Months of turbulence in the cryptocurrency industry have made it clear that financial regulators must be cautious about how they allow crypto and the traditional finance system to interact, Acting Comptroller of the Currency Michael J. Hsu said Tuesday (Oct. 11).
In a speech delivered at DC Fintech Week 2022, Hsu identified three risks associated with crypto that he said regulators should be prepared to monitor.
First among these is “skeuomorphism” — the practice of explaining new concepts by comparing them to familiar ones, he said. The risk here is that some in the crypto industry borrow terms like “ownership,” “custody” and “savings accounts” from traditional finance, but their crypto counterparts are different.
“Using the familiar to introduce something novel can downplay or mask the risks involved and establish false expectations,” Hsu said. “In time, people get hurt.”
Another risk is integrating crypto and traditional finance, Hsu said. While the traditional finance system is mature, the crypto industry is not, and integrating them would increase cross-contagion and systemic risk. Integration within the crypto industry is a risk as well, because the firms are only as strong as their weakest link.
Both the scope of activities within a single crypto firm and any integration of crypto and traditional finance should be limited “until crypto matures and appropriate guardrails and gates are put in place,” Hsu said.
A third risk outlined in the speech is data gaps. While regulators have monitored banks’ activities related to crypto, Hsu suggested that more data should be gathered regularly — from both banks and crypto firms — to ensure and understanding of the connectedness and exposure.
“My job as a bank regulator and member of the [Financial Stability Oversight Council (FSOC)] is to identify risks to banking and to the financial system,” Hsu said. “With crypto, looking for skeuomorphisms, commingling and data gaps can help in that endeavor.”
The speech came just over a week after the FSOC issued a report saying that crypto-asset activities “could pose risks” to the stability of the U.S. financial system.
Read more: Unregulated Crypto Poses Risks to Financial System, FSOC Report Says
As PYMNTS reported Oct. 3, the report looks into financial stability risks and regulatory gaps from digital assets.
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