic actors in crypto.

Action by Congress may be necessary, Hsu suggested. He noted that after the failure of BCCI, Congress passed the Foreign Bank Supervision Enhancement Act, barring any foreign bank from entering the United States unless it was subject to comprehensive, consolidated supervision by a domestic agency.

Hsu also pushed back on some arguments from crypto advocates, saying crypto is overwhelmingly used as an asset class rather than what some early advocates hoped would be a replacement for the traditional banking system. And crypto, like most asset classes or any attempt to participate in the financial markets, requires intermediaries, which often end up being banks.

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