Cryptocurrency firms operating multiple entities in different countries should be overseen by a single consolidated “home” regulator to avoid playing “games” aimed at circumventing regulators, the acting chief of the US banking regulator.
Michael Hsu, the acting chief of the Comptroller of the Currency (OCC) made the remarks in prepared remarks for the March 6 conference of the Institute of International Bankers in Washington, D.C.
The OCC is an agency within the Treasury Department that regulates U.S. banks and aims to ensure the security of the country’s banking system. It has the power to allow or deny banks from engaging in crypto-related activities.
In his speech, Hsu provided “useful lessons for crypto” from traditional banking on how to maintain trust globally.
Good to hear from Acting Controller @USOCC Michael Hu. #IIBAWC2023 pic.twitter.com/SWFGaUC0yv
— IIB (@IIBnews) March 6, 2023
He claimed that unless a crypto company is regulated by a single entity, those working with companies in multiple jurisdictions will “potentially be playing shell games” through arbitrage regulation and would 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 home regulator, can meaningfully monitor them.”
“Currently, no crypto platforms are under 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 exchange to the also-defunct Bank of Credit and Commerce International (BCCI) — a global bank found involved in a litany of financial crimes.
Acting Controller of the Currency Michael J. Hsu discusses the failure of the Bank of Credit & Commerce International in 1991 that led to significant changes in the way global banks are controlled and the agreements with the crypto exchange FTX. Learn more at https://t.co/HD1T3KHcss pic.twitter.com/7e45zgMbE6
— OCC (@USOCC) March 6, 2023
Hsu said the “fragmented oversight” of both firms meant that no authority or auditor could develop a “consolidated and holistic view” of them, as they operated in different countries without a framework for sharing information between authorities.
“By seemingly being everywhere and structuring entities in multiple jurisdictions, they were effectively nowhere and could circumvent meaningful regulation.”
In his reasoning for advocating such oversight, Hsu indicated that the arguments in the Bitcoin (BTC) whitepaper were “elegant” but that crypto “has proved extremely messy and complex.”
He added that peer-to-peer payments are “virtually non-existent” and crypto has become primarily an alternative asset class dominated by trading activities that rely on intermediates to “operate at any scale.”
“The events of the past year have shown that trust in those intermediaries can be quickly lost, large numbers of individuals can be hurt and knock-on effects on the traditional financial system can arise.”
Hsu said the international bodies that identified the need for a “comprehensive global oversight and regulatory framework for crypto participants” could look at 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 mentioned.
The FSB, IMF and BIS are currently working on papers and recommendations to set standards for a global cryptocurrency regulatory framework
“Trust is a fragile thing. It’s hard to earn and easy to lose,” Hsu said.
“Regulatory coordination and supervisory cooperation can help mitigate the risks of losing that trust. We learned this the hard way in banking. I believe it contains useful lessons for crypto.”