A PYMNTS Company

OCC’s Comptroller: Crypto Economy Is Dependent On ‘Hype’

 |  May 30, 2022

Michael Hsu, Acting Comptroller of the Office of the Comptroller of the Currency (OCC), told an audience at a crypto event on Tuesday, May 24 that the recent events with TerraUSD and other stablecoins are clear evidence that the crypto economy is dependent on hype. 

Hsu has been self-described as a crypto skeptic, and this is not the first time that he has warned about the risks of investing in crypto assets. Yesterday, speaking at the DC Blockchain Summit 2022, Hsu gave the perspective of a bank regulator on the recent collapse of the TerraUSD and the associated sell-off in crypto markets. 

The first observation focused on the vulnerabilities in the crypto system. “Crypto is highly fragmented and prone to hacks,” Hsu said. The crypto ecosystem has become increasingly fragmented with new blockchains being added daily. Cross-chain bridges have sprung up to mitigate interoperability challenges due to fragmentation, but these bridges are highly prone to being hacked, Hsu argued: “Contagion risks are real.” Using the example of TerraUSD, Hsu explained how first other stablecoins were affected, and then the broader crypto ecosystem. Last, he brought up the fact that custody and ownership rights are still underdeveloped. In an environment where centralized or decentralized exchanges and other intermediaries offer custody services, it is still not clear who owns the digital assets. This became more evident when two months ago Coinbase warned investors that they could lose their crypto if the company ever went bankrupt. 

After reminding the audience about these vulnerabilities, the acting comptroller said that thanks to the OCC’s “careful and cautious” approach to banks seeking to engage in crypto activities, “there has been no contagion from cryptocurrencies to traditional banking and finance.” According to him, no banks are under stress or even rumored to be under stress due to crypto exposure. The situation is similar in Europe, where the European Central Bank has said that banks’ participation in crypto is yet too small to represent a risk, but it also warned that if the growth in crypto continues at the same pace, it could have an impact on the financial stability of the markets given the interconnectedness of crypto and traditional banking. 

Hsu praised the OCC and the Federal Deposit Insurance Corporation (FDIC) for its recent efforts (in the form of a letter sent to banks) to contain any negative impact on the traditional banking system. The banking regulator sent letters earlier this year and last year reminding national banks that engagement in crypto activities is permissible only when banks have controls in place to do so in a safe and sound manner. 

Then, in the last part of his remarks, Hsu blamed the high-yield rewards offered by some crypto products and the hype created around them for the harm caused to consumers. Hype is essential for the crypto economy, Hsu argued. In an analogy with social media, he said, “it seems that hype and yield are to crypto as user engagement is to social media.” He mentioned the example of TerraUSD and how it went from $3 billion to over $18 billion just in a few months, in part because it offered 20% returns. But these high returns for yield farming are not unique to Terra, and he went one step further, saying that there seems to be growing acknowledgement that yield farming today may have more in common with Ponzi schemes than with productive innovation.