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Michael Hsu, chief federal regulator of the nation’s largest banks, said Friday that he finds arguments questioning the long-term value of cryptocurrency “compelling,” while calling for a strict regulatory regime to protect consumers and the economy against risks posed by stablecoins.
“The rise of Web3 and a blockchain-based digital economy are not inevitable,” Hsu, Acting Comptroller of the Currency, said in a talk at Georgetown University’s Institute of International Law, pointing to analyses made by critics of crypto, including Signal founder Moxie Marlinspike and crypto critic and Dan Olson.
Marlinspike argued in an widely read January blog post that Web3 is a flawed concept because decentralized protocols are inherently inefficient and that developers have been drawn to crypto projects not because they are solving problems that centralized internet companies can’t, but because they see it as a means to get rich quickly.
Olson, a video essayist, is the producer of a 2-hour, viral takedown of cryptocurrencies that compares the crypto craze to the housing bubble that led to the 2008 financial crisis. It has nearly 7 million views on YouTube.
Hsu echoed this metaphor in his comments Friday, likening cryptocurrency and the blockchain to financial derivatives that supercharged the economic meltdown of the 2000s. He said that derivatives genuinely do solve problems and help better distribute risk, but only when they are well regulated.
“I think where we are with digital assets feels very similar to me, that you’re kind of in the early days and if you can architect it right, and prevent the excesses, you can get closer to the promise and the potential” of the technology, he said.
Despite his doubts about the technology, Hsu said that “it’s hard to ignore the rapid growth of the developer community, market signals about blockchain firms long-term potential, and ponouncements and actions from a range of policymakers and governments.”
Hsu argued that Congress and regulators should act quickly to create an oversight regime for stablecoins, which he said support the entire $2 trillion market for cryptocurrencies, even though their market value is just $180 billion.
Stablecoins like tether
USDTUSD,
and USD Coin
USDCUSD,
are digital assets that peg their value to the U.S. dollar
DXY,
and are used by crypto investors to trade in and out of various digital assets such as bitcoin
BTCUSD,
or ether
ETHUSD,
and as a stable store of value for uninvested cryptocurrency.
“If there were to be a run on stablecoins, the entire crypto economy would likely be impacted, causing outsized losses for ordinary people owning crypto and potentially leading to a host of other knock-on effects.”
To prevent such an outcome Hsu argued that legislation should be passed requiring bank-like regulation of stablecoins and mandating interoperability of dollar-based stablecoins.
Hsu’s remarks come following a series of bills being promoted in Congress that would set up a new regulatory regime for stablecoins, including a new bill proposed Wednesday by Pennsylvania Sen. Pat Toomey, the ranking Republican on the Senate Banking Committee.
Ian Katz, analyst at Capital Alpha Partners, wrote in a note to clients this week that “The field of crypto-related legislation is starting to get crowded,” pointing to competing legislation submitted by Republican Sens. Bill Haberty of Tennessee and Trey Hollingsworth of Indiana, as well as a bipartisan bill being crafted by Sen. Cynthia Lummis, a Wyoming Republican and Sen. Kirsten Gillibrand, a New York Democrat.
He noted that stablecoin regulatory proposals typically envision a primary role for Hsu’s OCC, while the the industry is trying to shape legislation that would regulate the broader crypto economy so that the Commodity Futures Trading Commission would be the primary regulator of cryptos that aren’t stablecoins.
Still, divisions between Democrats and Republicans means that “we don’t forsee any major legislation passing Congress this year,” Katz wrote. “Even next year it will be an uphill struggle.”
